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Chapter 16: 7RQ (page 884)
Describe a merchandising company, and give an example.
The merchandising company sells products that are not produced by them and the examples are Walmart and Aptos.
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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
Preparing a schedule of cost of goods manufactured and an income statement for a manufacturing company
Chewy Bones manufactures its own brand of pet chew bones. At the end of December 2018, the accounting records showed the following:
Balances: Beginning Ending
Direct Materials \( 13,400 \) 10,500
Work-in-Process Inventory 0 1,500
Finished Goods Inventory 0 5,400
Other information:
Direct materials purchases $ 39,000
Plant janitorial services 900
Sales salaries 5,100
Delivery costs 1,700
Net sales revenue 115,000
Utilities for plant 1,200
Rent on plant 9,000
Customer service hotline costs 1,600
Direct labor 16,000
Requirements
1. Prepare a schedule of cost of goods manufactured for Chewy Bones for the year ended December 31, 2018.
2. Prepare an income statement for Chewy Bones for the year ended December 31, 2018.
3. How does the format of the income statement for Chewy Bones differ from the income statement of a merchandiser?
4. Chewy Bones manufactured 17,500 units of its product in 2018. Compute the company’s unit product cost for the year, rounded to the nearest cent.
Preparing an income statement and calculating unit cost for a merchandising company
Clyde Conway owns Clyde’s Pets, a small retail shop selling pet supplies. On December 31, 2018, the accounting records of Clyde’s Pets showed the following:
Merchandise Inventory on December 31, 2018 $ 10,100
Merchandise Inventory on January 1, 2018 15,900
Net Sales Revenue 56,000
Utilities Expense for the shop 3,300
Rent for the shop 4,100
Sales Commissions 2,650
Purchases of Merchandise Inventory 25,000
Requirements
1. Prepare an income statement for Clyde’s Pets for the year ended December 31, 2018.
2. Clyde’s Pets sold 3,850 units. Determine the unit cost of the merchandise sold, rounded to the nearest cent
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.
Give five examples of manufacturing overhead.
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