Maher Drapery Inc. specializes in making custom draperies for both commercial and residential customers. It began business on August 1, 2004, by acquiring $40,000 cash through issuing common stock. In August 2004, Maher accepted drapery orders, Jobs 801 and 802, for two new commercial buildings. The company paid cash for the following costs related to the orders:
Job 801
Raw materials $ 7,360
Direct labor (512 hours at $20 per hour) 10,240
Job 802
Raw materials 5,200
Direct labor (340 hours at $20 per hour) 6,800
During the same month, Maher paid $14,400 for various indirect costs such as utilities, equipment leases, and factory-related insurance. The company estimated its annual manufacturing overhead cost would be $240,000 and expected to use 20,000 direct labor hours in its first year of operation. It planned to allocate overhead based on direct labor hours. On August 31, 2004, Maher completed Job 801 and collected the contract price of $28,000. Job 802 was still in process. Maher uses a just-in-time inventory management system. Consequently, it has no raw materials inventory. Raw materials purchases are recorded directly in the Work in Process Inventory account.
Required
a. Use a horizontal financial statements model as follows to record Maher’s accounting events for August 2004. The first event is shown as an example.
Assets = Equity
Cash + Manuf Overhead + W I P + F G = com stk + Ret Earn Rev – Exp = Net Incom
40,000+ NA + NA + NA = 40,000 + NA NA – NA = NA
b. What was Maher’s ending inventory on August 31, 2004? Is this amount the actual or the estimated inventory cost?
c. When is it appropriate to use estimated inventory cost on a year-end balance sheet?