In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700 from unadjusted cost of good sold because overapplied overhead means that too much overhead was added to production during the period, and hence, the cost of goods sold was overstated. In Exhibit 3A–2, we add overapplied overhead to retained earnings (see row 19) because lowering cost of goods sold increases net operating income, which in turn increases retained earnings.
Sapphire Company −Income Statement
Exhibit 3A–5 shows Sapphire Company’s income statement for the month of January.
The sales and selling and administrative expenses come from the transaction analysis in Exhibit 3A–2 and they each contain a corresponding parenthetical cell reference. The cost of goods sold ($239,300) is carried over from the schedule of cost of goods sold in Exhibit 3A–4.
E X H I B I T 3 A – 5 Sapphire Company: Income Statement
EXERCISE 3A–2 Transaction Analysis LO3–5
Adams Company is a manufacturer that completed numerous transactions during the month, some of which are shown below:
a. Manufacturing overhead costs incurred on account, $80,000.
b. Depreciation was recorded for the month, $35,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).
c. Prepaid insurance expired during the month, $2,500 (75% related to production, and 25%
related to selling and administration).
d. Applied $115,000 of manufacturing overhead to production during the month.
e. Closed $5,125 of overapplied overhead to cost of goods sold.
Required:
The table shown below includes a subset of Adams Company’s balance sheet accounts. Record each of the above transactions using the accounts that are given. If a transaction increases an account balance, then record the amount as a positive number. If it decreases an account balance, then record the amount in parentheses.
Transaction Cash
Raw Materials
Work in Process
Finished Goods
Manufacturing Overhead
Retained Earnings
a. . . . . =
b. . . . . =
c. . . . . =
d. . . . . =
e. . . . . =
f. . . . . =
g. . . . . =
EXERCISE 3A–3 Transaction Analysis LO3–5
Dixon Company is a manufacturer that completed numerous transactions during the month, some of which are shown below:
a. Raw materials purchased on account, $100,000.
b. Raw materials used in production, $78,000 direct materials, and $16,000 indirect materials.
c. Sales commissions paid in cash, $45,000.
d. Depreciation was recorded for the month, $60,000 (65% related to factory equipment, and the remainder related to selling and administrative equipment).
e. Sales for the month, $450,000 (70% cash sales and the remainder were sales on account).
f. Factory utilities paid in cash, $12,000.
g. Applied $138,000 of manufacturing overhead to production during the month.
h. Various jobs costing a total of $190,000 were completed during the month and transferred to Finished Goods.
i. Cash receipts from customers who had previously purchased on credit, $115,000.
j. Various completed jobs costing a total of $220,000 were sold to customers.
k. Cash paid to raw material suppliers, $90,000.
Required:
The table shown below includes only one account from Dixon Company’s balance sheet—Retained Earnings. For each of the above transactions, select “No” if it would not affect Retained Earn- ings. Conversely if the transaction would affect Retained Earnings, then record the amount of the increase or (decrease) to this account under the “Yes” column.
Transaction
Work in Process
Manufacturing Overhead
Prepaid Expenses
PP&E (net)
Accounts Payable
Retained Earnings
a. . . . . =
b. . . . . =
c. . . . . =
d. . . . . =
e. . . . . =
Retained Earnings
Transaction Yes No
a. . . . . b. . . . . c. . . . . d. . . . . e. . . . . f. . . . . g. . . . . h. . . . . i. . . . . j. . . . . k. . . . .
