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PROBLEM SET B
Problem 18-1B (20 minutes)
The managerial accounting professional must do more than assign value to
ending inventory and cost of goods sold. S/he must understand the
Specifically for the home electronics industry, the managerial accountant
Problem 18-2B (60 minutes)
Instructor note: There can be more than one right answer to this problem. Students can
experience some challenges in completing this assignment. Their reaction is normal and a part of
the process in learning how difficult it is to make estimates of opportunity costs.
A good answer to this problem should show estimates for:
A good answer would also show that purchasing a higher-quality product
component at a greater cost will result, under the conditions specified in
this case, in losing money in the long run. Specifically, the answer should
appear similar to the following:
From the data available in Decision Maker, the company saves $30,000,
computed as 1,000 motorcycles multiplied by $30 per seat ($145 - $115).
(2) Estimates must be made of opportunity costs (and revenues):
(3) Recommend to buy from Supplier (B) based on the following:
Problem 18-3B (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
3.
Cost of factory rent—$6,750 ...............
$ 6,750
6,750
4.
Systems staff salary—
$15,000 ................................
15,000
$ 15,000
5.
Labeling (12,000
outsourced)—$3,750 total ..............
3,750
3,750
6.
Cost of office equipment
rent—$1,050 ................................
1,050
1,050
7.
Upper management
salaries—$120,000 .........................
120,000
120,000
8.
Annual fees for cleaning
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
Fundamental Accounting Principles, 21st Edition
1058
Problem 18-3B (continued)
Part 2
Nextgen
Calculation of Manufacturing Cost per BD
For Year Ended December 31, 2013
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
Cost of factory rent ................................
6,750
0.45
Machinery depreciation .........................
18,000
1.20
Total fixed production costs .................
24,750
1.65
Total production costs .............................
$60,000
$4.00
* 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
Problem 18-4B (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.
Fundamental Accounting Principles, 21st Edition
1060
Problem 18-5B (40 minutes)
Part 1
Unit and dollar amounts of raw materials inventory in blades
Beginning inventory, December 31, 2012 (2,500 x $20) ..........................
$ 50,000
Purchases of blades during 2013 (45,000 x $20) ................................
900,000
Blade inventory available for production ..................................................
950,000
Ending inventory, December 31, 2013 .......................................................
120,000
Blade inventory transferred to production ................................................
$830,000
**
* ([2,500+45,000-41,500*] x $20)
** 41,500 blades put into production * $20 per blade
Part 2
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 $60,000 of working
capital (6,000 units x ½ x $20).
Problem 18-6B (40 minutes)
Part 1
MERCHANDISING BUSINESS
BADGER RETAIL
Partial Income Statement
For Year Ended December 31, 2013
Cost of goods sold
Merchandise inventory, December 31, 2012 ................................
$100,000
Merchandise purchases ................................................................
250,000
Goods available for sale ................................................................
350,000
Less merchandise inventory, December 31, 2013 .......................
150,000
Cost of goods sold .........................................................................
$200,000
MANUFACTURING BUSINESS
NAIMA MFG
Partial Income Statement
For Year Ended December 31, 2013
Cost of goods sold
Finished goods inventory, December 31, 2012............................
$300,000
Cost of goods manufactured .........................................................
586,000
Goods available for sale ................................................................
886,000
Less finished goods inventory, December 31, 2013 ...................
200,000
Cost of goods sold .........................................................................
$686,000
Part 2
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
The answers will vary slightly but should include:
• The Merchandise Inventory account on December 31 for Badger and the
Finished Goods Inventory account on December 31 for Naima 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 Naima is a manufacturer, it will also have raw
materials and goods in process inventory accounts.
Fundamental Accounting Principles, 21st Edition
1062
Problem 18-7B (75 minutes)
Part 1
ELEGANT FURNITURE
Manufacturing Statement
For Year Ended December 31, 2013
Direct materials
Raw materials inventory, December 31, 2012 ..........
$ 40,375
Raw materials purchases ...........................................
894,375
Raw materials available for use ................................
934,750
Less raw materials inventory, December 31, 2013 ...
70,430
Direct materials used .................................................
$ 864,320
Direct labor .....................................................................
562,500
Factory overhead
Depreciation expense—Factory equipment .............
35,400
Factory supervision ....................................................
121,500
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
Total factory overhead costs .....................................
391,775
Total manufacturing costs ............................................
1,818,595
Goods in process inventory, December 31, 2012 .......
12,500
Total cost of goods in process .....................................
1,831,095
Less goods in process inventory, December 31, 2013 ...
14,100
Cost of goods manufactured ........................................
$1,816,995
Problem 18-7B (Continued)
Part 2
ELEGANT FURNITURE
Income Statement
For Year Ended December 31, 2013
Sales ................................................................................
$5,000,000
Less sales discounts .....................................................
57,375
Net sales .........................................................................
4,942,625
Cost of goods sold
Finished goods inventory, December 31, 2012.........
$
177,200
Cost of goods manufactured ......................................
1,816,995
Goods available for sale .............................................
1,994,195
Less finished goods inventory, December 31, 2013 .....
141,750
Cost of goods sold ......................................................
1,852,445
Gross profit from sales .................................................
3,090,180
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 selling expenses ..............................................
352,675
General and administrative expenses
Depreciation expense—Office equipment ...............
8,440
Office salaries expense .............................................
70,875
Rent expense—Office space ....................................
23,625
Total general and administrative expenses ............
102,940
Total operating expenses ...........................................
455,615
Income before state and federal taxes ........................
2,634,565
Income taxes expense ...................................................
136,700
Net income .....................................................................
$2,497,865
Fundamental Accounting Principles, 21st Edition
1064
Problem 18-7B (Continued)
Part 3
Raw
Materials
Finished
Goods
Cost of raw materials used .............................................
$864,320
Cost of finished 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
Average inventory (Total / 2) ..........................................
$ 55,403
$ 159,475
Turnover ratios (COGS* / Average inventory) ...............
15.6
11.6
Days’ sales in inventory [(Ending inv./COGS*) x 365] .....
29.7
27.9
* 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
The company is carrying 29.7 days supply of raw materials inventory and
Problem 18-8B (10 minutes)
