Fundamentals of Cost Accounting, 5th Edition Solution Manual

2 Cost Concepts and Behavior Solutions to Review Questions 2-1. Cost is a more general term that refers to a sacrifice of resources and may be either an opportunity cost or an outlay cost. An expense is an outlay cost charged against sales revenue in a particular accounting period and usually pertains only to external financial reports. 2-2. Product costs are those costs that are attributed to units of production, while period costs are all other costs and are attributed to time periods. 2-3. Outlay costs are those costs that represent a past, current, or future cash outlay. Opportunity cost is the value of what is given up by choosing a particular alternative. 2-4. Common examples include the value forgone because of lost sales by producing low quality products or substandard customer service. For another example, consider a firm operating at capacity. In this case, a sale to one customer precludes a sale to another customer. 2-5. Yes. The costs associated with goods sold in a period are not expected to result in future benefits. They provided sales revenue for the period in which the goods were sold; therefore, they are expensed for financial accounting purposes. 2-6. The costs associated with goods sold are a product cost for a manufacturing firm. They are the costs associated with the product and recorded in an inventory account until the product is sold. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 29 2-7. Both accounts represent the cost of the goods acquired from an outside supplier, which include all costs necessary to ready the goods for sale (in merchandising) or production (in manufacturing). The merchandiser expenses these costs as the product is sold, as no additional costs are incurred. The manufacturer transforms the purchased materials into finished goods and charges these costs, along with conversion costs to production (work in process inventory). These costs are expensed when the finished goods are sold. 2-8. Direct materials: Materials in their raw or unconverted form, which become an integral part of the finished product are considered direct materials. In some cases, materials are so immaterial in amount that they are considered part of overhead. Direct labor: Costs associated with labor engaged in manufacturing activities. Sometimes this is considered as the labor that is actually responsible for converting the materials into finished product. Assembly workers, cutters, finishers and similar ―hands on‖ personnel are classified as direct labor. Manufacturing All other costs directly related to product manufacture. These costs overhead: include the indirect labor and materials, costs related to the facilities and equipment required to carry out manufacturing operations, supervisory costs, and all other support activities. 2-9. Gross margin is the difference between revenue (sales) and cost of goods sold. Contribution margin is the difference between revenue (sales) and variable cost. 2-10. Contribution margin is likely to be more important, because it reflects better how profits will change with decisions. 2-11. Step costs change with volume in steps, such as when supervisors are added. Semivariable or mixed costs have elements of both fixed and variable costs. Utilities and maintenance are often mixed costs. 2-12. Total variable costs change in direct proportion to a change in volume (within the relevant range of activity). Total fixed costs do not change as volume changes (within the relevant range of activity). ©The McGraw-Hill Companies, Inc., 2017 30 Fundamentals of Cost Accounting 2-13. A value income statement typically uses a contribution margin framework, because the contribution margin framework is more useful for managerial decision-making. In addition, it splits out value-added and non value-added costs. Therefore, it differs in two ways from the gross margin income statement: classifying costs by behavior and highlighting value-added and non value-added costs. It differs from the contribution margin income statement by highlighting the value-added and non value-added costs. 2-14. A value income statement is useful to managers, because it provides information that is useful for them in identifying and eliminating non value-added activities. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 31 Solutions to Critical Analysis and Discussion Questions 2-15. The statement is not true. Materials can be direct or indirect. Indirect materials include items such as lubricating oil, gloves, paper supplies, and so on. Similarly, indirect labor includes plant supervision, maintenance workers, and others not directly associated with the production of the product. 2-16. No. Statements such as this almost always refer to the full cost per unit, which includes fixed and variable costs. Therefore, multiplying the cost per seat-mile by the number of miles is unlikely to give a useful estimate of flying one passenger. We should multiply the variable cost per mile by 1,980 miles to estimate the costs of flying a passenger from Detroit to Los Angeles. 2-17. Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations. However, for decision making or assessing product profitability, marketing and administrative costs that can be reasonably associated with the product (productspecific advertising, for example) are just as important as the manufacturing costs. 2-18. There is no ―correct‖ answer to this allocation problem. Common allocation procedures would include: (1) splitting the costs equally (25% each), (2) dividing the costs by the miles driven and charging based on the miles each person rides, (3) charging the incremental costs of the passengers (almost nothing), assuming you were going to drive to Texas anyway. 2-19. The costs will not change. Your allocation in 2-18 was not ―incorrect,‖ because the purpose of the allocation is not to determine incremental costs. 2-20. Answers will vary. The major cost categories include servers (mostly fixed), personnel (mostly fixed), and licensing costs (mostly variable). ©The McGraw-Hill Companies, Inc., 2017 32 Fundamentals of Cost Accounting 2-21. Answers will vary. The major cost categories include servers (mostly fixed), personnel (mostly fixed), and legal costs (mostly fixed). There are only small variable costs for Uber or Lyft. For the drivers, the costs of the vehicle and technology are mostly fixed. Vehicle operating expenses (fuel and maintenance) are mostly variable. 