Q17-36PGB - Horngren'S Financial And Managerial Accounting

Question

Meadow Construction, Inc. is a home builder in Arizona. Meadow uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:

a. Purchased materials on account, \(450,000.

b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.

	Direct material	Direct Labor
House 402	\)52,000	\(47,000
House 403	67,000	36,000
House 404	63,000	54,000
House 405	88,000	52,000

c. The company incurred total wages of \)240,000. Use the data from Item b to

assign the wages. Wages are not yet paid.

d. Depreciation of construction equipment, \(6,300.

e. Other overhead costs incurred: Equipment rentals paid in cash, \)40,000; Worker liability insurance expired, \(5,000.

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

h. House sold on account: 404 for \)250,000.

Requirements

1. Calculate Meadow’s predetermined overhead allocation rate for the year.

2. Prepare journal entries to record the events in the general journal.

3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.

Post the appropriate entries to these accounts, identifying each entry by letter.

Determine the ending account balances, assuming that the beginning balances

were zero.

4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.

5. Add the cost of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.

6. Compute gross profit on the house that was sold. What costs must gross profit

cover for Meadow Construction?

 

Step-by-Step Solution

Answer

1. The predetermined overhead allocation rate of the company is $0.20

2. Journal entries to record events in the general journal 

Date	Particulars	Debit ($)	Credit ($)
A	Raw material inventory	450,000
	Accounts payable		450,000
B	Work-in-process inventory (52,000+67,000+63,000+88,000)	270,000
	Raw material inventory		270,000
C	Work-in-process inventory (47,000+36,000+54,000+52,000)	189,000
	Manufacturing overhead	51,000
	Wages payable		240,000
D	Manufacturing overhead	6,300
	Accumulated depreciation		6,300
E	Manufacturing overhead	45,000
	Cash		40,000
	Prepaid insurance		5,000
F	Work-in-process inventory	37,800
	Manufacturing overhead		37,800
G	Finished goods inventory	236,200
	Work-in-process inventory		236,200
H	Account receivable	250,000
	Sales		250,000
I	Cost of goods sold	127,800
	Finished goods inventory (63,000+54,000+(54,000 x 0.20)		127,800

 

3. T-Account 

Work-in-process inventory

B	270,000	G	236,200
C	189,000
F	37,800
Balance	260,600

 

Finished goods inventory

G	236,200	I	127,800
Balance	108,400

 

4. The total cost of the unfinished house is $260,600

 

5. The total cost of the completed house that has not been sold is $108,400.

 

6. Gross profit on the house that was sold is $122,200. The gross profit covers the cost of production (direct material, direct labor, and the manufacturing overhead)

Meaning of Direct Labor Cost

Direct labor cost means the wages paid to the employees of a company who are engaged in the manufacturing of products. It is used to compute the total cost of the product.

The predetermined overhead allocation rate for the year

$$\begin{gathered} Predetermined overhead allocation rate=\frac{Total estimated overhead \cos ts}{Total estimated direct labor \cos ts} \\ =\frac{\$1,150,000}{\$5,750,000} \\ =20\% \end{gathered}$$

Allocation of manufacturing overhead

$$\begin{gathered} Allocation of manufacturing overhead=Total direct labour \cos t\times Predetermined \\ overhead allocation rate \\ =\$189,000\times 20\% \\ =\$37,800 \end{gathered}$$

Finished goods inventory

Particulars	Amount ($)
Direct material of house 402	52,000
Direct labor of house 402	47,000
Manufacturing overhead of house 402 (47,000 x 0.20)	9,400
Direct material of house 404	63,000
Direct labor of house 404	54,000
Manufacturing overhead of house 404 (54,000 x 0.20)	10,800
Total amount of finished goods inventory	236,200

Adding the cost of unfinished houses to show the total amount equal to the ending WIP

Particulars	Amount ($)
Direct material of house 403	67,000
Direct labor of house 403	36,000
Manufacturing Overhead (36,000 x 0.20)	7,200
Direct material of house 405	88,000
Direct labor of house 405	52,000
Manufacturing Overhead (52,000 x 0.20)	10,400
Total	260,600

Adding the cost of completed houses that have not been sold to show the total amount equal to the finished goods inventory

Particulars	Amount ($)
Direct material of house 402	52,000
Direct labor of house 402	47,000
Manufacturing Overhead (47,000 x 0.20)	9,400
Total	108,400

The gross profit of the house sold

$$\begin{gathered} Gross profit=Sale-Costs of goods sold \\ =\$250,000-\$127,000 \\ =\$122,200 \end{gathered}$$