BRIEF EXERCISES 1

1. Understanding of production processes is important to accurate costing of products.

The following statements describes different aspects of the production processes.

FALSE A.Manufacturing companies must produce their own raw materials to manufacture other
products for customers.

FALSE B.There are only two inputs into the production process: raw materials and labor.

TRUE C.In the traditional manufacturing environment, similar machines are grouped together.

TRUE D.Products that have been partially manufactured are often called "work in process
inventory"

FALSE E.The three types of inventory in a traditional manufacturing environment are direct
materials, raw materials and finished goods.

BRIEF EXERCISES 2

2. JIT and Lean Production (Decreases & Increases)

DECREASES a.Storage and other inventory carrying costs.

DECREASES b.The time required to make products typically.

INCREASES c.Customer satisfaction.

INCREASES d.The cost of raw materials may.

DECREASES e.Product quality improves because the number of defective units

INCREASES f.. Product flexibility_______________ because employees are highly trained

DECREASES g. The number of suppliers often ____________because companies must have highly
reliable suppliers that can deliver raw materials whenever needed.
BRIEF EXERCISES 3
Manufacturing vs. Nonmanufacturing Costs (Indicate whether each of the preceding costs is
a manufacturing cost or a nonmanufacturing cost)

a. Heat, water, and power used in the factory. MANUFACTURING

b. Cost of repairing mixing machines and ovens. MANUFACTURING

c. Wheat, sweetener, and coloring used in production. MANUFACTURING

d. Lease payments for salespersons' company cars. NON-MANUFACTURING

e. Wax paper used to package cereals. MANUFACTURING

f. Overtime paid to office employees. NON-MANUFACTURING

4. Features of Lean Production (true or false)

a. TRUE
b. FALSE
c. FALSE
d. TRUE
e. TRUE

5. Types of Manufacturing Cost (Indicate whether each of the preceding cost is

Direct Material (DM), Direct Labor (DL), Indirect Material (IM), Indirect Labor (IL), or
another manufacturing overhead cost (MOH)

A. IL
B. DM
C. IL
D. MOH
E. IL
F. DL
G. IM
6. Product Cost
The Perfect Smile manufactures extra whitening toothpaste. During this year the company had the
following cost:

Direct Materials Used $ 41,000

Direct Labor 28,000
Factory Rent 12,000
Factory Depreciation 9,000
Office Depreciation 4,050
Selling expenses 3,500
Administrative 50,000
Expenses

The company had no beginning or ending work in process inventory, no beginning finished goods
inventory, and started and completed 45,000 units of toothpaste during the year

Required:
A. Calculate the total manufacturing cost for the year.

Solutions:

Direct Materials used- $41,000

Direct Labor - 28,000
Factory Rent - 12,000
Factory Depreciation – 9,000
TOTAL MANUFACTURING COST = $90,000

B. Calculate the product cost on a per-unit basis

Solutions:
 $90,000 DIVIDED BY /45,000 units = $2.00 per unit

7. Product Cost
Berry Brothers is a new company that manufactures desks. In its first month of operation, it began
and completed 500 desks. The following production information has been provided:
Direct Materials cost per unit $18
Indirect labor costs 400
Indirect Material Cost 220
Marketing Expenses 750
Cost per direct labor hour 15
Factory rent 2,000
Administrative Expenses 1,600
Direct Labor per unit 4 hours
Required:
A. Calculate the cost of direct labor for one desk.
Cost per direct labor Hour - $15
Direct Labor per unit – 4 HOURS
= $ 60

8. Direct & Indirect Labor

Comfort quilts manufactures decorative quilts and incurred the following wage and
salary expenses for the most recent year.

Machine operators $100,000

Quality Control 50,000
Supervisor
Fabric Cutters 25,000
Factory Janitor 8,000
Company President 100,000

Required: Determine the amount of direct labor incurred during this year.