2-22. Direct material costs include the cost of supplies and medicine. One possible direct labor cost would be nursing staff assigned to the unit. Indirect costs include the costs of hospital administration, depreciation on the building, security costs, and so on. 2-23. Answers will vary. Common suggestions are number of students in each program, usage (cafeteria: meals; library: study rooms reserved; or career placement: interviews, for example), assuming usage is measured, or revenue (tuition dollars). 2-24. No, R&D costs are relevant for many decisions. For example, should a program of research be continued? Was a previous R&D project profitable? Should we change our process of approving R&D projects? R&D costs are expensed (currently) for financial reporting, but for managerial decision-making the accounting treatment is not relevant. 2-25. This question can create a good discussion of the different roles of financial and managerial accounting. An important issue is identifying the activities that are non value-added. These are almost certainly better known to the managers of the firm than to outsiders. These costs are also difficult to measure, meaning there are many different ―reasonable‖ numbers that might be reported. Because managers have an interest in reporting favorable numbers (however favorable is defined), there is a potential for managerial bias in the reports. A second reason is that most firms would be concerned about revealing potentially valuable competitive information. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 33 Solutions to Exercises 2-26. (15 min.) Basic Concepts. a. b. c. False. The statement refers to an expense. For example, R&D costs are incurred in expectation of future benefits. False. Variable costs can be direct (direct materials) or indirect (lubricating oil for machines that produce multiple products.) True. Each unit of a product has the same amount of direct material (same cost per unit), but producing more units requires more material (and more cost). 2-27. (15 min.) Basic Concepts. Cost Item a. b. c. d. e. f. g. h. i. j. 2-28. Fixed (F) Period (P) Variable (V) Product (M) Depreciation on buildings for administrative staff offices…… Cafeteria costs for the factory ………………………………………. Overtime pay for assembly workers ………………………………. Transportation-in costs on materials purchased ……………… Salariesof top executives in the company ………………………. Sales commissions for sales personnel …………………………. Assembly line workers’ wages ……………………………………… Controller’s office rental ………………………………………………. Administrative support for sales supervisors …………………… Energy to run machines producing units of output in the factory…………….. ……………………………………………………….. F F V V F V V F F P M M M P P M P P V M (10 min.) Basic Concepts. a. Assembly line worker’s salary. …………………………………………………………… b. Direct materials used in production process. ……………………………………….. c. Property taxes on the factory. ……………………………………………………………. d. Lubricating oil for plant machines. ……………………………………………………… e. Transportation-in costs on materials purchased. ………………………………….. B P C C P ©The McGraw-Hill Companies, Inc., 2017 34 Fundamentals of Cost Accounting 2-29. (15 min.) Basic Concepts. 9 2 10 8 7 6 5 1 3 4 11 2-30. Concept Definition Period cost ……………………Cost that can more easily be attributed to time intervals. Indirect cost …………………..Cost that cannot be directly related to a cost object. Fixed cost ……………………..Cost that does not vary with the volume of activity. Opportunity cost …………….Lost benefit from the best forgone alternative. Outlay cost ……………………Past, present, or near-future cash flow. Direct cost …………………….Cost that can be directly related to a cost object. Expense ……………………….Cost charged against revenue in a particular accounting period. Cost ……………………………..Sacrifice of resources. Variable cost …………………Cost that varies with the volume of activity. Full absorption cost ………..Cost used to compute inventory value according to GAAP. Product cost ………………….Cost that is part of inventory. (15 min.) Basic Concepts. Fixed (F) Period (P) Variable (V) Product (M) Cost Item a. Power to operate factory equipment ………………………….. b. Chief financial officer’s salary……………………………………. c. Commissions paid to sales personnel ………………………… d. Office supplies for the human resources manager ……….. e. Depreciation on pollution control equipment in the plant .. V F V F F M P P P M ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 35 2-31. (15 min.) Basic Concepts. a. b. c. d. e. f. g. h. i. Variable production cost per unit: ($360 + $60 + $15 + $30) …………………..$465 Variable cost per unit: ($465 + $45) …………………………………………………….$510 Full cost per unit: [$510 + ($225,000 ÷ 1,500 units)] ………………………………$660 Full absorption cost per unit: [$465 + ($135,000 ÷ 1,500)] ………………………$555 Prime cost per unit. (materials + labor + outsource) ………………………………$435 Conversion cost per unit: (labor + overhead + outsource) ………………………$540 Contribution margin per unit: ($900 – $510)………………………………………..$390 Gross margin per unit: ($900 – full absorption cost of $555)…………………..$345 Suppose the number of units decreases to 1,250 units per month, c, d, f which is within the relevant range. Which parts of (a) through (h) will and h change? For each amount that will change, give the new amount for will a volume of 1,250 units. change , as follows c. Full cost = $510 + ($225,000 ÷ 1,250) = $690 d. Full absorption cost = $465 + ($135,000 ÷ 1,250) = $573 f. Conversion costs = $360 + $30 + ($135,000 ÷ 1,250) + $60 = $558 h. Gross margin = $900 – $573 = $327 2-32. (15 min.) Basic Concepts: Intercontinental, Inc. a. b. c. d. e. f. g. h. i. Prime cost per unit: (materials + labor) ………………………………………………..$40 Contribution margin per unit: ($100 – $72) …………………………………………$28 Gross margin per unit: ($100 – full absorption cost of $74)…………………….$26 Conversion cost per unit: (labor + overhead) ………………………………………..$50 Variable cost per unit: ($60 + $12) ………………………………………………………$72 Full absorption cost per unit: [$60 + ($4,200,000 ÷ 300,000)] ………………….$74 Variable production cost per unit: ($16 + $24+ $20) ………………………………$60 Full cost per unit. [$72+ ($5,400,000 ÷ 300,000 units)] …………………………..