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Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-2B (45 minutes) Part 1 Cost classification and amounts Cost by Behavior Cost by Function Costs Variable Fixed Product Period Plastic for BDs—$1,000 ...................... $ 1,000 $ 1,000 Wages of assembly workers— $20,000 .......................................... 20,000 20,000 Rent cost of factory—$4,500 .............. $ 4,500 4,500 Systems staff’s salaries—$10,000 ...... Labeling (12,000 outsourced)— $2,500 total .................................... 2,500 Rent cost of office equipment—$700.... Upper management salaries— $100,000 ........................................ Annual fees for cleaning service—$3,000 ............................. Sales commissions—$0.50 per BD ... $0.50 x 10,000 $ 10,000 2,500 700 700 100,000 100,000 3,000 3,000 $0.50 x BDs sold Machinery depreciation—$15,000 ...... BDs sold 15,000 14-1 15,000 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-2B (concluded) Part 2 Hip-Hop Calculation of Manufacturing Cost per BD For Year Ended December 31, 2011 Item Variable manufacturing costs Total cost Per unit cost * Plastic for BDs ................................... $ 1,000 $0.10 Wages of assembly workers ............ Labeling .............................................. 20,000 2,500 2.00 0.25 Total variable manufacturing cost ... Fixed manufacturing costs Cost of factory rent ........................... 23,500 2.35 4,500 0.45 Machinery depreciation .................... Total fixed manufacturing costs ...... Total manufacturing costs 15,000 19,500 $43,000 1.50 1.95 $4.30 * Total cost / 10,000 BDs. Part 3 If 15,000 BDs are produced, we would expect the cost of the plastic for the BDs to increase to $1,500 (15,000 BDs x $0.10/BD), but the cost per unit to stay at $0.10 per BD. Variable costs increase in total as the number of units produced increases, but the unit cost remains constant. Part 4 If 15,000 BDs are produced, we would expect the cost of the factory rent to remain at $4,500 in total because it is a fixed cost. However, the cost per unit will decrease to $0.30 per BD ($4,500 / 15,000 BDs). Fixed costs do not change in total as production increases, but the unit cost will decrease as production increases. 14-2 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-3B (30 minutes) MEMORANDUM TO: FROM: DATE: SUBJECT: The memorandum content should include the following points: The memorandum should begin with a clarification between prime and conversion costs. Prime costs are resources consumed with direct production of a good. Thus, prime costs consist of direct materials and direct labor. Conversion costs are resources consumed by converting the product to a finished good. Thus, conversion costs are direct labor and factory overhead. Prime and conversion costs are also classified as product costs because they are capitalized as inventory and expensed when the product is sold. Period costs are resources committed to support sales and administration. For example, sales commission and office rent are labeled period costs. Period costs are not capitalized. 14-3 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-5B (40 minutes) Part 1 Unit and dollar amounts of raw materials inventory in blades Beginning inventory, December 31, 2010 (2,000 x $15) ........................... $ 30,000 Purchases of blades during 2011 (45,000 x $15) .....................................675,000 Blade inventory available for production ..................................................705,000 Blade inventory transferred to production (40,000* x $15) ......................600,000 Ending inventory, December 31, 2011 (7,000** x $15) ................................. $105,000 *20,000 pairs of skates = 40,000 blades **(2,000 + 45,000 – 40,000) = 7,000. Part 2 Analysis Component Topics of discussion for the memorandum include: General description of the JIT inventory system and how it operates. Cutting the blade inventory in half would free up $52,500 of working capital (7,000 units x ½ x $15). The funds freed up could be used to reduce debt, train employees, or purchase new equipment. The company would save on insurance, tracking, warehouse space, time, and material handling costs if inventory is reduced. Additional costs from a JIT system would arise from more frequent ordering, deliveries, and possibly handling. 14-4 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-6B (40 minutes) Part 1 MERCHANDISING BUSINESS CARDINAL DRUG (Retail) Partial Income Statement For Year Ended December 31, 2011 Cost of goods sold Merchandise inventory, December 31, 2010................................. $ 50,000 Merchandise purchases ................................................................. 350,000 Goods available for sale ................................................................. 400,000 Less merchandise inventory, December 31, 2011 ....................... 25,000 Cost of goods sold ......................................................................... $375,000 MANUFACTURING BUSINESS NANDINA (Manufacturing) Partial Income Statement For Year Ended December 31, 2011 Cost of goods sold Finished goods inventory, December 31, 2010 ............................ $200,000 Cost of goods manufactured ......................................................... 686,000 Goods available for sale ................................................................. 886,000 Less finished goods inventory, December 31, 2011 .................... 