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Cost and Management Accounting

Exercise No 1- (Schedule of CGM & CGS)

Problem No 1: (Mr. Walden)

Mr. Walden has offered to perform accounting services for the manufacturing company
his nephew has organized. Using this financial accounting text book, he has prepared
the following income statement.

Sales $56,000
Operating expenses
Raw material purchases 26,400
Rent 2,400
Depreciation 1,800
Insurance 1,080
Direct labor 14,400
Indirect labor 2,200
Selling and administrative 3,720
Total operating expenses 52,000
Net Income $4,000

The nephew does not like the results above and has accumulated the following data in
order to prepare a corrected income statement.

Beginning Inventory Ending Inventory

Raw materials $2,400 $3,000
Work in process 6,100 6,600
Finished goods 2,160 2,520

Three of the expenses listed on the income statement benefit the manufacturing
operations as well as the selling and administrative functions. The percentages
applicable to each are:

Manufacturing Selling and Administrative

Rent 60% 40%
Depreciation 80% 20%
Insurance 62% 38%

Required

1. Prepare a cost of goods manufactured statement.

2. Prepare an Income statement.
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Solution: Problem No 1: (Mr. Walden)

DM Used: $2,400 (beg inv) + $26,400 (purchases) – $3,000 (End Inv) = $25,800

DL: $14,400

FOH: $1,440 (rent) + $1,440 (Dep) + $670 (rent) + $2,200 (IDL) = $5,750

Manufacturing cost = 25,800 + 14,400 + 5,750 = $45,950

CGM: 45,450 + 6,100 (WIP Beg Inv) – 6,600 (WIP End Inv) = $45,450

Sales $56,000
CGS
CGM 45,450
Add FG ( Beg) 2,160
Less FG (End) (2,520)
CGS (45,090)
GM 10,910
Selling and administrative expenses
Rent 960
Depreciation 360
Insurance 410
Selling and administrative 3,720
Total Selling and administrative expenses 5,450
Net Income $5,460
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Problem No 2: (Allied Manufacturing Company)

The treasurer of Allied Mfg Company hired his niece, who had just completed her first
accounting course, as summer help in the accounting department. Her first assignment
was to prepare an income statement for the month of May. Applying the knowledge she
had acquired in Financial Accounting, she prepared the following statement.

Sales $976,000
Operating Expenses
Raw material purchases $194,000
Rent 124,000
Deprecation 30,000
Utilities 60,000
Direct labor 250,000
Indirect labor 46,000
Office salaries 62,000
Selling and Administrative 94,000 (860,000)
Net Income $116,000

The treasurer has decided to prepare a correct income statement and has gathered the
following data.

1. The beginning and ending inventories of raw materials were $43,000 and $46,000
respectively.
2. Three of the expenses listed on his niece’s income statement were applicable to the
manufacturing operations as well as selling and administrative functions. The
percentage applicable to each are as follows.

Manufacturing Selling and Administrative

Rent 70% 30%
Depreciation 75% 25%
Utilities 60% 40%

3. The Work in process and finished goods inventories were

Work in Process Finished Goods

May 1 $74,000 $58,000

May 31 70,000 62,000

Required:
Prepare a corrected Income Statement
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Solution: Problem No 2: (Allied Manufacturing Company)

DM Used: $43,000 (beg inv) + 194,000 (purchases) – 46,000 (End Inv) = $191,000

DL: $250,000

FOH: 86,800 (rent) + 22,500 (Dep) +36,000 (utilities) + 46,000 (IDL) = $191,300

Manufacturing cost = 191,000 + 250,000 + 191,300= $632,300

CGM: 632,300 + 74,000 (WIP Beg Inv) – 70,000 (WIP End Inv) = $636,300

Sales $976,000
Cost of goods sold:
CGM 636,300
FG (Beg Inv) 58,000
FG (End Inv) (62,000)
CGS 632,300
GP 343,700
Operating Expenses(period cost)
Office salaries 62,000
Sell & Admin 94,000
Rent 37,200
Depreciation 7,500
Utilities 24,000 224,700
Net Income $119,000
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Problem No 3: (Superior Company)

Selected account balances for the year ended December 31 are provided below for
Superior Company.

Selling and administrative salaries $110,000

Purchases of raw materials 290,000
Direct labor ?
Advertising expenses 80,000
Manufacturing overhead 270,000
Sales commission 50,000

Inventory balances at the beginning and end of the year were as follows;

Beginning of the year End of the year

Raw materials $40,000 $10,000

Work in process ? $35,000
Finished goods $50,000 ?

The total manufacturing costs for the year were $683,000; the goods available for sale
totaled $740,000; and the cost of goods sold $660,000.

Required:

A. Prepare a schedule of cost of goods manufactured and the cost of goods sold
section of the company’s income statement.

B. Assume that the dollar amount given above is for the equivalent of 40,000 units
produce during the year. Compute the average cost per unit for DM used and
the average cost of per unit for MOH.