$90 Suppose the number of units increase to 400,000 units per month, c, d, f which is within the relevant range. Which parts of (a) through (h) will and h change? For each amount that will change, give the new amount will for a volume of 400,000 units. change, as follows c. Gross margin = $100.00 – $70.50 = $29.50 d. Conversion costs = $16 + $20+ ($4,200,000 ÷ 400,000) = $46.50 f. Full absorption cost = $60 + ($4,200,000 ÷ 400,000) = $70.50 h. Full cost = $72 + ($5,400,000 ÷ 400,000) = $85.50 ©The McGraw-Hill Companies, Inc., 2017 36 Fundamentals of Cost Accounting 2-33. (15 min.) Cost Allocation—Ethical Issues This problem is based on the experience of the authors’ research at several companies. a. Answers will vary as there are several defensible bases on which to allocate the product development costs. As an example, many government-purchasing contracts are based on the cost of the product or service. In this case, using expected sales (units or revenue) leads to a potential circularity. Price depends on cost, which depends on sales, which depends on price. b. The company has an incentive to allocate as much cost as possible to government sales. This cost will be reimbursed (and the government may be less pricesensitive). Of course, the government recognizes this and has detailed allocation guidelines in place and an agency (the Defense Contract Audit Agency) that monitors contracts and the allocation of costs. 2-34. (15 min.) Cost Allocation—Ethical Issues This problem is based on the experience of the authors’ research at several companies. a. Answers will vary as there are several defensible bases on which to allocate the common costs. One possibility is relative sales revenue. (We ignore here whether we should allocate these costs, something we discuss in chapter 4.) b. You should explain to Star that you cannot agree with the allocation basis, especially given the reason for selecting the basis. If this fails to persuade Star, you should disclose to Star’s boss your disagreement with the analysis and the relation between Star and the vendor. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 37 2-35. (30 min.) Parts. Prepare Statements for a Manufacturing Company: Tappan Tappan Parts Cost of Goods Sold Statement For the Year Ended December 31 Beginning work in process inventory ………….. $1,354,000 Manufacturing costs: Direct materials: Beginning inventory ………………………….. $962,000 Purchases ……………………………………….. 1,118,000 (a)* Materials available …………………………. $2,080,000 Less ending inventory ……………………….. 884,000 Direct materials used ……………………… $1,196,000 Other manufacturing costs …………………. 310,000 ** Total manufacturing costs ………………. 1,506,000 (c) Total costs of work in process …………….. $2,860,000 Less ending work in process …………… 1,430,000 Cost of goods $ 1,430,000 (b) manufactured …………………………………………. Beginning finished goods inventory……………. 312,000 Finished goods available for sale ………………. $ 1,742,000 Ending finished goods inventory ……………….. 364,000 Cost of goods sold ………………………………….. $1,378,000 * Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. ** Difference between total manufacturing costs of $1,506,000 and direct materials used of $1,196,000. ©The McGraw-Hill Companies, Inc., 2017 38 Fundamentals of Cost Accounting 2-36. (10 min.) Service. Prepare Statements for a Service Company: Chuck’s Brokerage ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 39 2-37. Prepare Statements for a Service Company: Where2 Services. Formatted: Font: 12 pt ©The McGraw-Hill Companies, Inc., 2017 40 Fundamentals of Cost Accounting 2-38. (10 min.) Prepare Statements for a Service Company: Remington Advisors Sales revenue …………………………….. Cost of services sold (b) ……………….. Gross margin………………………………. Marketing and administrative costs (a) …………………………………….. Operating profit …………………………… $1,700,000 890,000 $810,000 (Given) (Sales revenue – gross margin) (Given) 505,000 $305,000 (Gross margin – operating profit) (Given) ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 41 2-39. (20 min.) Prepare Statements for a Service Company: Lead! Inc. You can solve this in the order shown below. Lead!, Inc. Income Statement For the Month Ended April 30 a Sales revenue …………………………………………………………………………….. $600,000 c Cost of services sold ……………………………………………………………………. 384,000 Gross margin ……………………………………………………………………………… $216,000 d Marketing and administrative costs ………………………………………………… 96,000 e Operating profit ($600,000 x 20%) …………………………………………………. $120,000 b a. Given b. $120,000 = 20% x $600,000. c. To find the cost of services sold plus marketing and administrative costs, start with the operating profit (b). Then cost of services plus marketing and administrative costs is $480,000 (= $600,000 – $120,000). But, marketing and administrative costs equal 25% of cost of services sold, so, Cost of services sold + marketing and administrative costs = $480,000 and Marketing and adminstrative costs = .25 x Cost of services sold. Combining these equations yields, 1.25 x Cost of services sold = $480,000 or cost of services sold = $384,000 (= $480,000 ÷ 1.25). d. $216,000 = $600,000 – $384,000. e. $96,000 = 25% x $384,000. ©The McGraw-Hill Companies, Inc., 2017 42 Fundamentals of Cost Accounting 2-40. (30 min.) Prepare Statements for a Manufacturing Company: Crabtree Machining Company. CrabtreeMachining Company Cost of Goods Sold Statement For the Year Ended December 31 Beginning work-in-process inventory …. Manufacturing costs: Direct materials: Beginning inventory ………………….. $115,200 Purchases ……………………………….. 717,600 Materials available …………………. $832,800 Less ending inventory ……………….. 141,600 Direct materials used ……………… $ 691,200 (a)* Other manufacturing costs …………. 1,901,760 ** Total manufacturing costs ………. Total costs of work in process …….. Less ending work in process …… Cost of goods manufactured … Beginning finished goods inventory……. Finished goods available for sale ………. Ending finished goods inventory ……….. Cost of goods sold ………………………….. $ 139,200 2,592,960 (c) $ 2,732,160 134,400 $ 2,597,760 (b) 117,120 $ 2,714,880 108,000 $2,606,880 * The best approach to solving this problem is to lay out the format of the Cost of Goods Sold Statement first, then fill in the amounts known. Next find the subtotals that are possible (e.g., Finished goods available for sale). Finally, solve for letters (a), (b), and (c) where (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. ** Difference between total manufacturing costs and direct materials used. