A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department.
Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way.
Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way.
Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object, while indirect costs are allocated to a cost object.
Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions.
Factors affecting the classification of a cost as direct or indirect include
A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is sales commission paid as a percentage of each sales revenue dollar.
A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year) regardless of the number of units of product produced on the machine.
A cost driver is a variable, such as the level of activity or volume that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.
The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range.
A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.
Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example automotive and textile companies.
Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution.
Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits.
Manufacturing companies have one or more of the following three types of inventory:
Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory (they are “inventoried”) to accumulate the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.
Direct material costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way.
Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way.
Manufacturing overhead costs are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way.
Prime costs are all direct manufacturing costs (direct material costs and direct manufacturing labor costs).
Conversion costs are all manufacturing costs other than direct material costs.
Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates.
Idle time is a subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.
A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include
SOLUTION
Choice "2" is correct.This question asks which of a series of statements about costs is/are correct. "All of the above" is an available option.Statement I says that the cost of the direct materials in Applewhite's products is considered a variable cost. The more Applewhite manufactures, the more the total cost of the direct materials will be. Statement I is correct.Statement II says that the cost of depreciation of Applewhite's plant machinery is considered a variable cost because Applewhite uses an accelerated depreciation method for both book and income tax purposes. Just because a cost changes over time (which is what using an accelerated depreciation method will cause) does not mean that the cost is variable. The fact that Applewhite may use the same method for book and tax purposes is irrelevant. Statement II is wrong.Statement III says that the cost of electricity for Applewhite's manufacturing facility is considered a fixed cost, even if the cost of the electricity has both variable and fixed components. The cost of the electricity would be considered a "mixed" cost, not a fixed cost. Statement III is wrong.
SOLUTION
Choice "2" is correct.Costs that maintain production capacity and do not vary regardless of utilization are classified as fixed costs. In this instance, the salary costs of direct service staff are required to maintain capacity based on the number of residents (doctors) and will be incurred whether the facility is full or empty. The costs are fixed.Choice "1" is incorrect. Direct labor costs mandated by statute do not vary with production, they vary with the compliance requirement. Consequently direct labor costs, in this instance, are fixed, not variable.Choice "3" is incorrect. Direct costs related to service provider salaries are considered to be direct costs of the service, not overhead costs.Choice "4" is incorrect. Comprehensive Care Nursing Home is a service company and does not have any inventory and therefore no inventoriable costs.
SOLUTION
Choice "3" is correct.The question asks what happens to variable and fixed costs when cost driver activity changes (i.e., when the cost driver level increases or decreases). Statement I says that, as the cost driver level increases, total fixed cost remains unchanged. Statement I is correct. Total fixed cost will remain unchanged regardless of changes in the cost driver because total fixed cost is unaffected by changes in the cost driver.Statement II says that, as the cost driver level increases, unit fixed cost increases. This statement is asking about unit fixed cost like the previous statement asked about total fixed cost. While total fixed cost will remain unchanged regardless of changes in the cost driver, unit fixed cost will not. If the cost driver level increases, total fixed cost will remain the same, but the total number of units will increase, and unit fixed cost will decrease, not increase. Statement II is incorrect. Statement III says that as the cost driver level decreases, unit variable cost decreases. This statement is asking about unit variable cost like the previous statement asked about unit fixed cost. Unit variable cost will remain unchanged regardless of what happens to the cost driver. Statement III is incorrect.
Sales | $5,000,000 |
Direct materials | 850,000 |
Direct manufacturing labor | 1,700,000 |
Variable manufacturing overhead | 400,000 |
Fixed manufacturing overhead | 750,000 |
Variable SG&A | 150,000 |
Fixed SG&A | 250,000 |
Under the absorption method, Year 1 Cost of Goods sold will be:
a. $2,550,000 | c. $3,100,000 |
b. $2,950,000 | d. $3,700,000 |
SOLUTION
Choice "d" is correct. Under the absorption method, Cost of Goods Sold is calculated by adding direct materials, direct manufacturing labor, variable manufacturing overhead, and fixed manufacturing overhead. Therefore, Cost of Goods Sold = $850,000 + $1,700,000 + $400,000 + $750,000 = $3,700,000.Choice "a" is incorrect. This calculation only takes into account direct materials and direct manufacturing labor.
Choice "b" is incorrect. This calculation incorrectly excludes fixed manufacturing overhead.
Choice "c" is incorrect. This calculation includes variable SG&A, but excludes fixed manufacturing overhead.
2-20 The following information was extracted from the accounting records of Roosevelt Manufacturing Company:
Direct materials purchased | 80,000 |
Direct materials used | 76,000 |
Direct manufacturing labor costs | 10,000 |
Indirect manufacturing labor costs | 12,000 |
Sales salaries | 14,000 |
Other plant expenses | 22,000 |
Selling and administrative expenses | 20,000 |
What was the cost of goods manufactured?
1. $124,000 | 3. $154,000 |
2. $120,000 | 4. $170,000 |
SOLUTION
Explanation Choice "2" is correct.In this question, the problem is to calculate the cost of goods manufactured. Certain cost data are provided. The problem assumes beginning and ending work in process is zero. The cost of goods manufactured is calculated as indicated below:
Direct materials used | $ 76,000 |
Direct manufacturing labor costs | 10,000 |
Indirect manufacturing labor costs | 12,000 |
Other plant expenses | 22,000 |
Total cost of goods manufactured | $120,000 |
2-21 Computing and interpreting manufacturing unit costs. Minnesota Office Products (MOP) produces three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its own dedicated production line at the plant. It currently uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total manufacturing overhead costs of the plant in July 2017 are $150 million ($15 million of which are fixed). This total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line. Summary data (in millions) for July 2017 are as follows:
Direct material costs | $ 89 | $ 57 | $ 60 |
Direct manufacturing labor costs | $ 16 | $ 26 | $ 8 |
Manufacturing overhead costs | $ 48 | $ 78 | $ 24 |
Units produced | 125 | 150 | 140 |
Required:
SOLUTION
(15 min.) Computing and interpreting manufacturing unit costs.
1.
Direct material cost | $ 89.00 | $ 57.00 | $60.00 | $206.00 |
Direct manuf. labor costs | 16.00 | 26.00 | 8.00 | 50.00 |
Manufacturing overhead costs | 48.00 | 78.00 | 24.00 | 150.00 |
Total manuf. costs | 153.00 | 161.00 | 92.00 | 406.00 |
$16; 26; 8) | 4.80 | 7.80 | 2.40 | 15.00 |
Variable costs | $148.20 | $153.20 | $89.60 | $391.00 |
Units produced (millions) | 125 | 150 | 140 | |
Manuf. cost per unit (Total manuf. costs ÷ units produced) | $1.2240 | $1.0733 | $0.6571 | |
$1.1856 | $1.0213 | $0.6400 |
$1.0733 | $183.60 | $203.93 | $144.56 | $532.09 |
Correct total manuf. costs based on variable manuf. costs plus fixed costs equal | ||||
150; | $177.84 | $194.05 | $140.80 | $512.69 |
$1.0213 220) | ||||
Fixed costs | 15.00 | |||
Total costs | $527.69 |
The total manufacturing cost per unit in requirement 1 includes $15 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. Given the unit volume changes for August 2017, the use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual product level) will overestimate total costs of $532.09 million in August 2017 relative to the correct total manufacturing costs of $527.69 million calculated using variable manufacturing cost per unit times units produced plus the fixed costs of $15 million.
