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Chapter 4: Problem 30

Visual Company produces gadgets for the coveted small appliance market. The following data reflect activity for the year 2017: $$\begin{array}{lcc} & \text { January 1, 2017 } & \text { December 31, 2017 } \\ \hline \text { Direct materials } & \$ 9,400 & \$ 18,000 \\ \text { Work in process } & 6,500 & 26,000 \\ \text { Finished goods } & 60,000 & 31,000 \end{array}$$ Visual Co. uses a normal-costing system and allocates overhead to work in process at a rate of \(\$ 3.10\) per direct manufacturing labor dollar. Indirect materials are insignificant so there is no inventory account for indirect materials. 1\. Prepare journal entries to record the transactions for 2017 including an entry to close out over-or underallocated overhead to cost of goods sold. For each journal entry indicate the source document that would be used to authorize each entry. Also note which subsidiary ledger, if any, should be referenced as backup for the entry. 2\. Post the journal entrifies to T-accounts for all of the inventories, Cost of Goods Sold, the Manutacturing Overhead Control Account, and the Manufacturing Overhead Allocated Account.

Short Answer

Expert verified
In summary, the journal entries for Visual Company in 2017 are: 1. Direct Materials Control - debit: \(\$8,600\) 2. Work in Process Control - debit: \(\$19,500\) 3. Finished Goods Control - credit: \(\$29,000\) 4. Manufacturing Overhead Allocated - credit: \(\$10,333.33\) The T-Accounts posting: a) Direct Materials Control: Debit: \(\$8,600\) | Credit: \\ b) Work in Process Control: Debit: \(\$19,500\) | Credit: \\ c) Finished Goods Control: Debit: \\ | Credit: \(\$29,000\) \\ d) Manufacturing Overhead Control Account: Debit: \\ | Credit: \\ e) Manufacturing Overhead Allocated Account: Debit: \\ | Credit: \(\$10,333.33\) There is no over-or-underallocated MOH as the actual MOH is equal to the MOH Allocated.

Step by step solution

01

Prepare journal entries

We will prepare the following journal entries based on the information provided: a) Record direct materials used: Direct Materials Control (DMC) is increased by the difference in the beginning and ending inventories. $$\text{DMC} = \$18,000 - \$9,400 = \$8,600$$ b) Record work in process (WIP) during 2017: WIP increases by the difference in the beginning and ending WIP inventories. $$\text{WIP} = \$26,000 - \$6,500 = \$19,500$$ c) Record finished goods (FG) during 2017: FG decrease by the difference in the beginning and ending FG inventories. $$\text{FG} = \$60,000 - \$31,000 = -\$29,000$$ d) Compute manufacturing overhead (MOH) allocated based on direct manufacturing labor dollars (DMLD): We are given the MOH rate per DMLD as $3.10. To find the direct labor dollars (DLD), we will use the equation: $$\text{WIP} = \text{DMC} + \text{DLD} + \text{MOH Allocated}$$ Plugging in the values: $$\$19,500 = \$8,600 + \text{DLD} + 3.10 \times \text{DLD}$$ $$ \implies \text{DLD}= \frac{\$19,500 - \$8,600}{1 + 3.10} = \$3,333.33$$ Now, we can calculate the MOH Allocated: $$\text{MOH Allocated} = 3.10 \times \text{DLD} = 3.10 \times \$3,333.33 = \$10,333.33$$ e) Close out over-or-underallocated MOH to cost of goods sold (COGS): Since the MOH Allocated is taken to be equal to the actual MOH, there is no over-or-underallocated MOH. Therefore, no journal entry is required here. Now, we can prepare the journal entries using the above information: 1. Direct Materials Control - debit: \(\$8,600\) 2. Work in Process Control - debit: \(\$19,500\) 3. Finished Goods Control - credit: \(\$29,000\) 4. Manufacturing Overhead Allocated - credit: \(\$10,333.33\)
02