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 43 2-41. (15 min.) Basic Concepts: Monroe Fabricators a. b. c. d. From the basic inventory equation, Beginning Inventory + Transferred in = Transferred out + Ending Inventory, so Ending Materials Inventory, December 31, = Beginning balance + Transferred in – Transferred out = $7,800 +$48,300-$43,800 …………………………………………. Total manufacturing costs = Cost of goods manufactured – Beginning work-in-process + Ending work-in-process = $163,350– $8,100+ $11,400 ……………………………………… (also can be found solving for Transferred in to Finished Goods) Total manufacturing costs = Direct materials + Direct labor + Manufacturing overhead, so, Direct labor = Total manufacturing costs – Direct materialsused – Manufacturing overhead, = $166,650 – $43,800 – $41,400 ………………………………….. Sales revenue = Gross margin+ Cost of Goods Sold = $147,750+ $168,150 ………………………………………………… = $12,300 = $166,650 = $81,450 = $315,900 ©The McGraw-Hill Companies, Inc., 2017 44 Fundamentals of Cost Accounting 2-42. (15 min.) Basic Concepts: Talmidge Co. a. b. c. d. From the basic inventory equation, Beginning work-in-process inventory + Total manufacturing cost = Cost of goods manufactured + Ending work-in-process inventory, so Ending work-in-process inventory, March 31, = Beginning balance + Total manufacturing cost – Cost of goods manufactured = $10,000+ $254,000– $260,000 ………………………………….. Purchases of direct materials = Ending direct materials inventory + Direct materials used – Beginning materials inventory = $27,000+ $62,000– $32,000 ……………………………………… (also can be found solving for Transferred in to Finished Goods) Cost of goods sold = Sales revenue – Gross Margin = $480,000 – $170,000 ……………………………………………….. Manufacturing overhead = Total manufacturing cost – Direct materials used – Direct labor = $254,000 – $62,000 – $120,000 ………………………………… = $4,000 = $57,000 = $310,000 = $72,000 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 45 2-43. (15 min.) Apparel. Prepare Statements for a Merchandising Company: Angie’s Angie’s Apparel Income Statement For the Month Ended July 31 Sales revenue …………………………………………………………………………….. Cost of goods sold (see statement below) ………………………………………. Gross margin ……………………………………………………………………………… Marketing and administrative costs ($42,000 + $27,000 + $9,000 + $16,500) ………………………………………… Operating profit …………………………………………………………………………… Angie’s Apparel Cost of Goods Sold Statement For the Month Ended July 31 Merchandise inventory, July 1 ………………………………………. Merchandise purchases ……………………………………………….$360,000 Transportation-in ………………………………………………………… 27,000 Total cost of goods purchased ……………………………………… Cost of goods available for sale ……………………………………. Merchandise inventory, July 31 …………………………………….. Cost of goods sold ……………………………………………………… $570,000 388,500 $181,500 94,500 $87,000 $ 9,000 387,000 $396,000 7,500 $388,500 ©The McGraw-Hill Companies, Inc., 2017 46 Fundamentals of Cost Accounting 2-44. (15 min.) Prepare Statements for a Merchandising Company: University Electronics. University Electronics Income Statement For the Year Ended February 28 Sales revenue …………………………………………………………………………….. $4,000,000 Cost of goods sold (see statement below) ………………………………………. 2,830,000 Gross margin ……………………………………………………………………………… $1,170,000 Marketing and administrative costs ($220,000 + $135,000 + $290,000 + $650,000) ……………………………….. 1,295,000 Operating profit (loss)…………………………………………………………………… $(125,000) University Electronics Cost of Goods Sold Statement For the Year Ended February 28 Merchandise inventory, March 1 …………………………………… Merchandise purchases ………………………………………………. $2,750,000 Transportation-in ………………………………………………………… 105,000 Total cost of goods purchased ……………………………………… Cost of goods available for sale ……………………………………. Merchandise inventory, February 28 ……………………………… Cost of goods sold ……………………………………………………… $ 185,000 2,855,000 $3,040,000 210,000 $2,830,000 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 47 2-45. (10 min.) Cost Behavior for Forecasting: Dayton, Inc. The variable costs will be 20 percent higherbecause there will be anincrease of 36,000 – 30,000 = 6,000 units (20% = 6,000 ÷ 30,000). Variable costs: Direct materials used ($510,000 x 1.2) …………………………… Direct labor ($1,120,000 x 1.2)………………………………………. Indirect materials and supplies ($120,000 x 1.2)………………. Power to run plant equipment ($140,000 x 1.2) ……………….. Total variable costs ……………………………………………………… Fixed costs: Supervisory salaries…………………………………………………….. Plant utilities (other than power to run plant equipment) ……. Depreciation on plant and equipment …………………………….. Property taxes on building ……………………………………………. Total fixed costs ………………………………………………………….. Total costs for 36,000 units ……………………………………………… Unit costs (= $3,024,000 ÷ 36,000) …………………………………… $ 612,000 1,344,000 144,000 168,000 $2,268,000 $ 470,000 120,000 67,500 98,500 756,000 $3,024,000 $84 Note that the variable cost per unit is $63 at both 30,000 units and at 36,000 units. Total variable cost at 30,000 units is $1,890,000 (=$510,000 + $1,120,000 + $120,000 + $140,000). Unit variable cost = $63 per unit = ($1,890,00030,000 units) or ($2,268,000 36,000 units). ©The McGraw-Hill Companies, Inc., 2017 48 Fundamentals of Cost Accounting 2-46. (30 min.) Components of Full Costs: MadridCorporation a. Variable manufacturing cost: $270 + $165 + $60= $495 b. Variable cost: $270 + $165 + $60 + $18 = $513 c. Full absorption cost: $270 + $165 + $60 + ($162,000 ÷ 1,800 units) = $585 d. Full cost: $270 + $165 + $60 + $18 + ($162,000 ÷ 1,800 units) + ($108,000 ÷ 1,800 units) = $663 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 49 2-47. (15 min.) Components of Full Costs: Madrid Corporation. a. Product cost = Direct materials + Direct labor + Manufacturing overhead. Product cost per unit: $270 + $165 + $60 + ($162,000 ÷ 1,800 units) = $585 b. Period costs = Marketing and administrative costs. Period costs for the period: $108,000 + ($18 x 1,800 units) = $140,400 ©The McGraw-Hill Companies, Inc., 2017 50 Fundamentals of Cost Accounting 2-48. (30 min.) Components of Full Cost: Larcker Manufacturing. a. Variable cost: $21.00 + $24.00 + $12.00 + $5.00 = $62.00 b. Variable manufacturing cost: $21.00 + $24.00 + $12.00 = $57.00 c. Full-absorption cost: $21.00 + $24.00 + $12.00 + ($135,000 ÷ 30,000 units) = $61.50 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 51 2-48. (continued) d. Full cost: $21.00 + $24.00 + $12.00 + ($135,000 ÷ 30,000 units) + $5.00 + ($117,000÷ 30,000 units)= $70.40 e. Profit margin = Sales price – full cost = $79.00 – $70.40 = $8.60 f. Gross margin = Sales price – full absorption cost = $79.00 – $61.50 = $17.50 g. Contribution margin = Sales price – variable cost = $79.00 – $62.00 = $17.00 ©The McGraw-Hill Companies, Inc., 2017 52 Fundamentals of Cost Accounting 2-49. (20 Min.) Gross Margin and Contribution Margin Income Statements: Larcker Manufacturing. Gross Margin Income Statement Sales revenue(a) …………. $2,370,000 …………………………………. Variable manufacturing costs (b) …………………….. 