Required:
Costs: | |
Rubber | Mixing department manager |
Reinforcement cables | Material handlers in each department |
Other direct materials | Custodian in factory |
Depreciation on formers | Night guard in factory |
Depreciation on mixing machines | Machinist (running the mixing machine) |
Rent on factory building | Machine maintenance personnel in each department |
Fire insurance on factory building | Maintenance supplies for factory |
Factory utilities | Cleaning supplies for factory |
Finishing department hourly laborers | Machinist (running the forming machines) |
SOLUTION
(15 min.) Direct, indirect, fixed, and variable costs.
Reinforcement cables—direct, variable Other direct materials—direct, variable
Depreciation on formers—indirect, fixed (unless “units of output” depreciation, which then would be variable)
Depreciation on mixing machines—indirect, fixed (unless “units of output” depreciation, which then would be variable)
Rent on factory building—indirect, fixed
Fire Insurance on factory building—indirect, fixed
Factory utilities—indirect, probably some variable and some fixed (e.g., electricity may be variable but heating costs may be fixed)
Finishing department hourly laborers—direct, variable (or fixed if the laborers are under a union contract)
Mixing department manager—indirect, fixed
Materials handlers—depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract, then indirect, fixed
Custodian in factory—indirect, fixed Night guard in factory—indirect, fixed
Machinist (running the mixing machine)—depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract, then indirect, fixed
Machine maintenance personnel—indirect, probably fixed, if salaried, but may be variable if paid only for time worked and maintenance increases with increased production
Maintenance supplies—indirect, variable
Cleaning supplies—indirect, most likely fixed because the custodians probably do the same amount of cleaning every night
Machinist (running the forming machine)—depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract, then indirect, fixed
Of course the rubber, reinforcement cables and other direct materials will also be a direct cost of the Mixing Department, but it is already a direct cost of each kind of tire produced.
Required:
Classify each cost item (A–H) as follows:
You will have two answers (D or I; V or F) for each of the following items:
Cost Item
D or I V or F
SOLUTION
(15–20 min.) Classification of costs, service sector.
Cost object: Each individual focus group Cost variability: With respect to the number of focus groups
There may be some debate over classifications of individual items, especially with regard to cost variability.
A | D | V |
B | I | F |
C | I | Fa |
D | I | F |
E | I | V |
F | I | F |
G | D | V |
H | I | Vb |
I | I | F |
Required:
Classify each cost item (A–H) as follows:
You will have two answers (D or I; V or F) for each of the following items:
SOLUTION
(15–20 min.) Classification of costs, merchandising sector.
Cost object: DVDs sold in movie section of store Cost variability: With respect to changes in the number of DVDs sold
There may be some debate over classifications of individual items, especially with regard to cost variability.
A | D | F |
B | I | F |
C | D | V |
D | D | F |
E | I | F |
F | I | V |
G | I | F |
H | D | V |
Required:
Classify each cost item (A–I) as follows:
You will have two answers (D or I; V or F) for each of the following items:
SOLUTION
(15–20 min.) Classification of costs, manufacturing sector.
Cost object: Type of chair assembled (Recliners or Rockers) Cost variability: With respect to changes in the number of Recliners assembled
There may be some debate over classifications of individual items, especially with regard to cost variability.
A | D | V |
B | I | F |
C | I | F |
D | D | V |
E | D | V |
F | I | V |
G | D | V |
H | I | F |
I | I | F |
Plan A: Pay 10 cents per minute of long-distance calling.
Plan B: Pay a fixed monthly fee of $15 for up to 240 long-distance minutes and 8 cents per minute thereafter (if she uses fewer than 240 minutes in any month, she still pays $15 for the month).
Plan C: | Pay a fixed monthly fee of $22 for up to 510 long-distance minutes and 5 cents per minute thereafter (if she uses fewer than 510 minutes, she still pays $22 for the month). |
Required:
SOLUTION
Plan A ($/month) | 0 | 5 | 10 | 15 | 20 | 24 | 30 | 32.75 | 35 | 40 | 45 | 51 | 54 | 60 | 65 |
Plan B ($/month) | 15 | 15 | 15 | 15 | 15 | 15 | 19.80 | 22 | 23.80 | 27.80 | 31.80 | 36.60 | 39 | 43.80 | 47.80 |
Plan C ($/month) | 22 | 22 | 22 | 22 | 22 | 22 | 22 | 22 | 22 | 22 | 22 | 22 | 23.50 | 26.50 | 29 |
$15 + $0.08 (y – 240) = $22
Plant management costs, $1,992,000 per year Cost of leasing equipment, $1,932,000 per year Workers’ wages, $800 per Surfer vehicle produced
Direct materials costs: Steel, $1,400 per Surfer; Tires, $150 per tire, each Surfer takes 5 tires (one spare).
City license, which is charged monthly based on the number of tires used in production:
0–500 tires | $ 40,040 |
501–1,000 tires | $ 65,000 |
more than 1,000 tires | $249,870 |
Consolidated currently produces 170 vehicles per month.
Required:
SOLUTION
(15–20 min.) Variable costs and fixed costs.
Steel | $1,400 per Surfer |
Tires | 750 per Surfer |
Direct manufacturing labor | 800 per Surfer |
Total | $2,950 per Surfer |
Fixed manufacturing costs per month
Plant management costs ($1,992,000 ÷ 12) | $ 166,000 |
Cost of leasing equipment ($1,932,000 ÷ 12) | 161,000 |
City license (for 170 surfers or 850 tires) | 65,000 |
Total fixed manufacturing costs | $392,000 |
Fixed costs per month (1 surfer takes 5 tires)
0 to 100 surfers per month | = $166,000 + $161,000 + $40,040 = $367,040 |
101 to 200 surfers per month | = $166,000 + $161,000 + $65,000 = $392,000 |
More than 200 surfers per month | = $166,000 + $161,000 + $249,870 = $576,870 |
2.
The concept of relevant range is potentially relevant for both graphs. However, the question does not place restrictions on the unit variable costs. The relevant range for the total fixed costs is from 0 to 100 surfers; 101 to 200 surfers; more than 200 surfers. Within these ranges, the total fixed costs do not change in total.
