Explanations of Transactions

We next look at a summary of Robinson Company’s transactions for February 2020 and the corresponding journal entries for those transactions.

1. Purchases of materials (direct and indirect) on credit, $89,000

2. Usage of direct materials, $81,000, and indirect materials, $4,000

3. Manufacturing payroll for February: direct labor, $39,000, and indirect labor, $15,000, paid in cash

4. Other manufacturing overhead costs incurred during February, $75,000, consisting of

• supervision and engineering salaries, $44,000 (paid in cash),

• plant utilities, repairs, and insurance, $13,000 (paid in cash),

• plant depreciation, $18,000

5. Allocation of manufacturing overhead to jobs, $80,000

1. Under normal costing, manufacturing overhead allocated—or manufacturing overhead applied—is the amount of manufacturing overhead costs allocated to individual jobs based on the budgeted rate, $40 per direct manufacturing labor-hour in this case, multiplied by the actual quantity of the allocation base used for each job. (The total actual direct manufacturing labor-hours across all jobs in February 2020 are 2,000.)
2. Keep in mind the distinct difference between transactions 4 and 5. In transaction 4, actual overhead costs incurred throughout the month are added (debited) to the Manufacturing Overhead Control account. These costs are not debited to Work-in-Process Control because, unlike direct costs, they cannot be traced to individual jobs. Manufacturing overhead costs are added (debited) to individual jobs and to Work-in-Process Control only when manufacturing overhead costs are allocated in transaction 5. At the time these costs are allocated, Manufacturing Overhead Control is, in effect, decreased (credited) via its contra account, Manufacturing Overhead Allocated. Manufacturing Overhead Allocated is referred to as a contra account because the amounts debited to it represent the amounts credited to the Manufacturing Overhead Control account. Having Manufacturing Overhead Allocated as a contra account allows the job-costing system to separately retain information about the manufacturing overhead costs the company has incurred (in the Manufacturing Overhead Control account) as well as the amount of manufacturing overhead costs it has allocated (in the Manufacturing Overhead Allocated account). If the allocated manufacturing overhead had been credited to manufacturing overhead control, the company would lose information about the actual manufacturing overhead costs it is incurring.
3. Under the normal-costing system described in our Robinson Company example, at the beginning of the year, the company calculated the budgeted manufacturing overhead rate of $40 per direct manufacturing labor-hour by predicting the company’s annual manufacturing overhead costs and the annual quantity of the cost-allocation base. Almost certainly, the total of the amounts allocated using the budgeted manufacturing rate will differ from the predicted total manufacturing overhead costs. We discuss what to do with this difference later in the chapter.

6. The sum of all individual jobs completed and transferred to finished goods in February 2020 is $188,800

7. Cost of goods sold, $180,000

8. Marketing costs for February 2020, $45,000, and customer-service costs for February 2020, $15,000, paid in cash

9. Sales revenues from all jobs sold and delivered in February 2020, all on credit, $270,000