1,710,000 Fixed manufacturing overheadcosts …………….. …………………………………. …………………………………. Gross margin………………. Variable marketing and administrative costs (c)…. Fixed marketing and administrative costs ……… Operating profit …………… 135,000 $525,000 150,000 117,000 $258,000 Contribution Margin Income Statement Sales revenue ………………… $2,370,000 Variable manufacturing costs …………………………….. Variable marketing and administrative costs ………… 1,710,000 Contribution margin…………. Fixed manufacturing overhead costs……………….. Fixed marketing and administrative costs ………… Operating profit ………………. $510,000 150,000 135,000 117,000 $258,000 (a) $79 x 30,000 units = $2,370,000 (b) $57 x 30,000 units = $1,710,000; $57 = ($21 direct material + $24 direct labor +$12 variable manufacturing overhead). (c) $5 x 30,000 units = $150,000 2-50. (20 Min.) Gross Margin and Contribution Margin Income Statements: Niles Castings. Gross Margin Income Statement Sales revenue ……………. Variable manufacturing costsa ………………………… Fixed manufacturing costs ………………… Gross margin………………. Variable marketing and administrative costs ……… Fixed marketing and administrative costs ……… Operating profit …………… $264,000 119,000 44,000 $ 101,000 Contribution Margin Income Statement Sales revenue ………………… Variable manufacturing costs ……………………………… Variable marketing and administrative costs …………. Contribution margin …………. Fixed manufacturing costs… $264,000 119,000 13,600 $131,400 44,000 13,600 32,000 $ 55,400 Fixed marketing and administrative costs …………. Operating profit……………….. 32,000 $55,400 a Variable manufacturing costs = $68,000 + $34,000 + $17,000 = $119,000 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 53 2-51. (20 Min.) Gross Margin and Contribution Margin Income Statements: Alpine Coffee Roasters. Gross Margin Income Statement Sales revenuea…………………. $230,400 Variable manufacturing costsb ……………………………… 126,000 Fixed manufacturing overhead costsc ……………….. 45,000 Gross margin……………………. $59,400 Variable marketing and administrative costsd …………. 10,800 Fixed marketing and administrative costse …………. 18,000 Operating profit ………………… $30,600 Contribution Margin Income Statement Sales revenue …………………… $230,400 Variable manufacturing costs ……………………………….. 126,000 Variable marketing and administrative costs …………… 10,800 Contribution margin …………… $93,600 Fixed manufacturing overhead costs …………………. 45,000 Fixed marketing and administrative costs …………… 18,000 Operating profit …………………. $30,600 a Revenue = $6.40 x 36,000 = $230,400 b Variable manufacturing costs = ($3.00 + $0.40 + $0.10) x 36,000 = $126,000 c Fixed manufacturing overhead costs = $1.25 x 36,000 = $45,000 d Variable marketing and administrative costs = $0.30 x 36,000 = $10,800 e Fixed marketing and administrative costs = $0.50 x 36,000 = $18,000 ©The McGraw-Hill Companies, Inc., 2017 54 Fundamentals of Cost Accounting 2-52. (30 min.) Value Income Statement: Ralph’s Restaurant. a. Ralph’s Restaurant Value Income Statement For the year 2 ending December 31 NonvalueValueadded added activities activities Sales revenue …………………………………. $1,000,000 Cost of merchandise ………………………… Cost of food serveda …………………….. $ 52,500 297,500 Gross margin ………………………………….. $ (52,500) $ 702,500 Operating expenses …………………………. Employee salaries and wagesb ………. 37,500 212,500 Managers’ salariesc………………………. 20,000 80,000 Building costsd …………………………….. 30,000 120,000 Operating income (loss) ……………………. $(140,000) $ 290,000 Total $1,000,000 350,000 $ 650,000 250,000 100,000 150,000 $ 150,000 a 15% nonvalue-added activities (= 5% not used + 10% incorrectly prepared) b 15% nonvalue-added activities c 20% nonvalue-added activities d 20% unused and nonvalue-added activities b. The information in the value income statement enables Ralph to identify nonvalueadded activities. He could eliminate such activities without reducing value to customers. Ralph can take steps to ensure that food is used prior to the expiration date, either by changing scheduling or purchasing procedures. He can also spend time training staff to take orders more carefully. Preparing a Year 3 statement helps Ralph see whether the company is improving in reducing nonvalue-added activities. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 55 2-53. (30 min.) a. Value Income Statement: DeLuxe Limo Service. b. The information in the value income statement enables the managers at DeLuxe to identify nonvalue-added activities. They could eliminate such activities without reducing value to customers. They can take steps to improve how directions are given to drivers and reduce customer complaints, for example. By preparing the same information in April, they can see how DeLuxe is improving (or becoming worse) in reducing nonvalue-added activities. ©The McGraw-Hill Companies, Inc., 2017 56 Fundamentals of Cost Accounting Solutions to Problems 2-54. (30 min.) Cost Concepts: Chelsea, Inc. a. Prime costs = direct materials + direct labor Direct materials = beginning inventory + purchases – ending inventory = $9,000 + $120,000 – $7,500 = $121,500 Direct labor is given as $96,000 Prime costs = $121,500 + $96,000 = $217,500 b. Conversion costs = Direct labor + Manufacturing overhead Conversion costs = $96,000 + $126,000 = $222,000 c. Total manufacturing costs = Direct materials + Direct labor + Manufacturing overhead = $121,500 (from a above) + $96,000 + $126,000 = $343,500 d. Cost of goods Beginning Work In Process + Total manufacturing costs manufactured = – Ending Work In Process = $4,500 + $343,500 (from c above) – $3,000 = $345,000 e. Cost of Cost of Goods = Goods + Sold Manufactured = = $345,000 + (from d above) $336,000 Beginning Finished Goods Inventory $27,000 – – Ending Finished Goods Inventory $36,000 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 57 2-55. (30 Minutes) Cost Concepts: Lawrence Components. a. $58,000. Prime costs Direct materials used b. = Direct materials used + Direct labor costs = Prime costs – Direct labor costs = $98,000 – $40,000 = $58,000 $12,000. Direct materials used Direct materials, beginning inventory = Beginning inventory + purchases – ending inventory = Direct materials used – purchases + ending inventory $58,000 – $56,000 + $10,000 = $12,000 c. $120,000. Total manufacturing costs Conversion cost d. = Prime costs + Conversion costs – Direct labor cost = Total manufacturing costs – Prime costs + Direct labor cost = $178,000 – $98,000 + $40,000 = $120,000 $4,000. Work-in-process, ending = Work-in-process, beginning + Total manufacturing costs – Cost of goods manufactured $6,000 + $178,000 – $180,000 = $4,000 e. $80,000. Conversion cost = Direct labor costs + Manufacturing overhead Manufacturing overhead = Conversion costs – Direct labor costs = $120,000 – $40,000 = $80,000 ©The McGraw-Hill Companies, Inc., 2017 58 Fundamentals of Cost Accounting 2-55. (continued) f. $10,000. Cost of goods sold Finished goods, beginning = Finished