Q30PGA - Horngren'S Financial And Managerial Accounting

Question

Superior Construction, Inc. is a home builder in Arizona. Superior 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, \(400,000.

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

	Direct material	Direct Labor
House 402	\)58,000	\(44,000
House 403	62,000	32,000
House 404	61,000	58,000
House 405	86,000	57,000

c. The company incurred total wages of \)300,000. Use the data from Item b to assign the wages. Wages are not yet paid.

d. Depreciation of construction equipment, \(6,700.

e. Other overhead costs incurred: Equipment rentals paid in cash, \)30,000; Worker liability insurance expired, \(7,000.

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

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

Requirements

1. Calculate Superior’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 costs 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 Superior Construction?

Step-by-Step Solution

Answer

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

 

2. Journal entries to record the transactions undertaken are recorded in step 2.

 

3. The closing balance of the work-in-process inventory T-account is $254,800 and the finished goods inventory T-account is $110,800.

 

4. The total cost of the unfinished house is $254,800

 

5. The total cost of the completed house that has not yet sold is $110,800

 

6. Gross profit on the house that was sold is $119,400. The gross profit covers the cost of production (Direct material, direct labor, and the manufacturing overhead).

Step-by-Step Solution Step 1: Overhead cost

The overhead cost means the total of indirect expenses incurred by the company while manufacturing the products or creating a service.

Step 2: The predetermined overhead allocation rate for the year

$\begin{array}{c}\mathbf{Predeterminedoverheadallocationrate}\mathbf{=}\frac{\mathrm{Totalestimatedoverheadcosts}}{\mathrm{Totalestimatedquantityoftheoverheadallocationbase}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$1,150,000}{\$5,750,000}\\ \mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{20}\end{array}$

Step 3: Journal entries

Date	Particulars	Debit ($)	Credit ($)
A	Raw material inventory	400,000
	Accounts payable		400,000
B	Work-in-process inventory (58,000+62,000+61,000+86,000)	267,000
	Raw material inventory		267,000
C	Work-in-process inventory (44,000+32,000+58,000+57,000)	191,000
	Manufacturing overhead	109,000
	Wages payable		300,000
D	Manufacturing overhead	6,700
	Accumulated depreciation		6,700
E	Manufacturing overhead	37,000
	Cash		30,000
	Prepaid insurance		7,000
F	Work-in-process inventory	38,200
	Manufacturing overhead		38,200
G	Finished goods inventory (58,000+44,000+(44,000 x0.20)+61,000+58,000+(58,000 x 0.20)	241,400
	Work-in-process inventory		241,400
H	Account receivable	250,000
	Sales		250,000
	Cost of goods sold	130,600
	Finished goods inventory (61,000+58,000+(58,000 x 0.20)		130,600

Step 4: T-account of WIP inventory and the finished goods inventory

                                   Work-in-process inventory

B	267,000	G	241,400
C	191,000
F	38,200
Balance	254,800

                                      Finished goods inventory

G	241,400	H	130,600
Balance	110,800

Step 5: Adding the cost of unfinished houses to show the total amount equal to the ending WIP

Particulars	Amount ($)
Direct material of house 403	62,000
Direct labor of house 403	32,000
Manufacturing Overhead (32,000 x 0.20)	6,400
Direct material of house 405	86,000
Direct labor of house 405	57,000
Manufacturing Overhead (57,000 x 0.20)	11,400
Total	254,800

Step 6: Adding the cost of completed houses that has not yet sold to show the total amount equal to the finished goods inventory

Particulars	Amount ($)
Direct material of house 402	58,000
Direct labor of house 402	44,000
Manufacturing Overhead (44,000 x 0.20)	8,800
Total	110,800

Step 7: The gross profit of the house sold

$\begin{array}{c}\mathrm{Grossprofit} =\mathrm{Sale}-\mathrm{Cost} \mathrm{of} \mathrm{good} \mathrm{ssold}\\ =\$250,000-\$130,600\\ =119,400\end{array}$