C. Assume that in the following year the company expects to produce 50,000 units
and MOH is fixed. What average cost per unit and total cost would you expect to
be incurred for direct materials? For manufacturing overhead?
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Solution: Problem No3: (Superior Company)

Direct materials:
Direct material – Beginning inventory $40,000
Purchases 290,000
Cost of DM available for use 330,000
Direct material ending inventory (10,000)
DM used $320,000
Direct manufacturing labor 93,000(?)
Manufacturing overhead 270,000
Manufacturing cost 683,000
Add WIP – Beginning inventory 42,000(?)
Deduct WIP – Ending inventory (35,000)
Cost of goods manufactured 690,000(?)
FG (Beg inv) 50,000
CGAS 740,000
FG (ending inv) (80,000)
CGS 660,000

(B) Average cost per unit for DM = $320,000 ÷ 40,000 = $8.00 per unit
Average cost per unit for MOH = $270,000 ÷ 40,000 = $6.75 per unit

(C) DM cost = 50,000× $8 = $400,000

Cost per unit = $690,000 ÷ 40,000 = $17.25
MOH Cost is fixed $ 270,000
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Problem No 4: (Swift Company)

Swift Company was organized on March 1 of the current year. After five months of start
up losses, management had expected to earn a profit during August. Management was
disappointed, however, when the income statement for August also showed a loss.

August income statement follows.

Sales $450,000
Less Operating expenses:
Direct labor cost $70,000
Raw material purchased 165,000
Manufacturing overhead 85,000
Selling and administrative expenses 142,000 462,000
Net Operating loss $(12,000)

After seeing the $12,000 loss for August, Swift’s president stated. “I was sure we’d be
profitable within six months, but our six months are up and this loss for August is even
worse than July’s. I think it is time to start looking for someone to buy out the
company’s assets – if we don’t, within a few months there won’t be any assets to sell. By
the way, I don’t see any reason to look for a new controller. We will just limp along with
Sam for the time being.

The company’s controller resigned a month ago. Sam a new assistant in the controller’s
office, prepared the income statement above. Sam has had little experience in
manufacturing operations.

Inventory balances at the beginning end of August were.

August 1 August 31
Raw material $8,000 $13,000
Work in process 16,000 21,000
Finished goods 40,000 60,000

Required:

The president has asked you to check over the income statement and make
recommendation as to whether the company should look for a buyer for its assets.
Support your answer with a schedule of CGM and a new income statement.
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Solution: Problem No 4: (Swift Company)

Sales $450,000
Cost of goods sold:
Materials inventory, August 1 $8,000
Purchases 165,000
Materials inventory, August 31 (13,000) 160,000
Direct Labor 70,000
Factory over head 85,000
Mfg Cost 315,000
Add WIP – Beg 16,000
Less WIP - End (21,000)
CGM 310,000
Add FG inventory Aug 1 40,000
Less FG inventory Aug 31 (60,000)
CGS 290.000
Gross Profit 160,000
Less S & A expenses (42,350) (142,000)
Operating Income 18,000
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Problem No 5: (Hickey Company)

Hickey Company, a manufacturing firm, produces a single produce. The following

information has been taken from the company’s production, sales, and cost records for
last year.

Production in units 30,000

Sales in units ?
Ending Finished goods inventory ?
Sales in dollars $650,000
Costs
Advertising $50,000
Direct labor 80,000
Indirect labor 60,000
Raw material purchased 160,000
Building rent 50,000
(production uses 80% of the space, admin and sales office
uses the rest)
Utilities – Factory 35,000
Royalty paid for use of production patent ?
($1 unit produced)
Maintenance – Factory 25,000
Rent for special production equipment ?
$6,000 per year plus $0.10 per unit produces
Selling and administrative salaries 140,000
Other factory overhead costs 11,000
Other selling &administrative expenses 20,000

Inventories Jan 1 Dec 31

Raw materials $20,000 $10,000
Work in Process 30,000 40,000
Finished goods 0 ?

The finished goods inventory is being carried at the average unit production cost for the
year. The selling price of the product is $ 25 per unit.
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Required

1. Prepare a schedule of cost of goods manufactured for the year. (CGM $450,000)

2. Compute the following.

a. The number of units in the finished goods inventory on December 31.

b. The cost of the units in the finished goods inventory at December 31.

3. Prepare an income statement.

Solution: Problem No 5: (Hickey Company)

Direct materials:
Direct material – Beginning inventory $20,000
Purchases 160,000
Cost of DM available for use 190,000
Direct material ending inventory (10,000)
DM used $170,000
Direct manufacturing labor 80,000
Manufacturing overhead:
Indirect labor 60,000
Rent 40,000
Utilities- Factory 35,000
Royalty 30,000
Maintenance 25,000
Rent 9,000
Other overhead 11,000 210,000
Manufacturing cost 460,000
Add: WIP (Beg) 30,000
Less: WIP (End) (40,000)
CGM $450,000

2 (a): Number of units sold = 650,000 ÷ $25 = 26,000 units

FG (End Inv) = FG (Beg inv) + Production – Units sold
= 0 + 30,000 -26,000 = 4,000 units

(b) CGM $450,000 Unit manufactured 3 0,000

Average cost per unit = $450,000 ÷ 30,000 = $15 per unit
FG (End Inv) = 4,000 × $15 = $60,000
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Sales $650,000
Cost of goods sold:
CGM 450,000
FG (Beg Inv) 0
FG (End Inv) (60,000)
CGS 390,000
GP 260,000
Operating Expenses
Rent 10,000
Sell & Admin 140,000
Other expenses 20,000
Advertising 50,000 (220,000)
Net Income $40,000

End of Exercise No 1