300,000 Cost of goods sold ......................................................................... $586,000 Part 2 MEMORANDUM TO: FROM: DATE: SUBJECT: The answers will vary slightly but should include: The Merchandise Inventory account on December 31 for Cardinal Drug and the Finished Goods Inventory account on December 31 for Nandina Mfg. are computed and reported on the income statement as part of cost of goods sold. The inventory accounts must also be included in the current asset section of the balance sheet. Since Nandina Mfg. is a manufacturer, it will also have raw materials and goods in process inventory accounts. 14-5 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-7B (10 minutes) 1. 2. 3. 4. 5. B B A B, C C 6. 7. 8. 9. 10. A A B A C, A Problem 14-8B (75 minutes) Part 1 FIRETHORN FURNITURE Manufacturing Statement For Year Ended December 31, 2011 Direct materials Raw materials inventory, December 31, 2010 .......... $ 42,375 Raw materials purchases ........................................... 896,375 Raw materials available for use................................. 938,750 Less raw materials inventory, December 31, 2011.... 72,430 Direct materials used.................................................. Direct labor ..................................................................... Factory overhead Depreciation expense—Factory equipment ............. 37,400 Factory supervision .................................................... 123,500 Factory supplies used ................................................ 8,060 Factory utilities............................................................ 39,500 Indirect labor ............................................................... 61,000 Miscellaneous production costs ............................... 10,440 Rent expense—Factory building ............................... 95,500 Maintenance expense—Factory equipment ............. 32,375 Total factory overhead costs ..................................... Total manufacturing costs ............................................ Goods in process inventory, December 31, 2010 ....... Total cost of goods in process ..................................... Less goods in process inventory, December 31, 2011 ... Cost of goods manufactured ........................................ 14-6 $ 866,320 564,500 407,775 1,838,595 14,500 1,853,095 16,100 $1,836,995 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-8B (Continued) Part 2 FIRETHORN FURNITURE Income Statement For Year Ended December 31, 2011 Sales.............................................................................. Less sales discounts ................................................... Net sales ....................................................................... Cost of goods sold Finished goods inventory, December 31, 2010 ......... $ 179,200 Cost of goods manufactured ......................................1,836,995 Goods available for sale ..............................................2,016,195 Less finished goods inventory, December 31, 2011 ..... 143,750 Cost of goods sold ...................................................... Gross profit from sales ................................................. Operating expenses Selling expenses Advertising expense .................................................. 22,250 Depreciation expense—Selling equipment ............. 12,125 Rent expense—Selling space ................................... 29,000 Sales salaries expense .............................................. 297,300 Total selling expenses............................................... General and administrative expenses Depreciation expense—Office equipment ............... 10,440 Office salaries expense ............................................. 72,875 Rent expense—Office space..................................... 25,625 Total general and administrative expenses ............ Total operating expenses............................................ Income before state and federal taxes ......................... Income taxes expense ................................................... Net income...................................................................... 14-7 $5,002,000 59,375 4,942,625 1,872,445 3,070,180 360,675 108,940 469,615 2,600,565 138,700 $2,461,865 Chapter 14 - Managerial Accounting Concepts and Principles Problem 14-8B (Continued) Part 3 Raw Materials Finished Goods Cost of raw materials used ............................................. $866,320 Cost of finished goods sold............................................ $1,872,445 Beginning inventory ........................................................ $ 42,375 $ 179,200 Ending inventory .............................................................. 72,430 143,750 Total beginning plus ending inventory .......................... $114,805 $ 322,950 Average inventory (Total / 2) ........................................... $ 57,403 $ 161,475 Turnover ratios (COGS / Average inventory) ................. 15.1 11.6 Days’ sales in inventory [(Ending inv./COGS) x 365] ....... 30.5 28.0 *To calculate the turnover and days’ sales in inventory for raw materials, use raw materials used rather than cost of goods sold. Turnover and days’ sales are rounded to one decimal place. Discussion: The inventory turnover ratio for the raw materials inventory is higher than the turnover ratio for finished goods. One reason for the difference could be that the source of supply for raw materials is relatively dependable, so that the management believes it is not necessary to carry a larger inventory to sustain operations through periods when the supply might be interrupted. The company is carrying 30.5 days’ supply of raw materials inventory and 28.0 days of finished goods inventory. During the year, the company increased its inventory of raw materials by 71% but decreased its inventory of finished goods by 20%. 14-8