Quiz 16 Practice

Example 1

During the year, Coronado Boat Yard has incurred manufacturing costs of $420,000 in
building three large sailboats. At year-end, each boat is about 70 percent complete.

How much of these manufacturing costs should be recognized as expense in Coronado

Boat Yard's income statement for the current year?

Coronado Boat Yard should not recognize any of the manufacturing costs on their year end
income statement. These are product costs and as a result, will not appear on the income
statement until the boats are sold and the revenue is earned.

Example 2

During the current year, the cost of direct materials purchased by a manufacturing firm was
$340,000, and the direct materials inventory increased by $20,000.

What was the cost of direct materials used during the year?

320000

Direct materials used is $340,000 less the $20,000 increase in the ending balance of direct
materials or $320,000.

Example 3

Hula's Heavyweights, Inc., is a company that manufactures forklifts. During the year, Hula's
purchased $1,450,000 of direct materials and placed $1,525,000 worth of direct materials into
production. Hula's beginning balance in the Materials Inventory account was $320,000.

What is the ending balance in Hula's Materials Inventory account?

245000

Direct Materials Inventory

Balance, 1/1 $ 320,000      

Purchases of direct
$ 1,450,000 Direct materials used $ 1,525,000
materials
 Balance, 12/31 $ 245,000      

Example 4

Listed below are eight technical accounting terms introduced or emphasized in this chapter:

Work in Process Inventory Cost of finished goods manufactured

Conversion costs Cost of Goods Sold
Period costs Management accounting
Prime costs Manufacturing overhead

Each of the following statements may (or may not) describe one of these technical terms. For
each statement, indicate the accounting term described, or answer "None" if the statement does
not correctly describe any of the terms.

a. The preparation and use of accounting information designed to assist managers in

planning and controlling the operations of a business.
b. All manufacturing costs other than direct materials used and direct labor.
c. Direct materials and direct labor used in manufacturing a product.
d. A manufacturing cost that can be traced conveniently and directly to manufactured units
of product.
e. The account debited at the time that the Manufacturing Overhead account is credited.
f. The amount transferred from the Work in Process Inventory account to the Finished
Goods Inventory account.
g. Costs that are debited directly to expense accounts when the costs are incurred.

a. Management accounting 
b. Manufacturing overhead 
c. Prime costs 
d. Prime costs 
e. Work in Process Inventory 
f.  Cost of finished goods manufactured
g. Period costs

Example 5

Into which of the three elements of manufacturing cost would each of the following be
classified?

a. Tubing used in manufacturing bicycles.

b. Wages paid by an automobile manufacturer to employees who test-drive completed
automobiles.
c. Property taxes on machinery.
d. Gold bullion used by a jewelry manufacturer.
 e. Wages of assembly-line workers who package frozen food.
f. Salary of plant superintendent.
g. Electricity used in factory operations.
h. Salary of a nurse in a factory first-aid station.

a. Direct materials  
b. Direct labor  
c. Manufacturing overhead  
d. Direct materials  
e. Direct labor  
f.  Manufacturing overhead  
g. Manufacturing overhead  
h. Manufacturing overhead

Example 6

Indicate whether each of the following should be considered a product cost or a period cost. If
you identify the item as a product cost, also indicate whether it is a direct or an indirect cost. For
example, the answer to item 0 is "indirect product cost." Begin with item a.

0. Property taxes on factory building.

a. Cost of disposal of hazardous waste materials to a chemical plant.

b. Amounts paid by a mobile home manufacturer to a subcontractor who installs plumbing in
each mobile home.
c. Depreciation on sales showroom fixtures.
d. Salaries of security guards in administrative office building.
e. Salaries of factory security guards.
f. Salaries of office workers in the credit department.
g. Depreciation on raw materials warehouse.
h. Income taxes on a profitable manufacturing company.

a. Indirect product cost  

b. Direct product cost  
c. Period cost  
d. Period cost  
e. Indirect product cost  
f.  Period cost  
g. Indirect product cost  
h. Period cost

