ACC 100 Lecture Notes - Lecture 3: Income Statement
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Lambeth Custom Cabinets (B)
Jack Lambeth, a master cabinet maker, owns and operates a shopwhere he sells custom-made cabinets. At the beginning of Septemberhis business had no outstanding debt and the following amounts wereon his books:
1. Raw materials inventory, $3,350.
2. Supplies inventory, $920.
3. Work-in-process inventory, $7,200.
Overhead | |||||
Job | Materials | Labor | (50% of Labor) | ||
A-3 | $950 | $ 1,300 | $650 | ||
A-4 | 1,050 | 850 | 425 | ||
A-5 | 625 | 900 | 450 | ||
Total | $2,625 | $3,050 | $1,525 | $ | 7,200 |
4. Cash as of September 1 were $16,890.
During the month, Lambeth's woodworking crew finished jobs A-3,A-4, and A-6 but did not finish A-5. Job A-7 and A-8 was startedbut not finished during September. Overhead costs (pertainingprimarily to equipment and shop depreciation, cleaning supplies,and insurance) are applied to every job at the end of the monthunless the job is finished during the month, in which case overheadis applied when the job is finished.
During September, the followingdirect materials and direct labor costs were incurred:
Job DirectMaterials Labor
A-3 $280 $750
A-4 350 1,300
A-5 180 550
A-6 375 490
A-7 590 370
A-8 900 870
Total $2,675 $4,330
Other financial factors of importance pertaining to Septemberwere:
A. $2,675 of raw materials werepurchased during the month.
B. Supplies of $780 were purchasedwhile $590 were used and thus transferred to the manufacturingoverhead account.
C. Total increases to the laborgeneral ledger account were $6,850. (Apparently there was $2,520indirect labor charged.)
D. General and administrative expenses for the month were$3,420.
E. Collections received from customers on jobs A-3, A-4, and A-6amounted to $7,125, $10,600, and $2,750, respectively, for a totalof $20,475.
F. At the end of the month, Lambeth Custom Cabinets had nooutstanding debts.
While Jack was reviewing theSeptember data he became very concerned about the manufacturingoverhead variance (MOV). Since Jack never wanted to lay off anemployee, the MOV was always large in months when business wasslow. (Jack assigned unoccupied workers to general clean-up andrepair worl< and charged their wages to indirect labor.) Ofcourse, Lambeth realized why the MOV was so large. What he worriedabout, however, was Mrs. Carter.
Mrs. Carter, a neighbor, hadstopped in the shop one day in early September to get a price onsome cabinets she wanted built. Jack's son, Jack Jr., spoke withher. Jack Jr. was working in the shop while on summer vacationbetween his first and second year of graduate business school. JackJr. studied the plans that Mrs. Carter had and estimated the costto build her cabinets at $2,050. His job estimation sheetshowed:
Lumber $990
Finishingmaterials 100
Direct laborcost 640
Overhead 320
$2,050
When Jack Jr. quoted a price of$2,560 ($2,050 cost $510 profit) to Mrs. Carter, she said that shecould get the same thing built by Walworth Custom Kitchens for$1,950.
Furthermore, she informed Jack Jr.that, "1 would throw the dumb economics books away before I wouldpay a penny more than $1,950 for book cabinets to store them."
Jack Jr. simply told her that hisbest price would be $2,560. He explained all about labor,materials, profit, overhead, and competitive capitalism. Inaddition, he told Mrs. Carter that Walworth couldn't make money ona $1,950 price and if Walworth was really willing to build theshelves for $1,950 she would be stealing from Mr. Walworth!
Mrs. Carter was very angry when sheleft. Jack Jr. later told his father the whole story and laughed ashe said, "Heck, we can't build stuff that costs $2,050 and sell itat a price of $1,950, let alone $2,000 can we?" At that timeLambeth didn't think much about the incident but he began to wonderwhether Jack Jr. had learned anything at graduate business school.Lambeth became especially concerned when he saw Bob Walworth, whosaid, "Mrs. Carter saved me last month." It seems that Walworth hadjust delivered Mrs. Carter's new cabinets for which she paid$1,950. Jack Lambeth wondered who was right â Jack Jr. orWalworth?
Prepare journal entries for the transaction for September.
Record the beginning balances in the General Ledger. Post theSeptember transaction from #1 into the General Ledger.
Prepare a Balance Sheet and Income Statement for September30th
Prepare a Variable Costing Income Statement for September30th
Based on what you know about the cost structure of LambethCustom Cabinets, could Lambeth make a profit and/or a positivecontribution margin on Mrs. Carter's order at a selling price of$1,950?
Hint: Use Excel to completerequirements 1-4.
