PROBLEM 1 - Determining and Reporting Product Cost Information
The following are data regarding last year's production of Dicer Ricer, one of the major products of Kitchen Gadget Company.
Purchases of direct materials - $332,000
Direct materials used - 333,600
Direct labor payrolls (paid during the year) - 176,700
Direct labor costs assigned to production - 180,000
Manufacturing overhead - 288,000
During the year, 61,000 units of this product were manufactured and 62,100 units were sold. Selected information concerning inventories during the year follows.
|
|
End of Year
|
Beginning of Year
|
|
Materials
|
$7
|
$12,800
|
|
Work in Process
|
4,700
|
3,000
|
|
Finished Goods, Jan. 1 (3,000 units @ $13)
|
?
|
39,000
|
Instructions -
a. Prepare a schedule of the cost of finished goods manufactured for the Dicer Ricer product.
b. Compute the average cost of a Dicer Ricer per finished unit for last year.
c. Compute the cost of goods sold associated with the sale of Dicer Ricer. Assume that there is a first-in, first-out (FIFO) flow through the Finished Goods Inventory account and that all units completed during the year are assigned the per-unit costs determined in part b.
d. Compute the amount of inventory relating to Dicer Ricer that will be listed in the company's balance sheet at December 31. Show supporting computations for the year-end amounts of materials inventory and finished goods inventory.
PROBLEM 2 - Measuring Unit Cost
Early in the year, John Raymond founded Raymond Engineering Co. for the purpose of manufacturing a special flow control valve that he had designed. Shortly after year-end, the company's accountant was injured in a skiing accident, and no year-end financial statements were prepared. However, the accountant had correctly determined the year-end inventories at the following amounts.
Materials - $46,000
Work in process - 31,500
Finished goods (3,000 units) - 88,500
As this was the first year of operations, there were no beginning inventories.
While the accountant was in the hospital, Raymond improperly prepared the following income statement from the company's accounting records.
|
Net sales
|
|
$610,600
|
|
Cost of goods sold:
|
|
|
|
Purchases of direct materials
|
$181,000
|
|
|
Direct labor costs
|
110,000
|
|
|
Manufacturing overhead
|
170,000
|
|
|
Selling expenses
|
70,600
|
|
|
Administrative expenses
|
132,000
|
|
|
Total costs
|
|
663,600
|
|
Net loss for year
|
|
$(53,000)
|
Raymond was very disappointed in these operating results. He stated, "Not only did we lose more than $50,000 this year, but look at our unit production costs. We sold 10,000 units this year at a cost of $663,600; that amounts to a cost of $66.36 per unit. I know some of our competitors are able to manufacture similar valves for about $35 per unit. I don't need an accountant to know that this business is a failure."
Instructions -
a. Prepare a schedule of the cost of finished goods manufactured for the year. (As there were no beginning inventories, your schedule will start with "Manufacturing costs assigned to production.") Show a supporting computation for the cost of direct materials used during the year.
b. Compute the average cost per unit manufactured.
c. Prepare a corrected income statement for the year, using the multiple-step format. If the company has earned any operating income, assume an income tax rate of 30 percent. (Omit earnings per share figures.)
d. Explain whether you agree or disagree with Raymond's remarks that the business is unprofitable and that its unit cost of production ($66.36, according to Raymond) is much higher than that of competitors (around $35). If you disagree with Raymond, explain any errors or shortcomings in his analysis.