goods, beginning + Cost of goods manufactured – Finished goods, ending = Cost of goods sold – Cost of goods manufactured + Finished goods, ending $142,000 – $180,000 + $48,000 = $10,000 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 59 2-56. (30 minutes) Cost Concepts: Columbia Products. a. Amounts per unit: (1) $217. Variable manufacturing cost Manufacturing overhead + Direct labor + Direct materials = $70 + $35 + $112 = $217 = (2) $362. Full unit cost = All unit fixed costs + All unit variable costs Unit fixed manufacturing = ($50,400 ÷ 900 units) = $56 Unit fixed marketing and administrative cost = ($67,500 ÷ 900 units) = $75 = $56 + $75 + $35 + $112 + $70 + $14 = $362 (3) $231. Variable cost = All variable unit costs = $14 + $70 + $35 + $112 = $231 (4) $273. Full absorption cost = Fixed and variable manufacturing overhead + Direct labor + direct materials = $56 + $70 + $35 + $112 = $273 (5) $147. Prime cost = Direct labor + Direct materials = $35 + $112 = $147 ©The McGraw-Hill Companies, Inc., 2017 60 Fundamentals of Cost Accounting 2-56. (continued) (6) $161. Conversion cost = Direct labor + Manufacturing overhead = $35 + ($70 + $56) = $161 (7) $86. Profit margin = Sales price – Full cost = $448 – $362 = $86 (8) $217. Contribution margin = Sales price – Variable costs = $448 – $231 = $217 (9) $175. Gross margin = Sales price – Full absorption cost = $448 – $273 = $175 b. As the number of units increases (reflected in the denominator), fixed manufacturing cost per unit (and the total cost per unit) decreases. The numerator (i.e., total fixed costs) remains the same. However, that does not mean Columbia should produce more units. That decision should be based on the total profits (revenues minus costs), not on unit profits. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 61 2-57. (30 min.) Prepare Statements for a Manufacturing Company: Yolo Windows. Yolo Windows Statement of Cost of Goods Sold For the Year Ended December 31 ($000) Work in process, Jan. 1…………………………………… Manufacturing costs: Direct materials: Beginning inventory, Jan. 1 ……………………….. $ 36 Add material purchases ……………………………. 3,280 Direct materials available ………………………….. 3,316 Less ending inventory, Dec. 31 ………………….. 32 Direct materials used ……………………………….. Direct labor ………………………………………………… Manufacturing overhead: Indirect factory labor ………………………………… 1,120 Indirect materials and supplies…………………… 280 Factory supervision ………………………………….. 840 Factory utilities ………………………………………… 360 Factory and machine depreciation ……………… 4,640 Property taxes on factory ………………………….. 112 Total manufacturing overhead ………………… Total manufacturing costs …………………… Total cost of work in process during the year ……… Less work in process, Dec. 31 ………………………. Costs of goods manufactured during the year Beginning finished goods, Jan. 1 ……………………… Finished goods inventory available for sale ……….. Less ending finished goods inventory, Dec. 31 …… Cost of goods sold …………………………………………. $ 48 $ 3,284 4,240 7,352 14,876 14,924 56 14,868 656 15,524 588 $14,936 ©The McGraw-Hill Companies, Inc., 2017 62 Fundamentals of Cost Accounting 2-57. (continued) Yolo Windows Income Statement For the Year Ended December 31 ($000) Sales revenue …………………………………………………………………. $18,160 Less: Cost of goods sold …………………………………………………..14,936 Gross margin …………………………………………………………………..$3,224 Administrative costs …………………………………………………………. $1,440 Marketing costs……………………………………………………………….. 600 Total marketing and administrative costs…………………………….. 2,040 Operating profit ………………………………………………………………..$1,184 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 63 2-58. (30 min.) Prepare Statements for a Manufacturing Company: Mesa Designs. Mesa Designs Statement of Cost of Goods Sold For the Year Ended December 31 ($000) Work in process, Jan. 1…………………………………… Manufacturing costs: Direct materials: Beginning inventory, Jan. 1 ……………………….. $ 96 Add materials purchases ………………………….. 10,300 Direct materials available ………………………….. $10,396 Less ending inventory, Dec. 31 ………………….. 110 Direct materials used ……………………………….. Direct labor ………………………………………………… Manufacturing overhead: Depreciation (factory) ……………………………….. $5,560 Depreciation (machines) …………………………… 9,240 Indirect labor (factory) …………………………………….. 3,340 Indirect materials (factory)…………………………. 960 Property taxes on factory ………………………….. 370 Utilities (factory) ………………………………………. 1,060 Total manufacturing overhead ………………… Total manufacturing costs …………………… Total cost of work in process during the year ……… Less work in process, Dec. 31 ………………………. Costs of goods manufactured during the year Beginning finished goods, Jan. 1 ……………………… Finished goods inventory available for sale ……….. Less ending finished goods inventory, Dec. 31 …… Cost of goods sold …………………………………………. $ 152 $10,286 13,000 20,530 43,816 $43,968 136 $43,832 1,974 $45,806 2,026 $43,780 ©The McGraw-Hill Companies, Inc., 2017 64 Fundamentals of Cost Accounting 2-58. (continued) Mesa Designs Income Statement For the Year Ended December 31 ($000) Sales revenue …………………………………………………………………. $60,220 Less: Cost of goods sold …………………………………………………..43,780 Gross margin ………………………………………………………………….. $ 16,440 Administrative costs …………………………………………………………. $4,200 Selling costs……………………………………………………………………. 2,140 Total marketing and administrative costs…………………………….. 6,340 Operating profit ……………………………………………………………….. $10,100 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 65 2-59. (30 min.) & Die. Prepare Statements for a Manufacturing Company: Billings Tool . Billings Tool & Die Statement of Cost of Goods Sold For the Year Ended December 31 ($ 000) Beginning work in process, Jan. 1………………………… Manufacturing costs: Direct materials: Beginning inventory, Jan. 1 …………………………… $ 72 Add: Purchases …………………………………………… 21,900 Direct materials available ………………………….. 21,972 Less ending inventory, Dec. 31 ……………………… 84 Direct materials used ………………………………… Direct labor ……………………………………………………. Manufacturing overhead: Indirect factory labor ……………………………………. 5,472 Factory supervision ……………………………………… 2,940 Indirect materials and supplies………………………. 4,110 Building utilities (90% of total) ……………………….. 6,750 Building & machine depreciation (75% of $5,400) 4,050 Property taxes—factory (80% of total) ……………. 