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Chapter 18 - Managerial Accounting Concepts and Principles
Problem 18-3A (Continued)
Part 2
LEONE COMPANY
Income Statement
For Year Ended December 31, 2015
Sales................................................................................ $4,462,500
Cost of goods sold
Cost of goods sold...................................................... 1,966,510
Gross profit from sales................................................. 2,495,990
Operating expenses
Total selling expenses............................................... 456,010
General and administrative expenses
Depreciation expense—Office equipment............... 7,250
Office salaries expense............................................. 63,000
Rent expense—Office space..................................... 22,000
18-1011
Chapter 18 - Managerial Accounting Concepts and Principles
Problem 18-3A (Continued)
Part 3
Raw
Materials
Finished
Goods
Cost of raw materials used......................................................$909,850
Average inventory (Total / 2)...................................................$174,425 $ 151,920
Inventory turnover (COGS* / Average inventory).................. 5.2 12.9
Days’ sales in inventory [(Ending inv./COGS*) x 365].......... 73.0 25.3
* 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
active that items are sold very quickly after they are available. This implies
that the demand for the product is very strong. It is also possible that the
finished goods turnover ratio is too high and that the company is risking lost
sales by not having enough product on hand.
Similar inferences are drawn from the days’ sales in inventory ratio results. In
Problem 18-4A (40 minutes)
18-1012
Chapter 18 - Managerial Accounting Concepts and Principles
Part 1
Units and dollar amounts of raw materials inventory in heels
Note: 16,600 pairs of boots manufactured require 33,200 heels.
Part 2 Analysis Component
Topics of discussion for this memorandum include:
Description (general) of the JIT inventory system and how it operates.
Cutting the heel inventory in half would free up $12,000 of working
capital (3,000 units x ½ x $8 cost).
18-1013
Chapter 18 - Managerial Accounting Concepts and Principles
Problem 18-5A (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
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
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 Finished Goods Inventory account on December 31 for Wave-Board are
computed and reported on the income statement as part of cost of goods
18-1014
Education.
Chapter 18 - Managerial Accounting Concepts and Principles
PROBLEM SET B
Problem 18-1B (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
2. Wages of assembly workers
—$30,000.......................................
30,000 30,000
7. Upper management salaries
—$120,000...................................... 120,000 120,000
8. Annual fees for cleaning
service—$4,520.............................. 4,520 4,520
18-1015
Chapter 18 - Managerial Accounting Concepts and Principles
Problem 18-1B (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
Wages of assembly workers 30,000 2.00
Labeling 3,750 0.25
Total variable production costs 35,250 2.35
Fixed production costs
* 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
18-1016
Chapter 18 - Managerial Accounting Concepts and Principles
Problem 18-2B (30 minutes)
Costs Product
Cost
Dir.
Mtls.
Dir.
Labo
r
Over-
head
Period
Cost Sellin
g
Gen. &
Admin
Advertising expense X X
Factory supplies used X X
Factory utilities X X
Rent expense-Office space X X
Rent expense-Selling space X X
Rent expense-Factory equip. X X
Maint. expense-Factory equip. X X
Sales salaries expense X X
Problem 18-3B (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
18-1017
Chapter 18 - Managerial Accounting Concepts and Principles
Factory overhead
Depreciation expense—Factory equipment............. 35,400
Rent expense—Factory building............................... 93,500
Maintenance expense—Factory equipment............. 30,375
Total factory overhead costs..................................... 391,775
Total manufacturing costs............................................ 1,818,595
Part 2
BEST BIKES
Income Statement
For Year Ended December 31, 2015
Sales................................................................................ $4,942,625
Cost of goods sold...................................................... 1,852,445
Gross profit from sales................................................. 3,090,180
Operating expenses
Selling expenses
Advertising expense.................................................. 20,250
18-1018
Chapter 18 - Managerial Accounting Concepts and Principles
Sales salaries expense.............................................. 295,300
Total selling expenses............................................... 352,675
General and administrative expenses
Income before taxes...................................................... 2,634,565
Income taxes expense................................................... 136,700
Net income...................................................................... $2,497,865
Problem 18-3B (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
* 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
18-1019
Chapter 18 - Managerial Accounting Concepts and Principles
The company is carrying 29.7 days supply of raw materials inventory and
Problem 18-4B (40 minutes)
Part 1
Unit and dollar amounts of raw materials inventory in blades
Note: 20,750 pairs of skates require 41,500 blades.
Part 2
Topics of discussion for the memorandum include:
General description of the JIT inventory system and how it operates.
Additional costs from a JIT system would arise from more frequent
ordering, deliveries, and possibly handling.
18-1020
