Comprehensive example of job

order costing system

ZIKO manufacturing company uses job order costing system. The company uses
machine hours to apply overhead cost to jobs. At the beginning of 2016, the
company estimated that 150,000 machine hours would be worked and $900,000
overhead cost would be incurred during 2016.

The balances of raw materials, work in process (WIP), and finished goods at the
beginning of 2016 were as follows:

Raw materials $ 40,000

Work in process 30,000
Finished goods 60,000

ZIKO manufacturing company recorded the following transactions during 2016:

a. Raw materials purchased on account, $820,000.

b. Raw materials were requisitioned for use in production, $760,000
($720,000 direct materials and $40,000 indirect materials).
c. Direct labor labor, $150,000; indirect labor, $220,000; sales commission,
$180,000; and administrative salaries, $400,000.
d. Sales travel costs were $34,000.
e. Utility costs incurred in the factory, $86,000.
f. Advertising expenses were $360,000.
g. Depreciation for the year was $700,000 ($560,000 relates to factory and
$140,000 relates to selling and administrative activities).
h. Insurance expired during the year, $20,000 ($14,000 relates to factory
operations and $6,000 relates to selling and administrative activities).
i. ZIKO manufacturing company worked 160,000 machine hours.
Manufacturing overhead was applied to production.
j. Goods costing $1,800,000 were completed during the year.
k. The goods costing $1,740,000 were sold to customers for $3,000,000.

Required:

1. Prepare journal entries, T-accounts and income statement from the above
information.
2. Prepare a journal entry to close the balance in manufacturing overhead
account (over or under applied manufacturing overhead) to cost of goods sold.

Solution:
1. Journal entries:
*Application of manufacturing overhead (entry 9):

Manufacturing overhead is applied to production by multiplying actual direct labor or

machine hours worked during the year and predetermined overhead rate computed at
the beginning of the year. It is shown as follows:

= $900,000 / 150,000 machine hours

=$6 per machine-hour

Manufacturing overhead applied to production = Actual machine hours

Predetermined overhead rate
 = 160,000 hours $6

$960,000

T accounts:
Cost of goods sold statement:

*Over applied manufacturing overhead

2. Journal entry to close the balance in manufacturing overhead account

(Disposition of over or under applied manufacturing overhead):

Notice that the balance in manufacturing overhead account is credit. It means

overhead is over-applied. The following journal entry would dispose it off to cost of
goods sold:

Manufacturing overhead 40,000

Cost of goods sold 40,000