Morrison Company Balance Sheet
January 1 Assets
Cash. . . . $ 32,000 Raw materials. . . . $ 9,000
Work in process. . . . 4,000
Finished goods . . . . 17,000 30,000 Prepaid expenses . . . . 2,000 Property, plant, and equipment (net) . . . . 190,000 Total assets. . . . $ 254,000 Liabilities and Stockholders’ Equity
Accounts payable . . . . $ 7,000 Retained earnings . . . . 247,000 Total liabilities and stockholders’ equity . . . . $ 254,000 PROBLEM 3A–4 Transaction Analysis LO3–5
Morrison Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows:
During January the company completed the following transactions:
a. Purchased raw materials on account, $74,000.
b. Raw materials used in production, $77,000 ($67,000 was direct materials and $10,000 was indirect materials).
c. Paid $167,000 of salaries and wages in cash ($95,000 was direct labor, $35,000 was indirect labor, and $37,000 was related to employees responsible for selling and administration).
d. Various manufacturing overhead costs incurred (on account) to support production,
$33,000.
e. Depreciation recorded on property, plant, and equipment, $90,000 (70% related to manufac- turing equipment and 30% related to assets that support selling and administration).
f. Various selling expenses paid in cash, $27,000.
g. Prepaid insurance expired during the month, $1,200 (80% related to production, and 20%
related to selling and administration).
h. Manufacturing overhead applied to production, $132,000.
i. Cost of goods manufactured, $288,000.
j. Cash sales to customers, $395,000.
k. Cost of goods sold (unadjusted), $285,000.
l. Cash payments to creditors, $62,000.
m. Underapplied or overapplied overhead $ ? . Required:
1. Calculate the ending balances that would be reported on the company’s balance sheet on January 31. You can derive your answers using Microsoft Excel and Exhibit 3A–2 as your guide, or you can use paper, pencil, and a calculator. (Hint: Be sure to calculate the underapplied or overapplied overhead and then account for its affect on the balance sheet.) 2. What is Morrison Company’s net operating income for the month of January?
PROBLEM 3A–5 Transaction Analysis LO3–5
Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.
Star Videos, Inc.
Balance Sheet January 1 Assets
Cash. . . $ 73,000 Accounts receivable . . . 96,000 Inventories:. . . Raw materials (film, costumes) . . . $ 33,000 Videos in process . . . 47,000 Finished videos awaiting sale . . . 78,000 158,000 Prepaid insurance . . . 8,000 Studio and equipment (net) . . . . 530,000 Total assets. . . $ 865,000 Liabilities and Stockholders’ Equity
Accounts payable . . . $ 150,000 Retained earnings . . . . 715,000 Total liabilities and stockholders’ equity . . . $ 865,000
Because the videos differ in length and in complexity of production, the company uses a job- order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied over- head is closed to cost of goods sold. The following transactions were recorded for the year:
a. Film, costumes, and similar raw materials purchased on account, $183,000.
b. Film, costumes, and other raw materials issued to production, $210,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
c. Utility costs incurred (on account) in the production studio, $78,000.
d. Depreciation recorded on the studio, cameras, and other equipment, $82,000. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
e. Advertising expense incurred (on account), $131,000.
f. Salaries and wages paid in cash as follows:
Direct labor (actors and directors) . . . . $84,000 Indirect labor (carpenters to build sets,
costume designers, and so forth) . . . . $105,000 Administrative salaries . . . . $95,000
g. Prepaid insurance expired during the year, $7,000 (70% related to production of videos, and 30% related to marketing and administrative activities).
h. Miscellaneous marketing and administrative expenses incurred (on account), $9,600.
i. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
j. Videos that cost $565,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
k. Sales for the year totaled $930,000 and were all on account.
l. The total cost to produce the videos that were sold according to their job cost sheets was $610,000.
m. Collections from customers during the year totaled $880,000.
n. Payments to suppliers on account during the year, $515,000.
o. Underapplied or overapplied overhead $ ? . Required:
1. Using Exhibit 3A–2 as your guide, prepare a transaction analysis that records all of the above transactions. Calculate the ending balances at December 31 for all balance sheet accounts.
2. Using Exhibit 3A–3 as your guide, prepare a schedule of cost of goods manufactured for the year. If done correctly, your cost of goods manufactured should equal what amount mentioned in the transactions above?