what costs must gross profit cover for cottage construction 552875

Accounting for construction transactions

Cottage Construction, Inc., is a home builder in Arizona. Cottage 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 $1,050,000 and total direct labor cost of $3,500,000. The following events occurred during August:

a. Purchased materials on account, $460,000.

b. Requisitioned direct materials and used direct labor in construction. Record the materials requisitioned

c. The company incurred total wages of $210,000. Use the data from item b to assign the wages.

d. Depreciation of construction equipment, $6,000.

e. Other overhead costs incurred on houses 402 through 405:

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

h. House sold: 404 for $200,000.

Requirements

1. Calculate Cottage’s construction overhead application rate for the year.

2. 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 cost 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 Cottage Construction?