Example 7

Stone Tools, Inc., had the following account balances as of January 1:

Direct Materials Inventory $8,700
Work in Process Inventory 76,500
Finished Goods Inventory 53,000
Manufacturing Overhead -0-

During the month of January, all of the following occurred:

1. Direct labor costs were $42,000 or 1,800 hours worked.

2. Direct materials costing $25,750 and indirect materials costing $3,500 were purchased.
3. Sales commissions of $16,500 were earned by the sales force.
4. $26,000 worth of direct materials were used in production.
5. Advertising costs of $6,300 were incurred.
6. Factory supervisors earned salaries of $12,000.
7. Indirect labor costs for the month were $3,000.
8. Monthly depreciation on factory equipment was $4,500.
9. Utilities expense of $7,800 was incurred in the factory.
10. Tools with manufacturing costs of $69,000 were transferred to finished goods.
11. Monthly insurance costs for the factory were $4,200.
12. $3,000 in property taxes on the factory were incurred and paid.
13. Tools with manufacturing costs of $89,000 were sold for $165,000.

Instructions

a. If Stone applies manufacturing overhead of $32,400, what will be the balances in the
Direct Materials, Work in Process, and Finished Goods Inventory accounts at the end of
January?
b. As of January 31, what will be the balance in the manufacturing overhead account.
c. What was Stone's operating income for January?

Ex. 16.6 a. Direct materials inventory, Jan. 1   $8,700

    Direct materials purchased   25,750
    Less: Direct materials used in production   (26,000)
       
    Direct materials inventory, Jan. 31   $8,450
       
    Work in process inventory, Jan. 1   $76,500
    Direct materials used   26,000
    Direct labor used   42,000
    Manufacturing overhead applied   32,400
    Less: Finished goods transferred out   (69,000)
       
    Work in process inventory, Jan. 31   $107,900
       
    Finished goods inventory, Jan. 1   $53,000
    Cost of finished goods transferred in   69,000
    Less: Cost of goods sold   (89,000)
       
    Finished goods inventory, Jan. 31   $33,000
       
  b. Manufacturing overhead, Jan. 1   $0
    Indirect materials purchased   3,500
    Supervisor salaries   12,000
    Indirect labor costs   3,000
    Depreciation   4,500
    Factory utilities   7,800
    Factory insurance   4,200
    Property taxes on factory   3,000
    Less: Manufacturing overhead applied   (32,400)
       
    Manufacturing overhead, Jan. 31   $5,600
       
  c. Operating income for the month of January:    
    Revenues   $165,000
    Cost of goods sold   (89,000)
       
    Gross profit   76,000
    Operating expenses:    
    Sales commissions $16,500  
    Advertising expense 6,300 (22,800)
     
    Operating income   $53,200
       

Example 8

Example 9

Exercise 16.10: Preparing an Income Statement Using the Cost of Finished Goods
Manufactured L.O. 4, 6

Ridgeway Company reports the following information pertaining to its operating activities:
 Ending Beginning
Balance Balance
Materials Inventory $70,000 $60,000
Work in Process Inventory 41,000 29,000
Finished Goods Inventory 16,000 21,000

During the year, the company purchased $35,000 of direct materials and incurred $22,000 of
direct labor costs. Total manufacturing overhead costs for the year amounted to $19,000.
Selling and administrative expenses amounted to $30,000, and the company's annual sales
amounted to $80,000.

Instructions

a. Prepare Ridgeway's schedule of the cost of finished goods manufactured

b. Prepare Ridgeway's income statement (ignore income taxes).

a.   RIDGEWAY COMPANY
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2005
    Work in process inventory, January 1, 2005   $29,000
    Manufacturing costs assigned to production:    
    Direct materials used (1) $25,000  
    Direct labor 22,000  
    Manufacturing overhead 19,000  
       
66,000

    $95,000
Total costs in process  

    41,000
Less: Work in process inventory, December 31, 2005  
    Cost of finished goods manufactured   $54,000
   
