Exercise 3-44
Concern for gas emissions and depletion of nonrenewable resources has caused environmentalists and others to push for higher fuel-efficiency standards for new cars.
The current corporate automotive fuel efficiency (CAFE) standards require automakers to produce an overall fuel efficiency of 26.2 miles per gallon for all autos produced.
Currently the U.S. government supports the development of hybrid autos that combine gas and electric power as the solution to the problem. Others propose simply raising the
CAFE standards for auto manufacturers. To study the issue, the American Council for an
Energy-Efficient Economy (ACEEE) conducted research to determine the cost for raising fuel efficiency for the different proposals. Their findings are as follows:
Option to reduce emissions and provide better fuel economy Fuel Efficiency (mpg)
Cost for each gallon of gas saved
Current mileage standards
Moderate increase inCAFE
Significant increase in CAFÉ
Partial hybrid (15% of power from electricity)
Full hybrid (40% of power form electricity)
26.2
40.8
59.3
45.8
52.6
$0.00
$0.57
$0.60
$1.38
$1.80
The increase in fuel economy required by higher CAFE standards would require automakers to use conventional technology to improve engines and transmissions. The hybrid vehicles require newer technology and electric motors.
Required
Give a brief critical review of the ACEEE’s research results. What questions would you have for the researchers who presented these results?

The following data pertain to Winstead Company for the year ended
December 31, 2010:
December 31,
2009
December 31,
2010
Purchases of direct materials
Direct labor
Indirect labor
Factory insurance
Depreciation-Factory
Repairs and maintenance-Factory
Marketing expenses
General and administrative expenses
Direct materials inventory
Work-in-process inventory
$25,000
$33,000
$120,000
$85,000
$25,000
$12,000
$65,000
$15,000
$110,000
$55,000
$35,000
$42,000
Finished goods inventory $18,000 $20,000
Required
Prepare a schedule of cost of goods manufactured and an income statement for Winstead Company similar to those in Exhibit 3.15a.

Consider the following information for Household Furnishing, Inc. for the year ended December 31, 2010:
Depreciation expense-Administrative office
Depreciation expense-Plant and equipment
Direct labor--Wages
Direct materials inventory, Dec. 31, 2010
Direct materials inventory, Jan. 1, 2010
Direct materials purchases
Finished goods inventory, Dec. 31, 2010
Finished goods inventory, Jan. 1, 2010
Heat, light, & power--Plant
Indirect labor
Property taxes--Plant
Sales representatives' salaries
Sales revenue
Factory Supervisor's salary
Supplies--Administrative office
Supplies--Plant
Work-in-Process inventory, Dec. 31, 2010
$33,000
$88,000
$487,000
$25,000
$18,000
$155,000
$38,000
$15,000
$44,000
$25,000
$34,000
$145,000
$1,500,000
$66,000
$16,000
$29,000
$9,000
Work-in-Process inventory, Jan. 1, 2010 $23,000
Required
Prepare a statement of cost of goods manufactured and an income statement for Household Furnishings for the year ended December 31, 2010, similar to the one in Exhibit 3.15a.

The following information was taken from the accounting records of Tomek
Manufacturing Company. Unfortunately, some of the data were destroyed by a computer malfunction.
Sales
Finished goods inventory, Jan. 1, 2010
Finished goods inventory, Dec. 31, 2010
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating Income
Work-in-Process inventory, Jan. 1, 2010
Direct material used
Direct labor
Factory overhead
Total manufacturing costs
Work-in-Process inventory, Dec. 31, 2010
Cost of goods manufactured
Required
Calculate the unknowns indicated by question marks.
Case A
$150,000
$35,000
$40,000
?
$25,000
?
$10,000
?
$18,000
$15,000
$50,000
?
$22,000
?
Case B
?
$28,000
?
$61,000
$23,000
$1,000
$22,000
$14,000
$8,000
$9,000
?
$35,000
?
$45,000

3-44 Interpreting Average Cost
This question is based on a report by Paul Raeburn, “Hybrid Cars: Less
Fuel but More Costs,” Business Week , April 15, 2002, p 107. See also information on the history of gas prices from January 2000 to the present at the U.S. Department of Energy website: http://tonto.eia.doe.gov/oog/info/gdu/gaspump.html
The rapid increase of gasoline prices in 2004-2008 should enhance the interest in the issue discussed. The costs shown for each gallon of gasoline saved look much better in 2008 than in 2002 when the article was written; in 2002 the price of gas averaged $1.30, about 30% of the 2008 price. The cost justification for higher fuel efficiency of the full hybrid would not pass in 2002 (cost of $1.80 per gallon when the price of gas was
$1.30), but would surely pass the test in summer 2008, with the price of gas at approximately $4.00 per gallon.
The main point of this exercise is to have the students understand that the determination of an average cost, as in this report, requires a specification of the level of activity, or output, that drives costs. This is the reason the concept of average cost is often misunderstood and misused in practice.
For example, since in this case total cost per gallon of gas depends on both variable costs (gasoline) and fixed costs (vehicle cost), the determination of an average cost requires an assumption of activity level.
While variable costs (the price of gasoline) are constant per unit, for the number of gallons purchased, the average per-gallon fixed cost of purchasing the vehicle will depend on the number of miles traveled. Car owners who travel relatively few miles will have large average fixed costs in contrast to “road warriors” with many miles traveled.
The Business Week report does a good job in this regard by reporting that the assumed activity was 12,000 miles per year for 12 years. This gives the reader a way to interpret the findings; those who drive more than this amount can expect lower “cost for each gallon of gas saved” from improvements in the vehicle, while those who drive fewer miles can expect higher costs than those reported.
Instructors can start this exercise by asking the class how average cost is determined in this case. The key idea to bring out is that average fixed cost is determined by some pre-determined activity level.