So far I have:
Job Cost
| A-3 | Materials | Labor | Overhead | Total | Transfer to FG | WIP |
| Beg. Bal. | 950.00 | 1,300.00 | 650.00 | 2,900.00 | ||
| Sept. Act. | 280.00 | 750.00 | 375.00 | 1,405.00 | ||
| Total | $ 1,230.00 | $ 2,050.00 | $ 1,025.00 | $ 4,305.00 | $ 4,305.00 | |
| A-4 | Materials | Labor | Overhead | Total | ||
| Beg. Bal. | 1,050.00 | 850.00 | 425.00 | 2,325.00 | ||
| Sept. Act. | 350.00 | 1,300.00 | 650.00 | 2,300.00 | ||
| Total | $ 1,400.00 | $ 2,150.00 | $ 1,075.00 | $ 4,625.00 | $ 4,625.00 | |
| A-5 | Materials | Labor | Overhead | Total | ||
| Beg. Bal. | 625.00 | 900.00 | 450.00 | 1,975.00 | ||
| Sept. Act. | 180.00 | 550.00 | 275.00 | 1,005.00 | ||
| Total | $ 805.00 | $ 1,450.00 | $ 725.00 | $ 2,980.00 | $ 2,980.00 | |
| A-6 | Materials | Labor | Overhead | Total | ||
| Beg. Bal. | $ - | $ - | $ - | $ - | ||
| Sept. Act. | 375.00 | 490.00 | 245.00 | $ 1,110.00 | ||
| Total | $ 375.00 | $ 490.00 | $ 245.00 | $ 1,110.00 | $ 1,110.00 | |
| A-7 | Materials | Labor | Overhead | Total | ||
| Beg. Bal. | $ - | |||||
| Sept. Act. | 590.00 | 370.00 | 185.00 | 1,145.00 | ||
| Total | $ 590.00 | $ 370.00 | $ 185.00 | $ 1,145.00 | $ 1,145.00 | |
| A-8 | Materials | Labor | Overhead | Total | ||
| Beg. Bal. | $ - | $ - | $ - | $ - | ||
| Sept. Act. | 900.00 | 870.00 | 435.00 | 2,205.00 | ||
| Total | $ 900.00 | $ 870.00 | $ 435.00 | $ 2,205.00 | $ 2,205.00 |
J/E
| Date | Act. # | D | C |
| 9/2 | 103 | $ 2,675.00 | |
| 100 | $ 2,675.00 | ||
| Purchase of Raw Materials | |||
| 9/4 | 104 | $ 780.00 | |
| 100 | $ 780.00 | ||
| Purchase of Supplies | |||
| 502 | $ 590.00 | ||
| 104 | $ 590.00 | ||
| Supplies Used | |||
| 9/10 | 110 | $ 4,330.00 | |
| 502 | $ 2,520.00 | ||
| 100 | $ 6,850.00 | ||
| Labor Incurred | |||
| 9/12 | 501 | $ 3,420.00 | |
| 100 | $ 3,420.00 | ||
| Gen. and Admin. Expense | |||
| 9/15 | 100 | $ 7,125.00 | |
| 106 | $ 7,125.00 | ||
| Collections Received for A-3 | |||
| 100 | $ 10,600.00 | ||
| 106 | $ 10,600.00 | ||
| Collections Received for A-4 | |||
| 100 | $ 2,750.00 | ||
| 106 | $ 2,750.00 | ||
Collections Received for A-6 | |||
G/L
| #100 Cash | |||||
| Date | Description | D | C | Balance | |
| 9/1 | Beg. Bal. | $ 16,890.00 | |||
| 9/2 | Purchase RM | $ 2,675.00 | $ 14,215.00 | ||
| 9/4 | Purchase Supplies | $ 780.00 | $ 13,435.00 | ||
| 9/10 | Labor Incurred | $ 6,850.00 | $ 6,585.00 | ||
| 9/12 | G&A Exp. | $ 3,420.00 | $ 3,165.00 | ||
| 9/15 | Collections Received A-3 | $ 7,125.00 | $ 10,290.00 | ||
| 9/15 | Collections Received A-4 | $ 10,600.00 | $ 20,890.00 | ||
| 9/15 | Collections Received A-6 | $ 2,750.00 | $ 23,640.00 | ||
| #103 Raw Materials | |||||
| 9/1 | Beg. Bal. | $ 3,350.00 | |||
| 9/2 | Purchase RM | $ 2,675.00 | $ 6,025.00 | ||
| #104 Supplies | |||||
| 9/1 | Beg. Bal. | $ 920.00 | |||
| 9/4 | Purchase Supplies | $ 780.00 | $ 1,700.00 | ||
| 9/4 | Supplies Used | $ 590.00 | $ 1,110.00 | ||
| #106 Accounts Receivable | |||||
| 9/1 | Beg. Bal. | $ 20,475.00 | |||
| 9/15 | Collections Received A-3 | $ 7,125.00 | $ 13,350.00 | ||
| 9/15 | Collections Received A-4 | $ 10,600.00 | $ 2,750.00 | ||
| 9/15 | Collections Received A-6 | $ 2,750.00 | $ - | ||
| #110 WIP Control | |||||
| 9/1 | Beg. Bal. | $ 7,200.00 | |||
| 9/10 | Labor Incurred | $ 4,330.00 | $ 11,530.00 | ||
| #112 Finished Goods | |||||
| #401 Sales | |||||
| #501 Gen. & AdminExp. | |||||
| 9/12 | G&A Exp. | $ 3,420.00 | $ 3,420.00 | ||
| #502 MOH Control | |||||
| 9/4 | Supplies Used | $ 590.00 | $ 590.00 | ||
| 9/10 | Labor Incurred | $ 2,520.00 | $ 3,110.00 | ||
| #503 MOH Allocated | |||||
| #505 CGS | |||||
I need to know if what I have is correct so far and where I'mheaded next. Is COGS going to be a debit of 10040? MOH All. creditof 2165?