Question

Sierra Company manufactures woven blankets and accounts for product costs using process costing. The company uses a single processing department. The following information is available regarding its May inventories.

	Beginning inventory	Ending inventory
Raw material inventory	\(60,000	\)92,500
Work-in-process inventory	435,000	515,000
Finished goods inventory	633,000	605,000

The following additional information describes the company’s production activities for May.

Raw material (purchased on credit)	\(250,000
Factory payroll cost (paid in cash)	1,530,000
Other overhead cost (other account credited)	87,000
Material used:
Direct	\)157,500
Indirect	60,000
Labor used:
Direct	\(780,000
Indirect	750,000
Overhead rate as percentage of direct labor	115%
Sales on credit	\)2,500,000

Required

1. Compute the cost of (a) product transferred from production to finished goods and (b) goods sold.
2. Prepare summary journal entries dated 31 May to record the following production activities during May: (a) Raw material purchases (b) Direct material usage (c) Indirect material usage (d) Direct labor cost incurred (e) Indirect labor cost incurred (f) Payment of factory payroll (g) Other overhead costs (h) Overhead applied (i) Goods transferred from production to finished goods, and (j) sale of finished goods.

Short answer

1. Cost of product transferred to finished goods:$1,754,500, Cost of goods sold:$1,782,500.
2. Both sides of the journal totals:$10,548,500.

Step-by-step solution

Definition of Indirect Labor Cost

Indirect costs refer to the costs paid by the business entity to their laborers or employees that are not directly engaged in the production process.

Computation of cost

Particular	Amount ($)
Beginning goods in process inventory	$435,000
Direct materials used in production	157,500
Direct labor used in production	780,000
Overhead applied (115% of direct labor cost)	897,000
Total production costs	2,269,500
Less: Ending goods in process inventory	(515,000)
Transferred to finished goods inventory (a)	$1,754,500
Beginning finished goods inventory	633,000
Add: goods transferred from production	1,754,500
Goods available for sale	2,387,500
Less: Ending finished goods inventory	(605,000)
Cost of goods sold (b)	$1,782,500

Summary of journal entries

31 May	Accounts and Explanation	Debit ($)	Credit ($)
a	Raw material inventory	250,000
	Account payable		250,000
b	Work-in-process inventory	157,500
	Raw material inventory		157,500
c	Factory overhead	60,000
	Raw material inventory		$60,000
d	Work-in-process inventory	780,000
	Factory wages payable		780,000
e	Factory overhead	750,000
	Factory overhead wages payable		750,000
f	Factory wages payable	1,530,000
	Cash		1,530,000
g	Factory overhead	87,000
	Other accounts		87,000
h	Work-in-process	897,000
	Factory overhead		897,000
i	Finished goods inventory	1,754,500
	Work-in-process		1,754,500
j	Accounts receivables	2,500,000
	Sales		2,500,000
	Cost of goods sold	1,782,500
	Finished goods inventory		1,782,500
		$10,548,500	$10,548,500