Watson Manufacturing Company employs a job order cost accounting system and keeps perpetual inventory records. The following transactions occurred in the first month of operations: 1. Direct materials requisitioned during the month:
Job 101………………………………..$20,000
Job 102…………………………………16,000
Job 103…………………………………24,000
…………………………………………$60,000
2. Direct labor incurred and charged to jobs during the month was:
Job 101…………………………………$30,000
Job 102…………………………………..28,000
Job 103…………………………………..20,000
…………………………………………..$78,000
3. Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate based on 75% of direct labor costs.
4. Actual manufacturing overhead costs incurred during the month amounted to $66,000.
5. Job 101 consisting of 1,000 units and Job 103 consisting of 200 units were completed during the month.
Prepare journal entries to record the above transactions.
Instructions
(a) Prepare journal entries to record the above transactions.
(b) Answer the following:
1. How much manufacturing overhead was applied to Job 103 during the month?
2. Compute the unit cost of Jobs 101 and 103.
3. What is the balance in Work In Process Inventory at the end of the month?
4. Determine if manufacturing overhead was under- or overapplied during the month. How much?

Watson Manufacturing Company

a) Journal Entries:

Description                Debit           Credit

Job 101                    $20,000

Job 102                      16,000

Job 103                     24,000

Direct materials                            $60,000

To record direct materials requisitioned during the month.

Job 101                 $30,000

Job 102                  28,000

Job 103                  20,000

Direct labor                                 $78,000

To record direct labor incurred and charged to jobs during the month.

Job 101                $22,500

Job 102                  21,000

Job 103                  15,000

Manufacturing Overhead          $58,500

To record manufacturing overhead costs applied

Manufacturing Overhead    $66,000

Cash Account                                          $66,000

To record the payment for manufacturing overhead.

Finished Goods Inventory $131,500

Job 101                                                     $72,500

Job 103                                                    $59,000

To transfer Jobs 101 & 103 to finished goods inventory.

b.1) Manufacturing overhead applied to Job 103 during the month is $15,000.

b.2) Computation of unit cost of Jobs 101 and 103:

                                                         Jobs 101        Job 103

Direct materials                               $20,000       $24,000

Direct labor                                        30,000         20,000

Manufacturing overhead applied     22,500         15,000

Total production costs                    $72,500      $59,000

Units produced                                    1,000              200

Unit costs                                          $72.50           $295

b.3) Work in Process Inventory:

Job 102:

Direct materials  $`16,000

Direct labor           28,000

Overhead applied 21,000

Total                   $65,000

4. Under- or overapplication of Manufacturing Overhead:

Actual overhead expense = $66,000

Applied overhead costs =      58,500

Underapplied by                     $7,500

Explanation:

a) We used journal entries to record the transactions for the jobs as they occurred during the month.  The entries showed which account was to be debited and which was to be credited, as every transaction affects the two sides of the accounting equation.  One account gave value and the other account received the value.  It is from the journal entries that the postings to the ledger accounts would be carried out.

b) In Watson Manufacturing Company's job costing system, each completed job is transferred out to the finished goods inventory account for sale.

c) Sometimes, the manufacturing overhead is underapplied or overapplied as Watson Manufacturing Company uses a predetermined rate of 75% of direct labor to apply overheads to the jobs.  It is underapplied when the actual overhead expense is higher than the applied costs, and vice versa.

d) The unit cost of Jobs 101 and 103 is determined by summing the direct material, labor, and overhead applied costs and then dividing by the number of units produced.

e) Job 102 was not completed during the period, and its costs are transferred to the Work In Process Inventory.

answer; rapid growth in buyer demand and high buyer switching cost;