Chapter 20: Accounting for manufacturing Please note: GST versions of the end-of chapter questions are not appropriate for this chapter. Discussion questions 1. Many non-accountants confuse the terms cost and expense. As an accounting student, explain the difference between a cost and an expense using a relevant example. A cost is when an economic sacrifice of resources is made in exchange for a product or service. An expense is a cost that results in the consumption or loss of resources and will result in a decrease in equity. Examples could include the following situation: Paying for an asset is a cost and then using the asset up is an expense. 2. ‘Accounting for cost of sales in a manufacturing entity creates no more problems than those encountered in a retail entity.’ Discuss this statement. In manufacturing entities, it is necessary to accumulate and record costs for three levels of inventory to determine the costs of sales. These inventories are: raw materials, work in process and finished goods. In a retail entity, costs are recorded and reported for only one level of inventory — finished goods, which are bought in a condition where they can be immediately resold. Determining cost of sales, therefore, involves only knowledge of the cost of finished goods. In accounting for costs of inventories, both manufacturing and retail activities must select either the periodic or perpetual costing system. Total costs or unit costs of inventory movements can be determined under both types of activities. However, more has to be done in a manufacturing entity where accounting for three different levels of inventory requires more effort in terms of recognising and recording costs. In manufacturing, a problem arises in determining which costs to assign to work in process, and hence finished goods. In handling factory overheads, it is necessary to introduce pre-determined overhead application rates. This is not necessary for a retailing entity. In summary, it can be argued that the accounting procedures are similar in both forms of activity, however more detail and a wider range of costing activities is necessary for a manufacturing entity. An additional problem arises in assigning factory overheads in a manufacturing entity. 3. As the new marketing manager for Fast Fones Industries Pty Ltd , a company that manufactures mobile phones you need to learn about the accounting system for the business. Why is it important that marketing managers have some understanding of the accounting processes within a manufacturing business for which they work? The accounting processes follow the manufacturing process of the phones and this may help the marketing manager understand the strengths and weaknesses of the product compared to competitors’ products. In setting a price for phones the marketing manager needs to understand how the costs of the phones were arrived at so that the price they set achieves the profit goals of the company, covers all manufacturing costs and at the same time is competitively priced within the market. If the marketing manager perceives that a phone is overpriced compared to others in the market then they need to work together with the accountant to establish a price. This may result in reduced gross profit margins or may lead to discussions with the accountants and production managers about how costs can be reduced throughout the manufacturing process. 4. Explain the difference between product and period costs. Is labour cost a period cost, a product cost, or can it be both? Product costs are integral to producing the product as they are necessary for its physical existence. They are included in the cost of inventories as assets until the products are sold. At that point, the product costs have been consumed or their benefit received so they are expensed on the income statement of the period as cost of sales. Period costs are identified with a specific time interval because they are not directly required to produce a product. Therefore, they are not added to inventory costs and are charged as expenses in the period in which they are incurred. According to the distinction above, labour cost can be both a period and a product cost. To be a product cost, labour must be traceable to the production of inventory (either directly or indirectly). If labour cannot be traced, it will be a period cost. 5. The senior management of a manufacturing entity decided to overhaul its approach to managerial performance evaluation. Paul Tyler, manager in charge of production, is informed that as a result of the new policy he will be held responsible ‘only for controllable costs, i.e. the direct costs of production’. Tyler is upset at this decision by senior management. Whose position would you support as a fellow manager? Explain. Under the performance evaluation principle, managers should only be responsible and accountable for financial costs over which they have control. The introduction of the new performance scheme would seem to have been made without the involvement of Tyler, a senior