Ramblewood Manufacturing, Incorporated. 1 st Web-Based Edition. Introduction

Ramblewood Manufacturing, Incorporated 1 st Web-Based Edition Introduction Page 1

An Introduction To Ramblewood Manufacturing, Incorporated Ramblewood Manufacturing, Incorporated operates in a job-order costing environment employing JIT inventory practices. Direct labor is charged directly to the individual job cards (sheets) with an automatic charge for manufacturing overhead at 80% of direct-labor dollars. Included within the recording of direct material and manufacturing overhead transactions in the manufacturing accounts is the allocation of telephone, supplies, insurance, and property taxes expense to the manufacturing process, recording the accrual and payment of direct labor, indirect labor, and offices wages and salaries. Also a major part of the recording process is payment of accounts payable, credit and cash sales, collections of accounts receivable, paying short-term and long-term obligations, sale of obsolete manufacturing equipment, and trade-in and exchange of manufacturing equipment. Ramblewood Manufacturing, Incorporated, is a small corporation, locally owned by principal stockholders being Eric Stromberg, Louis Cruize, and David Baldoni. They are skilled in welding and fabricating iron products and crafting customized iron fences. This business is located in an industrial park near North San Juan, California. Ramblewood Manufacturing has a rental agreement for its office space and a portion of its factory facilities. All of the manufacturing equipment is owned by the corporation. Ramblewood Manufacturing specializes in custom-made fencing and gates and is well known throughout northern California for its top quality work and reasonable prices. To complete the on-the-job training requirement for your accounting course, you have been placed in a four-week internship program with Ramblewood Manufacturing, Incorporated. You will be responsible for all of the accounting activities from June 3 through June 30, including recording the transactions, auditing your work, and correcting all errors. Your internship will also require the printing and preparation of the financial statements, analysis of the statements and business operations, and the closing of the books at the end of the second quarter, June 30. Since Ramblewood Manufacturing uses a web-based accounting system, this opportunity to obtain hands on experience and practice your accounting skills should be very rewarding and exciting. The first step in learning the proper procedures for recording is to review the chart of accounts. A clear understanding of how certain accounts are used by Ramblewood Manufacturing, Inc., is required before you begin the recording process. A detailed explanation of how several accounts are used in this accounting system follows on the next five pages. Pages 8, 9, and 10 list the full Chart of Accounts and page 11 displays the Customer List and Vendor List with the account numbers used to identify the customers and vendors when entering the transactions. Page 2

Introduction to the Web-Based Accounting System To properly enter the accounting transactions for Ramblewood Manufacturing, Inc., you will need to familiarize yourself with the chart of accounts for the business. The business has one revenue account: Custom Fencing and Gate Sales. Sales are made for cash or on account. Sales tax is not charged on sales. Ramblewood Manufacturing uses the NET method to record all purchases of direct materials. All direct materials will be purchased on account and credited to Accounts Payable. All purchases from vendors who extend cash discounts are recorded at the NET cost (the list price less the discount). Example: An inventory item with a $1,200 list price and extended terms of 2/10, n/30 will be recorded as a debit to Raw and In-Process Inventory for $1,176 ($1,200 x.98). As each purchase invoice is paid on time, Accounts Payable will be debited and Cash credited. On the rare occasion when a purchase invoice that offers a cash discount is, through error, not paid within the discount period, the lost discount will require a debit to the Discounts Lost account and a credit to the Accounts Payable account. This credit to Accounts Payable will adjust the balance owed to the vendor to the full balance due (at list prices). Ramblewood Manufacturing, Inc., uses a just-in-time (JIT) inventory system and joborder costing. Upon receipt of direct material, the material is placed into production and the cost is charged directly to the Raw and In-Process Inventory account (there is no Direct Material Inventory account). All purchases of direct materials will require additional data entry recording the quantity of the specific item(s) being purchased and the specific Job to which they are to be charged. This information will be an automatic part of each journal entry where direct material is involved. This maintains a constant updated record of the quantity of all direct material charged to Raw and In-Process Inventory and the individual Job Cards (or Job Sheets). The Ramblewood Manufacturing JIT inventory system involves a change from the traditional when recording finished products. Materials are ordered and production begins only when there is a confirmed sales order. Upon completion of each job, the total manufacturing of the job is charged to the Cost of Goods Sold account and credited to the Raw and In-Process Inventory account. This eliminates the need to carry a Finished Goods Inventory account. When the product is delivered to the customer (usually within one day of product completion), the sale is recorded as a debit to the Cash account (or the Accounts Receivable account) and a credit to the Custom Fencing and Gate Sales account. On some custom orders, the customer may be required to pay a cash deposit to initiate production of the order. Custom jobs are normally completed in three weeks or less. The cash deposit is recorded as a debit to Cash and a credit to Accounts Receivable. When the job is completed and delivered to the customer, the Accounts Receivable account is debited for the entire amount of the sales invoice, thus clearing the temporary credit balance in the customer s account. Should any customer have a credit balance in his/her account at the end of the accounting period, the balance is transferred to the Unearned Revenue account as an adjusting entry. Page 3

