Cost of Goods Manufactured

The following data (in thousands of dollars) have been taken from the accounting records of Larder Corporation for the
just completed year.

Required:
(a.) Prepare a Schedule of Cost of Goods Manufactured in good form.
(b.) Compute the Cost of Goods Sold.
(c.) Using data from your answers above as needed, prepare an Income Statement in good form
Answer:

000 units are to be produced. Unit costs for January were: ($9. the Big Bertha.000 40. Since fewer units are expected to be produced in February. .000. b.000 $3. Summary data (in millions) for January for the most popular electronic storage device. Unit costs should be higher in February if only 30. it is not necessary to calculate the exact February unit cost. and indirect manufacturing costs.000 + $8. Answer: a. was: Direct manufacturing costs Direct manufacturing labor costs Indirect manufacturing costs Units produced Big Bertha $9.000) / 40. Total indirect manufacturing costs for January were $300 million. and were allocated to each product on the basis of direct manufacturing labor costs of each line at a rate of $2. Speculate as to whether the unit costs in February will most likely be higher or lower than unit costs in January. This will result in an increase in total cost per unit since variable costs per unit will most likely not change with the decreased production.000 Required: a. Indirect manufacturing costs most likely include both fixed and variable components. total fixed costs will be spread over fewer units.833 for each direct labor dollar.500. Briefly explain your reasoning. Compute the manufacturing cost per unit for each product produced in January.500.CGM Springfield Manufacturing produces electronic storage devices. and uses the following three-part classification for its manufacturing costs: direct materials.000.000 $8.000 = $512. direct manufacturing labor. Suppose production will be reduced to 30.000.50 per unit b.000 units in February.000.000 + $3.

N = 1.000 = $3N. For each option.000 units.700 and favors Option 1 above 1.000 units.000 = $4.000. operates retail stores in several shopping malls. Answer: a. Beginning at zero sales. paying a fixed rent of $15.20 x $30 x 800) = $9. a florist. or 3. $15.800 plus 20% of revenue received up to a maximum rent of $25.000 and favors Option 1 above 2.800 + 0.800 + (0.401 to 2. compute the breakeven sales and the monthly rent paid at break-even. Option 1 above 2. Option 1 N = Breakeven units $30N – $18N .000 plus 10% of revenue received. show the sales levels at which each option is preferable up to 5.10 x $30 x 1.000 Option 3 N = Breakeven units $30N – $18N – 0.000) = $12. paying a base rent of $4.000 units Rent at breakeven = $9. Karen Hefner. $15. b.000 a month.800/$6 = 800 units Rent at breakeven = $4. or 2. The mall operator offers the following three options for its retail store rentals: 1.000 + (0.000 for $15. Required: a. Option 2 from 1.000 + 0.000 plus $3 per unit.000 = $9.000 = 0 N = $9.000/$12 = 1. N = 2.000/$9 = 1.700 units.800 plus $6 per unit.10($30N). $10.700 units . Option 1 equals Option 2 when sales are 2.10($30N) – $9.800 = 0 $6N – $4.800 = 0 N = $4.000 = 0 $9N – $9.20($30N).$15.600 b.000 Option 1 equals Option 3 when sales are 1.20($30N) – $4. $6.200 = $6N. A new mall is opening where Karen wants to locate a store.250 units Rent at breakeven = $15.400 units for $4.000. Option 3 from 0 to 1.000 = 0 $12N – $15.CVP.000 for $9. paying a base rent of $9.000 = 0 N = $15.000 Option 2 N = Breakeven units $30N – $18N – 0. but the location manager is not sure about the rent method to accept. The average selling price of an arrangement is $30 and the average cost of each sale is $18.

Explain the differences between the profits obtained from the traditional system and the ABC system.000 50. 25.0 30 10 25 0. for each style of faucet 1. Determine the activity-cost-driver rate for setup costs and inspection costs.000 PER UNIT data: Selling price ……………………………… Direct materials …………………………… Direct labor ………………………………. respectively. 2. d. Which system provides a better estimate of profitability? Why? . and 10 machine hours to manufacture 1000-unit batches of brass. The following additional data apply: BRASS CHROME WHITE Projected sales in units 30. Chrome.000 $870.700 inspection hours Required: a.500 $405.900 hours 2.000 40. compute the estimated overhead costs per unit. Using the ABC system. Using the traditional system.. compute the estimated operating profit per unit. Setup hours ………………………………… Inspection hours …………………………… $40 $ 8 $15 $20 $ 4 $ 3 $30 $ 8 $ 9 $12 $ 3 $ 9 40 25 1..400 hours 95 setup hours 2. chrome and white faucets. c.5 20 30 10 1.0 20 Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labor hours Machine hours Setups Inspections Overhead costs $465. Machine hours ……………………………. Overhead cost based on direct labor hours (Traditional system) ………………… Hours per 1000-unit batch: Direct labor hours …………………………. and White..500 Activity levels 2. b. Production takes 25. determine the operating profit per unit for each style of faucet.ABC Costing Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass..