Post journal entries to T-Accounts

Post the journal entries to their respective T-Accounts: a) Direct Materials Control: Debit: \(8,600 | Credit: \) b) Work in Process Control: Debit: \(19,500 | Credit: \) c) Finished Goods Control: Debit: \( | Credit: \)29,000 d) Manufacturing Overhead Control Account: Debit: \( | Credit: \) e) Manufacturing Overhead Allocated Account: Debit: \( | Credit: \)10,333.33 Ultimately, the journal entries made and their posting in the T-Accounts enable us to understand the movement in inventory accounts, manufacturing overhead accounts, and the cost of goods sold during the year 2017 for Visual Company. The over-or-underallocated MOH is found to be zero as the MOH Allocated is assumed to be equal to the actual MOH.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Normal Costing System
The Normal Costing System is a method used by companies to allocate costs to products based on a standard set of rates. It incorporates actual direct material and direct labor costs and adds a predetermined overhead rate to cover manufacturing overhead expenses. This approach allows companies to estimate the cost of production efficiently.
Normal costing differs from actual costing, which uses actual overhead rates. Here鈥檚 how it works:
  • Assign Direct Costs: Record actual costs for direct materials and direct labor.
  • Apply Overhead: Use a predetermined rate based on direct labor hours, machine hours, or any other cost driver to assign overhead costs.
  • Estimate Costs: With these two components, companies can calculate the costs of their products more predictably.
Through normal costing, Visual Company simplifies its accounting process, ensuring that overhead allocation remains consistent through the year, which is crucial for budgeting and variance analysis.
Manufacturing Overhead
Manufacturing Overhead (MOH) refers to the indirect factory-related costs incurred during production. These are not direct expenses like materials or labor but are still essential to manufacturing. They include costs such as factory utilities, depreciation, and maintenance of equipment.
The allocation of MOH is part of the normal costing process, where a predetermined overhead rate is applied. In our example, Visual Company uses a rate of $3.10 per direct manufacturing labor dollar, which simplifies overhead tracking by applying expected overhead costs directly with labor expenses.
Understanding MOH is crucial, as it influences pricing strategies and profitability. It helps companies to:
  • Estimate Production Costs: By applying a fixed rate, companies gain a realistic picture of production expenses.
  • Control Costs: Awareness of overhead costs can help control and reduce them over time.
  • Price Products Accurately: By including overhead, companies ensure they price their products correctly to cover all incurred expenses.
Work in Process
Work in Process (WIP) represents the goods that are in the production phase but not yet finished. They are more than raw materials but less completed than finished goods. Companies need to track these goods to understand their current manufacturing levels and financial standing.
In the example, Visual Company鈥檚 WIP increased significantly, indicating higher levels of production activities in 2017. Tracking WIP is important because:
  • It provides insight into production efficiency.
  • Helps with inventory management by accounting for mid-production goods.
  • Serves as a financial indicator to signal production costs and potential delays.
By maintaining accurate WIP figures, businesses like Visual Company can better forecast their cash flow needs and minimize bottlenecks in production.
T-Accounts
T-Accounts are a simplified way to track debits and credits within an accounting system. Named for their "T" shape, they help visualize transactions' effects on individual accounts. They are a vital part of accounting, aiding in organizing financial data easily and accurately.
When Visual Company records journal entries, these entries are posted to T-accounts. Each T-account represents a specific account (e.g., Work in Process, Direct Materials, etc.), showing all increases (debits) on the left and decreases (credits) on the right side. Using T-Accounts offers several benefits:
  • Simplifies Complex Transactions: By visually breaking down each transaction.
  • Enhances Understanding: Offers a clear view of how each transaction affects overall financial statements.
  • Improves Accuracy: By ensuring each debit has a corresponding credit, maintaining the accounting equation.
Thus, T-accounts improve transparency and accuracy in recording financial activities, making them indispensable in accounting practices, particularly in manual bookkeeping.