Machine Operators - $100,000

Fabric Cutters - $25,000
Direct Labor Incurred = $125,000

9. Raw Materials Used

Fun central produces a variety of popular board games. The company has decided to
strategically position itself in the industry with unique handcrafted games boards and
game pieces. The company’s controller has accumulated the following data
regarding raw materials used in production:

Pounds of laminated corrugated materials purchased 15,000

Board Games produced 10,000
Average pounds of laminated corrugated material per 0.80
board
Average cost per pound of laminated corrugated $1.24
 material
Board games sold during the period 7.850

Required: Given that the company did not have any laminated corrugated board at the
beginning of the period, calculate the amount of raw material cost that is included in the
product cost for the period.

SOLUTION: 10,000 boards * .80 per board = 8,000 pounds, * $1.24 = $9,920

10. Cost Flows: Raw Materials Used

At the beginning of the month, AGN Manufacturing had the following information
available for the month of September:
BEGINNING ENDING
Raw material $ 25,000 $32,000
inventory
Work in process 60,000 85,000
inventory
Finished-goods 10,000 2,000
inventory
During the month of September. the company purchased $120,000 of raw materials. How
much raw materials was used in September?

Beginning raw inventory - $ 25,000

Raw materials Purchased- $ 120,000
Ending raw material inventory - $ 32,000
Raw materials used in production $113,000

11. Cost of Goods Manufactured

Candy's Chocolate Shoppe had the following information available for the
month of September:
BEGINNING ENDING
 Raw materials
$40,000 $20,000
inventory

Work in Process 25,000 15,000

Inventory
Finished-good- 10,000 20,000
inventory
Raw materials 75,000
purchased
Direct labor 30,000
(3,000 hours @
$10)
Overhead 50,000

Cost of goods Manufactured $185,000

12. Shelly's Bakery had the following information available for the month of
January:

Beginning Ending
 Raw materials inventory $30,000 $20,000
Work in process inventory 20,000 15,000
Finished-goods inventory 15,000 20,000
Raw materials purchased 80,000
Direct labor (2,500 hrs @ $12) 30,000
Overhead 60,000

Required
Calculate the cost of goods manufactured for the month
Cost of goods manufactured $185,000

13. Cost of Goods Sold

Memories, Inc., which produces specialty picture frames, had the following
summary cost information:

Direct materials used $24,000
Direct labor 22,000
Factory rent 6,000
Equipment depreciation 7,500
Marketing expense 15,000
Administrative expense 18,000
Number of units produced 25,000
The company had no beginning or ending work in process inventory and no beginning
finished-goods inventory. The company sold 24,000 units.
Required
Calculate the cost of goods sold.
Direct materials used $24,000,
Direct labor $22,000,
Factory rent $6,000,
Equipment depreciation 7,500,
Manufacturing cost = $59,000, $59,500 / 25,000 number of units
= $2.38, Cost of goods sold 24,000 units sold * by $2.38 =$57,120

14. Basic Cost Flows: Raw Materials Used

 At the beginning of the month, Chateo, Inc., had raw materials of $54,000. During
the month, the company purchased an additional $38,000 of raw materials. If the
company used $63,000 of the raw materials for the month's production needs, what
is the company's ending raw materials inventory balance?

Beginning raw material $54,000 +

Raw material purchased $38,000 -
= Raw material available for production $92,000 -
Raw material used in production $63,000 (equals)
= ending raw material inventory balance
$29,000.

15. Calculation of Net Income

Net income should be computed in the following manner:

$ 132,500
Sales (5,300 units x $25)
84,800

Less: Cost of goods sold

$ 47,700
Gross profit
Less: Selling and administrative expenses 18,900

$ 28,800
Net income
Cost of goods sold and selling and administrative expenses have been computed in the
following manner:

Computation of Cost of Goods Sold
 $ 56,000
Direct materials

Direct labor 38,000

Factory overhead:

$ 24,00
Factory rent 0

10,000 34,000
Factory equipment depreciation

$128,0 00
Total cost of goods manufactured

Number of units manufactured 8,000

Product cost per unit 16
($128,000 / 8,000 units)

