Group 1: Cost Concepts

1. Kendall Company specializes in producing fashion outfits. On July 31, 2021, a tornado touched down
at its factory and general office. The inventories in the warehouse and the factory were completely
destroyed as was the general office nearby. Next morning, through a careful search of the disaster site,
however, Bill Francis, the company’s controller, and Elizabeth Walton, the cost accountant, were able to
recover a small part of manufacturing cost data for the current month.
“What a horrible experience,” sighed Bill “And the worst part is that we may not have enough records to
use in fi ling an insurance claim.”
“It was terrible,” replied Elizabeth. “However, I managed to recover some of the manufacturing cost
data that I was working on yesterday afternoon. The data indicate that our direct labor cost in July
totaled P250,000 and that we had purchased P365,000 of raw materials. Also, I recall that the amount of
raw materials used for July was P350,000. But I’m not sure this information will help. The rest of our
records are blown away.”
“Well, not exactly,” said Bill. “I was working on the year-to-date income statement when the tornado
warning was announced. My recollection is that our sales in July were P1,240,000 and our gross profit
ratio has been 40% of sales. Also, I can remember that our cost of goods available for sale was P770,000
for July.”
“Maybe we can work something out from this information!” exclaimed Elizabeth. “My experience tells
me that our manufacturing overhead is usually 60% of direct labor.”
“Hey, look what I just found,” cried Elizabeth. “It’s a copy of this June’s balance sheet, and it shows that
our inventories as of June 30 are Finished goods P38,000, Work in process P25,000, and Raw materials
P19,000.”
“Super,” yelled Bill. “Let’s go work something out.”
In order to file an insurance claim, Kendall Company must determine the amount of its inventories as of
July 31, 2021, the date of the tornado touchdown.
Instructions
Determine the amount of cost in the Raw Materials, Work in Process, and Finished Goods inventory
accounts as of the date of the tornado touchdown.

Solutions:
Given:

July 2021 Inventory June 30

Labor Cost - 250,000 Finished Goods - 38,000
Raw Materials (purchase) - 365,000 Work in Process - 25,000
Raw Materials (used) - 350,000 Raw Materials - 19,000
Sales - 1,240,000
Gross Profit Ratio - 40%
Cost of Goods Available for Sale - 770,000
Manufacturing Overhead - 60% (direct labor)

First, we get to determine the amount of cost in Raw Materials. In order for us to get the cost of raw
materials purchase we can only then calculate it as follows: Raw Materials = (Ending Inventory -
Beginning Inventory) + Cost of Goods Sold. But since we don't have COGS yet so we have to find the
COGS first.

To get the COGS, we have to follow this: Cost of Goods Sold = Sales - Gross Profit

Given:
Sales - 1,240,000.00
Gross Profit Ratio - 40% ( 1,240,000 * 40% = 49,600)

Cost of Goods Sold = Sales - Gross Profit

= 1,240,000 - 49,6000
COGS = 744,000

To get the Work in Process, we must first solve the Cost of Goods Manufactured. Let's follow this: Cost
of Goods Manufactured = Cost of Goods Available for Sale - Beginning Finished Goods

Cost of Goods Manufactured = COGAS - Beg. FG

= 770,000 - 38,000
= 732,000

For the Raw materials inventory, we simply add the June 30 inventory of raw materials to the additional
purchase raw materials in July then less the rest of raw materials being used in July.

19,000 + 365,000 - 350,000 = 34,000

Next, we get the total manufacturing cost by just adding the following; raw materials used, direct labor,
manufacturing overhead (60%)

Raw materials (used) 350,000

Direct labor 250,000
Manufacturing Overhead (60%) 150,000
Total manufacturing costs 750,000
Our Beginning Work in Process is given already in the scenario which is 25,000. Now, we can proceed by
determining the Ending Work in Process. To get the Ending WIP, we have to less the total manufacturing
cost with the cost of goods manufactured then add the beginning WIP. Like this, Ending WIP =
Manufacturing Cost - Cost of Goods Manufactured + Beginning WIP

Ending WIP = Mfg Cost - COGM + Beginning WIP

= 750,000 - 732,000 + 25,000

= 18,000 + 25,000
= 43,000

2. Anchor Glass Container Corporation, the third largest manufacturer of glass containers in the United
States, supplies beverage and food producers and consumer products manufacturers nationwide. Parent
company Consumers Packaging Inc. (Toronto Stock Exchange: CGC) is a leading international designer
and manufacturer of glass containers. The management discussion on page 46 appeared in a recent
annual report of Anchor Glass.

Anchor Glass Container

Management Corporation
Discussion

Cost of Products Sold Cost of products sold as a percentage of net sales was 89.3% in the current year
compared to 87.6% in the prior year. The increase in cost of products sold as a percentage of net sales
principally reflected the impact of operational problems during the second quarter of the current year at
a major furnace at one of the Company’s plants, higher downtime, and costs and expenses associated
with an increased number of scheduled capital improvement projects, increases in labor, and certain
other manufacturing costs (with no corresponding selling price increases in the current year). Reduced
fixed costs from the closing of the Streator, Illinois, plant in June of the current year and productivity and
efficiency gains partially offset these cost increases
Instructions
What factors affect the costs of products sold at Anchor Glass Container Corporation?

Answer
Based on the management discussion, Anchor's cost of products sold as a percentage of net sales had
increased 1.7% to 89.3% from 87.6% the previous year. Factors influencing the cost of products sold at
Anchor reflected the impact of operational problems at a major furnace at one of the company's plants
during the second quarter of the current year. The cost of goods sold is represented by direct labor
costs, direct raw material costs, and overhead costs. Increases in any of these components will directly
result in higher product costs, lowering the gross profit margin.

Inefficient operations will result in a higher cost per unit output. Anchor operates in an industry with a
low profit margin and relies heavily on volume to make a profit. Cost increases caused by inefficiency in
operations with no corresponding selling price will inevitably affect profit margins by increasing the cost
of products sold.

The following operational problems at a major furnace at one of Anchor's plants during the second
quarter were reflected in an increase in cost of products sold:

* Higher down time – One of the issues impacting manufacturing companies is the growing trend of
factory shutdowns, which reduces business profit. Anchor is a part of a continuous manufacturing
process with a high fixed overhead cost. Higher downtime results in unabsorbed fixed overhead costs,
which have a negative impact on operational results and raise the cost of products sold for sales during
that period.

* Cost and expenses associated with an increased number of scheduled capital improvement project –
Capital improvement projects are designed for long-term benefit rather than immediate revenue.
However, the cost and expenses (overhead) associated with capital improvement projects will rise in
lockstep with the number of projects.

* Increases in labor - Higher labor costs (better wage rates and employee benefits) benefit workers, but
they reduce company profits, the number of jobs available, and the number of hours each person works.
Labor costs are influenced by a variety of policies, including the minimum wage, overtime pay, payroll
taxes, and hiring subsidies. Policies that raise labor costs can have a significant impact on both
employment and hours in individual businesses as well as the overall economy.