manager affected by the new scheme. The principle of any performance scheme is based on a particular concept of what costs are controllable by the manager. A controllable cost is one that can be authorised by a particular manager. The question is whether Tyler can be held accountable for the direct cost of production, i.e. materials and labour. Does the manager have control over the quality/price of direct materials and direct labour — decisions which would normally be influenced by other managers, e.g. purchasing officer and personnel manager. It can be argued that a production manager can be held accountable for some elements of the material and labour costs. Suggest that Tyler should negotiate with senior management and establish which particular elements of the materials and labour costs he can control, which could then form the basis for evaluating his performance. 6. As a graduate accountant one of the first things you have been asked to do by your employer, Smart Manufacturing Systems Pty Ltd, is to write a memo to senior management explaining the difference between absorption and direct costing. Write the memo and explain which one is required by the accounting standard on inventories. Under absorption costing all manufacturing costs are treated as product costs whether they vary with the level of production or not. Direct material costs, direct labour costs and factory overhead costs are all treated as part of the costs of a product or service. With direct costing only product costs that vary with production levels are included in the cost of the product or service. Costs that do not change with the level of output are treated as period costs and expensed. Absorption costing is the only method of inventory costing allowed under IAS2/AASB102 Inventories. 7. Smart Manufacturing Systems Pty Ltd is a small manufacturing business that houses its manufacturing operations, selling activities and administration activities in one building. The insurance premium on this building is $9000 for the reporting period concerned. Recommend how this cost should be assigned to production costs, selling costs and administrative activities. The particular issue of how to assign an insurance premium on a building is a typical example of the cost allocation problem encountered daily in most costing systems. It is difficult not to argue that manufacturing, selling and administrative activities housed in one building should all bear the cost of insurance of that total building. The question of how much should be assigned to each operation is the problem of allocating common costs. Theoretically one should try to establish a cost driver associated with each functional operation which would result in an appropriate allocation of the $9000. A number of allocation bases can be discussed. The most obvious one is floor space. Others can include volume occupied by the building, the number of staff employed in the building, and evaluation of the contribution made by the various operational activities, etc. In the absence of any detailed analysis of suitable cost drivers, the most obvious solution will be to allocate on the basis of floor space. Such an approach assumes that the various operational activities allocate the optimal floor space for the particular function performed and that each activity is of equal risk of the insurance being used. 8. ‘Accounting for inventories for a manufacturer is rather pointless if the periodic system of inventory is used. Only by using the perpetual inventory system can meaningful information for management decision making become available.’ Discuss this statement. As with a retailing entity, the problem of inventory accounting for a manufacturer arises because the particular inventory system influences the way inventory is costed, recorded and reported. Under the periodic inventory system, costing and reporting is based on the need for a periodic stocktake, which can only be done at particular intervals because of cost and convenience factors. With a perpetual inventory system, costing is done on a regular, day to day basis and inventory values can be based on inventory that should be present rather than what is actually present. The perpetual inventory system does allow for more regular reporting of inventory costs and costs of sales. Whichever system is better depends on the particular decisions management wishes to make and how regularly such decisions must be made. In certain circumstances, it may be that the periodic inventory system gives management sufficient information to make appropriate decisions. The question of which approach to take to inventory costing depends to a large extent on the costs that need to be incurred, compared with the benefits in terms of decision making by management. Another point to note is that with the periodic system, it is necessary to talk in total dollar inventories, whereas with the perpetual inventory system, unit cost information, as well as total dollar costs, is readily available on a short-term basis. 