(a) 80 | 400 | $367,040 | $367,040 ÷ 80 = $4,588 | $2,950 | $7,538 |
(b) 205 | 1,025 | $576,870 | $576,870 ÷ 205 = $2,814 | $2,950 | $5,764 |
The unit cost for 80 vehicles produced per month is $7,538, while for 205 vehicles it is only $5,764. This difference is caused by the fixed cost increment of $209,830 (an increase of 50%, $209,830 ÷ $367,040 = 57%) being spread over an increment of 125 (205 – 80) vehicles (an increase of 156%, 125 ÷ 80). The fixed cost per unit is therefore lower.
Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 40¢ per jaw-breaker.
Next year Gummy Land expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.
Required:
What is the annual variable manufacturing cost?
SOLUTION
(20 min.) Variable costs, fixed costs, relevant range.
The variable costs, the materials, are 40 cents per jaw breaker, or $18,720 ($0.40 per jaw breaker × 3,900 jaw breakers per month × 12 months) for the year.
Assume the second machine costs $6,500 and is depreciated using straight-line depreciation over 10 years and zero residual value, just like the first machine. This will add $650 of depreciation per year.
Fixed costs for next year will increase to $15,700 from $15,050 for the current year + $650 (because rent and other fixed overhead costs will remain the same at $14,400). That is, total fixed costs for next year equal $650 (depreciation on first machine) + $650 (depreciation on second machine) + $14,400 (rent and other fixed overhead costs).
The variable cost per jaw breaker next year will be 90% × $0.40 = $0.36. Total variable costs equal $0.36 per jaw breaker × 93,600 jaw breakers = $33,696.
If Gummy Land decides not to increase capacity and meet only that amount of demand for which it has available capacity (5,000 jaw breakers per month or 5,000 × 12 = 60,000 jaw breakers per year), the variable cost per unit will be the same at $0.40 per jaw breaker. Annual total variable manufacturing costs will increase to $0.40 × 5,000 jaw breakers per month × 12 months = $24,000. Annual total fixed manufacturing costs will remain the same, $15,050.
During the process of product development, production, marketing, distribution, and customer service, TTC has kept track of the following cost drivers:
Number of smartphones shipped by TTC Number of design changes Number of deliveries made to cell phone companies Engineering hours spent on initial product design Hours spent researching competing market brands Customer-service hours Number of smartphone orders processed Machine hours required to run the production equipment
Required:
SOLUTION
(20 min.) Cost drivers and value chain.
Market the new design to cell phone companies—Marketing Manufacture the TTC smartphone—Production Process orders from cell phone companies—Distribution Deliver the TTC smartphones to the cell phone companies—Distribution
Provide online assistance to cell phone users for use of the TTC smartphone—Customer service
Make design changes to the TTC smartphone based on customer feedback—Design of products and processes
Design of products and processes | Perform market research on competing brands | Hours spent researching competing market brands |
Design a prototype of the TTC smartphone Make design changes to the smartphone based on customer feedback | Engineering hours spent on initial product design Number of design changes | |
Production | Manufacture the TTC smartphones | Machine hours required to run the production equipment |
Marketing | Market the new design to cell phone companies | Number of smartphones shipped by TTC |
Distribution | Process orders from cell phone companies Deliver the TTC smartphones to cell phone companies | Number of smartphone orders processed Number of deliveries made to cell phone companies |
Customer service | Provide on-line assistance to cell phone users for use of the TTC smartphone | Customer service hours |
1. Accounts payable | A. Number of invoices sent |
2. Recruiting | B. Number of purchase orders |
3. Network Maintenance | C. Number of units manufactured |
4. Production | D. Number of computers on the network |
5. Purchasing | E. Number of employees hired |
6. Warehousing | F. Number of bills received from vendors |
7. Billing | G. Number of pallets moved |
Required:
SOLUTION
(10–15 min.) Cost drivers and functions.
1.
1. Accounts payable | Number of bills received from vendors |
2. Recruiting | Number of employees hired |
3. Network maintenance | Number of computers on the network |
4. Production | Number of units manufactured |
5. Purchasing | Number of purchase orders |
6. Warehousing | Number of pallets moved |
7. Billing | Number of invoices sent |
1. Accounts payable | Number of checks written |
2. Recruiting | Number of interviews conducted |
3. Network Maintenance | Number of computer transactions |
4. Production | Number of direct labor employees |
5. Purchasing | Number of different types of materials purchased |
6. Warehousing | Distance of deliveries made |
7. Billing | Number of credit sales transactions |
Trainer: $11,000 per session Materials: $2,500 per session and $35 per attendee
Catering Costs (subcontracted):
Food: $75 per attendee
Setup/cleanup: $25 per attendee
Fixed fee: $5,000 per training session
National Training is pleased with the service they use for the catering and have allowed them to place brochures on each dinner table as a form of advertising. In exchange, the caterer gives National Training a $1,000 discount per session.
Required:
SOLUTION
(20 min.) Total costs and unit costs
Variable cost per attendee (Materials $35 + Food, $75 | $135 | $135 | $135 | $135 | $135 |
Fixed Costs per session (Trainer, $11,000 + Materials, $2,500 + Catering, $5,000 − | |||||
Offset for brochures, $1,000) | $17,500 | $17,500 | $17,500 | $17,500 | $17,500 |
Variable costs (number of attendees × variable cost per attendee) | 0 | 6,750 | 13,500 | 23,625 | 27,000 |
Total costs (fixed + variable) | $17,500 | $24,250 | $31,000 | $41,125 | $44,500 |
1.
Total costs | |||||
(fixed + variable) | $17,500 | $24,250 | $31,000 | $41,125 | $44,500 |
$355 | $215 | $168.33 | $ 145 |
As shown in the table above, for 100 attendees the total cost will be $31,000, and the cost per attendee will be $310.00.
Alternatively, National Training could charge a flat fee of $20,000 plus $150 per attendee. This would provide a margin of $15.00 per guest plus a $2,500 markup on the fixed costs. At 100 attendees, profit would be $4,000 ($2,500 on fixed costs + ($15.00 × 100 attendees)). At 175 attendees, profit would be $5,125 ($2,500 on fixed costs + ($15.00 × 175 attendees)).
Required:
SOLUTION
(25 min.) Total and unit cost, decision making.
1.
Note that the production costs include the $28,000 of fixed manufacturing costs but not the $10,000 of period costs. The variable cost is $1 per flange for materials, and $2.80 per flange ($28 per hour divided by 10 flanges per hour) for direct manufacturing labor for a total of $3.80 per flange.
$3.80 × 5,000 + $28,000 = $47,000
Average (unit) cost = $47,000 ÷ 5,000 units = $9.40 per unit. This is below Flora’s selling price of $10 per flange. However, in order to make a profit, Gayle’s Glassworks also needs to cover the period (non-manufacturing) costs of $10,000, or $10,000 ÷ 5,000 = $2 per unit.
