Instructor: Md.

Jahirul Islam
Assistant Professor of Accounting
Department of Business Administration
BGMEA University of Fashion and Technology (BUFT)

Problem-3.2
Aristocracy Fashion Ltd. uses job order costing system and applies overhead cost on the
basis of machine hours. At the beginning of the month of July, 2011 it was estimated that
the company would work 3,20,000 machine hours and incur Tk. 32,00,000 in manufacturing
overhead costs. The company spent the entire month of July, 2011 working on large order
and it had no inventory balances at the beginning of the month of July, 2011. Cost data
relating to July, 2011 follow:
(i)Raw materials were purchased on account/on credit Tk. 3,50,000.
(ii) Raw materials were issued from storeroom to production/Raw materials were
requisitioned for production, Tk. 4,00,000 (80% direct and 20% indirect).
(iii) Employee salary and wages were accrued as follows: direct labor Tk. 2,00,000, indirect
labor Tk.50,000 and selling and administrative salaries, Tk. 1,35,000.
(iv) Utility costs were incurred in the factory, Tk. 92,000.
(v) Advertising costs were incurred, Tk. 1,28,000.
(vi)Prepaid insurance expired during the month, Tk. 40,000 (90% related to the factory
operations, and 10% related to the selling and administrative activities).
(vii) Depreciation was recorded, Tk. 90,000 (80% related to the factory assets and 20%
related to the selling and administrative assets).
(viii) Miscellaneous marketing and administrative expenses incurred, Tk. 15,000.
(ix) Other manufacturing overhead costs incurred, Tk. 10,000.
(x) Manufacturing overhead was applied to the job on the basis of 30,000 machine-hours
actually worked during the period.
(xi) Goods that cost Tk. 2,20,000 were transferred to the finished goods warehouse.
(xii) Sales for the month totaled Tk. 7,10,000. The total cost to manufacture these goods
was Tk. 2,70,000.
(xiii) Payment to the suppliers on account during the month for Tk. 3,00,000, and
payments to the employees for salaries and wages for Tk. 3,50,000.
(xiv) Collections from customers during the month for Tk. 4,50,000.

Required:
(i)Prepare journal entries to record the transactions for the month of July, 2011.

(ii)Is manufacturing overhead underapplied or overapplied for the month of July, 2011?
Prepare a journal entry to close this balance to Cost of Goods Sold.

(iii)Prepare an income statement for the month of July, 2011.

Solution of Problem-3.2

Requirement (i)

Working Note:

Predetermined Overhead Rate

= Estimated Manufacturing Overhead Costs ÷ Estimated Total Units of Allocation Base

=Tk. 32,00,000 ÷ 3,20,000 machine-hours

= Tk. 10 per machine-hour

 Aristocracy Fashion Ltd.
Journal
Date Particulars Dr. (Tk.) Cr. (Tk.)
i Raw Material Dr. 3,50,000
Accounts Payable Cr. 3,50,000
ii Work-in-Process (4,00,000×80%) Dr. 3,20,000
Manufacturing Overhead Dr. 80,000
(4,00,000×20%) 4,00,000
Raw Material Cr.
iii Work-in-Process Dr. 2,00,000
Manufacturing overhead Dr. 50,000
Salaries Expense Dr. 1,35,000
Salaries & Wages Payable Cr 3,85,000
iv Manufacturing overhead Dr. 92,000
Accounts Payable Cr. 92,000
v Advertising Expense Dr. 1,28,000
Accounts Payable Cr. 1,28,000
vi Manufacturing overhead (40,000×90%) Dr. 36,000
Insurance Expense (40,000×10%) Dr. 4,000
Prepaid Insurance Cr. 40,000
vii Manufacturing overhead (90,000×80%) Dr. 72,000
Depreciation Expense (90,000×20%) Dr. 18,000
Accumulated Depreciation Cr. 90,000
viii Miscellaneous Selling & Administrative Dr. 15,000
Expenses
Accounts Payable Cr. 15,000
ix Manufacturing Overhead Dr. 10,000
Accounts Payable Cr. 10,000
x Work-in-Process (30,000×10) Dr. 3,00,000
Manufacturing overhead Cr. 3,00,000
xi Finished Goods Dr. 2,20,000
Work-in-Process Cr. 2,20,000
xii Accounts Receivable Dr. 7,10,000
Sales Cr. 7,10,000
Cost of Goods Sold Dr. 2,70,000
Finished Goods Cr. 2,70,000
xiii Accounts Payable Dr. 3,00,000
Cash Cr. 3,00,000
Salaries & Wages Payable Dr. 3,50,000
Cash Cr. 3,50,000
xiv Cash Dr. 4,50,000
Accounts Receivable Cr. 4,50,000
Requirement (ii)

Particulars Amount (Tk.)

Applied Manufacturing Overhead 3,00,000
Actual Manufacturing Overhead 3,40,000
(80,000+50,000+92,000+36,000+72,000+10,000)

Underapplied Manufacturing Overhead 40,000

Aristocracy Fashion Ltd.

Journal
Date Particulars Amount (Tk.) Amount (Tk.)
Cost of Goods Sold Dr. 40,000
Manufacturing Overhead Cr. 40,000

Requirement (iii)
Aristocracy Fashion Ltd.
Income Statement
For the month ended July 31, 2011

Particulars Amount (Tk.) Amount (Tk.)

Sales 7,10,000
Less: Cost of Goods Sold (2,70,000 + 40,000) 3,10,000

Gross Margin/Gross Profit 4,00,000

Less: Selling & Administration Expenses:
Selling & Administration Salaries 1,35,000
Advertising 1,28,000
Insurance Expense 4,000
Depreciation Expense 18,000

Miscellaneous Selling & Administrative Expenses 15,000

Total Selling & Administration Expenses 3,00,000

Net Operating Income 1,00,000