9. You are the new accountant for Ted Cowpitt, who runs his own small pottery manufacturing business. Ted says, `I can’t see why it is so difficult to work out the value of my pottery inventory. Surely you just need to know roughly how much clay is used in each one and multiply that by the cost of clay?’ Explain to Ted how his pottery inventories would need to be valued and why it is more complicated than just the cost of the clay used. The cost of the clay would represent the direct material costs of each pot. The amount of time in labour spent on each pot would also need to be determined along with the cost of the labour to determine direct labour costs. There may also be indirect material costs from wastage of clay to consider as well as any other inputs of material such as glazes and colouring agents. Factory overhead costs would also need to be considered such as repairs and depreciation of equipment, rent on the premises, supervisors salaries etc. 10. There are differences between the inventories of a manufacturing entity and a retail entity. Do these differences have any effects on the financial statements of the two types of entities? Explain these differences and their effects on the financial statements. Finished goods inventory held for resale is the main inventory accounted for and reported by a retail entity. Because of the nature of manufacturing, several major types on inventories must be carried, accounted for and reported on. The essential inventories are raw materials, work-in-process, and finished goods. Accounting for inventory for a retail entity can be either the periodic or the perpetual system. For a manufacturer, however, the perpetual inventory system will be the norm, except for very small manufacturing entities that may be able to use the periodic system. The differences in the different inventories accounted for will cause some differences in what is reported in the income statement. In this statement, a retail entity will show the costs of sales (goods purchased for resale) as a deduction from sales to obtain gross profit. This involves records of finished goods only. For a manufacturing entity, the cost of sales can only be derived once the cost of goods manufactured is known. This involves using both raw materials and work-in-process records. The cost of goods manufactured item in the income statement replaces ‘purchases’ in the case of a retail entity. The role of finished goods in calculating cost of sales is essentially the same for both types of entity. The existence of different inventories for the two types of entity will affect how inventories are reported in the balance sheet. Finished goods inventory only is reported in this statement for a retail entity, but for a manufacturing entity, the statement must disclose the different types on inventory under the general heading of ‘inventory.’ Raw materials, work-in-process, and finished goods will be shown under this heading. Other inventories, such as loose tools used in the factory can also be shown. Exercises Exercise 23.1 Product or period costs Classify the following items as being either product costs or period costs: 1. depreciation on a vehicle used by the entity’s general manager 2. containers used to package finished goods 3. salaries of workers handling inventory during production 4. rent on the premises 5. lease payments on a motor vehicle used by a sales representative 6. superannuation contributions for production workers by the entity (LO2) 1. Period. 2. Product. 3. Product. 4. Product for the portion of the premises that relates to production or the factory. Period for the portion of the premises used for offices and administration. 5. Period. 6. Product. Exercise 20.2 Product and period costs As the Human Resources manager for Beautiful Bottles Pty Ltd, a company manufacturing bottles for the food industry, you have been asked by the accountant to help reduce the product costs of each bottle. You have compiled the following information to help with the decision. You are considering two options. The first option is to replace one of the senior production staff with a junior staff member. This option will reduce the amount of quality control checks that the company can perform. The second option is not to replace two of the junior staff when they resign. This will reduce the number of bottles that can be produced by 300 000 bottles per year. Required (a) Explain what some of the qualitative factors are that may arise from each of the two options being considered and whether these may favour one option over the other. (b) Calculate the Direct Labour cost per bottle under the current conditions and each of the two proposed options. (c) Using the qualitative factors from requirement (a) and the quantitative factors from requirement (b) explain which option you would consider the best for Beautiful Bottles Pty Ltd. (LO1 and LO2) (a) Option 1: •This option could lead to a loss of quality due to the reduction in quality control checks. This in turn would lead to more bottles being returned. A