Thus total costs, both inventoriable (manufacturing) and period (non-manufacturing), for the flanges is $9.40 + $2 = $11.40. Gayle’s Glassworks cannot sell below Flora’s price of $10 and still make a profit on the flanges.
Alternatively, At Flora’s price of $10 per flange: | ||||
Revenue | $10 | × | 5,000 = | $50,000 |
Variable costs | $3.80 | × | 5,000 = | 19,000 |
Fixed costs | 38,000 | |||
Operating loss | $ (7,000) |
Gayle’s Glassworks cannot sell below $10 per flange and make a profit. At Flora’s price of $10 per flange, the company has an operating loss of $7,000.
Average (unit) inventoriable (manufacturing) cost will be $66,000 ÷ 10,000 units = $6.60 per flange Unit total cost including both inventoriable and period costs will be ($66,000 + $10,000) ÷ 10,000 = $7.60 per flange, and Gayle’s Glassworks will be able to sell the flanges for less than Flora’s price of $10 per flange and still make a profit.
Alternatively, At Flora’s price of $10 per flange: | |||||
Revenue | $10 | × | 10,000 | = | $100,000 |
Variable costs | $3.80 | × | 10,000 | = | 38,000 |
Fixed costs | 38,000 | ||||
Operating income | $ 24,000 |
Gayle’s Glassworks can sell at a price below $10 per flange and still make a profit. The company earns operating income of $24,000 at a price of $10 per flange. The company will earn operating income as long as the price exceeds $7.60 per flange.
The reason the unit cost decreases significantly is that inventoriable (manufacturing) fixed costs and fixed period (non-manufacturing) costs remain the same regardless of the number of units produced. So, as Gayle’s Glassworks produces more units, fixed costs are spread over more units, and cost per unit decreases. This means that if you use unit costs to make decisions about pricing, and which product to produce, you must be aware that the unit cost only applies to a particular level of output.
Required:
SOLUTION
(20–30 min.) Inventoriable costs versus period costs.
Merchandising-sector companies purchase and then sell tangible products without changing their basic form.
Service-sector companies provide services or intangible products to their customers—for example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.
Marketing, distribution, and customer-service costs
$ 37,000
Merchandise inventory, January 1, 2017 | 27,000 |
Utilities | 17,000 |
General and administrative costs | 43,000 |
Merchandise inventory, December 31, 2017 | 34,000 |
Purchases | 155,000 |
Miscellaneous costs | 4,000 |
Transportation-in | 7,000 |
Purchase returns and allowances | 4,000 |
Purchase discounts | 6,000 |
Revenues | 280,000 |
Required:
SOLUTION
(20 min.) Computing cost of goods purchased and cost of goods sold.
1a. Marvin Department Store Schedule of Cost of Goods Purchased For the Year Ended December 31, 2017 (in thousands) | |||
Purchases | $155,000 | ||
Add transportation-in | 7,000 | ||
162,000 | |||
Deduct: | |||
Purchase returns and allowances | $4,000 | ||
Purchase discounts | 6,000 | 10,000 | |
Cost of goods purchased | $152,000 | ||
1b. | Marvin Department Store Schedule of Cost of Goods Sold For the Year Ended December 31, 2017 (in thousands) | ||
Beginning merchandise | inventory 1/1/2017 | $ 27,000 | |
152,000 | |||
Cost of goods available for sale | 179,000 | ||
Ending merchandise inventory 12/31/2017 | 34,000 | ||
Cost of goods sold | $145,000 | ||
2. | Marvin Department Store Income Statement Year Ended December 31, 2017 (in thousands) | ||
Revenues | $280,000 | ||
145,000 | |||
Gross margin | 135,000 | ||
Operating costs | |||
Marketing, distribution, and customer service costs | $37,000 | ||
Utilities | 17,000 | ||
General and administrative costs | 43,000 | ||
Miscellaneous costs | 4,000 | ||
Total operating costs | 101,000 | ||
Operating income | $ 34,000 |
2-35 Cost of goods purchased, cost of goods sold, and income statement. The following data
are for Arizona Retail Outlet Stores. The account balances (in thousands) are for 2017.
Marketing and advertising costs | $ 55,200 |
Merchandise inventory, January 1, 2017 | 103,500 |
Shipping of merchandise to customers | 4,600 |
Depreciation on store fixtures | 9,660 |
Purchases | 598,000 |
General and administrative costs | 73,600 |
Merchandise inventory, December 31, 2017 | 119,600 |
Merchandise freight-in | 23,000 |
Purchase returns and allowances | 25,300 |
Purchase discounts | 20,700 |
Revenues | 736,000 |
Required:
(20 min.) Cost of goods purchased, cost of goods sold, and income statement.
1a.
Arizona Retail Outlet Stores Schedule of Cost of Goods Purchased For the Year Ended December 31, 2017
(in thousands) | ||
Purchases | $598,000 | |
Add freight—in | 23,000 | |
621,000 | ||
Deduct: | ||
Purchase returns and allowances | $25,300 | |
Purchase discounts | 20,700 | 46,000 |
Cost of goods purchased | $575,000 | |
1b. Arizona Retail Outlet Stores |
Schedule of Cost of Goods Sold For the Year Ended December 31, 2017 (in thousands)
Beginning merchandise | inventory 1/1/2017 | $103,500 |
575,000 | ||
Cost of goods available for sale | 678,500 | |
Ending merchandise inventory 12/31/2017 | 119,600 | |
Cost of goods sold | $558,900 | |
2. Arizona Retail Outlet Stores Income Statement Year Ended December 31, 2017 (in thousands) |
Revenues | $736,000 | |
558,900 | ||
Gross margin | 177,100 | |
Operating costs | ||
Marketing and advertising costs | $55,200 | |
Depreciation on store fixtures | 9,660 | |
Shipping of merchandise to customers | 4,600 | |
General and administrative costs | 73,600 | |
Total operating costs | 143,060 | |
Operating income | $ 34,040 |
2-36 Flow of Inventoriable Costs. Renka’s Heaters selected data for October 2017 are presented here (in millions):
Direct materials inventory 10/1/2017 | $ 105 |
Direct materials purchased | 365 |
Direct materials used | 385 |
Total manufacturing overhead costs | 450 |
Variable manufacturing overhead costs | 265 |
Total manufacturing costs incurred during October 2017 | 1,610 |
Work-in-process inventory 10/1/2017 | 230 |
Cost of goods manufactured | 1,660 |
Finished-goods inventory 10/1/2017 | 130 |
Cost of goods sold | 1,770 |
Required:
Calculate the following costs:
SOLUTION
(20 min.) Flow of Inventoriable Costs. | |
(All numbers below are in millions). | |
1. | |
Direct materials inventory 10/1/2017 | $ 105 |
Direct materials purchased | 365 |
Direct materials available for production | 470 |
Direct materials used | (385) |
Direct materials inventory 10/31/2017 | $ 85 |
2. | |
Total manufacturing overhead costs | $ 450 |
Subtract: Variable manufacturing overhead costs | (265) |
Fixed manufacturing overhead costs for October 2017 | $ 185 |
3. | |
Total manufacturing costs incurred during October 2017 | $ 1,610 |
Subtract: Direct materials used (from requirement 1) | (385) |
Total manufacturing overhead costs | (450) |
Direct manufacturing labor costs for October 2017 | $ 775 |
4. | |
Work-in-process inventory 10/1/2017 | $ 230 |
Total manufacturing costs incurred during October 2017 | 1,610 |
Work-in-process available for production | 1,840 |
Subtract: Cost of goods manufactured (moved into finished goods) | (1,660) |
Work-in-process inventory 10/31/2017 | $ 180 |
5. | |
Finished goods inventory 10/1/2017 | $ 130 |
Cost of goods manufactured (moved from work in process) | 1,660 |
Cost of finished goods available for sale in October 2017 | $ 1,790 |
6. | |
Cost of finished goods available for sale in October 2017 (from requirement 5) | $ 1,790 |
Subtract: Cost of goods sold | (1,770) |
Finished goods inventory 10/31/2017 | $ 20 |
Direct materials inventory | 21,000 | 23,000 |
Work-in-process inventory | 26,000 | 25,000 |
Finished-goods inventory | 13,000 | 20,000 |
Purchases of direct materials | 74,000 | |
Direct manufacturing labor | 22,000 | |
Indirect manufacturing labor | 17,000 | |
Plant insurance | 7,000 | |
Depreciation—plant, building, and equipment | 11,000 | |
Repairs and maintenance—plant | 3,000 | |
Marketing, distribution, and customer-service costs | 91,000 | |
General and administrative costs | 24,000 |
Required:
SOLUTION
(30–40 min.) Cost of goods manufactured, income statement, manufacturing company.
