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SRS Educational Supply Company provides educational materials and supplies to educational institutions. The company meets educational supply needs with workbooks, classroom visual aids, instructor support materials, art supplies, lab supplies, and administrative office supplies. Despite providing consistent services, the company uses job order costing, assigning costs to processing units. For example, the company calculates sales/marketing costs for a period and divides them by the number of customers to determine the cost per customer, which aids in calculating sales/marketing and customer costs. Though service industries may not perfectly match normal costing systems, these concepts help determine costs per customer.

The SRS Educational Press, a wholly owned subsidiary, primarily produces print materials for customers. It also publishes and maintains a stock of books for general sale. The press uses normal costing, with two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead, allocated based on direct manufacturing labor costs).

The following data (in thousands) pertains to 2017:

- Direct materials and supplies purchased on credit: $800
- Direct materials used: $710
- Indirect materials issued to various production departments: $100
- Direct manufacturing labor: $1,300
- Indirect manufacturing labor incurred by various production departments: $900
- Depreciation on building and manufacturing equipment: $400
- Miscellaneous manufacturing overhead incurred by various production departments: $550 (Ordinarily, this would include repairs, photocopying, utilities, etc.)
- Manufacturing overhead allocated at 160% of direct manufacturing labor costs: ?
- Cost of goods manufactured: $4,120
- Revenues: $8,000
- Cost of goods sold (before adjustment for under- or overallocated manufacturing overhead): $4,020

Inventories, December 31, 2016 (not 2017):

- Materials control: $100
- Work-in-process control: $60
- Finished goods control: $500

Tasks:

1. Prepare an overview diagram of the job-costing system at the SRS Educational Press.

2. Prepare journal entries to summarize the 2017 transactions. As your final entry, dispose of the year-end under- or overallocated manufacturing overhead as a write-off to the cost of goods sold. Number your entries. Explanations for each entry may be omitted.

3. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead Control, and Manufacturing Overhead Allocated.

4. How did the SRS Educational Press perform in 2017? Should the company continue in-house press production?

Answer :

Final answer:

The job-costing system at the SRS Educational Press involves two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool. Journal entries are used to summarize the 2017 transactions, including the allocation of costs. The SRS Educational Press performed favorably in 2017, but further analysis is needed to determine the future of in-house press production.

Explanation:

1. Overview diagram of the job-costing system at the SRS Educational Press:

The job-costing system at the SRS Educational Press involves two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead). Direct materials and supplies purchased on credit are used in production, while direct materials and direct manufacturing labor are allocated to specific job orders. Indirect materials, indirect manufacturing labor, and miscellaneous manufacturing overhead are also incurred and allocated based on the direct manufacturing labor costs.

2. Journal entries to summarize the 2017 transactions:

  1. Debit Direct materials and supplies purchased on credit and credit Accounts Payable.
  2. Debit Work-in-process control and credit Direct materials used for the materials used in production.
  3. Debit Manufacturing overhead and credit Indirect materials issued to various production departments for the indirect materials used.
  4. Debit Work-in-process control and credit Direct manufacturing labor for the direct manufacturing labor costs incurred.
  5. Debit Manufacturing overhead and credit Indirect manufacturing labor incurred by various production departments for the indirect labor costs.
  6. Debit Manufacturing overhead and credit Depreciation on building and manufacturing equipment for the depreciation expense.
  7. Debit Manufacturing overhead and credit Miscellaneous manufacturing overhead incurred by various production departments for the miscellaneous manufacturing overhead costs.
  8. Debit Manufacturing overhead allocated and credit Manufacturing overhead for the allocation of overhead at 160% of direct manufacturing labor costs.
  9. Debit Work-in-process control, Finished goods control, and Manufacturing overhead allocated, and credit Cost of goods manufactured for the cost of goods manufactured.
  10. Debit Accounts Receivable and credit Revenues for the revenues earned.
  11. Debit Cost of goods sold and credit Finished goods control for the cost of goods sold.
  12. Debit Cost of goods sold and credit Manufacturing overhead allocated for the write-off of under- or overallocated manufacturing overhead to cost of goods sold.

3. Posted T-accounts:

  • Materials control: Debit - $800, Credit - $710
  • Work-in-process control: Debit - $710, Credit - $500, Credit - $4,120
  • Finished goods control: Debit - $4,020, Credit - $8,000
  • Manufacturing Overhead Control: Debit - $550, Debit - $400, Credit - $900, Credit - $1,300, Credit - $100, Credit - $710, Credit - $160% of direct manufacturing labor costs
  • Manufacturing Overhead Allocated: Debit/Credit - $160% of direct manufacturing labor costs

4. The performance of the SRS Educational Press in 2017:

The company had revenues of $8,000 and incurred costs of goods manufactured of $4,120 and costs of goods sold of $4,020. The company also disposed of the under- or overallocated manufacturing overhead of $160% of direct manufacturing labor costs as a write-off to cost of goods sold. The performance seems favorable as the company generated revenue and managed to keep the costs of goods sold close to the costs of goods manufactured. However, a more detailed analysis is required to determine if the company should continue to have in-house press production.

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