loss of reputation with regards to the reliability of the bottles could damage the reputation of the company and lead to a loss of long term profit even though short term profits may initially improve. Option 2: •The loss of sales and possible inability to meet customers’ demand could lead to the loss of some customers who may seek an alternative supplier who can sell them all the bottles they need. There may be both a short term and a long term decrease in profits as a result of this option. (b) Current conditions: DL cost/ bottle = ($120 000 + $140 000 + $400 000)/3 300 000 = $0.20 DL cost/bottle Option 1: DL cost/bottle = ($120 000 + $70 000 + $440 000)/3 300 000 = $0.191 DL cost/bottle Option 2: DL cost/bottle = ($120 000 + $140 000 + $320 000)/3 000 000 = $0.193 DL cost/bottle (c) Option 1 reduces the direct labour cost per bottle more than option 2 and doesn’t lead to a reduction in production levels so this would result in the best short term profit increase. Both options may have negative long term profit impacts but the extent of this is uncertain. On balance, option 1 would appear to be the best choice for Beautiful Bottles Pty Ltd. Exercise 20.3 Basic cost behaviour Innovative Computers Pty Ltd produces laptops. Each computer contains a rechargeable battery and LCD screen. Batteries and screens are purchased from an outside supplier for $96 and $150 each, respectively. The production process is highly automated with an annual depreciation charge of $720 000. Required (a) What are per computer and total costs of the rechargeable batteries and LCD screens for 10 computers, 100 computers, 1000 computers and 10 000 computers? (b) What is the depreciation charge per computer if 1000 computers are produced each year? What would it be for 10 000 computers? (c) What kind of cost behaviour is evident in requirements (a) and (b)? (LO4) (a) No of Computers Cost per Computer of batteries & LCD Screen Total Cost 10 (96 + 150) $246 $2460 100 (96 + 150) $246 $24 600 1000 (96 + 150) $246 $246 000 10 000 (96 + 150) $246 $2 460 000 (b) Depreciation charge per computer: 1000 computers: 720 000/1000 = $720 10 000 computers 720 000/10 000 = $72 (c) The cost of each rechargeable battery and LCD screen is a variable cost which is fixed per computer. The depreciation charge is a fixed cost which varies per computer as volume changes. Exercise 20.4 Allocation of overhead As the marketing manager for Fast Fones Industries Pty Ltd you have asked the accountant what it costs to make the FFI2020 model as you want to set a price for the phone. A similar phone produced by a competitor sells for $420. Your usual pricing policy is to set the price of phones at the cost of manufacturing plus 100% mark-up. The accountant has given you the following costs. Required (a) Calculate the cost and the price of the FFI2020 using each of the factory overhead rates that the accountant has supplied. How do the different allocation methods for factory overhead affect the pricing of the FFI2020 compared to the price of the competition, and what are the likely implications of this for the marketability of the phone? (LO1 and LO3) (a) Factory overhead method Direct labour hours Labour costs Machine hours Direct materials $192 $192 $192 Direct labour 3 3 3 Overhead 16 20 10 Total costs 211 215 205 Mark up (100%) 211 215 205 Price $422 $430 $410 As the market price of a similar phone is $420 if the overhead is allocated on the basis of machine hours then the FFI2020 would be competitively priced. If the overhead is allocated on either of the other two allocation bases they may have difficulty competing in the market. Fast Fones Industries Pty Ltd also has to ensure that the method of allocation of overhead results in all overhead costs being covered by the pricing otherwise the company could be under-pricing the phones and operating at a loss. Exercise 20.5 Income statement Listed below are selected financial data from the accounting records of Innovative Computers Pty Ltd for the year ended 30 June 2019. Required (a) Prepare an income statement for the year ended 30 June 2019. (LO5) (a) INNOVATIVE COMPUTERS PTY LTD Income Statement for the year ended 30 June 2019 INCOME $3 520 000 Cost of sales: Beginning finished goods $144 000 Cost of goods manufactured 1 352 000 Goods available 1 496 000 Ending finished goods (180 000) Cost of sales 1 316 000 GROSS PROFIT 2 204 000 Less: Selling and admin expenses 801 200 PROFIT $1 402 800 Exercise 20.6 Cost of goods manufactured Smart Manufacturing Systems Pty Ltd provides the following information. Required (a) Calculate total manufacturing costs for the period ending 30 June 2019. (b) Calculate cost of goods manufactured for the period ending 30 June 2019. (c) Calculate cost of sales for the period ending 30 June 2019. (d) Calculate profit or loss after tax for the period ending 30 June 2019. (LO5) (a) Direct materials 18 000 Direct labour 30 000 Factory depreciation 6000 Indirect labour 15 000 Total manufacturing costs $ 69 000 Direct materials: Materials (1 July 