1.
Peterson Company
Schedule of Cost of Goods Manufactured Year Ended December 31, 2017
(in thousands)
Direct materials cost | ||
Beginning inventory, January 1, 2017 | $ 21,000 | |
Purchases of direct materials | 74,000 | |
Cost of direct materials available for use | 95,000 | |
Ending inventory, December 31, 2017 | 23,000 | |
Direct materials used | $ 72,000 | |
Direct manufacturing labor costs | 22,000 | |
Indirect manufacturing costs | ||
Indirect manufacturing labor | 17,000 | |
Plant insurance | 7,000 | |
Depreciation—plant building & equipment | 11,000 | |
Repairs and maintenance—plant | 3,000 | |
Total indirect manufacturing costs | 38,000 | |
Manufacturing costs incurred during 2017 | 132,000 | |
Add beginning work-in-process inventory, January 1, 2017 | 26,000 | |
Total manufacturing costs to account for | 158,000 | |
Deduct ending work-in-process inventory, December 31, 2017 | 25,000 | |
Cost of goods manufactured (to Income Statement) | $133,000 | |
2. Peterson Company |
Income Statement Year Ended December 31, 2017 (in thousands)
Revenues | $310,000 | |
Cost of goods sold: | ||
Beginning finished goods, January 1, 2017 | $ 13,000 | |
Cost of goods manufactured | 133,000 | |
Cost of goods available for sale | 146,000 | |
Ending finished goods, December 31, 2017 | 20,000 | |
Cost of goods sold | 126,000 | |
Gross margin | 184,000 | |
Operating costs: | ||
Marketing, distribution, and customer-service costs | 91,000 | |
General and administrative costs | 24,000 | |
Total operating costs | 115,000 | |
Operating income | $ 69,000 |
2-38 Cost of goods manufactured, income statement, manufacturing company. Consider the following account balances (in thousands) for the Carolina Corporation:
Direct materials inventory | 124,000 | 73,000 |
Work-in-process inventory | 173,000 | 145,000 |
Finished-goods inventory | 240,000 | 206,000 |
Purchases of direct materials | 262,000 | |
Direct manufacturing labor | 217,000 | |
Indirect manufacturing labor | 97,000 | |
Plant insurance | 9,000 | |
Depreciation—plant, building, and equipment | 45,000 | |
Plant utilities | 26,000 | |
Repairs and maintenance—plant | 12,000 | |
Equipment leasing costs | 65,000 | |
Marketing, distribution, and customer-service costs | 125,000 | |
General and administrative costs | 71,000 |
Required:
SOLUTION
(30–40 min.) Cost of goods manufactured, income statement, manufacturing company.
Carolina Corporation Schedule of Cost of Goods Manufactured Year Ended December 31, 2017 (in thousands)
Direct materials costs | |
Beginning inventory, January 1, 2017 | $124,000 |
Purchases of direct materials | 262,000 |
Cost of direct materials available for use | 386,000 |
Ending inventory, December 31, 2014 | 73,000 |
Direct materials used | $313,000 |
Direct manufacturing labor costs | 217,000 |
Indirect manufacturing costs | |
Indirect manufacturing labor | 97,000 |
Plant insurance | 9,000 |
Depreciation—plant building & equipment | 45,000 |
Plant utilities | 26,000 |
Repairs and maintenance—plant | 12,000 |
Equipment lease costs | 65,000 |
Total indirect manufacturing costs | 254,000 |
Manufacturing costs incurred during 2017 | 784,000 |
Add beginning work-in-process inventory, January 1, 2017 | 173,000 |
Total manufacturing costs to account for | 957,000 |
Deduct ending work-in-process inventory, December 31, 2017 | 145,000 |
Cost of goods manufactured (to Income Statement) | $812,000 |
Carolina Corporation
Income Statement
Year Ended December 31, 2017
(in thousands)
Revenues | $1,300,000 | |
Cost of goods sold: | ||
Beginning finished goods, January 1, 2017 | $ 240,000 | |
Cost of goods manufactured | 812,000 | |
Cost of goods available for sale | 1,052,000 | |
Ending finished goods, December 31, 2017 | 206,000 | |
Cost of goods sold | 846,000 | |
Gross margin | 454,000 | |
Operating costs: | ||
Marketing, distribution, and customer-service costs | 125,000 | |
General and administrative costs | 71,000 | |
Total operating costs | 196,000 | |
Operating income | $ 258,000 |
2-39 Income statement and schedule of cost of goods manufactured. The Howell Corporation has the following account balances (in millions):
For Specific Date For Year 2017 | |||
Direct materials inventory, Jan. 1, 2017 | $15 | Purchases of direct materials | $325 |
Work-in-process inventory, Jan. 1, 2017 | 10 | Direct manufacturing labor | 100 |
Finished goods inventory, Jan. 1, 2017 | 70 | Depreciation—plant and equipment | 80 |
Direct materials inventory, Dec. 31, 2017 | 20 | Plant supervisory salaries | 5 |
Work-in-process inventory, Dec. 31, 2017 | 5 | Miscellaneous plant overhead | 35 |
Finished goods inventory, Dec. 31, 2017 | 55 | Revenues | 950 |
Marketing, distribution, and customer-service costs | 240 | ||
Plant supplies used | 10 | ||
Plant utilities | 30 | ||
Indirect manufacturing labor | 60 |
Required:
Prepare an income statement and a supporting schedule of cost of goods manufactured for the year ended December 31, 2017. (For additional questions regarding these facts, see the next problem.)
