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Chapter 16: Q28PGA (page 895)

Question:Preparing a schedule of cost of goods manufactured and an income statement for a manufacturing company

Gourmet 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 \( 13,500 \) 7,500

Work-in-Process Inventory 0 3,500

Finished Goods Inventory 0 5,200

Other information:

Direct materials purchases$ 36,000

Plant janitorial services 700

Sales salaries 6,000

Delivery costs1,300

Net sales revenue 107,000

Utilities for plant 1,300

Rent on plant 17,000

Customer service hotline costs 1,200

Direct labor23,000

Requirements

1. Prepare a schedule of cost of goods manufactured for Gourmet Bones for the year ended December 31, 2018.

2. Prepare an income statement for Gourmet Bones for the year ended December 31, 2018.

3. How does the format of the income statement for Gourmet Bones differ from the income statement of a merchandiser?

4. Gourmet Bones manufactured 17,900 units of its product in 2018. Compute the company’s unit product cost for the year, rounded to the nearest cent.

Short Answer

Expert verified

The COGM is $80,500, net operating income is $23,200. Manufacturing company’s income statement COGS includes COGM and change in finished goods inventory and COGS on income statement of merchandise inventory includes purchases and change in merchandise inventory. The unit product cost is $4.50

Step by step solution

01

Step-by-Step SolutionStep 1: Preparation of schedule of cost goods manufactured

Gourmet Bones

Schedule of cost goods manufactured

The year ended December 31, 2018

Amount ($)

Amount ($)

Amount ($)

Beginning WIP Inventory

Direct Materials Used

Beginning Direct material

$13,500

Purchases of direct material

$36,000

Direct Materials available for use

$49,500

Ending direct materials

-$7,500

Direct Materials used

$42,000

Direct Labor

$23,000

Manufacturing overhead

Plant Janitorial services

$700

Utilities for plant

$1,300

Rent on Plant

$17,000

Total Manufacturing Overhead

$19,000

Total manufacturing cost incurred during the year

$84,000

Total manufacturing cost to account for

$84,000

Ending WIP Inventory

-$3,500

Cost of goods manufactured

$80,500

02

Preparation of Income statement

Gourmet Bones

Income Statement

The year ended December 31, 2018

Amount ($)

Amount ($)

Revenues:

Net Sales Revenue

$107,000

Cost of goods sold

Beginning finished goods inventory

0

Cost of goods manufactured

$80,500

Cost of goods available for sale

$80,500

Ending finished goods inventory

-$5,200

Cost of goods sold

$75,300

Gross Profit

$31,700

Selling and administrative Expenses

Sales Salaries Expense

$6,000

Delivery Expense

$1,300

Customer service hotline Expense

$1,200

Total Selling and administrative Expenses

$8,500

Operating Income (loss)

$23,200

03

Difference in income statement format between Gourmet and merchandiser company

In an income statement of the manufacturing company, the cost of goods sold is based on the cost of goods manufactured, and for a merchandising company, the cost of goods sold is based on the cost of merchandise purchased including freight in and the change in merchandise inventory.

04

Computation of unit product cost

Unitproductcost=CostofgoodsmanufacturedTotalunitsproduced=$80,50017,900=$4.50

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Most popular questions from this chapter

Identifying product costs and period costs Classify each cost of a paper manufacturer as either a product cost or a period cost:

a. Salaries of scientists studying ways to speed forest growth.

Winnebago Industries, Inc. is a leading manufacturer of recreational vehicles (RVs), including motorized and towable products. The company designs, develops, manufactures, and markets RVs as well as supporting products and services. The RVs are sold to consumers through a dealer network. On the August 29, 2015, balance sheet, Winnebago reported inventory of approximately \(112 million. Of this amount, approximately \)12 million, about 11%, was Finished Goods Inventory (Notes to Consolidated Financial Statements, Note 3). Suppose Winnebago motor homes have an average sales price of $96,000 and cost of goods sold is 89% of sales. Thor Industries, Inc., a major competitor, has an average cost of goods sold of 86% of sales. For year ending August 29, 2015, Winnebago sold 9,097 motor homes (Form 10-K, Item 1 Business).

Requirements

1. Why would the Finished Goods Inventory be such a relatively small portion of total inventory?

2. What is the average cost of goods sold (in dollars) for a Winnebago motor home? What is the average gross profit?

3. If Winnebago could reduce production costs so that the average cost of goods sold is equal to their competitor’s average cost of goods sold, how much more profit would Winnebago earn on each motor home sold?

4. Based on 2015 sales, how much would operating income increase if the company reduced the average cost of goods sold to equal their competitor’s average cost of goods sold?

5. How could managers at Winnebago use managerial accounting to reduce costs and increase profits?

Selected data for three companies are given below. All inventory amounts are ending balances and all amounts are in millions.

Company A Company B Company C

Cash \( 6 Wages Expense \) 12 Administrative Expenses $ 4

Net Sales Revenue 48 Equipment 32 Cash 25

Finished Goods Inventory 10 Accounts Receivable 8 Net Sales Revenue 75

Cost of Goods Sold 23 Service Revenue 65 Selling Expenses 8

Selling Expenses 4 Cash 34 Merchandise Inventory 12

Equipment 67 Rent Expense 12 Equipment 55

Work-in-Process Inventory 9 Accounts Receivable 19

Accounts Receivable 14 Cost of Goods Sold 25

Cost of Goods Manufactured 23

Administrative Expenses 7

Raw Materials Inventory 6

Identifying differences between service, merchandising, and manufacturing companies Using the data on the previous page, calculate operating income for each company.

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.

Preparing a schedule of cost of goods manufactured and an income statement for a manufacturing company

Certain item descriptions and amounts are missing from the monthly schedule of cost of goods manufactured and income statement of Charlie Manufacturing Company. Fill in the blanks with the missing words, and replace the Xs with the correct amounts.

ing Direct Ending Direct Direct Manufacturing Overhead Total Costs Total Costs Ending Direct Materials Beginning Direct Materials Purchases of Direct Materials \( 26,000 \) X \( X X X (29,000) 177,000 50,000 \) X 51,000 81,000 (26,000) C

Net Sales Revenue Cost of Goods Sold Total Income Cost of Goods Sold: Gross Profit Expenses: Selling Expenses Administrative Expenses Cost of Goods Ending Beginning \( X 232,000 268,000 X 150,000 90,000 \) 118,000 X X X $ X CHARLIE MANUFACTURING COMPANY June 30
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