Number of units sold 5,300

Cost of goods sold ($16 x 5,300 units) $ 84,800

Computation of Selling and Administrative Expenses

Office equipment depreciation 1400

Marketing expenses 5500

Administrative expenses 12000

Total selling and administrative expenses 18900
 16. Basic Cost Flows: Raw Materials Used
BMV Automotive Manufacturers had the following information available for the
month of January related to their current production of sports cars:

Beginning Ending
Raw materials inventory $20,000 $37,000
Work in process inventory 55,000 80,000
Finished-goods inventory 10,000 3,000
During the month of January, BMV purchased $140,000 of raw materials. How
much raw material was used in January?
$20,000 + $140,000 = $160,000 - $37,000 = $123,000
17. Cost of Goods Sold
Bell Computers, which produces made-to-order laptops, had the following
summary cost information:
Direct materials used $18,000
Direct labor 21,000
Factory rent 5,000
Equipment depreciation 7,500
Marketing expense 12,000
Administrative expense 16,000
Shipping charges 4,500
Number of units produced 20,000
The company had no beginning or ending work in process inventory and no
beginning finished-goods inventory
Require
d
Calculate the cost of goods sold if 18,000
units are sold.
 Net income should be computed in the
following manner:

Sales (18,000 units x $2.58) $ 51,000
Less: Cost of goods sold   46,440
Gross profit $  4,560
Less: Selling and administrative expenses   35,500
$ 
Net income -30,940
Cost of goods sold and selling and administrative expenses have been computed in
the following manner:

Computation of Cost of Goods Sold
Direct materials $ 18,000
Direct labor 21,000
Factory overhead:
Factory rent $ 5,000
Factory equipment depreciation  7,500  12,500
Total cost of goods manufactured $51,000
Number of units manufactured 20,000
Product cost per unit ($51,000 / 20,000 units) $ 2.58
Number of units sold 18,000
Cost of goods sold ($2.58 x 18,000 units) $ 46,440
Computation of Selling and Administrative Expenses
Equipment depreciation 7,500
Marketing expenses 12,000
Administrative expenses 16,000

Total selling and administrative expenses 35,500
 18. Cost of Goods Sold and Merchandise Available for Sale in
a Merchandising Company
Dash Department Store features women's fashions. At the beginning of the year,
the store had $514,000 in merchandise. Total purchases for the year were
$463,000.
Required
A. Calculate the cost of goods sold for the year, assuming that the year-end
inventory was $488,000.
B. What was the total amount of merchandise available for sale during the year?

a. $514,000 + $463,000 = $977,000 - $488,000 = $489,000

b. $977,000

19.
20.
21.
Problem 22

Cost of Goods Manufactured, Cost of Goods Sold, and Impact on Financial Statements

The accounting information system of Bosch, Inc., reported the following cost and inventory
data for the year:

Cost Incurred
Raw Materials purchased 125,000
Direct Labor 75,000
Indirect Labor 40,000
Equipment maintenance 10,000
Insurance on factory 12,000
Rent on factory 30,000
Equipment Depreciation 20,000
Factory supplies 11,000
Advertising expenses 15,000
Selling and administrative expense 21,000
Inventories Beginning Ending

Raw Materials 10,000 12,000

Work in Process 20,000 31,000
Finish Good 30,000 25,000

a. Calculate the cost of goods manufactured. $310,000

Set up T accounts for DM and WIP with beginning and ending balances. Add DM purchases and determine amount
of DM transferred to WIP. Add all amounts for OH. Add DL and OH cost to WIP. Credit needed to balance WIP is the
amount transferred to FG and is the cost of goods manufactured.

b. Calculate the cost of goods sold. $315,000

Set up T account for finished goods inventory account. Add amount transferred from WIP. Credit amount
needed to balance is cost of goods sold.

c. List the costs not included in cost of goods manufactured and cost of goods sold are considered
to be PERIOD COSTS, otherwise known as NON-MANUFACTURING COSTS. An
example of costs not included in the cost of goods manufactured and cost of goods
manufactured and cost of goods sold include ADVERTISING, SELING, AND
ADMINSTRATIVE EXPENSES. Nonmanufacturing costs are incurred outside the production process and
typically consist of administrative and selling costs. These costs are incurred regardless of production of
product.
d. Material Cost flow from DIRECT MATERIALS to WORK IN PROCESS INVENTORY to
FINISHED GOODS. As material moves through the production process to the finished
product, completed costs of sold units go to account COST OF GOODS SOLD.
 My Solution on computation in Excel