SOLUTION
(25–30 min.) Income statement and schedule of cost of goods manufactured.
Howell Corporation Income Statement for the Year Ended December 31, 2017 (in millions)
Revenues | $950 | |
Cost of goods sold | ||
Beginning finished goods, Jan. 1, 2017 | $ 70 | |
Cost of goods manufactured (below) | 645 | |
Cost of goods available for sale | 715 | |
Ending finished goods, Dec. 31, 2017 | 55 | 660 |
Gross margin | 290 | |
Marketing, distribution, and customer-service costs | 240 | |
Operating income | $ 50 |
Howell Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2017 (in millions)
Direct materials costs | ||
Beginning inventory, Jan. 1, 2017 | $ 15 | |
Purchases of direct materials | 325 | |
Cost of direct materials available for use | 340 | |
Ending inventory, Dec. 31, 2017 | 20 | |
Direct materials used | $320 | |
Direct manufacturing labor costs | 100 | |
Indirect manufacturing costs | ||
Indirect manufacturing labor | 60 | |
Plant supplies used | 10 | |
Plant utilities | 30 | |
Depreciation––plant and equipment | 80 | |
Plant supervisory salaries | 5 | |
Miscellaneous plant overhead | 35 | 220 |
Manufacturing costs incurred during 2017 | 640 | |
Add beginning work-in-process inventory, Jan. 1, 2017 | 10 | |
Total manufacturing costs to account for | 650 | |
Deduct ending work-in-process, Dec. 31, 2017 | 5 | |
Cost of goods manufactured | $645 |
2-40 Interpretation of statements (continuation of 2-39).
Required:
SOLUTION
(15–20 min.) Interpretation of statements (continuation of 2-39).
Schaeffer’s manufacturing costing system uses a three-part classification of direct materials, direct manufacturing labor, and manufacturing overhead costs.
For Specific Date For Year 2017 | |||
Work-in-process inventory, Jan. 1, 2017 | $10 | Plant utilities | $ 8 |
Direct materials inventory, Dec. 31, 2017 | 4 | Indirect manufacturing labor | 21 |
Finished-goods inventory, Dec. 31, 2017 | 16 | Depreciation—plant and equipment | 6 |
Accounts payable, Dec. 31, 2017 | 24 | Revenues | 359 |
Accounts receivable, Jan. 1, 2017 | 53 | Miscellaneous manufacturing overhead | 15 |
Work-in-process inventory, Dec. 31, 2017 | 5 | Marketing, distribution, and customer-service costs | 90 |
Finished-goods inventory, Jan 1, 2017 | 46 | Direct materials purchased | 88 |
Accounts receivable, Dec. 31, 2017 | 32 | Direct manufacturing labor | 40 |
Accounts payable, Jan. 1, 2017 | 45 | Plant supplies used | 9 |
Direct materials inventory, Jan. 1, 2017 | 34 | Property taxes on plant | 2 |
Required:
Prepare an income statement and a supporting schedule of cost of goods manufactured. (For additional questions regarding these facts, see the next problem.)
SOLUTION
(25–30 min.) Income statement and schedule of cost of goods manufactured.
Schaeffer Corporation Income Statement for the Year Ended December 31, 2017 (in millions)
Revenues | $359 | |
Cost of goods sold | ||
Beginning finished goods, Jan. 1, 2017 | $ 46 | |
Cost of goods manufactured (below) | 224 | |
Cost of goods available for sale | 270 | |
Ending finished goods, Dec. 31, 2014 | 16 | 254 |
Gross margin | 105 | |
Marketing, distribution, and customer-service costs | 90 | |
Operating income (loss) | $ 15 |
Schaeffer Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2017 (in millions)
Direct material costs | ||
Beginning inventory, Jan. 1, 2017 | $ 34 | |
Direct materials purchased | 88 | |
Cost of direct materials available for use | 122 | |
Ending inventory, Dec. 31, 2017 | 4 | |
Direct materials used | $118 | |
Direct manufacturing labor costs | 40 | |
Indirect manufacturing costs | ||
Plant supplies used | 9 | |
Property taxes on plant | 2 | |
Plant utilities | 8 | |
Indirect manufacturing labor costs | 21 | |
Depreciation––plant and equipment | 6 | |
Miscellaneous manufacturing overhead costs | 15 | 61 |
Manufacturing costs incurred during 2017 | 219 | |
Add beginning work-in-process inventory, Jan. 1, 2017 | 10 | |
Total manufacturing costs to account for | 229 | |
Deduct ending work-in-process inventory, Dec. 31, 2017 | 5 | |
Cost of goods manufactured (to income statement) | $224 |
2-42 Terminology, interpretation of statements (continuation of 2-41).
Required:
SOLUTION
(15–20 min.) Terminology, interpretation of statements (continuation of 2-36).
1. Direct materials used | $118 million |
Direct manufacturing labor costs | 40 million |
Prime costs | $158 million |
Direct manufacturing labor costs | $ 40 million |
Indirect manufacturing costs | 61 million |
Conversion costs | $101 million |
2. Inventoriable costs (in millions) for Year 2017 | |
Plant utilities | $ 8 |
Indirect manufacturing labor | 21 |
Depreciation—plant and equipment | 6 |
Miscellaneous manufacturing overhead | 15 |
Direct materials used | 118 |
Direct manufacturing labor | 40 |
Plant supplies used | 9 |
Property taxes on plant | 2 |
Total inventoriable costs | $219 |
Period costs (in millions) for Year 2017 Marketing, distribution, and customer-service costs | $ 90 |
During December David worked the following hours:
Week 1 | 50 | 6.0 |
Week 2 | 44 | 2.0 |
Week 3 | 46 | 4.0 |
Week 4 | 45 | 3.5 |
Included in the total hours worked are two company holidays (Christmas Eve and Christmas Day) during Week 4. All overtime worked by David was Monday–Friday, except for the hours worked in Week 3; all of the Week 3 overtime hours were worked on a Saturday.
Required:
SOLUTION
(20 min.) Labor cost, overtime and idle time.
