ACC 406 Lecture Notes - Lecture 2: Income Statement, Balance Sheet, Financial Statement
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Question #1:
Leslie Limited is a manufacturing company that makes a single product â the âWhatchamacallitâ Whatchamacallits go through two processing departments â Department #1 and Department #2.
The cost to manufacture a âWhatchamacallitâ has historically been in the range of $2.94 to $3.00, with 80% of the cost being from Department #1. However, due to increased competition putting a squeeze on sales prices, Leslieâs management has realized that the cost to manufacture âWhatchamacallitsâ must be reduced. In recent months, several cost-cutting strategies have been put into place, particularly in Department #1. Leslieâs senior management team is anxiously awaiting the production report for Department #1 for the month of January to see whether the cost cutting strategies have worked.
Leslie Limited hired a new accountant in January of 2014. Her name is Emma. Emma, a Dal co-op student, only has a little experience with Process Costing, recently prepared a report that summarizes production and costs for Department #1 for January.
Here it Emmaâs report:
| Work in progress inventory Jan 1st â 8,000 units: materials 100% complete, conversion costs 80% complete | $20,000 (of which $5,000 is materials and $15,000 is conversion costs) |
| Materials costs added in January: | $27,000 |
| Conversion costs added in January: | $75,000 |
| Total costs of Department #1: | $122,000 |
| Department #1 costs assigned to: | |
| Units completed and transferred to Dept #2: 50,000 units at $2.44 each. | $122,000 |
| Work in progress inventory, Jan 31st â 5,000 units: materials 100% complete, conversion 75% complete | _ |
The President of Leslie Limited reads the above report and becomes quite frustrated and confused. He does not understand how unit costs assigned in Dept. #1 could have increased despite the cost cutting efforts that have been made.
Required #1: Prepare a report for Department #1 showing how much cost should have been assigned to the units completed and transferred to Department #2 and to the ending WIP inventory.
Required #2: Explain to the President why the unit cost appearing on Emmaâs report was higher than anticipated. Have the cost cutting strategies worked?
All questions have to do with cost accounting systems,more in particular, process cost systems.
Complete each of the following statements by writing theappropriate words or amounts in the answers blanks.
1-5. Identify whether the process cost or job order cost systemwould be more appropriate for each of the followingbusinesses:
1. accounting firm 1. ____
2. breakfast cereal manufacturer 2. ____
3. ship construction 3. ____
4. pharmaceuticals company 4. ____
5. computer chip manufacturer 5. ____
6. The number of units that could have been completed within agiven accounting period with respect to direct materials andconversion costs is the 6. ____
7. Direct labor and factory overhead are referred to as 7.____
8â9. Oslo Manufacturing incurred $72,000 of direct materialscosts, direct labor costs of $24,500, and factory overhead of$20,500. If 1,000 direct materials equivalent units and 900conversion equivalent units were manufactured, then:
8. The equivalent unit cost for direct materials is 8. $____
9. The equivalent unit cost for conversion is 9. $____
10. The periodic report prepared for each processing department,summarizing (1) the units for which the department is responsibleand their disposition and (2) the costs charged the department andtheir allocation, is termed the 10. ____
11. The method of inventory costing that assumes the unitproduct costs should be determined separately for each period inthe order in which the costs were incurred is 11. ____
12â15. In a process cost system, the cost of goods completed andthe ending inventory valuation are determined by using thefollowing four steps:
12. ____
13. ____
14. ____
15. ____
16â17. The transferred costs of completed production inDepartment A using a process cost system include:
16. ____
17. ____
18â20. The three categories of units to be assigned cost for anaccounting period in a process cost system are:
18. ____
19. ____
20. ____
21â24. Department W had 8,000 units in work in process that were30% converted at the beginning of the period at a cost of $16,400.During the period, 15,000 units of direct materials were added at acost of $48,000, 16,000 units were completed, and 7,000 units were40% completed. The first-in, first-out cost method is used and allmaterials are added at the beginning of the process. Direct laborwas $30,000, and factory overhead was $54,000 during theperiod.
21. The number of equivalent units of conversion for the period was21. ____
22. The total conversion costs for the period were 22. $____
23. The conversion cost of the units started and completed duringthe period was 23. $____
24. The conversion cost of the 7,000 units in process at the end ofthe period was 24. $____
Indicate the titles of the accounts to be debited and creditedin recording the selected transactions given below by inserting theletter or letters of the account titles listed in the appropriatecolumns. (Do not record the amounts.)
ACCOUNTS
A. Accounts Payable E. FactoryOverheadâDepartment A I. Sales
B. Accounts Receivable F.Factory OverheadâDepartment B J. Wages Payable
C. Cash G. Finished GoodsK. Work in ProcessâDepartment A
D. Cost of Goods Sold H.Materials L. Work inProcessâDepartment B
TRANSACTIONS | Debit | Credit | ||
0. Paid cash for wages owed, $47,000............................................................. | J | 0. ____ | C | 0. ____ |
1-2. Materials requisitioned for use in Department A,$36,000, of which $31,500 entered directly into the product..................................................... |
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3-4. Labor in Department A, $13,000, was used directlyin the manufacture of the product..................................................................................................... |
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5-6. Factory overhead applied to production inDepartment A, $6 per machine hour..................................................................................................... |
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| 7-8. Goods finished in Department A and transferred toDepartment B, $79,000............................................................................................................... |
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9-10. Goodsfinished in Department B and transferred to finished goods,$114,000............................................................................................................. |
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11-12. Cost of finishedgoods sold, $126,374......................................................... | 11. ____ | 12. ____ |
Eminence Corporation makes rocking chairs. The chairs move through two departments during production. Lumber is cut into chair parts in the cutting department, which transfers the parts to the assembly department for completion. The company sells the unfinished chairs to hobby shops.
The list of beginning balances are given below:
| Cash | $ | 24,000 | |
| Raw materials | 8,000 | ||
| Work in process cutting | 9,500 | ||
| Work in process assembly | 11,500 | ||
| Finished goods | 2,000 | ||
| Production supplies | 100 | ||
| Common stock | 47,000 | ||
| Retained earnings | 8,100 | ||
The transactions for the second year of operation (2019) are described here. (Assume that all transactions are cash transactions unless otherwise indicated.)
1) The company purchased $10,000 of direct raw materials and $650 of indirect materials. Indirect materials are capitalized in the Production Supplies account.
2) Materials totaling $7,250 were issued to the cutting department.
3) Labor cost was $23,500. Direct labor for the cutting and assembly departments was $11,000 and $10,000, respectively. Indirect labor costs were $2,500. (Note: Assume that sufficient cash is available when periodic payments are made. These amounts represent summary data for the entire year and are not presented in exact order of collection and payment.)
4) The predetermined overhead rate was $0.50 per direct labor dollar in each department.
5) Actual overhead costs other than indirect materials and indirect labor for the month were $7,300.
6) The cutting department transferred $15,500 of inventory to the assembly department.
7) The assembly department transferred $30,500 of inventory to finished goods.
8) The company sold inventory costing $17,500 for $32,000.
9) Selling and administrative expenses were $4,200.
10) At the end of 2019, $150 of production supplies was on hand.
11) Assume that over- or underapplied overhead is insignificant.
Required
A) Record the data in T-accounts.
B) Record the closing entry for over- or underapplied manufacturing overhead, assuming that the amount is insignificant.
C) Close the revenue and expense accounts.
D) Prepare a schedule of cost of goods manufactured and sold, an income statement, and a balance sheet for 2019.
