P19-36B

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?

Solution:

Requirement 1

Predetermined
Overhead = Total Estimated overhead costs / Total Estimated Quantity of the overhead allocation base
Allocation Rate
= $1,150,000 / $5,750,000
= 0.2
= 20% of the Direct labor cost

Requirement 2

Date Accounts and Explanation Debit Credit

Aug.31 (a) Raw material Inventory 450,000
Accounts Payable 450,000
(To record raw materials purchased on credit)
Aug.31 (b) Work-in-Process Inventory 270,000
Raw materials Inventory 270,000
(To record raw materials used and assigned to WIP)
Aug.31 (c) Work-in-Process Inventory 189,000
Construction Overhead 51,000
Wages payable 240,000
(To record direct labor assigned to WIP and indirect overheads)
Aug.31 (d) Construction Overhead 6,300
Accumulated depreciation - Equipment 6,300
(To record depreciation accumulated in construction overhead)
Aug.31 (e) Construction Overhead 45,000
Cash 40,000
Prepaid insurance 5,000
(To record payment of rent and expiration of prepaid insurance)
Aug.31 (f) Work-in-Process Inventory 37,800
Construction overhead 37,800
(To record overhead allocated to WIP)
Aug.31 (g) Finished goods inventory 236,200
Work-in-Process Inventory 236,200
(To record jobs completed and costs assigned to finished goods)
Aug.31 (h) Accounts receivable 250,000
Sales revenue 250,000
(To record sale of house no.404 on credit)
Aug.31 (h) Cost of goods sold 127,800
Finished goods inventory 127,800
(To record cost of good sold)

(b) Raw material used = House No.402 + House No.403 + House No.404 + House No. 405
= $52,000 + $67,000 + $63,000 + $88,000
= $270,000
(c) Direct labor = House No.402 + House No.403 + House No.404 + House No. 405
= $47,000 + $36,000 + $54,000 + $52,000
= $189,000
Construction overhead = Wages payable - Direct labor
= $240,000 - $189,000

1
 = $51,000
(f) Allocated Direct labor = Predetermined overhead allocation rate * Direct labor cost
= 20% * $189,000
= $37,800
(g) Cost of House No. 402 = Direct material + Direct labor + Indirect Overhead
= $52,000 + $47,000 + (20% * $47,000)
= $108,400
Cost of House No. 404 = Direct material + Direct labor + Indirect overhead
= $63,000 + $54,000 + (20% * $54,000)
= $127,800
Finished Goods inventory = Cost of House No. 402 + Cost of House No. 404
= $108,400 + $127,800
= $236,200
(h) Cost of House No. 404 = Direct Material + Direct labor + Indirect overhead
= $63,000 + $54,000 + (20% * $54,000)
= $127,800

Requirement 3

Work-in-Process Inventory Finished Goods Inventory

(b) Direct Material 270,000 236,200 (g) Finished goods inventory (g) Finished 236,200 127,800 (h) Cost of
(c) Direct Labor 189,000 Goods inventory Goods sold
(f) Construction Overhead 37,800
Balance 260,600 Balance 108,400

Requirement 4

MEADOW CONSTRUCTION, INC.

Reconciliation of Work-in-Process Inventory Subsidiary
and Control Accounts

Total WIP
Particulars House #403 House #405 Balance
Unfinished houses: US$67,000 US$88,000
Direct Materials US$36,000 US$52,000
Direct Labor 7,200 10,400
Construction Overhead (20% of direct labor) 110,200 150,400 260,600
Total cost equals Ending Work-In-Process Inventory

Requirement 5

MEADOW CONSTRUCTION, INC.

Reconciliation of Finished Goods Inventory Subsidiary
and Control Accounts
Particulars House #402
Completed, unsold house:
Direct Materials US$52,000
Direct Labor 47,000
Construction Overhead (20% of direct labor) 940

Total cost equals Ending Finished Goods Inventory 99,940

Requirement 6

MEADOW CONSTRUCTION, INC.

Gross Profit on Homes Sold in August
Particulars House #404
Sales revenue US$250,000
Less: Cost of goods sold (127,800)
US$122,200
Gross profit

Cost of House No. 404 = Direct material + Direct labor + Indirect overhead
= $63,000 + $54,000 + (20% * $54,000)
= $127,800