4,032 Total manufacturing overhead ……………………. Total manufacturing costs ………………………. Total cost of work in process during the year …………. Less work in process, Dec. 31 ………………………….. Costs of goods manufactured during the year ….. Beginning finished goods, Jan. 1 …………………………. Finished goods available for sale …………………………. Less ending finished goods, Dec. 31 ……………………. Cost of goods sold …………………………………………….. $ 192 $21,888 5,040 27,354 54,282 54,474 174 54,300 324 54,624 390 $ 54,234 ©The McGraw-Hill Companies, Inc., 2017 66 Fundamentals of Cost Accounting 2-59. (continued) BillingsTool & Die Income Statement For the Year Ended December 31 ($ 000) Sales revenue …………………………………………………….. Less: Cost of goods sold (per statement)………………… Gross profit ………………………………………………………… Marketing and administrative costs: Depreciation (25% of total) ………………………………… $ 1,350 Utilities (10% of total)………………………………………… 750 Property taxes (20% of total) ……………………………… 1,008 Administrative costs………………………………………….. 9,600 Marketing costs ……………………………………………….. 5,226 Total marketing and administrative costs …………….. Operating profit …………………………………………………… $77,820 54,234 $ 23,586 17,934 $ 5,652 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 67 2-60. (10 Min.) Cost Allocation with Cost Flow Diagram: Coastal Computer. a. (1) (2) Main Street Number of computers sold…….. 2,000 Percentage ………………………… 55.56% Allocated Accounting Department cost ($180,000) ….. $100,000 Lakeland Mall 1,600 44.44% Total 3,600 100% $80,000 $180,000 Main Street Revenue …………………………….. $1,000,000 Percentage …………………………. 33.33% Allocated Accounting Department cost ($180,000) ….. $60,000 Lakeland Mall $2,000,000 66.67% Total $3,000,000 100% $120,000 $180,000 b. a33.33% = $1,000,000 ÷ ($1,000,000 + $2,000,000) b 66.67% = $2,000,000 ÷ ($1,000,000 + $2,000,000) ©The McGraw-Hill Companies, Inc., 2017 68 Fundamentals of Cost Accounting 2-61. (20 Min.) Cost Allocation with Cost Flow Diagram: Wayne Casting, Inc. a. (1) (2) (3) Chillicothe Metals Material purchased (tons) ……… 130 Percentage ………………………… 52% Allocated waste handling cost ($300,000) ……………………. $156,000 Ames Supply 120 48% Total $144,000 $300,000 Chillicothe Metals Amount of waste (tons) …………. 12.8 Percentage …………………………. 85.33% Allocated waste handling cost ($300,000) ……………………. $256,000 Ames Supply 2.2 14.67% Total $44,000 $300,000 Chillicothe Metals Cost of materials purchased ….. $624,000 Percentage ………………………… 41.6% Allocated waste handling cost ($300,000) ……………………. $124,800 Ames Supply $876,000 58.4% Total $1,500,000 100% $175,200 $300,000 250 100% 15 100% ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 69 2-61. (continued) b. a52% = 130 tons ÷ (130 tons + 120 tons) b48% = 120 tons ÷ (130 tons + 120 tons) ©The McGraw-Hill Companies, Inc., 2017 70 Fundamentals of Cost Accounting 2-62. (20 Min.) Cost Allocation with Cost Flow Diagram: Pacific Business School. a. Number of students …………………. Percentage ………………………… Credit Hours …………………………… Percentage ………………………… Undergraduate 900 60% 13,500 45% Allocation of student-related costsa………………………………… Allocation of credit-hour costsb ….. Total Allocations ………………….. $1,350,000 803,250 $2,153,250 Graduate 600 40% 16,500 55% $900,000 981,750 $1,881,750 Total 1,500 100% 30,000 100% $2,250,000 1,785,000 $4,035,000 a $1,350,000 = 60% x $2,250,000; $900,000 = 40% x $2,250,000. b $803,250 = 45% x $1,785,000; $981,750 = 55% x $1,785,000. ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 71 2-62. (continued) b. a45% = 13,500 credithours ÷ (13,500 credithours + 16,500 credithours) b55% = 16,500 students ÷ (13,500 credithours + 16,500 credithours) c60% = 900 students ÷ (900 students + 600 students) d40% = 600 students ÷ (900 students + 600 students) ©The McGraw-Hill Companies, Inc., 2017 72 Fundamentals of Cost Accounting 2-63. a. b. (40 Min.) Find the Unknown Information. Finished goods + Cost of goods – Cost of = Finished goods beginning inventory manufactured goods sold ending inventory Finished goods + $88,800 – $87,040 = $14,080 beginning inventory Finished goods = $ 12,320 (= $14,080 – $88,800 + $87,040) beginning inventory Direct materials used Direct materials used Direct materials used + Direct labor + + $ 12,160 + = $42,400 Manufacturing = overhead Total manufacturing costs $23,040 $77,600 = (= $77,600 – $12,160 – $23,040) c. Gross margin % = Gross margin ÷ Sales revenue = (Sales revenue – COGS) ÷ Sales revenue Rearranging, Sales revenue = Cost of Goods Sold ÷ (1.0 – Gross Margin %) $87,040 ÷ (1.0 – .375) $87,040 ÷ 0.625 Sales revenue = $139,264 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 73 2-64. (40 Min.) Find the Unknown Information. a. b. c. Cost of goods sold = Finished goods Cost of goods Finished goods + – beginning inventory manufactured ending inventory = $22,320 + $611,650 – $38,770 Cost of goods sold = $595,200 Total manufacturing costs = $612,320 = Direct materials used Direct materials used Direct labor + Manufacturing overhead + $270,400 + $225,000 + Direct materials used = $116,920 Direct materials used = Beginning + inventory Materials purchased – Ending inventory $116,920 = $2,520 Materials purchased – $2,088 Materials purchased = $116,488 + (= $612,320 – $270,400 – $225,000) (= 116,920 – $2,520 + $2,088) d. Gross margin % = = 38% Gross margin ÷ Sales revenue (Sales revenue – ÷ Sales revenue Cost of goods sold) 38% x Sales revenue = Sales revenue – Cost of goods sold Cost of goods sold = Sales revenue – (38% x Sales revenue) Cost of goods sold = Sales revenue x (1 – 38%) Sales revenue = Cost of goods sold ÷ (100% – 38%) = $595,200 (from a) ÷ 62% $960,000 ©The McGraw-Hill Companies, Inc., 2017 74 Fundamentals of Cost Accounting 2-65. (40 min.) Cost Allocation and Regulated Prices: The City of Imperial Falls. a. The rate is 20 percent above the average cost of collection: Total cost of collection Total waste collected (tons) Average cost per pound Price per pound = $400,000 + $1,280,000 + $320,000 = $2,000,000 = 4,000 + 12,000 = 16,000 tons = 32,000,000 pounds = $2,000,000 ÷ 32,000,000 pounds = $.0625 per pound = $.0625 x 1.20 = $.075 per pound b. First, allocate costs to the two cost objects: households and businesses: Allocation of administrative costs and truck costs: Total costs Number of customers Allocated cost per customer = = = = = $400,000 + $1,280,000 $1,680,000 12,000 + 3,000 15,000 customers $1,680,000 ÷ 15,000 customers = $112 per customer Allocation of other collection costs: Total costs Total waste collected (tons) Allocated cost per ton of waste = = = = = $320,000 4,000 + 12,000 16,000 tons $320,000 ÷ 16,000 tons $20 per ton ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 75 2-65. (continued) Allocation to customer types: Households Allocation of customer cost: Allocated cost per customer ……………. $112 Number of customers …………………….. 12,000 Allocated cost ……………………………….. $1,344,000 Allocation of other costs: Allocated cost per ton …………………….. $20 Number of tons ……………………………… 4,000 Allocated cost ……………………………….. $80,000 Business Total allocated cost ………………………… $1,424,000 Total number of tons ………………………. 