Starr company reports the following information for august.

Recording product costs

Starr Company reports the following information for August.::

Raw materials purchases on account......................$76,200

Direct materials used in production.........................$48,000

Factory wages earned (direct labor)........................$15,350

Overhead rate..........................................................120% of direct labor cost

Prepare journal entries to record the following events.

!. Raw material purchased.

2. Direct materials used in production.

3. Direct labor used in production

4. Applied overhead

Answer

General guidance

Concepts and reason
Transaction: A business transaction refers to any events that affect the financial position of the business that can be reliably measured in monetary terms. A business transaction affects the accounting equation.

Journal entry: Journal is the book of original entry, where all the monetary transactions are recorded date-wise with the debit and credit entry. The record of business transactions in a chronological order in the journal is referred to as journal entry. Journal entry is represented in the form of a table with the Date, Accounts Titles and Explanation, Reference Number, Debit, and Credit columns.

Job order costing: It is a method of cost accounting, in which cost is collected and Job order costing. It is a method of cost accounting, in which cost is collected and accumulated for each job, work order, or project separately. Especially the job order costing is followed in organizations where customized goods are produced. The costs of goods manufactured incurred in each job, or project, work order are determined in the Cost of Good Manufactured Schedule.

Direct materials: Direct materials are the raw materials that are directly associated with the production of the goods in the factory. Direct material per unit is the cost of direct material incurred to produce one unit of product.

Direct labor costs: Direct labor costs are the wages paid to the laborers working directly in the factory premises. These costs are incurred to convert the raw material into finished goods.

Manufacturing overhead costs: The costs which do not relate directly with the manufacturing of products are referred to as manufacturing overhead costs or indirect costs. Example Insurance cost related to factory operations, Depreciation incurred on factory equipment rent, electricity, wages to workers, and depreciation on manufacturing equipment.

Inventory: Inventory is the total of three components, raw material, work in process and finished goods and recorded as current asset on the balance sheet. Ending inventory includes the ending balances of the aforesaid components.

Raw materials: Raw materials inventory is the source ingredient of production used to manufacture the finished product.

Work-in-process (WIP): Work-in-process inventory is the partially completed goods which must go through other processes before being transformed into finished goods. Manufacturing costs like direct labor costs and direct overhead costs are added to work-in-process value because these are also the manufacturing or production costs.

Finished goods: Finished goods inventory are the finished or completed goods which are ready for sale.

Fundamentals

Accounting Equation: This is a mathematical equation which represents the association between assets, liabilities and stockholders’ equity. This is also called as balance sheet equation. It is represented as follows:

Assets (A)
Stockholders Equity (SE)
Liabilities (L)

Assets: Assets are the resources possessed or controlled by company to generate income in the future is known as an asset. Assets are classified into current assets, non-current assets, fixed assets, and intangible assets. Assets are recorded according to their liquidity, convertibility into cash.

Liabilities: Liabilities are contractual agreements made by a company to pay certain amount to suppliers, lenders, or any organizations which arise due to operations of business. Liabilities are classified into current liabilities and long-term liabilities. Current liabilities are the obligations to be paid within a year, and long-term liabilities have a longer maturity period.

Stockholders’ equity: Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known also as net assets of the company, which is assets minus liabilities. Stockholders’ equity section includes preferred stock, common stock, retained earnings, treasury stock, and accumulated other comprehensive income.

Revenues: Revenue is the income received by a company from its business operations. This is the top line of the income statement. Expenses are deducted from top line to attain bottom line of the income statement, net income.

Expenses: Expenses are money spent by a company to generate revenue. Expenses are reported on the income statement and include cash expenses, non-cash expenses like depreciation, and written off benefits due to uncertainty.

The format of journal entry is shown below:

Accounts title and explanation Post Ref.Debit (S) Credit (S)
Date
Year
Reference
Number
Reference
Number
Month
Day Debit Acco

Normal balance of an account: Normal balance of an account refers to that side of the account where the increase in the account is recorded. Normal balance means, the usual or natural balance of a particular account. All assets accounts have normal debit balances and all liabilities accounts have normal credit balances. Revenue/Income account normally have credit balances, expense account normally has debit balances.

Accounts
Debit/ Credit
Debit
Assets account
Liabilities account
Credit
Debit
Expenses account
Income account
Credit
Dividends

Rules of debit and credit: The category of accounts determines how the increases and decreases are recorded in the said account. In other words, the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

1.Debit increases all asset and expenses accounts. Debit decreases all liabilities, revenues and stockholders’ equity account.

2.Credit increases all liabilities, revenues and stockholders’ equity account. Credit decreases all asset and expense accounts.

Step-by-step

Step 1 of 4

Prepare journal entry for the purchase of raw material on account:

Post
Debit (S)
Credit (S)
Accounts title and explanation
Date
Ref.
Raw Materials Inventory (A+
Accounts Payable (L+)
To recor

Post
Debit (S)
Credit (S)
Accounts title and explanation
Date
Ref.
Raw Materials Inventory (A+
Accounts Payable (L+)
To recor


• Raw material inventory is an asset and it increases due to purchase of inventory. Therefore, debit raw material inventory account with $76,200.

• Accounts payable is a liability and it increases due to raw materials were purchased on account. Therefore, credit accounts payable account with $76,200.

Step 2 of 4

Prepare journal entry to record, the direct materials used in production:

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref
Work-in-Progress (A+
Raw Materials Inventory (A-)
(To recor

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref
Work-in-Progress (A+
Raw Materials Inventory (A-)
(To recor


Work-in-process inventory is an asset, and it increases due to direct materials were used in production. Therefore, debit work-in-process inventory with $48,000.

Raw material inventory is an asset, and it decreases the value of raw material inventory. Therefore, credit raw material inventory with $48,000.

Step 3 of 4

Prepare journal entry to record, the direct labor used in production:

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref.
Work-in-Progress (A+)
August
$15,350
$15,350
Wages Payable

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref.
Work-in-Progress (A+)
August
$15,350
$15,350
Wages Payable


Work-in-process inventory is an asset, and it is increases due to direct labor were used in production. Therefore, debit work-in-process inventory with $15,350.

• Wages payable is a liability and it is increases due to direct labor were used in production. Therefore, credit accounts payable account with $15,350.

Step 4 of 4

Prepare journal entry to record, the applied overhead at the rate of 120% of direct labor cost:

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref.
|Work-in-Progress (A+)
August
S18,420
Manufacturing overhe

Applied overhead is

Applied overhead = Direct labor costx120%
-$15,350x120%
= $18,420

Thus, the applied overhead is $18,420.

To compute the applied overhead, apply the pre-determined overhead rate of 120% to the direct labor cost incurred.

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref.
|Work-in-Progress (A+)
August
S18,420
Manufacturing overhe


Work-in-process inventory is an asset, and it is increases due to overhead were applied. Therefore, debit work-in-process inventory with $18,420.

Manufacturing overhead is an expense, and it has decreases due to overhead applied @120%. Therefore, credit manufacturing overhead with $18,420.

Answer

Post
Debit (S)
Credit (S)
Accounts title and explanation
Date
Ref.
Raw Materials Inventory (A+
Accounts Payable (L+)
To recor

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref
Work-in-Progress (A+
Raw Materials Inventory (A-)
(To recor

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref.
Work-in-Progress (A+)
August
$15,350
$15,350
Wages Payable

Post
Accounts title and explanation
Debit (S)
Credit (S)
Date
Ref.
|Work-in-Progress (A+)
August
S18,420
Manufacturing overhe

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