Question

ALABAMA CORPORATION

…. manufactures a single product, cleverly named Product X. The following information is available for the calendar year 2018 just completed, during which they produced and sold 200,000 units. Sales for the year was $2,400,000. During the year, the company paid a sales commission of 5 percent of sales. The corporate income tax rate was 30%. Also assume that the per-unit manufacturing cost in 2018 was the same as in the previous year, 2017.

Raw materials purchases

$300,000

Direct labor

140,000

Depreciation - factory equipment

45,000

Depreciation - factory building

30,000

Depreciation - headquarters building

50,000

Factory insurance

15,000

Property taxes:

Factory

20,000

Headquarters

18,000

Utilities - factory

34,000

Utilities - sales/other

1,800

Administrative salaries

150,000

Indirect labor salaries

156,000

Sales office salaries

90,000

Inventory Information

12/31/2017

12/31/2018

Raw materials

$124,000

$152,000

Work in process

124,000

130,000

Finished Goods

109,000

119,000

REQUIRED:

Post all of the above a summary entries in T accounts.

Compute the direct materials used in production.

Compute the prime cost.

Compute the conversion cost.

Prepare the Schedule of Raw Materials Used

Prepare the Schedule of Cost of Goods Manufactured

Prepare the Schedule of Cost of Goods Sold

Calculate the manufacturing cost per unit

Prepare an income statement for 2018, in good form.

As part of the annual audit you notice that “Indirect labor salaries” included the $20,000 salary paid to Ken, who actually works in the advertising department of the company.

Does this seem reasonable? Why or why not?

Does this make a difference in terms of the net operating income? Why or why not?

What incentive would management have to include the advertising costs as “indirect labor”? (That is, what would their motivation be to do this?)

Answer 1

As per policy, only four parts of a question is allowed to answer, but more than four parts are answered here :

t-ACCOUNTS:
Raw Material Account
OB	124000	WIP	272000
PURCH.	300000	CB	152000
Total	424000	Total	424000
WIP Account
OB	124000	Finished Goods	706000
DM	272000	CB	130000
DL	140000
F O/h	300000
Total	836000	Total	836000
Finished Goods Account
OB	109000	COGS	696000
WIP	706000	CB	119000
Total	815000	Total	815000
Income Summary:
Sales	2400000
Less:COGS	696000
GP	1704000
Less: Expenses:
Adminis	218000
Selling	211800
Total expenses	429800
IBT	1274200
Tax	382260
IAT	891940
Factory Overhead Account
Ind. Labor	156000	WIP	300000
Dep-factory	45000
Dep-fac Budg	30000
Insur	15000
Prop tax - fact	20000
Utilities	34000
Total	300000	Total	300000
Administration Exp Account
Dep - Budg	50000	Income Summary	218000
Prop tax-HQ	18000
Salaries	150000
Total	218000	Total	218000
Selling Exp Account
Utilities	1800	Income Summary	211800
salaries	90000
Commission	120000
Total	211800	Total	211800
REQ 1) RAW MATERIAL USED = $272000
REQ 2) PRIME COST = DM + DL = 272000+140000= 412000
REQ 3) CONVERSION COST = DL+factory overhead = 140000+300000=440000
REQ 4) SCHEDULE OF RAW MATERIAL USED:
OB	124000
add: PURCHASES	300000
Total available	424000
less: CB	152000
RM USED	272000
REQ 5) SCHEDULE OF COGM :
RM USED	272000
DL USED	140000
F OVERHEAD	300000
Total Cost incurred	712000
Add: WIP OB	124000
Total WIP	836000
Less : WIP CB	130000
COGM	706000
REQ 6) SCHEDULE OF COGS :
FG OB	109000
add: COGM	706000
Total FG available	815000
less: FG CB	119000
COGS	696000
REQ 7) Manufacturing Cost per unit:
COGM / UNITS MANUFACTURED
706000 / 200000 = $3.53 PER UNIT