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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 manufactured ......................................
1,935,650
Goods available for sale..............................................
2,103,000
Less finished goods inventory, December 31, 2015 .......
136,490
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
Sales salaries expense ..............................................
392,560
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
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
Beginning inventory ................................................................
$166,850
$ 167,350
Ending inventory ................................................................
182,000
136,490
Total beginning plus ending inventory ................................
$348,850
$ 303,840
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
supply might be interrupted. Another possible reason is that significant
volume discounts can be obtained by making larger purchases of the raw
materials. It is also possible that management has been carrying too much in
the inventory of raw materials, and could reduce the level without harming the
Problem 14-4A (40 minutes)
Part 1
Units and dollar amounts of raw materials inventory in heels
Units
Cost per
Unit
Dollars
Beginning inventory, December 31, 2014 1,200 $8 $9,600
Purchases during 2015 35,000 8280,000
Inventory available for production 36,200 8289,600
Less: Inventory transferred into production 33,200 8265,600
Ending inventory, December 31, 2015 3,000 8$24,000
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
Goods available for sale................................................................
500,000
Less merchandise inventory, December 31, 2015 .......................
175,000
Cost of goods sold .........................................................................
$ 325,000
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
Less finished goods inventory, December 31, 2015 ...................
225,000
Cost of goods sold .........................................................................
$1,150,000
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
sold.
The inventory accounts must also be included in the current asset section
of the balance sheet. Since Wave-Board is a manufacturer, it will also have
raw materials and work in process inventory accounts.
Problem 14-1B (45 minutes)
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
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
decrease to $1,000 (10,000 BDs x $0.10/BD), but the cost per unit will stay at $0.10
per BD. Variable costs decrease in total as the number of units produced
decreases, but the unit cost remains constant.
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
increase to $0.675 per BD ($6,750 / 10,000 BDs). Fixed costs do not change in
total as production decreases, but the unit cost will increase as production
decreases.
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
Depr. expense-Selling equip.
X
X
Depr. expense-Factory equip.
X
X
Factory supervision
X
X
Factory supplies used
X
X
Factory utilities
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
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 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
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
Work in process inventory, December 31, 2014 .........
12,500
Total cost of work in process .......................................
1,831,095
Less work in process inventory, December 31, 2015 .....
14,100
Cost of goods manufactured ........................................
$1,816,995
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
Goods available for sale..............................................
1,994,195
Less finished goods inventory, December 31, 2015 .....
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 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
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
higher than the turnover ratio for finished goods. One reason for the
difference could be that source of supply for raw materials is relatively
dependable, so that the management believes it is not necessary to carry a
larger inventory to sustain operations through periods when the supply
might be interrupted.
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
