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P16-39B, cont.
Requirement 2
ORGANIC BONES
Income Statement
Year Ended December 31, 2016
Revenues:
Sales Revenue
$ 114,000
Cost of Goods Sold:
Requirement 3
For a manufacturing company, cost of goods sold on the income statement is based on cost of goods
Requirement 4
Unit cost
=
Cost of goods manufactured / Total units produced
P16-40B Preparing a schedule of cost of goods manufactured and an income statement for a man-
ufacturing company
Learning Objectives 2, 4
COGM: $191,000
SOLUTION
MARIA MANUFACTURING COMPANY
Schedule of Cost of Goods Manufactured
Month Ended June 30, 2016
Beginning Work-in-Process Inventory
$ 29,000
Direct Materials Used:
Missing Amounts:
Beginning Raw Materials Inventory:
Raw Materials Available for Use
$ 81,000
Purchases of Raw Materials
(56,000)
Beginning Raw Materials Inventory
$ 25,000
P16-40B, cont.
Total Manufacturing Costs to Account For:
Beginning Work-in-Process Inventory
$ 29,000
Total Manufacturing Costs Incurred During the Month
184,000
Total Manufacturing Costs to Account For
$ 213,000
MARIA MANUFACTURING COMPANY
Income Statement
Month Ended June 30, 2016
Sales Revenue
$ 470,000
Cost of Goods Sold:
Beginning Finished Goods Inventory
$ 116,000
Cost of Goods Manufactured
191,000
P16-40B, cont.
Cost of Goods Manufactured:
[From the Schedule of Cost of Goods Manufactured]
Cost of Goods Available for Sale:
P16-41B Determining the flow of costs through a manufacturer’s inventory accounts
Learning Objective 4
3. $23,670,000
Best Shoe Company makes loafers. During the most recent year, Best incurred total manufacturing costs
of $24,300,000. Of this amount, $2,200,000 was direct materials used and $17,800,000 was direct labor.
Beginning balances for the year were Raw Materials Inventory, $700,000; Work-in-Process Inventory,
$900,000; and Finished Goods Inventory, $900,000. At the end of the year, balances were Raw Materi-
als Inventory, $900,000; Work-in-Process Inventory, $1,700,000; and Finished Goods Inventory,
$730,000.
Requirements
Analyze the inventory accounts to determine:
1. Cost of raw materials purchased during the year.
2. Cost of goods manufactured for the year.
3. Cost of goods sold for the year.
SOLUTION
Requirement 1
Cost of raw materials purchased during the year:
Requirement 2
Cost of goods manufactured for the year:
=
$23,500,000
Requirement 3
Cost of goods sold for the year:
Continuing Problem
Problem P16-42 is the first problem in a sequence of problems for Daniels Consulting. This company
was also used for the Continuing Problems in the financial accounting chapters as the business evolved
from a service company to a merchandising company. However, it is not necessary to complete those
problems prior to completing P16-42.
P16-42
Daniels Consulting is going to manufacture billing software. During its first month of manufacturing,
Daniels incurred the following manufacturing costs:
SOLUTION
DANIELS CONSULTING, INC.
Schedule of Cost of Goods Manufactured
Month Ended January 31, 2018
Beginning Work-in-Process Inventory
$ 0
Direct Materials Used:
Critical Thinking
Decision Case 16-1
PowerSwitch, Inc. designs and manufactures switches used in telecommunications. Serious flooding
throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the
company’s computer system, including all accounting records, was destroyed.
Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is
anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory.
He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.
“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”
“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last
year’s annual report. We need first-quarter cost data.”
“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is
still in my desk drawer. All I can make out is that for the first quarter, material purchases were $476,000
and direct labor, manufacturing overhead, and total manufacturing costs to account for were $505,000,
$245,000, and $1,425,000, respectively. Wait! Cost of goods available for sale was $1,340,000.”
“Great,” says Stephen. “I remember that sales for the period were approximately
$1,700,000. Given our gross profit of 30%, that’s all you should need.”
Paul is not sure about that but decides to see what he can do with this information. The beginning in-
ventory numbers were:
• Raw Materials, $113,000
• Work-in-Process, $229,000
• Finished Goods, $154,000
Requirements
1. Prepare a schedule showing each inventory account and the increases and decreases to each account.
Use it to determine the ending inventories of Raw Materials, Work-in-Process, and Finished Goods.
