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Chapter 16: 11RQ (page 885)
What are the three manufacturing costs for a manufacturing company? Describe each.
The three manufacturing costs are direct material, direct labor, and manufacturing overhead.
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Classifying costs Wheels, Inc. manufactures wheels for bicycles, tricycles, and scooters. For each cost given below, determine if the cost is a product cost or a period cost. If the cost is a product cost, further determine if the cost is direct materials (DM), direct labor (DL), or manufacturing overhead (MOH) and then determine if the product cost is a prime cost, conversion cost, or both. If the cost is a period cost, further determine if the cost is a selling expense or administrative expense (Admin). Cost (a) is answered as a guide
Cost Product Period
DM DL MOH Prime Conversion Selling Admin.
a. Metal used for rims
b. Sales salaries
c. Rent on factory
d. Wages of assembly workers
e. Salary of production supervisor
f. Depreciation on office equipment
g. Salary of CEO
h. Delivery expense
Computing cost of goods sold and operating income, merchandising company
Consider the following partially completed income statements for merchandising companies and compute the missing amounts:
Smith, Inc. Allen, Inc.
Net Sales Revenue \( 101,000 \) (d )
Cost of Goods Sold:
Beginning Merchandise Inventory (a) 29,000
Purchases and Freight In 50,000 (e)
Cost of Goods Available for Sale (b) 89,000
Ending Merchandise Inventory (2,200) (2,200)
Cost of Goods Sold 61,000 (f)
Gross Profit 40,000 114,000
Selling and Administrative Expenses (c ) 84,000
Operating Income \( 12,000 \) (g)
Identifying product costs and period costs Classify each cost of a paper manufacturer as either a product cost or a period cost:
c. Cost of electricity at the paper mill
Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.
Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.
“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”
“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.”
“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were \(476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were \)505,000, \(245,000, and \)1,425,000, respectively. Wait! Cost of goods available for sale was \(1,340,000.”
“Great,” says Stephen. “I remember that sales for the period were approximately \)1,700,000. Given our gross profit of 30%, that’s all you should need.”
Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were:
• Direct Materials, \(113,000
• Work-in-Process, \)229,000
• Finished Goods, $154,000
Requirements
1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods.
2. Itemize a list of the cost of inventory lost.
Computing cost of goods manufactured
Use the following inventory data for Caddy Golf Company to compute the cost of goods manufactured for the year:
Direct Materials Used $ 12,000
Manufacturing Overhead 21,000
Work-in-Process Inventory:
Beginning Balance 1,000
Ending Balance 5,000
Direct Labor 9,000
Finished Goods Inventory:
Beginning Balance 18,000
Ending Balance 4,000
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