2018) + materials purchased – materials (30 June 2019) = $40 000 + $16 000 – $38 000 = $18 000 (b) Total manufacturing costs 69 000 Work in process (1 July 2018) 13 000 Total cost of work in process during the year 82 000 Less: Work in process (30 June 2019) 14 000 Cost of goods manufactured $68 000 (c) Finished goods inventory (1 July 2018) 20 000 Cost of goods manufactured 68 000 Total cost of goods available for sale 88 000 Less: Finished goods inventory (30 June 2019) 18 000 Cost of sales $70 000 (d) Sales 108 000 Less: Cost of sales 70 000 Gross margin 38 000 Less: Advertising and admin expenses 32 000 Income before taxes 6 000 Less: Income tax expense 2 000 Profit after tax $4 000 Exercise 20.7 Cost of goods manufactured statement and analysis Below is selected financial data extracted from the accounting records of Wilson Manufacturing Pty Ltd for the year ended 30 June 2019. Required (a) Prepare a cost of goods manufactured statement for the year ended 30 June 2019. (b) Calculate ratios of each of the major manufacturing costs to the total manufacturing costs for the period. (c) Using your answers to part B and the business knowledge vignette on p. 349, explain whether the mix of costs reflect a 1950s productions technique or one from the 2000s. (LO5) (a) WILSON MANUFACTURING PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $ 263 600 Net purchases of raw materials 1 546 000 1 809 600 Ending raw materials (195 400) Direct materials used $1 614 200 Direct labour 403 550 Factory overhead: Indirect labour 123 800 Indirect materials 342 000 Sundry factory overhead 1 551 950 2 017 750 Manufacturing costs for the period 4 035 500 Beginning work in process 362 600 Total work in process 4 398 100 Ending work in process (452 200) COST OF GOODS MANUFACTURED $3 945 900 (b) Cost of raw materials ratio: Cost of direct labour ratio: Cost of factory overhead costs: (c) The mix of production costs outlined in the business knowledge vignette suggests that in the 1950s the mix of costs was: Direct Materials 35%; Direct Labour 40%; Factory Overhead 25%. By the 2000s the mix of costs had changed to: Direct Materials 40%; Direct Labour 10%; Factory Overhead 50%. Given the ratios calculated in part B, in particular the high percentage of labour, the mix of production costs for Wilson Manufacturing Pty Ltd reflects more a production technique of the 2000s. Exercise 20.8 Work in process Information from the records of Smart Manufacturing Systems Pty Ltd for the year ended 30 June 2019 is given below. Required (a) Calculate the cost of work in process inventory on 1 July 2018. (LO5) (a) SMART MANUFACTURING SYSTEMS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $24 000 Purchases 210 000 234 000 Ending raw materials (25 500) Direct materials used $208 500 Direct labour (240 000 2) 120 000 Factory overhead 240 000 Manufacturing costs for the period 568 500 Beginning work in process (671 300 – 568 500) *102 800 Total work in process 671 300 Ending work in process (50 500) Cost of goods manufactured $620 800 * Work in process on 1 July 2018 $102 800 Exercise 20.9 Work in process Information from the records of Manufacturing Systems Pty Ltd for the year ended 30 June 2019 is given below. Required (a) Calculate the ending work in process inventory on 30 June 2019. (LO5) (a) MANUFACTURING SYSTEMS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $ 65 000 Purchases 820 000 885 000 Ending raw materials (72 300) Direct materials used $ 812 700 Direct labour 120 000 Factory overhead ($812 700 1.5) 1 219 050 Manufacturing costs for the period 2 151 750 Beginning work in process 243 500 Total work in process 2 395 250 Ending work in process ($2 395 250 – $2 198 750) *(196 500) Cost of goods manufactured $2 198 750 * Ending work in process on 30 June 2019 $196 500 Exercise 20.10 Different costs for different purposes Management uses different costs for different purposes in decision making. Included in the different costs are product costs, period costs, variable costs and fixed costs. Required (a) As a manager, choose the concept of cost mentioned above that best describes the cost involved in each of the following situations. i. Depreciation for printing equipment used for this book is a cost on the income statement. It is a cost in terms of cost behaviour. ii. The paper used to produce this textbook is a cost on the income statement. It is also a cost in terms of cost behaviour. iii. A commission is paid to the sales representative who sold this book is a cost on the income statement. iv. A cost could be called an inventoriable cost because this type of cost is treated as an asset on the balance sheet unless the related item is sold. v. The costs of operating a service department are classified as costs as far as the products produced are concerned. vi. Depreciation for the delivery vehicle used by the sales representative is a cost on the income statement. In terms of cost behaviour, it is a . (LO4) (a) i. Product, fixed. ii. Product, variable. iii. Period. iv. Product. v. Factory