3-53 Cost of Goods Manufactured and Sold
Winstead Company
Statement of Cost of Goods Manufactured
December 31, 2010 For the Year Ended
Direct Materials Used
Direct Materials Inventory, Beginning
Direct Materials Purchases
Total Direct Materials Available
Direct Materials Inventory, Ending
Direct Materials Used
Direct Labor--Wages
Factory Overhead
Repair and Maintenance
Factory insurance
Depreciation Expense--Plant
Indirect Labor--Wages
Total Factory Overhead
Total Manufacturing Costs Incurred during year
Work-in-Process Inventory, Beginning
Total Manufacturing Costs to Account for
Work-in-Process Inventory, Ending
Cost of Goods Manufactured
+
-
$25,000
120,000
145,000
35,000
$15,000
12,000
65,000
25,000
Winstead Company
Income Statement
For the Year Ended December 31, 2010
Sales Revenue
Cost of Goods Sold
Finished Goods Inventory, Beginning
Cost of Goods Manufactured
$18,000
303,000
Total Goods Available for Sale
Finished Goods Inventory, Ending
321,000
20,000
Cost of Goods Sold
Gross Margin
Marketing Expenses
General and Administrative
Total Selling & Administrative Expenses
Operating Income
$110,000
55,000
$110,000
85,000
+ 117,000
312,000
+
-
33,000
345,000
42,000
$303,000
$650,000
301,000
$349,000
165,000
$184,000

3-54 Cost of Goods Manufactured and Sold
Household Furnishings, Inc
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2010
Direct Materials Used
Direct Materials Inventory, Beginning
Direct Materials Purchases
$18,000
155,000
Total Direct Materials Available
Direct Materials Inventory, Ending
173,000
25,000
Direct Materials Used
Direct Labor--Wages
Factory Overhead
Heat, Light, & Power--Plant
Supplies--Plant
Property Taxes--Plant 34,000
Depreciation Expense--Plant and Equip.
88,000
Indirect Labor--Wages
Supervisor's Salary Plant
$44,000
29,000
25,000
66,000
Total Factory Overhead
Total Manufacturing Costs Incurred during year
Work-in-Process Inventory, Beginning
Total Manufacturing Costs to Account for
Work-in-Process Inventory, Ending
Cost of Goods Manufactured
$148,000
487,000
286,000
921,000
23,000
944,000
9,000
$935,000
Household Furnishings, Inc
Income S tatement
For the Year Ended December 31, 2010
$1,500,000 Sales Revenue
Cost of Goods Sold
Finished Goods Inventory, Beginning
Cost of Goods Manufactured
$15,000
935,000
Total Goods Available for Sale
Finished Goods Inventory, Ending
950,000
38,000
912,000
$588,000
Cost of Goods Sold
Gross Margin
Sales Representatives' Salaries
Supplies--Administrative Office
Depreciation Expense--A dmin. Office
Total Selling & Administrative Expenses
Net Income
$145,000
16,000
33,000
194,000
$394,000

3-56 Cost of Goods Manufactured, Calculating Unknowns
Case A
1. Direct materials used
+ Direct labor
+ Manufacturing overhead
Total manufacturing costs
2. Sales
$18,000
35,000
50,000
$103,000
$150,000
- Cost of goods sold - ? = $125,000
Gross margin $25,000
3. Beginning finished goods
+ Cost of goods manufactured
$ 35,000
+ ? = $130,000
- Ending finished goods
Cost of goods sold
-40,000
125,000
4. Beginning work in process ?
+ Total manufacturing costs +103,000
- Ending work in process -22,000
Cost of goods manufactured $130,000
= $49,000
5. Gross margin $25,000
- Selling and administrative expenses - ? = $15,000
Operating income $10,000
Case B
1. Sales
- Cost of Goods sold
Gross margin
? = $84,000
- 61,000
$23,000
2. Beg. Finished goods inventory
+ Cost of goods manufactured
$ 28,000
+45,000
- End. Finished goods inventory - ? = $12,000
Cost of goods sold $61,000

3-56 (continued -1)
3. Direct materials used $ 8,000
+ Direct labor
+ Manufacturing overhead
Total manufacturing costs
4. Total manufacturing costs
+ Work in process inv., Jan.
- Work in process inv., Dec.
Cost of goods manufactured
+ 9,000
+ ?
$35,000
= $ 18,000
$35,000
14,000
- ? = $4,000
$45,000