Problem 14-3A (Continued)
Part 2
LEONE COMPANY
Income Statement
For Year Ended December 31, 2015
Sales……………..……………………………..………………….…... $4,462,500
Cost of goods sold
Finished goods inventory, December 31, 2014.........$ 167,350
Cost of goods sold………..………………….….…………….. 1,966,510
Gross profit from sales………………………….…….……….. 2,495,990
Operating expenses
Selling expenses
Advertising expense…………………..……………….…….. 28,750
Depreciation expense—Selling equipment….......... 8,600
Rent expense—Selling space……………...…….………. 26,100
Total general and administrative expenses…………. 92,250
Total operating expenses………………..…………………… 548,260
Income before taxes………………………………… 1,947,730
Income taxes expense………………….……………………….. 233,725
Net income……………..………………………………………..…… $1,714,005
Problem 14-3A (Continued)
Part 3
Raw
Materials
Finished
Goods
Cost of raw materials used………………..…………………………….$909,850
Cost of goods sold………….……………………………………..………. $1,966,510
Average inventory (Total / 2)……………………..……………….……$174,425 $ 151,920
Inventory turnover (COGS* / Average inventory)…..….……… 5.2 12.9
* To calculate the turnover and days’ sales in inventory for raw materials, use raw materials used
rather than cost of goods sold.
Discussion: The inventory turnover ratio for the raw materials inventory is
significantly lower than the turnover ratio for finished goods.
One reason for the difference could be that source of supply for raw materials
is relatively undependable, so that management believes it is necessary to
carry a larger inventory to sustain operations through periods when the
Similar inferences are drawn from the days’ sales in inventory ratio results. In
Financial and Managerial Accounting, 6th Edition
Problem 14-4A (40 minutes)
Part 1
Units and dollar amounts of raw materials inventory in heels
Part 2 Analysis Component
Topics of discussion for this memorandum include:
Description (general) of the JIT inventory system and how it operates.
The funds freed up could be used to reduce debt, train employees, or
purchase new equipment.
Additional costs from a JIT system would arise from more frequent
ordering, deliveries, and possibly handling.
Problem 14-5A (40 minutes)
Part 1
MERCHANDISING BUSINESS
MUSIC WORLD RETAIL
Partial Income Statement
For Year Ended December 31, 2015
Cost of goods sold
Merchandise inventory, December 31, 2014……………………….….. $ 200,000
Merchandise purchases……………….………………………..…………….. 300,000
MANUFACTURING BUSINESS
WAVE–BOARD MFG.
Partial Income Statement
For Year Ended December 31, 2015
Cost of goods sold
Finished goods inventory, December 31, 2014………….……………$ 500,000
Cost of goods manufactured…………….…………………..……….…….. 875,000
Goods available for sale……………………………………………..…..….… 1,375,000
Part 2
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
The answers will vary but should include:
The Merchandise Inventory account on December 31 for Music World and
The inventory accounts must also be included in the current asset section
Financial and Managerial Accounting, 6th Edition
PROBLEM SET B
Problem 14-1B (45 minutes)
Part 1 Cost classification and amounts
Cost by Behavior Cost by Function
Costs Variable Fixed Product Period
1. Plastic for BDs—$1,500……………….…
$ 1,500 $ 1,500
4. Systems staff salary—
$15,000………..……………………….…. 15,000 $ 15,000
5. Labeling ($0.25 per BD) 3,750 3,750
6. Cost of office equipment
rent—$1,050………………………..…..…. 1,050 1,050
service—$4,520………………….…….. 4,520 4,520
9. Sales commissions—$0.50
per BD………………..………….…….….
$0.50 x #
BDs sold
$0.50 x #
BDs sold
10. Machinery depreciation,
straight-line—$18,000….…….......... 18,000 18,000
Problem 14-1B (continued)
Part 2
Maxwell
Calculation of Manufacturing Cost per BD
For Year Ended December 31, 2015
Item
Total cost
(at 15,000 units) Per unit cost *
Variable production costs
Plastic for BDs……………………….……… $ 1,500 $ 0.10
Fixed production costs
Cost of factory rent……………….…….….. 6,750 0.45
Machinery depreciation…………………… 18,000 1.20
* Total cost / 15,000 BDs.
Part 3
If 10,000 BDs are produced, we would expect the cost of the plastic for the BDs to
Part 4
If 10,000 BDs are produced, we would expect the cost of the factory rent to
remain at $6,750 in total because it is a fixed cost. However, the cost per unit will
Financial and Managerial Accounting, 6th Edition
Problem 14-2B (30 minutes)
Costs Product
Cost
Dir.
Mtls.
Dir.
Labor
Over-
head
Period
Cost Selling
Gen. &
Admin
Advertising expense X X
Depr. expense-Office equip. X X
Direct labor X X
Indirect labor X X
Misc. production costs X X
Office salaries expense X X
Raw materials purchases X X
Problem 14-3B (75 minutes)
Part 1
BEST BIKES
Schedule of Cost of Goods Manufactured
For Year Ended December 31, 2015
Direct materials
Raw materials inventory, December 31, 2014.......... $ 40,375
Raw materials purchases…………………..……………….. 894,375
Raw materials available for use……………..……………. 934,750
Less raw materials inventory, December 31, 2015.. . 70,430
Factory supplies used………………………….….…………. 6,060
Factory utilities………….……………….….………………….. 37,500
Indirect labor…………….………………….….………………… 59,000
Miscellaneous production costs………..……….…….… 8,440
Rent expense—Factory building……………….….…….. 93,500
Maintenance expense—Factory equipment….……... 30,375
Financial and Managerial Accounting, 6th Edition
Problem 14-3B (Continued)
Part 2
BEST BIKES
Income Statement
For Year Ended December 31, 2015
Sales……………..……………………………..………………….…... $4,942,625
Cost of goods sold
Finished goods inventory, December 31, 2014.........$ 177,200
Cost of goods manufactured……………..…….…………..1,816,995
Operating expenses
Selling expenses
Advertising expense…………………..……………….…….. 20,250
Depreciation expense—Selling equipment….......... 10,125
Rent expense—Selling space……………...…….………. 27,000
Sales salaries expense…………………..………………….. 295,300
Total general and administrative expenses…………. 102,940
Total operating expenses………………..…………………… 455,615
Income before taxes………………….…….…….……………… 2,634,565
Income taxes expense………………….……………………….. 136,700
Net income……………..………………………………………..…… $2,497,865
Problem 14-3B (Concluded)
Part 3
Raw
Materials
Finished
Goods
Cost of raw materials used………………..……………..….…..$864,320
Cost of goods sold………….……………………………….……… $1,852,445
Beginning inventory……………..………………………………….$ 40,375 $ 177,200
Ending inventory……………..……………………….…………….. 70,430 141,750
Total beginning plus ending inventory………………….…..$110,805 $ 318,950
* To calculate the turnover and days’ sales in inventory for raw materials, use raw materials used
rather than cost of goods sold.
Discussion: The inventory turnover ratio for the raw materials inventory is
higher than the turnover ratio for finished goods. One reason for the
The company is carrying 29.7 days supply of raw materials inventory and
27.9 days of finished goods inventory. During the year, the company
Financial and Managerial Accounting, 6th Edition