4,000 Number of pounds …………………………. 8,000,000 Average allocated cost per pound ……. $.1780 Price (= 1.20 x average cost) …………… $.2136 $576,000 12,000 24,000,000 $.0240 $.0288 $112 3,000 $336,000 $20 12,000 $240,000 c. Answers will vary. This problem illustrates that cost allocation can have an important effect on decisions when the allocated costs are used as if they are actual costs. In the current example, the proposed allocation approach allows the company to compete with other haulers for business customers because they maintain a monopoly on the household business. ©The McGraw-Hill Companies, Inc., 2017 76 Fundamentals of Cost Accounting 2-66. (30 min.) Reconstruct Financial Statements: San Ysidro Company. aMaterials used is given, but this number is not. To obtain it, Beg. Bal. + Purchases = Mat. Used + End. Bal. Beg. Bal. = Mat. Used + End. Bal. – Purchases $309,880 = $1,069,880 + $248,000 – $1,008,000 bTotal labor = Indirect labor + Direct labor = $1,209,600 = 0.08 Direct labor + Direct labor Direct labor = $1,209,600 ÷ 1.08 = $1,120,000 Indirect labor = 0.08 x $1,120,000 = $89,600 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 77 2-66 (continued) a Total depreciation = Depreciation on plant + Depreciation on administrative building portion Depreciation on plant is 80% of the total depreciation, so total depreciation is, = $181,440 ÷ 0.80 = $226,800 Depreciation on administrative portion = $226,800 x (1.0 – 0.8) = $45,360. ©The McGraw-Hill Companies, Inc., 2017 78 Fundamentals of Cost Accounting 2-67. (20 Min.) Finding Unknowns: Mary’s Mugs. a. $2,812.50. Direct materials cost per unit = Direct materials cost ÷ Units produced = $6,000 ÷ 20,000 units = $0.30 per unit. Direct materials used per mug = 0.4 pounds. Direct materials cost per pound = $0.30 ÷ 0.4 pounds = $0.75 per pound. Direct materials inventory = 3,750 pounds  $0.75 per pound = $2,812.50. b. 2,750 units. Finished goods inventory (in units) = Finished goods inventory ÷ Manufacturing cost per unit. Manufacturing cost per unit = (Direct material + Direct labor + Indirect manufacturing cost) ÷ Units produced = ($6,000 + $27,000 + $5,400 + $6,000) ÷ 20,000 = $44,400 ÷ 20,000 = $2.22 per unit. Finished goods inventory (in units) December 31, Year 1 = $6,105 ÷ $2.22 = 2,750 units c. $4.25. Selling price per unit = Sales revenue ÷ Units sold = Sales revenue ÷ (Units produced – units in ending finished goods inventory) = $73,312 ÷ (20,000 – 2,750) = $73,312 ÷ 17,250 = $4.25. d. $13,642. Operating income for the year: Sales revenue …………………………………………………. Cost of goods sold (17,250 x $2.22) …………………… Gross margin…………………………………………………… Less marketing and administrative costs Variable marketing and administrative costs ……. Fixed marketing and administrative costs ……….. Operating profit ……………………………………………….. $ 73,312 38,295 $ 35,017 $3,375 18,000 21,375 $ 13,642 ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 79 2-68. (40 Min.) Finding Unknowns: BS&T Partners. Note: This problem is challenging, because there is no indication of how to begin or the order in which to solve for the unknowns. We begin by computing the following unit costs: Manufacturing cost per unit = Direct materials + Direct labor + Manufacturing overhead = $5.00 + $6.25 + $15.75 = $27.00 Full cost per unit = Manufacturing cost per unit + Selling, general & administrative = $27.00 + $12.00 = $39.00 a. Direct material inventory (pounds) = Direct material inventory (cost) ÷ Cost per pound = $3,500 ÷ $10.00 = 350 pounds. b. Finished goods inventory, cost = (Finished goods inventory, units) ÷ (Manufacturing cost per unit) = $10,800 ÷ $27 = 400 units ©The McGraw-Hill Companies, Inc., 2017 80 Fundamentals of Cost Accounting 2-68 (continued) c. Full costs = Cost of goods sold + Selling, general, and administrative costs Then, Operating profit = Sales revenue – Cost of goods sold – Selling, general, and administrative costs = Sales revenue – Full costs $55,200 = $414,000 – Full costs Full costs = $414,000 — $55,200 = $358,800 Full costs = Units sold x Full cost per unit $358,800 = Units sold x $39.00 Units sold = $358,800 ÷ $39.00 = 9,200 units sold d. Sales revenue = Selling price per unit x Units sold $414,000 = Selling price per unit x 9,200 units sold Selling price per unit = $414,000 ÷ 9,200 = $45.00 e. Finished goods ending (units) = Finished goods beginning (units) + Units produced – Units sold 400 = 0 + Units produced — 9,200 Units produced = 9,200 + 400 = 9,600 f. Direct labor cost incurred = Direct-labor hours worked x Wage rate per hour Direct labor cost incurred = Units produced x Direct labor cost per unit = 9,600 x $6.25 = $60,000 $60,000 = Direct-labor hours worked x $20.00 Direct-labor hours worked = $60,000 ÷ $20.00 = 3,000 direct-labor hours ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 81 Solutions to Integrative Case 2-69. (30 min.) Analyze the Impact of a Decision on Income Statements: Tunes2Go. a. This year’s income statement: Sales revenue ………………………….. Baseline (Status Quo) $4,800,000 Rent Equipment $4,800,000 Difference 0 Operating costs: Variable ………………………………. (600,000) (600,000) 0 Fixed (cash expenditures) ………. Equipment depreciation ………….. Other depreciation …………………. Loss from equipment write-off …. Operating profit (before taxes) ……. (2,250,000) (450,000) (375,000) 0 $1,125,000 (2,250,000) 0 (450,000) 0 (375,000) 0 (2,550,000) a $2,550,000 lower $ (1,425,000) $2,550,000 lower a Equipment write-off = $3 million cost – $450,000 accumulated depreciation for one year (equipment was purchased on January 1 of the year). b. Next year’s income statement: Baseline (Status Quo) Sales revenue ………………………….. $4,800,000 Operating costs: Equipment rental …………………… 0 Variable ……………………………….. (600,000) Fixed cash expenditures …………. (2,250,000) Equipment depreciation ………….. (450,000) Other depreciation …………………. (375,000) Operating profit ………………………… $1,125,000 Rent Equipment $5,136,000 a Difference $336,000 higher (690,000) (600,000) (2,115,000) b 0 (375,000) $1,356,000 690,000 higher 0 135,000 lower 450,000 lower 0 $231,000 higher a $5,136,000 = 1.07  $4,800,000 b $2,115,000 = (1.00 – 0.06)  $2,250,000 c. Despite the effect on next year’s income statement, the company should not rent the new machine because net cash inflow as a result of installing the new machine ($336,000 + $135,000) does not cover cash outflow for equipment rental ($690,000). ©The McGraw-Hill Companies, Inc., 2017 82 Fundamentals of Cost Accounting ©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 2 83