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?
0
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
Balance, 1/1
Purchases of direct
materials
Balance, 12/31
Direct Materials Inventory
$ 320,000
$ 1,450,000 Direct materials used
$
245,000
$ 1,525,000
Example 4
Listed below are eight technical accounting terms introduced or emphasized in this chapter:
Work in Process Inventory
Conversion costs
Period costs
Prime costs
Cost of finished goods manufactured
Cost of Goods Sold
Management accounting
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
Work in Process Inventory
Finished Goods Inventory
Manufacturing Overhead
$8,700
76,500
53,000
-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
Direct materials purchased
Less: Direct materials used in production
Direct materials inventory, Jan. 31
$8,700
25,750
(26,000)
$8,450
Work in process inventory, Jan. 1
Direct materials used
Direct labor used
Manufacturing overhead applied
Less: Finished goods transferred out
$76,500
32,400
(69,000)
Work in process inventory, Jan. 31
$107,900
Finished goods inventory, Jan. 1
Cost of finished goods transferred in
Less: Cost of goods sold
$53,000
69,000
(89,000)
26,000
42,000
Finished goods inventory, Jan. 31
$33,000
b. Manufacturing overhead, Jan. 1
Indirect materials purchased
Supervisor salaries
Indirect labor costs
Depreciation
Factory utilities
Factory insurance
Property taxes on factory
Less: Manufacturing overhead applied
$0
3,500
12,000
3,000
4,500
7,800
4,200
3,000
(32,400)
Manufacturing overhead, Jan. 31
$5,600
c. Operating income for the month of January:
Revenues
Cost of goods sold
Gross profit
Operating expenses:
Sales commissions
Advertising expense
Operating income
$165,000
(89,000)
76,000
$16,500
6,300
(22,800)
$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:
Materials Inventory
Work in Process Inventory
Finished Goods Inventory
Ending
Balance
$70,000
41,000
16,000
Beginning
Balance
$60,000
29,000
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
Manufacturing costs assigned to production:
Direct materials used (1)
$25,000
22,000
Direct labor
19,000
Manufacturing overhead
$29,000
66,000
$95,000
Total costs in process
Less: Work in process inventory, December 31, 2005
Cost of finished goods manufactured
(1) Computation of direct materials used:
Direct materials, January 1, 2005
Direct materials purchased
Direct materials available
Less: Direct materials, December 31, 2005
Direct materials put into production
41,000
$54,000
$60,000
35,000
$95,000
70,000
$25,000
b.
RIDGEWAY COMPANY
Income Statement
For the Year Ended December 31, 2005
Sales
$80,000
59,000
Less: Cost of goods sold (1)
$21,000
Gross profit on sales
Less: Selling and administrative expenses
Net loss
30,000
$(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
Cost of finished goods manufactured
Cost of goods available for sale
Less: Finished goods inventory, December 31, 2005
Cost of goods sold
$21,000
54,000
$75,000
$16,000
$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
(b)
Sales commissions paid to sales personnel at Gap retail stores. Select all that
apply.
Choice
Selected
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
Points
+1
(c) Costs incurred by General Motors to ship automobile seats purchased from the
Lear Corporation to GM assembly plants.
Choice
Selected
Direct Labor Cost
No
Indirect Material Cost
No
Product Cost
Yes
Direct Material Cost
No
Overhead Cost
No
Indirect Labor Cost
No
Period Cost
No
Points
+1
(d) Insurance paid on the Target retail stores in Michigan.
Choice
Selected
Direct Material Cost
No
Period Cost
Yes
Indirect Labor Cost
No
Product Cost
No
Indirect Material Cost
No
Overhead Cost
No
Direct Labor Cost
No
Points
+1
(e)
Insurance paid on the Target warehouse holding merchandise inventory. Select all
that apply.
Choice
Selected
Points
Overhead Cost
Yes
+1
Direct Material Cost
No
Indirect Material Cost
Yes
Indirect Labor Cost
No
Product Cost
Yes
Direct Labor Cost
No
Period Cost
No
+1
+1
(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
Indirect Labor Cost
No
Direct Material Cost
No
Overhead Cost
No
Direct Labor Cost
No
Points
Product Cost
No
Indirect Material Cost
No
Period Cost
Yes
(h)
+1
Bolts used by Trek Bicycle Corporation to secure the bike parts to the frame.
Select all that apply.
Choice
Selected
Period Cost
No
Direct Labor Cost
No
Indirect Material Cost
Yes
Direct Material Cost
No
Product Cost
Yes
Indirect Labor Cost
No
Overhead Cost
Yes
Points
+1
+1
+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
Direct labor
Income taxes expense
General and administrative expenses
Manufacturing overhead
Selling expenses
$750,000
900,000
100,000
500,000
1,800,000
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
Direct labor applied to production
Manufacturing overhead
Total manufacturing costs assigned to work in process
b. Cost of finished goods manufactured:
Cost per completed motor home
Number of motor homes completed during the year
Cost of finished goods manufactured (50 units × $60,000 per unit)
c. Cost of goods sold:
Cost per completed motor home
Number of completed motor homes sold
Cost of goods sold (48 units × $60,000 per unit)
d. Gross profit on sales:
Sales ($95,000 average sales price × 48 units sold)
Less: Cost of goods sold (c)
Gross profit on sales
e. (1) Ending inventory of work in process:
Total manufacturing costs assigned to work in process (a)
Less: Cost of finished goods manufactured (b)
Ending inventory of work in process
(2) Ending inventory of finished goods:
Cost of finished goods manufactured (b)
Less: Cost of goods sold (c)
$750,000
900,000
1,800,000
$3,450,000
$60,000
50
$3,000,000
$60,000
48
$2,880,000
$4,560,000
2,880,000
$1,680,000
$3,450,000
3,000,000
$450,000
$3,000,000
2,880,000
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
Direct materials used
Direct labor payrolls (paid during the year)
Direct labor costs assigned to production
Manufacturing overhead
$332,000
333,600
176,700
180,000
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:
Materials
Work in Process
Finished Goods, Jan. 1 (3,000 units @ $13)
End
of Year
$?
4,700
?
Beginning
of Year
$12,800
4,100
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 yearend 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
Direct labor assigned to production
Manufacturing overhead
$333,600
180,000
288,000
801,600
Total manufacturing costs
Total cost of all goods in process during the year
Less: Work in process inventory, Dec. 31
$805,700
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)
Units manufactured
$801,000
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
59,100 units manufactured in 2007 (or later)
$39,000
788,985
Cost of goods sold
d. Inventory at December 31:
Materials:
Inventory at Jan. 1
Add: Purchases of direct materials
Total direct materials available during the year
Less: Direct materials used
$827,985
$12,800
332,000
$344,800
333,600
Materials inventory at Dec. 31
Work in process inventory, Dec. 31 (given)
Finished goods:
Inventory at Jan. 1
Add: Cost of finished goods manufactured (part a)
$11,200
4,700
$39,000
801,000
Cost of finished goods available for sale
Less: Cost of goods sold (part c)
Finished goods inventory, Dec. 31
Total inventory appearing in the year-end balance sheet
$840,000
827,985
12,015
$27,915