Several accounts which require special attention are listed below: 103 Short-Term Investments is a current asset control account representing the total of shortterm, marketable securities held by Ramblewood. 115 Raw and In-Process Inventory is the inventory control account for all jobs in process. It is debited for all purchases of direct materials and is periodically debited for direct labor. The Manufacturing Overhead account is closed to the Raw and In-Process Inventory account at the end of the accounting period. The balance of the Raw and In-Process Inventory account will be a major check figure given at the end of each week of data entry. 123 Prepaid Insurance is debited for the purchase of all insurance policies. 125 Prepaid Property Tax is used to account for property taxes paid in advance. 126 Prepaid Advertising is used only for adjusting entries. All advertising costs are debited directly to the Advertising Expense account. 129 Office Supplies is debited directly for all purchases of Office Supplies. The Office Supplies Expense account is adjusted for the portion of the total supplies used during the accounting period. 185 Manufacturing Overhead is used to record all indirect material and indirect labor used in the manufacturing process. Manufacturing Overhead is also charged for all costs that can be assigned to the manufacturing process. This includes, among other items, rent charges applicable to the factory area, shop and factory tools, a pro rata share of all utility and telephone expenses, depreciation on shop equipment, property taxes on factory assets, and insurance costs on the factory area. The balance of the Manufacturing Overhead account is applied to the Raw and In-Process Inventory account at 80% of Direct Labor cost. Any over or under applied balance is closed to the Cost of Goods Sold. 311 Dividends Declared is debited for all official dividend declarations. At the end of each accounting period the account is closed to the Retained Earnings account. 401 Custom Fencing and Gate Sales is credited for all cash, credit, and bank credit card sales. 501 Cost of Goods Sold is the cost account debited for the cost of each job that has been completed and sold. Page 4

602 Office Supplies Expense is used only for adjusting entries. 603 Truck Operating Expense is charged for all operating and repair expenses incurred in maintaining and using trucks for delivering finished products to customers. The trucks are not used in the factory or in the production process. 604 Advertising Expense is debited directly for all advertising fees incurred. 607 Credit Card Expense accounts for the bank credit card fees charged to Ramblewood Manufacturing, Inc., for allowing customers to use their credit cards to purchase merchandise and services. These fees will be between 1 and 4 percent of the total amount (including sales tax) of the customer charge. Credit card charges for bank cards will be accounted for at the end of the month on the bank statement. 621 Rent Expense General may be adjusted for the portion of the Prepaid Rent account applicable to the administrative function. 622 Insurance Expense General is adjusted at the end of each accounting period. 623 Bad Debt Expense is charged for all bad debts that are written off as uncollectible. Ramblewood Manufacturing uses the Direct Write-off Method to account for all bad debts. 624 Property Tax Expense General is used to account for the property taxes for the period charged against the assets of the business that are used in the administrative function. 625 Utilities Expense General is used to record the pro rata share of utilities expense that is related to the administrative function. 626 Telephone Expense General is used to record the pro rata share of telephone expense that is related to administrative function. 628 License Expense is debited for all business and vehicle license fees. 713 Dividends Earned is an Other Revenue Account that is credited for dividends earned on short-term investments. 721 Gain on Sale of Assets is credited when the proceeds from the sale of a Plant and Equipment asset are greater than the book value of the asset. This account is not used in like-kind exchange (trade) transactions. Page 5

731 Gain on Short-Term Investments is credited when the proceeds of an investment sale exceed the original basis of the investment. 814 Discounts Lost is charged for the loss incurred when a purchase invoice, through error, is not paid on time (before the end of the discount period). When the NET purchases method is used to record the purchases of merchandise, an internal control system is established to insure that all invoices are paid in time to qualify for the discount. 821 Loss on Sale/Disposal of Assets is debited when a Plant and Equipment asset is sold and the proceeds of the sale are less than the book value of the asset. This account is also used to account for the loss incurred when an asset with book value is donated or given away. 831 Loss on Short-Term Investments is debited when the proceeds from an investment sale are less than the original basis of the investment. KEY DETAILS TO REMEMBER AS YOU JOURNALIZE TRANSACTIONS Recording Transactions and Using the Chart of Accounts When entering the transactions in the Ramblewood Manufacturing, Incorporated accounting system, all of the accounts will be identified by account number. You will see the account title appear instantly on the screen as you enter the account number. With the cursor at the account title entry prompt, the chart of accounts can be displayed on the screen by clicking on the down arrow at the prompt. Special data entry procedures that will make your work more efficient have been built into the web-based Ramblewood Manufacturing, Incorporated accounting system. These procedures will be introduced and explained in detail in the first few entries that you journalize for June 3, 4, and 5. Recording Direct Material Direct material information is entered into the system for any journal entry that changes the quantity/value of the Raw and In-Process Inventory account. When a journal entry for any purchase of direct material is made, documentation supporting the journal entry is required. As a business control feature, the NET method is used to record all merchandise purchases. It is intended that all invoices be paid on time. If an error is made and an invoice is not paid on time, the cost of this error will be recorded in the Discounts Lost account. Page 6