   
  (1) Computation of direct materials used:    
    Direct materials, January 1, 2005   $60,000
    Direct materials purchased   35,000
    Direct materials available   $95,000
    Less: Direct materials, December 31, 2005  
70,000

    Direct materials put into production   $25,000

       
b.   RIDGEWAY COMPANY
Income Statement
For the Year Ended December 31, 2005
    Sales   $80,000
    Less: Cost of goods sold (1)  
59,000

    $21,000
Gross profit on sales  

    Less: Selling and administrative expenses  

30,000

    Net loss   $(9,000)

   
   
  (1) The company's cost of goods sold figure is based on the    
    following flow of costs through production to finished goods:    
    Finished goods inventory, January 1, 2005   $21,000
    Cost of finished goods manufactured   54,000
    Cost of goods available for sale   $75,000
    $16,000
Less: Finished goods inventory, December 31, 2005  
    Cost of goods sold   $59,000
   
   

Example 10

(a) Wheat used to make flour at General Mills.

Choice Selected Points

Indirect Material Cost No    

Period Cost No    
Direct Material Cost Yes +1

Product Cost Yes +1

Indirect Labor Cost No    
Overhead Cost No    
Direct Labor Cost No    
 Sales commissions paid to sales personnel at Gap retail stores. Select all that
(b)
apply.
Choice Selected Points

Overhead Cost No    
Direct Labor Cost No    
Direct Material Cost No    
Indirect Labor Cost No    
Product Cost No    
Indirect Material Cost No    
Period Cost Yes +1

(c) Costs incurred by General Motors to ship automobile seats purchased from the
Lear Corporation to GM assembly plants.
Choice Selected Points

Direct Labor Cost No    

Indirect Material Cost No    
Product Cost Yes +1
Direct Material Cost No    
Overhead Cost No    
Indirect Labor Cost No    
Period Cost No    

(d) Insurance paid on the Target retail stores in Michigan.

Choice Selected Points

Direct Material Cost No    

Period Cost Yes +1
Indirect Labor Cost No    
Product Cost No    
Indirect Material Cost No    
Overhead Cost No    
Direct Labor Cost No    

Insurance paid on the Target warehouse holding merchandise inventory. Select all
(e)
that apply.
Choice Selected Points

Overhead Cost Yes +1

Direct Material Cost No    
Indirect Material Cost Yes +1
Indirect Labor Cost No    
Product Cost Yes +1
Direct Labor Cost No    
Period Cost No    

(f) Bonus paid to all production employees of General Motors at the end of a profitable
fiscal year. Select all that apply.
Choice Selected Points

Indirect Labor Cost Yes +1

Product Cost Yes +1

Overhead Cost Yes +1
Period Cost No    
Indirect Material Cost No    
Direct Material Cost No    
Direct Labor Cost No    

(g) Health care costs for the office workers at the headquarters of Johnson & Johnson
Company. Select all that apply.
Choice Selected Points

Indirect Labor Cost No    

Direct Material Cost No    
Overhead Cost No    
Direct Labor Cost No    
Product Cost No    
Indirect Material Cost No    
Period Cost Yes +1

Bolts used by Trek Bicycle Corporation to secure the bike parts to the frame.
(h)
Select all that apply.
Choice Selected Points

Period Cost No    
Direct Labor Cost No    
Indirect Material Cost Yes +1
Direct Material Cost No    
Product Cost Yes +1
Indirect Labor Cost No    
Overhead Cost Yes +1

Example 11

Road Ranger Corporation began operations early in the current year, building luxury motor
homes. During the year, the company started and completed 50 motor homes at a cost of
$60,000 per unit. Of these, 48 were sold for $95,000 each and two remain in finished goods
inventory. In addition, the company had six partially completed units in its factory at year-end.
Total costs for the year (summarized alphabetically) were as follows:

Direct materials used $750,000

Direct labor 900,000
Income taxes expense 100,000
General and administrative expenses 500,000
Manufacturing overhead 1,800,000
Selling expenses 500,000

