Question

Flow of Costs and Income Statement

Ginocera Inc. is a designer, manufacturer, and distributor of custom gourment kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 20Y8. In January, the company spent $600,000 to develop a late-night advertising infomercial for the new product. During 20Y8, the company spent an additional $1,400,000 promoting the product through these infomercials, and $800,000 in legal costs. The knives were ready for manufacture on January 1, 20Y8.

Ginocera uses a job order cost system to accumulate costs associated with the Kitchen Ninja Knife. The unit direct materials cost for the knife is:

Hardened steel blanks (used for knife shaft and blade)	$4.00
Wood (for handle)	1.50
Packaging	0.50

The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 250 knives.

After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife into a decorative box. The direct labor cost is $0.50 per unit.

The knives are sold to stores. Each store is given promotional materials, such as posters and aisle displays. Promotional materials cost $60 per store. In addition, shipping costs average $0.20 per knife.

Total completed production was 1,200,000 units during the year. Other information is as follows:

Number of customers (stores)	60,000
Number of knives sold	1,120,000
Wholesale price (to store) per knife	$16

Factory overhead cost is applied to jobs at the rate of $800 per stamping machine hour after the knife blanks are stamped. There were an additional 25,000 stamped knives, handles, and cases in process and waiting to be assembled on December 31, 20Y8.

In your computations, if required, round interim per unit costs to two decimal places.

Required:

1. Prepare an annual income statement for the Kitchen Ninja knife series.

Ginocera Inc.
Income Statement
For the Year Ended December 31, 20Y8
			$
			$
Selling and administrative expenses:
Selling expenses:
	$
Total selling expenses		$
Administrative expenses:
Total selling and administrative expenses
			$

2. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 20Y8.

Finished Goods	$
Work in Process	$

Answer 1

This case here needs the computation of manufacturing cost which needs to asserted in income statement as cost of goods sold. The labor is not applied to work in process. Hence, the cost of work in process shall exclude the cost of labor.

Requirement 1

Manufacturing cost per unit
Direct material
Hardened steel blank	$                   4.00
Wood for handle	$                   1.50
Packaging	$                   0.50
total direct material	$                   6.00
Direct labor	$                   0.50
factory overhead (800/250)	$                   3.20
Total manufacturing cost per knife	$                   9.70

Income statement

Sales(1120,000 X 16)		$17,920,000
Cost of good sold(1120,000 X 9.7)		$10,864,000
Gross profit		$7,056,000
Selling expense:
Infomercial campaign (600,000 + 1400,000 )	$2,000,000
Promotional material (60,000 X $60)	$3,600,000
Shipping cost(1120,000 X 0.2)	$224,000
Total selling expense	$5,824,000
Administrative expense:
Legal expense	$800,000
Total selling and administrative expense		$6,624,000
Income from operation		$432,000

Requirement 2

Finished goods inventory

= (Completed units – sold) X 9.7

=(1200,000 – 1120,000 ) X 9.7

= $ 776,000

Work in process

= 25,000 X (6 + 3.20)

= $ 230,000

Note that in work in process, direct labor is yet to be applied.