Recording Direct Labor As the work on each order progresses, time tickets (sheets) will be used to record all of the cutting and finishing or welding time charged to that job. Time tickets are recorded directly to the Job Card (Job Sheets) and overhead is automatically allocated to the job at a predetermined rate of 80% of direct labor cost. Time tickets are used to record hours and minutes. Minutes on the time tickets are converted to the next full hour. Direct labor has two rates: $48 per hour and $60 per hour. At the end of each two-week period, the employees are paid and the accumulated cost of the time tickets is recorded in the Raw and In-Process Inventory account. Recording Manufacturing Overhead The Manufacturing Overhead account will be debited whenever indirect material costs, indirect labor costs, or manufacturing costs other than direct material and direct labor occur. The account is debited during the adjusting process for the pro rata share of manufacturing costs that are initially charged as expenses or prepaids. Customer and Vendor Data Detailed information on customer and vendor account activity and balances will be maintained automatically in the Accounts Receivable and the Accounts Payable ledgers. Information will be recorded in the system by identifying each customer or vendor/creditor by number. Ramblewood Manufacturing, Incorporated, extends 30-day credit to all charge customers. Balances that are over the 30-day credit period are considered past due. Other Information You may terminate a journalizing session at any time. When you return to the journal entry process at a later time, the last entry recorded and posted will be displayed on the screen. It is recommended that you periodically backup your work. Instructions for backup are given in the first Module. Scroll through the Support option in the menu bar of the Data Entry screen to see what features are available to you as a student. A June 3 Trial Balance, Schedule of Accounts Receivable, Schedule of Accounts Payable, and a Job Cost and Status Report of Raw and In-Process Inventory can be printed before you begin your data entry. Page 7

Ramblewood Manufacturing, Incorporated Chart of Accounts ASSETS 101 Cash 103 Short-Term Investments 105 Accounts Receivable 109 Notes Receivable 113 Interest Receivable 115 Raw and In-Process Inventory 123 Prepaid Insurance 124 Prepaid Rent 125 Prepaid Property Tax 126 Prepaid Advertising 129 Office Supplies 131 Office Equipment 132 Accumulated Depreciation, Office Equipment 135 Shop Equipment 136 Accumulated Depreciation, Shop Equipment 139 Trucks 140 Accumulated Depreciation, Trucks 141 Factory 142 Accumulated Depreciation, Factory 145 Shipping Facility 146 Accumulated Depreciation, Shipping Facility 185 Manufacturing Overhead LIABILITIES 201 Accounts Payable 203 Notes Payable 207 Dividends Payable 209 Salaries and Wages Payable 211 Estimated Property Taxes Payable 213 Income Taxes Payable 215 Interest Payable 221 Unearned Revenues 250 Mortgage Note Payable Page 8

Ramblewood Manufacturing, Incorporated Chart of Accounts STOCKHOLDERS' EQUITY 301 Common Stock 305 Retained Earnings 311 Dividends Declared REVENUE 401 Custom Fence and Gate Sales COST OF GOODS SOLD 501 Cost of Goods Sold OPERATING EXPENSES 601 Office Salaries & Wages Expense 602 Office Supplies Expense 603 Truck Operating Expense 604 Advertising Expense 607 Credit Card Expense 611 Depreciation Expense, Office Equipment 615 Depreciation Expense, Trucks 621 Rent Expense - General 622 Insurance Expense - General 623 Bad Debt Expense 624 Property Tax Expense - General 625 Utilities Expense - General 626 Telephone Expense - General 627 Bank Service Charges 628 License Expense 629 Professional Services Expense 631 Miscellaneous Expense Page 9

Ramblewood Manufacturing, Incorporated Chart of Accounts OTHER REVENUE 711 Interest Earned 713 Dividends Earned 721 Gain on Sale of Assets 731 Gain on Short-Term Investments 741 Miscellaneous Revenue OTHER EXPENSES 811 Income Tax Expense 813 Interest Expense 814 Discounts Lost 821 Loss on Sale/Disposal of Assets 831 Loss on Short-Term Investments INCOME SUMMARY 901 Income Summary Page 10

Ramblewood Manufacturing, Incorporated Customer List Customer Number Customer 10400 Arcade Construction Co. 10650 Best-line, Incorporated 10930 Flexible Storage 11000 Larson Pools, Inc. 11150 Ralph E. Morales 11460 Sierra Builders 11680 Tulane County 11901 Windover Pools and Spas Ramblewood Manufacturing, Incorporated Vendor List Vendor Number Vendor 20500 Ambrosini Steel, Inc. 21880 Delta Supply 22500 Gooden Welding Supplies 23400 Granite Business Supply 24800 Kraftsman Air and Gas 25850 Penryn Legal Group 26575 Rapid City Steel, Inc. 28500 Yomoto Steel, Inc. Page 11