overhead. vi. Period, fixed. Exercise 20.11 Valuation of manufacturing inventories During the year ended 30 June 2019, Beautiful Bottles Pty Ltd incurred the following costs. The company charges factory overhead costs to work in process inventory and finished goods inventory, using an overhead application rate based on direct labour costs. Required (a) Determine the company’s overhead application rate. (b) If the company’s ending finished goods inventory of $64 210 included $9300 of direct materials costs, determine the inventory’s labour and overhead costs. (LO6) (a) Overhead application rate: (b) DL + 2.8 DL + 9300 = 64 210 3.8 DL = 54 910 DL = 54 910/3.8 = $14 450 Direct labour = $14 450 Overhead = 2.8 (14 450) = $40 460 Exercise 20.12 Valuation of manufacturing inventories During the year ended 30 June 2019, Fast Fones Industries Pty Ltd incurred the following costs. The company charges factory overhead costs to work in process inventory and finished goods inventory using an overhead application rate based on direct materials costs. Required (a) Determine the company’s overhead application rate. (b) If the company’s ending finished goods inventory of $841 600 included $25 600 of direct labour costs, determine the inventory’s material and overhead costs. (LO6) (a) Overhead application rate: (b) DM + 2.4 DM + 25 600 = 841 600 3.4DM = 816 000 DM = 816 000/3.4 = $240 000 Direct material = $240 000 Overhead = 2.4 (240 000) = $576000 Exercise 20.13 Manufacturing statement with missing data For each company below, fill in the missing data. Each company is independent. (LO3 and LO5) Income statement Company A Company B Company C Sales $194 600 (1) 154 400 80 300 Beginning finished goods 29 800 (2) 36 300 8 500 Cost of goods manufactured 96 200 86 000 (5) 32 600 Ending finished goods 38 000 50 800 5 800 (9) Cost of sales 88 000 71 500 (6) 35 300 Gross profit 106 600 82 900 (7) 45 000 (10) Operating Expenses 36 600 (3) 61 200 21 000 Profit 70 000 21 700 (8) 24 000 (11) Beginning work in process 25 800 28 400 9 100 (12) Direct labour 36 500 50 800 12 500 Raw materials used 22 000 42 800 11 800 Factory overhead 28 800 36 600 13 400 Ending work in process 16 900 (4) 72 600 14 200 (See explanations below.) (1) $88 000 + 106 600 = $194 600 (2) $88 000 + 38 000 – 96 200 = $29 800 (3) $106 600 – 70 000 = $36 600 (4) 25 800 + 36 500 + 22 000 + 28 800 – 96 200 = $16 900 (5) $28 400 + 50 800 + 42 800 + 36 600 – 72 600 = $86 000 (6) $36 300 + 86 000 – 50 800 = $71 500 (7) $154 400 –71 500 = $82 900 (8) $82 900 – 61 200 = $21 700 (9) $8 500 + 32 600 – 35 300 = $5 800 (10) $80 300 – 35 300 = $45 000 (11) $45 000 – 21 000 = $24 000 (12) $32 600 + 14 200 – (12 500 + 11 800 + 13 400) = $9 100 Exercise 20.14 Manufacturing statement with missing data For each company below, fill in the missing data. Each company is independent. (LO5) Income statement Company X Company Y Company Z Sales $320 000 $1 120 000 (5) 120 000 Beginning finished goods 18 300 (2) 49 000 7800 Cost of goods manufactured 197 700 761 200 (6) 61 350 Ending finished goods 24 000 26 200 9150 (9) Cost of sales 192 000 (1) 784 000 60 000 Gross profit 128 000 336 000 60 000 (10) Operating Expenses 89 600 (3) 235 200 18 000 (11) Profit 38 400 100 800 (7) 42 000 Beginning work in process 19 300 32 400 4750 (12) Direct labour 21 500 (4) 256 000 42 150 Raw materials used 18 750 124 000 6150 Factory overhead 159 750 385 800 13 900 Ending work in process 21 600 37 000 (8) 5600 (See explanations below.) (1) 320 000 – 128 000 = $192 000 (2) 192 000 + 24 000 – 197 700 = $18 300 (3) 128 000 – 38 400 = $89 600 (4) 197 700 + 21 600 – 159 750 – 18 750 – 19 300 = $21 500 (5) 336 000 + 784 000 = $1 120 000 (6) 784 000 + 26 200 – 49 000 = $761 200 (7) 336 000 – 235 200 = $100 800 (8) 761 200 – 32 400 – 256 000 – 124 000 – 385 800 = $37 000 (9) 7800 + 61 350 – 60 000 = $9150 (10) 120 000 – 60 000 = $60 000 (11) 60 000 – 42 000 = $18 000 (12) 61 350 + 5600 – 13 900 – 6150 – 42 150 = $4750 Exercise 20.15 Use of raw materials Precision Balls Ltd produces and sells high-quality lawn bowls sets. Each set of balls is contained in a wooden carrying case, which is purchased from an outside supplier. The wooden cases are held as raw materials inventory until they are placed into production and combined with the lawn bowls. The production and purchasing departments have provided the following information for the month of May. 1. Beginning raw materials inventory of wooden cases was 760 at a cost of $19 000. 2. The company purchased 1600 additional cases at $25 each. 3. 1800 cases were transferred to production. 4. 