2. Itemize a list of the cost of inventory lost.
SOLUTION
Requirement 1
Shown in the schedule, below, the ending inventories are: Raw Materials Inventory, $143,000; Work-in-Process Inventory, $239,000; and
Finished Goods Inventory, $150,000.
POWERSWITCH, INC.
Flow of Costs Schedule
For the 1st Quarter
Raw Materials Inventory
Work-in-Process Inventory
Finished Goods Inventory
Beginning
Beginning
Beginning
Decision Case 16-1, cont.
Calculations:
a Cost of Goods Sold:
Sales
(1 – Gross Profit %)
=
Cost of Goods Sold
c Cost of Goods Manufactured:
Beginning Finished
Goods Inventory
+
Cost of Goods
Manufactured
=
Cost of Goods
Available for Sale
$154,000
+
Cost of Goods
Manufactured
=
$1,340,000
Therefore:
Cost of Goods
Manufactured
=
$1,186,000
Decision Case 16-1, cont.
e Direct Materials Used:
Beginning
Work-in-Process
Inventory
+
Direct + Direct + Manufacturing
Materials Labor Overhead
Used
=
Total Manufacturing
Costs to Account For
f Ending Raw Materials Inventory:
Raw Materials
Available for Use
–
Ending Raw
Materials Inventory
=
Direct Materials
Used
$589,000
–
Ending Raw Materials Inventory
=
$446,000
Therefore:
Ending Raw Materials Inventory
=
$143,000
Requirement 2
Inventory lost in the flood:
Ethical Issue 16-1
Becky Knauer recently resigned from her position as controller for Shamalay Automotive, a small,
struggling foreign car dealer in Upper Saddle River, New Jersey. Becky has just started a new job as
controller for Mueller Imports, a much larger dealer for the same car manufacturer. Demand for this par-
ticular make of car is exploding, and the manufacturer cannot produce enough to satisfy demand. The
manufacturer’s regional sales managers are each given a certain number of cars. Each sales manager
then decides how to divide the cars among the independently owned dealerships in the region. Because
of high demand for these cars, dealerships all want to receive as many cars as they can from the regional
sales manager.
Becky’s former employer, Shamalay Automotive, receives only about 25 cars each month. Conse-
quently, Shamalay is not very profitable.
Becky is surprised to learn that her new employer, Mueller Imports, receives more than 200 cars each
month. Becky soon gets another surprise. Every couple of months, a local jeweler bills the dealer $5,000
for “miscellaneous services.” Franz Mueller, the owner of the dealership, personally approves payment
of these invoices, noting that each invoice is a “selling expense.” From casual conversations with a
sales- person, Becky learns that Mueller frequently gives Rolex watches to the manufacturer’s regional
sales manager and other sales executives. Before talking to anyone about this, Becky decides to work
through her ethical dilemma. Put yourself in Becky’s place.
Requirements
1. What is the ethical issue?
2. What are your options?
3. What are the possible consequences?
4. What should you do?
SOLUTION
Students’ responses will vary. Illustrative answers follow.
a. The ethical issue facing Becky is deciding what to do about the gifts to the sales managers. Although
c. The possible consequences include:
1. If Becky does nothing, her job and those of the other employees may remain secure for the
time being. However, as controller she could be held accountable for laundering a bribe if the
scheme became public. A lawsuit brought by other dealers who did not receive a fair share of
available cars could name her as an involved party. If Becky is a CPA, she could also lose
her CPA license.
d. Accountants should never become party to, or appear to be involved in, an unethical (and possibly
illegal) situation such as this. This is especially true for persons with fiduciary responsibilities like a
controller. Becky should discuss her concerns with the owner. If Mueller is indeed bribing the sales
representatives and refuses to stop this practice, Becky should inform the manufacturer, or she
should resign.
Communication Activity 16-1
In 100 words or fewer, explain the difference between product costs and period costs. In your explana-
tion, explain the inventory accounts of a manufacturer.
SOLUTION
Period costs are operating costs that are expensed in the same accounting period in which they are in-
