Quiz 16 Practice

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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
70,000
Less: Direct materials, December 31, 2005
Direct materials put into production $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

30,000
Less: Selling and administrative expenses
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

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