ACCTG 101 Lecture Notes - Lecture 19: Income Statement, Gross Margin

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20 Aug 2020

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Direct materials are defined as materials that can be directly and conveniently traced to a particular product or other costs object and that become an integral part of the finished product. Direct materials typically cause few problems in the costing of products. However, questions do arise and judgment is often needed to correctly classify materials as direct or indirect. If so, then it may be classed a direct cost. Otherwise, it is regarded as an indirect cost. Direct labour is the labour cost of all production employees who work directly on the product being made or service being provided. Sometimes, direct labour is called touch labour to reflect the hands on relationship between the employee and the product or service. Assembly line workers are the clearest example of direct labour. All costs incurred in the factory that are not feasibly classified as direct materials or direct labour are called manufacturing overhead. Manufacturing overhead includes both indirect materials and indirect labour.

Related Questions

Hello,

When attempting to access the Study Guide/Workbook to AccompanyManagerial Accounting (1st edition), I need assistance. In thet-tables, h. is showing to be $46,700. However when I read h. atthe top for given data, it reads "completed all jobs but one; thejob cost sheet for this job shows $2100 for direct materials $2000for direct labor $4100 applied overhead". Can you please help me tounderstand where the $46700 is coming from? Is there a formula? Iam trying to complete the work in process inventory and finishedgoods inventory t-tables.

Thank you in advance for your assistance.

Question:

Study Guide/Workbook to accompany Managerial Accounting (1stEdition)

Chapter 2, Problem 5PSA

Problem

Recording Manufacturing Costs and AnalyzingManufacturing Overhead

Christopherâs Custom Cabinet Company uses a job order costingsystem with overhead applied as a percentage of direct labor costs.Inventory balances at the beginning of 2009 follow:

Raw materials inventory	$15,000
Work in process inventory	5,000
Finished goods inventory	20,000

The following transactions occurred during January:

(a) Purchased materials on account for $26,000.

(b) Issued materials to production totaling $22,000, 90percent of which was traced to specific jobs and the remaindertreated as indirect materials.

$10,000 for assembly workers

3,000 for factory supervision

1,000 for administrative personnel

1,500 for sales commissions

(d) Recorded depreciation: $6,000 for machines, $1,000for office copier.

(e) Had $2,000 in insurance expire, allocated equallybetween manufacturing and administrative expenses.

(f) Paid $6,500 in other factory costs in cash.

(g) Applied manufacturing overhead at a rate of 200percent of direct labor cost.

(h) Completed all jobs but one; the job cost sheet forthis job shows $2,100 for direct materials, $2,000 for directlabor, and $4,000 for applied overhead.

(i) Sold jobs costing $50,000; the company usescost-plus pricing with a markup of 30 percent.

Required:

1.Set up T-accounts, record the beginningbalances, post the January transactions, and compute the finalbalance for the following accounts:

Raw Materials Inventory

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Manufacturing Overhead

Selling and Administrative Expenses

Sales Revenue

Other accounts (Cash, Payables, etc.)

2. Determine how much gross profit the companywould report during the month of January beforeany adjustment is made for the overhead balance.

3. Determine the amount of overâor underappliedoverhead.

4. Compute adjusted gross profit assuming thatany overâor underapplied overhead balance is adjusted directly toCost of Goods Sold.

Step-by-step solution

Step 1 of 1

Req. 1

Raw Materials Inventory		Work in Process Inventory		Finished Goods Inventory
1/1 15,000	b. 22,000	1/1 5,000	h. 46,700	1/1 20,000	i. 50,000
a. 26,000		b. 19,800		h. 46,700
Bal. 19,000		c. 10,000		Bal. 16,700
		g. 20,000
		Bal. 8,100

Cost of Goods Sold	Manufacturing Overhead		Selling and Administrative Expenses
i. 50,000	b. 2,200	g. 20,000	c. 2,500
	c. 3,000		d. 1,000
	d. 6,000		e. 1,000
	e. 1,000		Bal. 4,500
	f. 6,500
		Bal. 1,300 Overapplied

Sales Revenue		Other Accounts (Cash, Payables, etc.)
	i. 65,000	i. 65,000	a. 26,000
			c. 15,500
			d. 7,000
			e. 2,000
			f. 6,500
		Bal. 8,000

Supporting Calculations:

b. Direct Materials $22,000 x 90% = $19,800;

Indirect Materials $22,000 x 10% =$2,200

c. Selling and administrative salaries = $1,000 + $1,500 =$2,500

g. Applied manufacturing overhead = $10,000 X 200% = $20,000

h. Ending Balance in WIP = $2,100 + $2,000 + $4,000 = $8,100

Cost of Goods Manufactured = $5,000 +$19,800 + $10,000 + $20,000 - $8,100 =

$46,700

i. Sales Revenue = $50,000 X 1.3 = $65,000

Req. 2

Unadjusted gross profit = $65,000 - $50,000 = $15,000

Req. 3

Manufacturing overhead is $1,300 overapplied.