1.(a) Total cost of hours worked at regular rates | |
50 hours × $24 per hour | $1,200 |
44 hours × $24 per hour | 1,056 |
46 hours × $24 per hour | 1,104 |
45 hours × $24 per hour | 1,080 |
4,440 | |
Minus idle time | |
(6.0 hours × $24 per hour) | 144 |
(2.0 hours × $24 per hour) | 48 |
(4.0 hours × $24 per hour) | 96 |
(3.5 hours × $24 per hour) | 84 |
Total idle time | 372 |
Direct manufacturing labor costs | $4,068 |
(b) Idle time = 15.5 hours × $24 per hour = | $ 372 |
(c) Overtime and holiday premium. | |
Week 1: Overtime (50 – 40) hours × Premium, $12 per hour | $ 120 |
Week 2: Overtime (44 – 40) hours × Premium, $12 per hour | 48 |
Week 3: Overtime (46 – 40) hours × Premium, $24 per hour | 144 |
Week 4: Overtime (45 – 40) hours × Premium, $12 per hour | 60 |
Week 4: Holiday 8 hours × 2 days × Premium, $24 per hour | 384 |
Total overtime and holiday premium | $ 756 |
(d) Total earnings in December | |
Direct manufacturing labor costs | $4,068 |
Idle time | 372 |
Overtime and holiday premium | 756 |
Total earnings | $5,196 |
Overtime premium caused by the heavy overall volume of work is also an indirect cost because it is not related to a particular job that happened to be worked on during the overtime hours. If, however, the overtime is the result of a demanding “rush job,” the overtime premium is a direct cost of that job.
For the previous month (March 2017) Ron was able to piece together the following information:
Direct materials purchased | $120,000 |
Work-in-process inventory, 3/1/2017 | $ 35,000 |
Direct materials inventory, 3/1/2017 | $ 12,500 |
Finished-goods inventory, 3/1/2017 | $160,000 |
Conversion costs | $330,000 |
Total manufacturing costs added during the period | $420,000 |
Cost of goods manufactured | 4 times direct materials used |
Gross margin as a percentage of revenues | 20% |
Revenues | $518,750 |
Calculate the cost of:
Required:
SOLUTION
(30–40 min.) Missing records, computing inventory costs.
This problem is not as easy as it first appears. These answers are obtained by working from the known figures to the unknowns in the schedule below. The basic relationships between categories of costs are:
Manufacturing costs added during the period (given) | $420,000 |
Conversion costs (given) | $330,000 |
Direct materials used = Manufacturing costs added – Conversion costs |
=
$420,000 – $330,000 = $90,000 Cost of goods manufactured = Direct Materials Used × 4
= $90,000 × 4 = $360,000
Schedule of Computations | ||
Direct materials inventory, 3/1/2017 (given) | 12,500 | |
Direct materials purchased (given) | 120,000 | |
Direct materials available for use | 132,500 | |
Direct materials inventory, 3/31/2017 | 3 = | 42,500 |
Direct materials used | 90,000 | |
Conversion costs (given) | 330,000 | |
Manufacturing costs added during the period (given) | 420,000 | |
Add work in process inventory, 3/1/2017 (given) | 35,000 |
Manufacturing costs to account for | 455,000 |
Deduct work in process inventory, 3/31/2017 | 2 = 95,000 |
Cost of goods manufactured (4 × $90,000) | 360,000 |
Add finished goods inventory, 3/1/2017 | 160,000 |
Cost of goods available for sale | 520,000 |
Deduct finished goods inventory, 3/31/2017 | 1 = 105,000 |
Cost of goods sold (80% × $518,750) | $415,000 |
Some instructors may wish to place the key amounts in a Work in Process T-account. This problem can be used to introduce students to the flow of costs through the general ledger (amounts in thousands):
Beg Inv Purch. | Beg Inv | 35 | Beg Inv | 160 | ||||
90 | COGM 360 | 360 | COGS 415 | 415 | ||||
End Inv | 42.5 | Conversion To account for | 330 455 | Available for sale | 520 | |||
End Inv | 95 | End Inv | 105 |
2-45 Comprehensive problem on unit costs, product costs. Atlanta Office Equipment manufactures and sells metal shelving. It began operations on January 1, 2017. Costs incurred for 2017 are as follows (V stands for variable; F stands for fixed):
Direct materials used | $140,000 V |
Direct manufacturing labor costs | 22,000 V |
Plant energy costs | 5,000 V |
Indirect manufacturing labor costs | 18,000 V |
Indirect manufacturing labor costs | 14,000 F |
Other indirect manufacturing costs | 8,000 V |
Other indirect manufacturing costs | 26,000 F |
Marketing, distribution, and customer-service costs | 120,000 V |
Marketing, distribution, and customer-service costs | 43,000 F |
Administrative costs | 54,000 F |
Variable manufacturing costs are variable with respect to units produced. Variable marketing, distribution, and customer-service costs are variable with respect to units sold.
Inventory data are as follows:
Direct materials | 0 lb | 2,300 lbs |
Work in process | 0 units | 0 units |
Finished goods | 0 units | ? units |
Production in 2017 was 100,000 units. Two pounds of direct materials are used to make one unit of finished product.
Revenues in 2017 were $473,200. The selling price per unit and the purchase price per pound of direct materials were stable throughout the year. The company’s ending inventory of finished goods is carried at the average unit manufacturing cost for 2017. Finished-goods inventory at December 31, 2017, was $20,970.
Required:
SOLUTION
(30 min.) Comprehensive problem on unit costs, product costs.
2.
Manufacturing Costs for 100,000 units
Direct materials costs | $140,000 | $ – | $140,000 |
Direct manufacturing labor costs | 22,000 | – | 22,000 |
Plant energy costs | 5,000 | – | 5,000 |
Indirect manufacturing labor costs | 18,000 | 14,000 | 32,000 |
Other indirect manufacturing costs | 8,000 | 26,000 | 34,000 |
Cost of goods manufactured | $193,000 | $40,000 | $233,000 |
Average unit manufacturing cost: Finished goods inventory in units: | $233,000 ÷ 100,000 units = $2.33 per unit = $20,970 (given) $2.33 per unit = 9,000 units |
4.