. Problem 23: The accounting information system of Textbook Co. reported the following cost
and inventory data for the year:

Cost Incurred
Raw Materials purchased 100,000
Direct Labor 50,000
Indirect Labor 35,000
Equipment maintenance 9,000
Insurance on factory 11,000
Rent on factory 40,000
Equipment Depreciation 20,000
Factory supplies 12,000
Advertising expenses 16,000
Selling and administrative expense 25,000
Net Revenue 350,000
Inventories Beginning Ending

Raw Materials 15,000 18,000

Work in Process 20,000 29,000
Finish Good 35,000 30,000

Requirements:
a) Cost of goods manufactured = 265,000
b) Cost of goods sold = 270,00
c) Gross margin = 80,000 and operating income = 39,000
My Solution:
Problem 24: B&B Manufacturing Co. was organized on January 1 of the current year,
Outside investors who financed the business stipulated that the company must show a profit by
sixth month or the financing will be stopped. B&B reported losses for the first four months, but
expected to show a profit in the fifth month (current). After reviewing the income statement for the
fifth month (May), the president, Craig was disappointed with the performance and called an
employee meeting. At the meeting, Craig informed the employees that, on the basis of the
performance for the first five months and, in particular, month of May, he saw very little hope of a
profit by the sixth month. He also informed the employees that they should prepare to close the
business. After the meeting, the controller quit, leaving you in charge of the accounting function.
The latest Financial Information is as follows:
Income Statement
For the month ended May 31
Sales 325,000
Less: Raw Materials purchased 140,000
Direct Labor 75,000
Indirect Labor 10,000
Utilities 25,000
Depreciation 30,000
Insurance 15,000
Rent 12,000
Selling and administrative 30,000
Advertising 25,000 (362,000)
Net Loss (37,000)
Inventories Beginning Ending

Raw Materials 15,000 18,000

Work in Process 20,000 29,000
Finish Good 35,000 30,000

Additional Information:
70% of utilities, depreciation, insurance, and rent are related to production operations, whereas
25% of those cost are related to selling and administrative activates
Requirements:

a) Prepare the income statement for May on the basis of the information provided previously.
(include a statement of cost of goods manufactured and a statement of cost of goods sold
b) Do you agree with the president’s assessment of the situation? Why or why not?
c) How will you explain to the investors why your income statement is different from the one
prepared by the controller?
Solution
a.)
Step1: Now, we compute the manufacturing overhead cost for the month of
May;

Step 2: Preparing the statement of cost of goods manufactured for the month ended
31 May
 Step 3: The cost of good which are sold is obtained by adding the beginning finished goods
inventory and cost of goods manufactured and we minus the amount of ending finished
goods inventory.

Step 4: Operating income = gross margin - selling and administrative expenses

Gross margin= Sales revenue -cost of goods sold
Below is the computations of selling and administrative expenses to be deducted
from gross margin in order to get operating net income.
Step 5: Below is the income statement for the month ended 31st May

b.) The assessment on the net loss computed by the president is not correct because
the income statement for the month was calculated wrongly by all expenses being
debited and raw materials purchases also being debited. Also the president did not
consider the beginning and ending inventories of work in process, raw materials and
finished goods. Which as shown a higher net loss.
c.) The income that has being prepared here differs from the controller's income
statement since the controller's income statement debited all expenses and the
materials purchases and also did not consider the beginning and ending inventories
of raw materials, work on process and finished goods while calculating the net
operating income.
In my income statement, the cost of raw materials used is computed by considering
raw materials beginning and ending inventories, cost of goods manufactured is
calculated by considering work on process beginning and ending inventory and cost
of goods sold is calculated by finished goods beginning and ending inventory.