Req. 4

Adjusted gross profit = $65,000 â ($50,000 - $1,300) =$16,300

Comment

Please help me answer the following questions:
1. Management accounting:
A) is both retrospective, providing feedback about past operations,and also prospective, incorporating forecasts and estimates aboutfuture events.
B) is primarily oriented to external stakeholders.
C) must be consistent with rules formulated by the FinancialAccounting Standards Board (FASB).
D) provides information that is generally available only on aquarterly or annual basis.

2. Management accounting information is BEST described as:
A) providing a signal that something is wrong.
B) identifying and helping to explain what is wrong.
C) simply summarizing information, but giving no indication thatanything is wrong.
D) measuring overall organizational performance.

3. Which of the following would be MOST helpful for a top managerof a company?
A) profitability report of the company
B) information to monitor hourly and daily operations
C) number of customer complaints
D) operating expense summary reported by department

4. The Balanced Scorecard is said to be "balanced" because itmeasures:
A) short-term and long-term objectives.
B) financial and nonfinancial objectives.
C) internal and external objectives.
D) All of the above are correct.

5. The ________ perspective of the Balanced Scorecard asks, "How issuccess measured by our shareholders?"
A) learning and growth
B) customer
C) financial
D) shareholder

6. Defect rates for products and yield percentages in manufacturingare measures of quality included in the ________ perspective of theBalanced Scorecard.
A) financial
B) production
C) process
D) internal

7. The purpose of the Balanced Scorecard is BEST described ashelping an organization:
A) develop customer relations.
B) mobilize employee skills for continuous improvements inprocessing capabilities, quality, and response times.
C) introduce innovative products and services desired by targetcustomers.
D) translate an organization's mission, vision, and strategy into aset of performance measures that help to implement thestrategy.

8. The FIRST step in developing strategic objectives for theBalanced Scorecard is:
A) defining the long-run financial objectives.
B) identifying the target customer.
C) articulating the organization's vision.
D) select objectives for the customer value proposition.

9. Identify the BEST description of the Balanced Scorecard'scustomer perspective. To achieve our firm's vision andstrategy:
A) How do we lower costs?
B) How do we motivate employees?
C) How can we obtain greater profits?
D) How does the company intend to attract, retain, and deepenrelationships with targeted customers by differentiating itselffrom competitors?

10. Fixed costs:
A) may be either direct or indirect costs.
B) vary with production or sales volume.
C) include parts and materials used to manufacture a product.
D) can be adjusted in the short run to meet actual demands.

11. Which of the following describes a variable cost?
A) Variable cost are always indirect costs.
B) Variable costs increase in total when the actual level ofactivity increases.
C) Variable costs include most personnel costs and depreciation onmachinery.
D) Variable costs can always be traced directly to the costobject.

12. Cost-volume-profit analysis is used PRIMARILY bymanagement:
A) as a planning tool.
B) for control purposes.
C) to establish a target net income for next year.
D) to attain extremely accurate financial results.

13. The break-even point is the level at which revenues:
A) equal fixed costs.
B) equal variable costs.
C) equal fixed costs minus flexible costs.
D) equal variable costs plus fixed costs.

14. Cost-volume-profit analysis assumes all of the followingEXCEPT:
A) all costs are purely variable or fixed.
B) units manufactured equal units sold.
C) total variable costs remain the same over the relevantrange.
D) total fixed costs remain the same over the relevant range.

Sun Air Boat Builders, Inc

Sun Air Boat Builders served boaters with a small, lightweightfiberglass sailboat capable of being carried on a car roof. Thoughthe firm could hardly be considered as one of the nationâsindustrial giants, its burgeoning business had required it toinstitute a formal system of cost control. Jan Larson, Sun AirâsPresident, explained:

Our seasonal demand, as opposed to a need for regular, levelproduction, means that we must keep a good line of credit at thebank. Modern cost control and inventory valuation proceduresenhance our credibility with the bankers and, more importantly,have enabled them to improve our operations. Our supervisors haverealized the value of good cost accounting, and the main officehas, In turn, become much more aware of problems in the barn.