Instructions

Compute the following for the current year:

 a. Total manufacturing costs charged to work in process during the period.
b. Cost of finished goods manufactured.
c. Cost of goods sold.
d. Gross profit on sales.
e. Ending inventories of (1) work in process and (2) finished goods.

a. Total manufacturing costs assigned to work in process:  

  Direct materials used $750,000
  Direct labor applied to production 900,000
1,800,000
  Manufacturing overhead
  Total manufacturing costs assigned to work in process $3,450,000
   
b. Cost of finished goods manufactured:  
  Cost per completed motor home $60,000
50
  Number of motor homes completed during the year
  Cost of finished goods manufactured (50 units × $60,000 per unit) $3,000,000
   
c. Cost of goods sold:  
  Cost per completed motor home $60,000
48
  Number of completed motor homes sold
  Cost of goods sold (48 units × $60,000 per unit) $2,880,000
   
d. Gross profit on sales:  
  Sales ($95,000 average sales price × 48 units sold) $4,560,000
2,880,000
  Less: Cost of goods sold (c)
  Gross profit on sales $1,680,000
   
e. (1) Ending inventory of work in process:  
  Total manufacturing costs assigned to work in process (a) $3,450,000
3,000,000
  Less: Cost of finished goods manufactured (b)
  Ending inventory of work in process $450,000
   
  (2) Ending inventory of finished goods:  
  Cost of finished goods manufactured (b) $3,000,000
2,880,000
  Less: Cost of goods sold (c)
  Ending inventory of finished goods $120,000
   
(Alternative computation of ending inventory of finished goods:
   
Finished units on hand, 2, times unit cost, $60,000, equals $120,000)

Example 12

The following are data regarding last year's production of Baby Buddy, one of the major
products of Toledo Toy 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, 60,000 units of this product were manufactured and 62,100 units were sold.
Selected information concerning inventories during the year follows:

End Beginning
 
of Year of Year
Materials $? $12,800
Work in Process 4,700 4,100
Finished Goods, Jan. 1 (3,000 units @ $13) ? 39,000

Instructions

a. Prepare a schedule of the cost of finished goods manufactured for the Baby Buddy
product.
b. Compute the average cost of Baby Buddy per finished unit.
c. Compute the cost of goods sold associated with the sale of Baby Buddy. 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 Baby Buddy 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.

a. TOLEDO TOY CO.

Schedule of the Cost of Finished Goods Manufactured—Baby Buddy
For the Year Ended 2007 (or later)
  Work in process inventory, Jan. 1, 2007 (or later)   $4,100
  Manufacturing costs assigned to production:    
  Direct materials used $333,600  
  Direct labor assigned to production 180,000  
  Manufacturing overhead 288,000
 
  Total manufacturing costs 801,600
 

  Total cost of all goods in process during the year   $805,700

  Less: Work in process inventory, Dec. 31 4,700
 
  Cost of finished goods manufactured   $801,000
 
   
b. Unit cost of goods finished in 2007 (or later):    
  Cost of finished goods manufactured (part a)   $801,000
  Units manufactured  
60,000

  Unit cost   $13.35

 
   
c. Cost of goods sold (62,100 units, FIFO basis):    
  3,000 units from finished goods inventory at Jan. 1   $39,000
  59,100 units manufactured in 2007 (or later)  
788,985

  Cost of goods sold   $827,985

 
   
d. Inventory at December 31:    
  Materials:    
  Inventory at Jan. 1 $12,800  
  Add: Purchases of direct materials 332,000
 
  Total direct materials available during the year $344,800
 

  Less: Direct materials used 333,600

 
  Materials inventory at Dec. 31 $11,200
 

  Work in process inventory, Dec. 31 (given)   4,700

  Finished goods:    
  Inventory at Jan. 1 $39,000  
  Add: Cost of finished goods manufactured (part a) 801,000
 
  Cost of finished goods available for sale $840,000
 

  Less: Cost of goods sold (part c) 827,985

 
  Finished goods inventory, Dec. 31 12,015
 

  Total inventory appearing in the year-end balance sheet   $27,915