90 per unit.000/2. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 – ($8 + $15 + $12) Operating profit per unit for Chrome faucets is $10 = $20 – ($4 + $3 + $3) Operating profit per unit for White faucets is $4 = $30 – ($8 + $9 + $9) b.000/40. 50 batches x 20 inspection hours per batch = 1. d.000 units per batch = 40 batches.00/unit Overhead costs for Chrome faucets ($2.000 units in projected sales / 1.45 + $3.50) = $9. Overhead costs per unit for White faucets are $7. Traditional system: .000 units = $4.45 per unit. Operating profit per unit for White faucets is $5.90 + $4.45 per unit Operating profit per unit for Chrome faucets is $7.40 per unit.000 inspection hours 25 setup hours x $4.500/95. and for inspection costs is $150 per inspection hour = $405. 40 batches x 1 setup hour per batch = 40 setup hours.000 units in projected sales/ 1.90 per unit.900 = $122.700. The activity-cost-driver rate for setup costs is $4.90/unit 800 inspection hours x $150 = $120.45).55 = $20 – ($4 + $3 + $5.000/30.000/30.00) = $5. 40.000/40.500/50. ABC system: Overhead costs per unit for Brass faucets are $9. 50 batches x .90).900 per setup hour = $465. c.000 units = $4.40). 30 batches x 30 inspection hours per batch = 900 inspection hours 30 setup hours x $4.000 units = $3.900 = $147.000/50.50/unit Overhead costs for Brass faucets ($4. 50.000 units in projected sales / 1.000 units per batch = 30 batches.900 = $196.40 per unit Operating profit per unit for Brass faucets is $7.000 units = $3.90/unit 900 inspection hours x $150 = $135. Overhead costs per unit for Chrome faucets are $5. 30. 30 batches x 1 setup hour per batch = 30 setup hours.000 inspection hours x $150 = $150. 40 batches x 20 inspection hours per batch = 800 inspection hours 40 setup hours x $4.60 = $40 – ($8 + $15 + $9.90 + $3.5 setup hour per batch = 25 setup hours.00/unit Overhead costs for white faucets ($4.000 units = $2.45/unit 1.00) = $7.Answer: a.10 = $30 – ($8 + $9 + $7.000 units = $4.000 units per batch = 50 batches.

10 = $30 – ($8 + $9 + $7.90).55 = $20 – ($4 + $3 + $5. Operating profit per unit for Chrome faucets is $7. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated. Operating profit per unit for White faucets is $4 = $30 – ($8 + $9 + $9) ABC system: Operating profit per unit for Brass faucets is $7. Operating profit per unit for White faucets is $5. Because the products do not all require the same proportionate shares of the overhead resources of setup hours and inspection hours.60 = $40 – ($8 + $15 + $9. Operating profit per unit for Chrome faucets is $10 = $20 – ($4 + $3 + $3). . the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours.Operating profit per unit for Brass faucets is $5 = $40 – ($8 + $15 + $12).45).40).

to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Silver Lake Cabinets should also consider the impact on current customers when these customers hear that another customer was offered a discounted price. these incremental costs will increase by the cost of adding capacity. The following per unit data apply for sales to regular customers: Direct materials Direct labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (60%) Targeted selling price $100 125 60 75 360 216 $576 Silver Lake Cabinets has excess capacity. and the impact on the competition and if they might choose to meet the discounted price. what is the minimum acceptable price of this one-time-only special order? b. Required: a. what other items should Silver Lake Cabinets consider before accepting this onetime-only special order? c.RELEVANT _One time offer Silver Lake Cabinets is approached by Ms. How would the analysis differ if there was limited capacity? Answer: a. so direct material costs will increase by $30 per unit. Currently. If additional capacity is needed to process this order. a new customer. Zhang wants the cabinets in cherry rather than oak. . b. For Silver Lake Cabinets. $315 = Variable costs ($100 + $125 + $60) + $30 additional cost for cherry. Ms. the incremental costs total $315. Other than price. c. Jenny Zhang.

product line.000.000 units x $11.000 ($25.000 $120. In other words.000 annually.000 Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11. What other items should Quiett Truck consider before outsourcing any of the parts it currently manufactures? Answer: a. Other factors to consider include the supplier’s ability to meet expected quality and delivery standards. product.000 15.000 reduction in annual production costs. which are all but the $10. If WB23 is outsourced. 40% of the fixed costs cannot be immediately converted to other uses. Required: a.20 per part) outsourced cost is greater than the $110. c.000 x 40%) of fixed costs that cannot be immediately converted to other uses.20 per unit. Avoidable costs are those costs eliminated when a part. Describe avoidable costs.000 25.000 units are produced each year with production costs as follows: Direct materials Direct manufacturing labor Variable support costs Fixed support costs Total costs $ 45. .000 (10. Based on the financial considerations given.RELEVANT_Make or Buy Quiett Truck manufactures part WB23 used in several of its truck models. Quiett Truck should NOT outsource WB23 because the $112. What amount of the WB23 production costs is avoidable? b.000 35. Avoidable production costs for WB23 total $110. Should Quiett Truck outsource WB23? Why or why not? c. the outsourcing would cost Quiett Truck an additional $2. or business segmented is discontinued. b. and the likelihood of suppliers increasing prices of components in the future. 10.