Sun Airâs manufacturing andwarehouse facilities consisted of three historic barns converted tomake 11 -foot âsilver Streakâ sailboats. The companyâs plansincluded the addition of 15-and 18-foot sailboats to its presentline. Longer-term plans called for adding additional sizes andstyles in the hope of becoming a major factor in the regional boatmarket.

The âSilver Streak â was anopen--cockpit,day sailer sporting a mainsail and small jib on a17-foot,telescoping aluminum mast.It was ideally suited to the manysmall lakes and ponds of the region,and after three years it hadbecome quite popular. It was priced at $2,265 complete.

Manufacturing consisted basicallyof three processes: molding, finishing, and assembly. The moldingdepartment mixed all ingredients to make the fiberglass hull,performed the actual molding, and removed the hull from the mold.Finishing included hand additions to the hull for running andstanding rigging, reinforcement of the mast and tiller steps, andgeneral sanding of rough spots. Assembly consisted of theattachment of cleats, turnbuckles, drain plugs, tiller, and soforth, and the inspection of the boat with mast, halyards, andsails in place. The assembly department also prepared the boat forstorage or shipment.

Mixing and molding fiberglasshulls, while manually simple, required a great deal of expertise,or âeyeball,â as it was known in the trade.. Addition of too muchor too little catalyst, use of too much or too little heat, orfailure to allow proper time for curing could each cause a hull tobe discarded. Conversely, spending too much time on adjustments tomixing or molding equipment o on âpersonalizedâ supervision of eachhull could cause severe underproduction problems. Once a batch offiberglass was mixed there was no time to waste being overcautiousor it was likely to âfreeze âin its kettle..

With such a situation, and thecompanyâs announced intent of expanding its product line, it becameobvious that a standard cost system would be necessary to helpcontrol costs and to provide some reference for supervisorsâperformance.

Randy Kern, the moldingdepartment supervisor, and Bill Schmidt, Sun Air âs accountant,agreed after lengthy discussion to the following standardcosts:

Materials -Glass cloth 120 sq.ft @$2.00 = $240.00

-Glass mix 40lbs. .@$3.75 = 150.00

Directlabor -Mixing 0.5 hr..@$20.25 = 10.12

-Molding 1.0 hr..@$20.25 = 20.25

Indirect costs -Absorb at $24.30 per hull *= 24.30

Total cost to mold hull $444.67

* The normal volume of operationsfor overhead derivation purposes was assumed to be 450 hulls permonth.

The estimated monthly indirectcost equation was: Budget = $9.72 * hulls + $6,561

Analysis of Operations

After several additional months of operations, Bill Schmidtexpressed his disappointment about the apparent lack of attentionbeing paid to the standard costs. The molders tended to have acautious outlook toward mixing too little or âcookingâ too long. Noone wanted to end up throwing away a partial hull because there wastoo little glass mix.

In reviewing the most recentmonth âs production results, Schmidt noted the following actualcosts for production of 430 hulls:

Materials:

Purchased 60,000 sq. ft glass cloth @$1.80

20,000 lbs. glass mix @$4.09

Used 54,000 sq. ft. glass cloth

19,000 lbs. glass mix

Direct Labor: Mixing 210 hrs. @$21.37

Molding 480 hrs @$20.25

Overhead :Incurred $11,140

Before proceeding with furtheranalysis, Schmidt called Kern to arrange a discussion of variances.He also told Jan Larson, âMaybe we should look into an automatedmolding operation. Although I havenât finished my analysis, itlooks like there will be unfavorable variances again. Kern insiststhat the standards are reasonable, then never meetsthem!â

Larson seemed disturbed and answered, âWell, some variances areinevitable. Why donât you analyze them in some meaningful mannerand discuss your ideas with Kern, who is an expert in molding whoseopinion I respect. Then the two of you meet with me to discuss thewhole matter.â

Questions

1. Determine the molding departmentâsdirect cost variances and overhead variances. Why do you think theyoccurred?

2. Do you think Sun Airâs standards aremeaningful? How would you improve them?

3. Assume that the monthâs actual andstandard production costs for items other than molding hullsamounted to $914.33 per boat, and that 430 boats were sold. Preparea statement of budgeted and actual gross margin for the month,assuming planned sales of 450 boats.

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ACCTG 101 Lecture Notes - Lecture 19: Income Statement, Gross Margin

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