Page 759 - Accounting Principles (A Business Perspective)

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c. Prepare the journal entry to transfer underapplied or overapplied overhead to Cost of Goods Sold.

Beyond the numbers—Critical thinking
Business decision case A Companies often do work on a cost-reimbursement basis. That is, Company B
reimburses Company A for the cost of doing work for Company B. Suppose your company has a contract that calls
for reimbursement of direct materials and direct labor, but not overhead. Following are costs that various
organizations incur; they fall into three categories: direct materials (DM), direct labor (DL), or overhead (OH).
Glue used to attach labels to bottles containing a patented medicine.

Compressed air used in operating paint sprayers for Student Painters, a company that paints houses and
apartments.
Insurance on a factory building and equipment.
A production department supervisor's salary.
Rent on factory machinery.
Iron ore in a steel mill.
Oil, gasoline, and grease for forklift trucks in a manufacturing company's warehouse.
Services of painters in building construction.
Cutting oils used in machining operations.

Cost of paper towels in a factory employees' washroom.
Payroll taxes and fringe benefits related to direct labor.
The plant electricians' salaries.
Crude oil to an oil refinery.
Copy editor's salary in a book publishing company.
a. Classify each of these items as direct materials, direct labor, or overhead.
b. Assume your classifications could be challenged in a court case. Indicate to your attorneys which of your

answers for part a might be successfully disputed by the opposing attorneys. In which answers are you completely
confident?
Business decision case B Quality Painters, Inc., uses a job cost system. As of 2010 January 1, its records
showed the following inventory balances:
Materials $ 7,000
Work in process 50,000
Finished goods 0
The work in process inventory consisted of two jobs:
Job No. Direct Direct OverheadTotal
Materials Labor
100 Community $ 9,000 $12,000 $ 4,000 $25,000
housing
101 Regal apartments 10,000 9,000 6,000 25,000
$19,000 $21,000 $10,00 $50,000
Here are data for the company for January:
Materials purchased, USD 90,000.

Direct labor costs: direct labor to Job No. 100, USD 20,000; to Job No. 101, USD 48,000; and to Job No. 102 (a
new job), USD 50,000. Indirect labor, USD 10,000.
Direct materials used: direct materials for Job No. 100, USD 15,600; for Job No. 101, USD 28,800; and for Job
No. 102, USD 48,000. Supplies (indirect materials) used amounted to USD 4,000.

Accounting Principles: A Business Perspective 760 A Global Text