Superior Construction, Inc. is a home builder in Arizona. Superior uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:
a. Purchased materials on account, \(400,000.
b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.
| Direct material | Direct Labor |
House 402 | \)58,000 | \(44,000 |
House 403 | 62,000 | 32,000 |
House 404 | 61,000 | 58,000 |
House 405 | 86,000 | 57,000 |
c. The company incurred total wages of \)300,000. Use the data from Item b to assign the wages. Wages are not yet paid.
d. Depreciation of construction equipment, \(6,700.
e. Other overhead costs incurred: Equipment rentals paid in cash, \)30,000; Worker liability insurance expired, \(7,000.
f. Allocated overhead to jobs.
g. Houses completed: 402, 404.
h. House sold on account: 404 for \)250,000.
Requirements
1. Calculate Superior’s predetermined overhead allocation rate for the year.
2. Prepare journal entries to record the events in the general journal.
3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.
Post the appropriate entries to these accounts, identifying each entry by letter.
Determine the ending account balances, assuming that the beginning balances
were zero.
4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.
5. Add the costs of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.
6. Compute gross profit on the house that was sold. What costs must gross profit
cover for Superior Construction?