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Most popular questions from this chapter

Proration of overhead. The Ride-On-Wave Company (ROW) produces a line of non- motorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2017 ? Budgeted manufacturing overhead cost Budgeted direct manufacturing labor cost Budgeted direct manufacturing labor cost Actual direct manufacturing labor cost \(\$ 125,000\) \(\$ 250,000\) \(\$ 117,000\) \(\$ 228,000\) Inventory balances on December 31,2017 , were as follows: \(\begin{tabular}{lcc} & & 2017 direct manufacturing \\ Account & Ending balance & labor cost in ending balance \\ \hline Work in process & \)\$ 50,700\( & \)\$ 20,520\( \\ Finished goods & 245,050 & 59,280 \\ cost of goods sold & 549,250 & 148,200 \end{tabular}\) 1\. Calculate the manufacturing overhead allocation rate. 2\. Compute the amount of under-or overallocated manufacturing overhead. 3\. Calculate the ending balances in work in process, finished goods, and cost of goods sold if under-or overallocated manufacturing overhead is as follows: a. Written off to cost of goods sold b. Prorated based on ending balances (before proration) in each of the three accounts c. Prorated based on the overhead allocated in 2017 in the ending balances (before proration) in each of the three accounts 4\. Which method would you choose? Justify your answer.

Service industry, job costing, law firm. Kidman \(\&\) Associates is a law firm specializing in labor relations and employee-related work. It employs 30 professionals \((5 \text { partners and } 25\) associates) who work directly with its clients. The average budgeted total compensation per professional for 2017 is \(\$ 97,500\). Each professional is budgeted to have 1,500 billable hours to clients in 2017 . All professionals work for clients to their maximum 1,500 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Kidman \& Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2017 is \(\$ 2,475,000\). 1\. Prepare an overview diagram of Kidman's job-costing system. 2\. Compute the 2017 budgeted direct-cost rate per hour of professional labor. 3\. Compute the 2017 budgeted indirect-cost rate per hour of professional labor. 4\. Kidman \& Associates is considering bidding on two jobs: a. Litigation work for Richardson, Inc., which requires 120 budgeted hours of professional labor b. Labor contract work for Punch, Inc., which requires 160 budgeted hours of professional labor. Prepare a cost estimate for each job.

Describe the seven steps in job costing.

Define cost pool, cost tracing, cost allocation, and cost-allocation base.

Service industry, job costing, two direct- and two indirect-cost categories, law firm (continuation of \(4-37\) ). Kidman has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used the firm's resources and interviews with personnel about what factors drive the level of indirect costs. Management concluded that a system with two direct-cost categories (professional partner labor and professional associate labor) and two indirect-cost categories (general support and secretarial support) would yield more accurate job costs. Budgeted information for 2017 related to the two direct-cost categories is as follows: $$\begin{array}{lcc} & \text { Professional Partner Labor } & \text { Professional Associate Labor } \\ \hline \text { Number of professionals } & 5 & 25 \\ \text { Hours of billable time per professional } & 1,500 \text { per year } & 1,500 \text { per year } \\ \text { Total compensation (average per } & \$ 210,000 & \$ 75,000 \\ \text { professional) } & & \end{array}$$ Budgeted information for 2017 relating to the two indirect-cost categories is as follows: $$\begin{array}{lcc} & \text { General Support } & \text { Secretarial Support } \\ \hline \text { Total costs } & \$ 2,025,000 & \$ 450,000 \\ \text { Cost-allocation base } & \text { Professional labor-hours } & \text { Partner labor-hours } \end{array}$$ 1\. Compute the 2017 budgeted direct-cost rates for (a) professional partners and (b) professional associates. 2\. Compute the 2017 budgeted indirect-cost rates for (a) general support and (b) secretarial support. 3\. Compute the budgeted costs for the Richardson and Punch jobs, given the following information: $$\begin{array}{lcc} & \text { Richardson, Inc. } & \text { Punch, Inc. } \\ \hline \text { Professional partners } & 48 \text { hours } & 32 \text { hours } \\ \text { Professional associates } & 72 \text { hours } & 128 \text { hours } \end{array}$$ 4\. Comment on the results in requirement 3. Why are the job costs different from those computed in Problem \(4-37 ?\) 5\. Would you recommend Kidman \& Associates use the job-costing system in Problem 4-37 or the jobcosting system in this problem? Explain.
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