Atlanta Office Equipment Income Statement Year Ended December 31, 2017 (in thousands)
Revenues (91,000 units sold × $5.20) $473,200 | ||
Cost of units sold: | ||
Beginning finished goods, Jan. 1, 2017 | $ 0 | |
Cost of goods manufactured | 233,000 | |
Cost of goods available for sale | 233,000 | |
Ending finished goods, Dec. 31, 2017 | 20,970 | 212,030 |
Gross margin | 261,170 | |
Operating costs: | ||
Marketing, distribution, and customer-service costs ($120,000 + $43,000) | 163,000 | |
Administrative costs | 54,000 | 217,000 |
Operating income | $ 44,170 |
Note: Although not required, the full set of unit variable costs is: | |
Direct materials cost ($0.70 × 2 lbs.) | $1.400 |
Direct manufacturing labor cost ($22,000 ÷ 100,000) | 0.22 |
Plant energy cost ($5,000 ÷ 100,000) | 0.05 = $1.93 per unit manufactured |
Indirect manufacturing labor cost ($18,000 ÷ 100,000) | 0.18 |
Other indirect manufacturing cost ($8,000 ÷ 100,000) | 0.08 |
Marketing, distribution, and customer-service costs ($120,000 ÷ 91,000) | $1.329 per unit sold |
Direct Material Direct Manufacturing Labor Manufacturing Overhead Marketing Costs Distribution Expense Customer Service |
SOLUTION
(15 min.) Different meanings of product costs
Direct materials | Include | Include | Include |
Direct manufacturing labor | Include | Include | Include |
Manufacturing overhead | Include | Include | Include |
Marketing costs | Include | Exclude* | Exclude |
Distribution expense | Include | Exclude* | Exclude |
Customer service | Include | Exclude* | Exclude |
2-47 Cost classification; ethics. Paul Howard, the new plant manager of Garden Scapes Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Howard receives a year-end bonus of 11.5% of the plant’s operating income before tax. The year-end income statement provided by the plant’s controller was disappointing to say the least. After reviewing the numbers, Howard demanded that his controller go back and “work the numbers” again. Howard insisted that if he didn’t see a better operating income number the next time around he would be forced to look for a new controller.
Garden Scapes Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished-goods warehousing costs of $3,640,000, are classified as period expenses. Howard had suggested that warehousing costs be included as product costs because they are “definitely related to our product.” The company produced 260,000 units during the period and sold 240,000 units.
As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by $280,000. He was also sure these new numbers would make Howard happy.
Required:
SOLUTION
(20-25 min.) Classification of costs; ethics.
Units produced $3,640,000 $14 per unit.
If the $3,640,000 is treated as period costs, the entire amount would be expensed during the year as incurred. If it is treated as a product cost, it would be “unitized” at $14 per unit and expensed as each unit of the product is sold. Therefore, if only 240,000 of the 260,000 units are sold, only $3,360,000 ($14 per unit × 240,000 units) of the $3,640,000 would be expensed in the current period. The remaining $3,640,000 – $3,360,000 = $280,000 would be inventoried on the balance sheet until a later period when the units are sold. The value of finished goods inventory can also be calculated directly to be $280,000 ($14 per unit × 20,000 units).
Case 1 Case 2 (in thousands) | ||
Accounts receivable, 12/31 | $ 8,000 | $ 3,150 |
Cost of goods sold | A | 31,800 |
Accounts payable, 1/1 | 4,500 | 2,550 |
Accounts payable, 12/31 | 2,700 | 2,250 |
Finished-goods inventory, 12/31 | B | 7,000 |
Gross margin | 18,000 | C |
Work-in-process inventory, 1/1 | 3,000 | 1,500 |
Work-in-process inventory, 12/31 | 0 | 4,700 |
Finished-goods inventory, 1/1 | 5,000 | 7,000 |
Direct materials used | 13,000 | 19,000 |
Direct manufacturing labor | 4,500 | 8,500 |
Manufacturing overhead costs | 9,500 | D |
Purchases of direct materials | 13,500 | 10,500 |
Revenues | 52,000 | 52,300 |
Accounts receivable, 1/1 | 3,000 | 2,100 |
SOLUTION
(20–25 min.) Finding unknown amounts.
Let G = given, I = inferred | |||
Step 1: Use gross margin formula | Case 1 | Case 2 | |
Revenues | $52,000 G | $52,300 G | |
Cost of goods sold | A 34,000 I | 31,800 G | |
Gross margin | $18,000 G | C | $20,500 I |
Step 2: Use schedule of cost of goods manufactured formula | |||
Direct materials used | $13,000 G | $19,000 G | |
Direct manufacturing labor costs | 4,500 G | 8,500 G | |
Indirect manufacturing costs | 9,500 G | D | 7,500 I |
Manufacturing costs incurred | 27,000 I | 35,000 I | |
Add beginning work in process, 1/1 | 3,000 G | 1,500 G | |
Total manufacturing costs to account for | 30,000 I | 36,500 I | |
Deduct ending work in process, 12/31 | 0 G | 4,700 G | |
Cost of goods manufactured | $30,000 I | $31,800 I |
Step 3: Use cost of goods sold formula | ||
Beginning finished goods inventory, 1/1 | $ 5,000 G | $ 7,000 G |
Cost of goods manufactured | 30,000 I | 31,800 I |
Cost of goods available for sale | 35,000 I | 38,800 I |
Ending finished goods inventory, 12/31 | B 1,000 I | 7,000 G |
Cost of goods sold | $34,000 I | $31,800 G |
For case 1, do steps 1, 2, and 3 in order.
For case 2, do steps 1, 3, and then 2.
Try It 2-1 Solution
The following table shows the total costs of gasoline and insurance and the cost per mile if the truck is driven (a) 20,000 miles and (b) 30,000 miles.
(1) | (2) = $0.15 × (1) | (3) | (4) = (2) + (3) | (5) = (4) ÷ (1) |
20,000 | $3,000 | $6,000 | $ 9,000 | $0.45 |
30,000 | 4,500 | 6,000 | 10,500 | 0.35 |
Try It 2-2 Solution
We first calculate the cost of direct materials used and then total manufacturing costs incurred in 2017.
The cost of direct materials used is:
Beginning inventory of direct materials, January 1, 2017 | $12,000 |
+ Purchases of direct materials in 2017 | 85,000 |
− Ending inventory of direct materials, December 31, 2017 | 7,000 |
= Direct materials used in 2017 | $90,000 |
Total manufacturing costs incurred refers to all direct manufacturing costs and manufacturing overhead costs incurred during 2017 for all goods worked on during the year. Diana Corporation classifies its manufacturing costs into the three categories described earlier.
(i) Direct materials used in 2017 | $ 90,000 |
(ii) Direct manufacturing labor costs in 2017 | 30,000 |
(iii) Manufacturing overhead costs in 2017 | 40,000 |
Total manufacturing costs incurred in 2017 | $160,000 |
Try It 2-3 Solution
The cost of goods manufactured in 2017 for Diana Corporation is calculated as follows:
Beginning work-in-process inventory, January 1, 2017 | $ 9,000 |
Total manufacturing costs incurred in 2017 | 160,000 |
Total manufacturing costs to account for | 169,000 |
Ending work-in-process inventory, December 31, 2017 | 8,000 |
Cost of goods manufactured in 2017 | $161,000 |
Beginning inventory of finished goods, January 1, 2017 | $ 15,000 |
Cost of goods manufactured in 2017 | 161,000 |
Ending inventory of finished goods, December 31, 2017 | 21,000 |
Cost of goods sold in 2017 | $155,000 |