Inventory and Cost

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. (The Norwegian currency is the krone, which is denoted by Nkr. ) The company uses a sob-order costing system arid applies manufacturing overhead cost to jobs on the basis of direct labor-hours. At the beginning of the year, the following estimates were made for the purpose of computing the predetermined overhead rate: manufacturing overhead cost, Nkr360,000; and direct labor-hours, 900.

The following transactions took place during the year (all purchases and services were acquired on account):

a. Raw materials were purchased for use in production, Nkr200,000.

b. Raw materials were requisitioned for use in production (all direct materials), Nkr185,000.

c. Utility bills were incurred, Nkr70,000 (90% related to factory operations, and the remainder related to selling and administrative activities).

d. Salary and wage costs were incurred: [pic] e. Maintenance costs were incurred in the factory, Nkr54,000.

f. Advertising costs were incurred, Nkrl36,000.

g. Depreciation was recorded for the year, Nkr95,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).

h. Rental cost incurred on buildings, Nkrl20,000 (85% related to factory operations, and the remainder related to selling and administrative facilities).

i. Manufacturing overhead cost was applied to jobs, Nkr

j. Cost of goods manufactured for the year, Nkr770,000.

k. Sales for the year (all on account) totaled Nkrl,200,000. These goods cost Nkr800,000 according to their job cost sheets. The balances in the inventory accounts at the beginning of the year were: [pic]


  1. Prepare journal entries to record the preceding data.
  2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above. ) Determine the ending balances in the inventory accounts and in the Manufacturing Overhead account.
  3. Prepare a schedule of cost of goods manufactured.
  4. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost Goods Sold. Prepare a schedule of cost of goods sold.
  5. Prepare an income statement for the year.
  6. Job 412 was one of the many jobs started and completed during the year.

The job required Nkr8,000 in direct materials and 39 hours of direct labor time at a total direct labor cost of Nkr9,200. The job contained only four units. If the company bills at a price 60% above the unit product cost on the job cost sheet, what price per unit would have been charged to the customer?


1. a. Raw Materials 200,000    Accounts Payable  200,000       b. Work in Process 185,000    Raw Materials  185,000       c. Manufacturing Overhead 63,000    Utilities Expense 7,000    Accounts Payable  70,000       d. Work in Process 230,000    Manufacturing Overhead 90,000    Salaries Expense 110,000    Salaries and Wages Payable  430,000       e. Manufacturing Overhead 54,000    Accounts Payable  54,000       f. Advertising Expense 136,000    Accounts Payable  136,000       g. Manufacturing Overhead 76,000    Depreciation Expense 19,000    Accumulated Depreciation  95,000       h.Manufacturing Overhead 102,000    Rent Expense 18,000    Accounts Payable  120,000       i. Work in Process 390,000    Manufacturing Overhead  390,000  [pic] 975 actual DLH ? Nkr400 per DLH = Nkr390,000 j. Finished Goods 770,000    Work in Process  770,000       k. Accounts Receivable 1,200,000    Sales  1,200,000   Cost of Goods Sold 800,000    Finished Goods  800,000 

2. Accounts Receivable Sales  (k) 1,200,000  Bal. 30,000  Bal. 21,000  Bal. 60,000        (a) 200,000 (d)       Direct materials:    Raw materials inventory, beginning Nkr 30,000   Purchases of raw materials  200,000   Materials available for use 230,000   Raw materials inventory, ending  45,000   Materials used in production  Nkr185,000  Direct labor  230,000  Manufacturing overhead applied to work in process   390,000  Total manufacturing costs  805,000  Add: Work in process, beginning   21,000    826,000  Deduct: Work in process, ending   56,000  Cost of goods manufactured  Nkr770,000     

4.  Manufacturing Overhead 5,000    Cost of Goods Sold  5,000        Schedule of cost of goods sold:     Finished goods inventory, beginning  Nkr 60,000   Add: Cost of goods manufactured   770,000   Goods available for sale  830,000   Deduct finished goods inventory, ending   30,000   Unadjusted cost of goods sold  800,000   Deduct: Overapplied overhead   5,000   Adjusted cost of goods sold  Nkr795,000 

5. Froya Fabrikker A/S  Income Statement  Sales  Nkr1,200,000  Cost of goods sold   795,000  Gross margin  405,000  Selling and administrative expenses:    Advertising expense Nkr136,000   Utilities expense 7,000   Salaries expense 110,000   Depreciation expense 19,000   Rent expense  18,000  290,000  Net operating income  Nkr 115,000 

6. Direct materials Nkr 8,000  Direct labor 9,200  Manufacturing overhead applied  15,600  (39 hours ? Nkr400 per hour)   Total manufacturing cost 32,800  Add markup (60% ? Nkr32,800)  19,680  Total billed price of Job 412 Nkr52,480  Nkr52,480 ? 4 units = Nkr13,120 per unit