c. Model X is the most profitable because it has the greatest contribution margin per constrained resource. and $20 for Model Z ($40 / 2. Model Y is the most profitable because it has the greatest contribution margin per unit. Model X. When there is excess capacity.0). . Norton may also want to educate salespeople about the effects of constrained resources.0). which model is the most profitable to produce? Why? d. e. For each model.0 machine-hour per unit). To encourage sales persons to promote specific products. The following per unit data apply: Model X Selling price $80 Direct materials 30 Direct labor ($10 per hour) 15 Variable support costs ($5 per machine-hour) 5 Model Y $90 30 15 10 Model Z $100 38 20 10 Required: a.50 for Model Y ($35 / 2. For each model. Answer: a. and Model Z. Considerable market demand exists for all models. d. $17. $35 for Model Y ($90 – $30 – $15 – $10). For each model. The contribution margin per machine-hour is $30 for Model X ($30 contribution margin / 1. The contribution margin per unit is: $30 for Model X ($80 – $30 – $15 – $5). Model Y. which model is the most profitable to produce? Why? e. b. When there are machine-hour capacity constraints. c. If there is a machine breakdown. If there is excess capacity. compute the contribution margin per machine-hour. b. compute the contribution margin per unit. Norton may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits.CVP_ Multiple Products Norton’s Mufflers manufactures three different product lines. and $40 for Model Z ($100 – $30 – $20 – $10). compute the contribution margin percentage. How can Norton encourage her sales people to promote the more profitable model? f.

foot used) Allocated corporate costs Corporate profit Chocolate $40.000 towards corporate costs and profits.000 60. I would not recommend discontinuing the Other Candy product line because this product line contributes $4.000 Other Candy $25.000 3.000 $10.000 5.000 5.000) Fudge $35.000 26.000 3.000 15.000 3.000 – $26.000 16.000 7.000 14. corporate profits would immediately decrease by $9.000 Total $100. corporate profits for the current year would have decreased by what amount? Answer: a. corporate profits would be $4.000 8.000 – $3. No.000.000 10. Do you recommend discontinuing the Other Candy product line? Why or why not? b.000 – $15.000 2.000 19.000 15. If the Chocolate product line were discontinued.RELEVANT_ Add or Drop The management accountant for the Chocolate S’more Company has prepared the following income statement for the most current year: Sales Cost of goods sold Contribution margin Delivery and ordering costs Rent (per sq. If the Chocolate product line had been discontinued.000 2.000 – $3.000 = $4.000 Required: a.000 – $3.000 – $2.000 $4. b.000 40.000 less than currently reported.000 5.000 $(1.000 = $9. $25. $40.000 .000 Without the Other Candy product line.000 2.000 $7.

Explain why the income was different each year using the two methods. Show computations. Required: a. Budgeted fixed manufacturing overhead rate for 20X5 = $2.000 units at a price of $50.000 3.400.000.000 (favors variable method) .000 (favors absorption method) 20X6 difference of $400.000 units and sold 80.000 each year.000.600.000.000 100.000 100.000 Contribution margin 2.000 20X6 $4.400. respectively.000 units at a price of $50 per unit.000 0 2.700.200.000 800.000 Sales Cost of goods sold: Beginning inventory Variable Fixed Subtotal Ending inventory Total COGS Gross margin Selling and administrative Operating income b. c.000 2.000 = $20 20X5 difference of $400.200.000.000 $ 300.000 1.000 2.800.000 – 90.000 4. There was no beginning inventory in 20X5.000 100.000 100. Answer: a.000 1.000) x $20 = $400.000 Fixed expenses: Manufacturing Selling and administrative 2.000. b. Variable-costing income statements: Sales Variable expenses Operating income c. Both variable unit and total fixed manufacturing costs for 20X5 and 20X6 remained constant at $20 and $2.200.000.000 4.000 = (70.000.000 2.500. Absorption Bobby Smith and Sons Company was concerned that increased sales did not result in increased profits for 20X6. the company made 70. In 20X5.000. the company produced 100.000.000 $ 600.000 / 100.000 300.000) x $20 = $400.000 – 80.000 2.000 20X5 $4. Selling and administrative expenses were all fixed at $100.000 1.000.500.000 800. Prepare income statements for each year using variable costing.VARIABLE vs.000 0 4.000 20X6 $4.000 $ 700. Absorption-costing income statements: 20X5 $4.000 units and sold 90. In 20X6.000 = (100.000 800. Prepare income statements for each year using absorption costing.000 $ 200.000.