120 cases were given to managers of possible retail outlets for promotional purposes. Of the cases placed into production, 65% were combined with lawn bowls sets, which were then transferred to finished goods. Of the cases transferred to finished goods during May, 70% had been sold by the end of the month. There was no beginning inventory of wooden cases in finished goods or in work in process. Required (a) Determine the cost of the wooden cases that would be included in the following accounts as at 31 May: i. raw materials ii. work in process iii. finished goods iv. selling expenses v. cost of sales. (LO5) (a) i. 760 + 1600 – 1800 – 120 = 440 cases in raw materials 440 cases @ $25 = $11 000 raw materials inventory as at 31 May. ii. 1800 (1 – 0.65) = 630 cases 630 cases @ $25 = $15 750 work in process inventory as at 31 May. iii. (1800 65%) 30% = 351 351 cases @ $25 = $8 775 cost of wooden cases in finished goods as at 31 May. iv. 120 @ $25 = $3 000 cost of wooden cases in selling expenses as at 31 May. v. (1800 65%) 70% = 819 819 cases @ $25 = $20 475 cost of wooden cases in cost of sales as at 31 May. Problems Problem 20.16 Cost of goods manufactured statement Smart Manufacturing Systems Pty Ltd’s accountant recently prepared the following data from the company’s accounting records for the year ended 30 June 2019. Factory overhead is applied at the rate of 240% of direct labour cost. Required (a) Prepare a cost of goods manufactured statement for the year ended 30 June 2019. (b) What is the company’s cost of sales for the year ended 30 June 2019? (c) What was the company’s gross profit for the year ended 30 June 2019? (LO5) (a) SMART MANUFACTURING SYSTEMS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $75 600 Purchases 324 000 399 600 Ending raw materials (72 300) Direct materials used $327 300 Direct labour 114 000 Factory overhead (240% DL$) 273 600 Manufacturing costs for the period 714 900 Beginning work in process 53 800 Total manufacturing costs 768 700 Ending work in process (51 400) Cost of goods manufactured $717 300 (b) Cost of Sales: Beginning finished goods $94 500 Cost of goods manufactured 717 300 Goods available 811 800 Ending finished goods 97 200 Cost of sales $714 600 (c) Gross Profit: Sales – COS $1 200 300 – $714 600 = $485 700 Problem 20.17 Accounting for a manufacturing entity During the year ended 30 June 2019, Beautiful Bottles Pty Ltd incurred the following costs in connection with its production activities. The beginning and ending inventory values were as follows. Required (a) Calculate the relationship between factory overhead costs and direct labour cost. (b) Prepare a cost of goods manufactured statement for the year ended 30 June 2019. (c) Prepare closing entries using the Manufacturing Summary account. (d) Prepare the general journal entry to close the Manufacturing Summary account. (LO6) (a) Factory overhead calculation: Factory electricity $71 000 Indirect labour 90 000 Depreciation 65 000 Plant rent 56 000 Supplies (factory) 23 000 Repairs (factory) 26 000 Factory overhead costs $331 000 (b) BEAUTIFUL BOTTLES PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $28 400 Purchases 390 000 418 400 Ending raw materials (23 600) Direct materials used $394 800 Direct labour 82 750 Factory overhead: Electricity 71 000 Indirect labour 90 000 Depreciation 65 000 Rent 56 000 Supplies 23 000 Repairs 26 000 331 000 Total manufacturing cost for the period 808 550 Beginning work in process 52 400 Total work in process 860 950 Ending work in process 62 000 Cost of goods manufactured $798 950 (c) Closing entries: 2019 June 30 Manufacturing summary 884 550 Raw materials inventory 28400 Work in process inventory 52 400 Raw materials purchases 390 000 Direct labour 82 750 Electricity expense 71 000 Indirect labour expense 90 000 Depreciation – machinery 65 000 Rent expense 56 000 Supplies expense 23 000 Repairs expense 26 000 To close manufacturing accounts with debit balances. 30 Raw materials inventory 23 600 Work in process inventory 62 000 Manufacturing summary 85 600 To establish ending raw materials and work in process inventories. (d) 30 Profit or loss summary 798 950 Manufacturing summary 798 950 To close manufacturing summary account. Exercise 20.18 Allocation of factory overhead As the marketing manager for Fast Fones Industries Pty Ltd, you have asked the accountant what it costs to make the Fone2000 model because you want to set a price for the phone. A similar phone produced by a competitor sells for $600. Your usual pricing policy is to set the price of phones at twice the cost of manufacturing them. The accountant has not been entirely helpful in giving you the following costs. Required (a) Assuming that the total factory overhead to be allocated to the various phone models produced by Fast Fones Industries Pty Ltd is $2 400 000, what are the implications of allocating too much, or too little, factory overhead to the cost of each Fone2000? (b) Calculate the cost and the price of the Fone2000 using each of the factory overhead rates that the accountant has supplied. How do the different allocation methods for factory overhead affect the pricing of the Fone2000 compared with the price of the competition, and what are the likely implications of this for how well the phone does in the phone market? (LO3) (a) If too much factory overhead is allocated to a phone then the phone may not be competitively priced once the budgeted mark-up is added to costs. If too little factory overhead is allocated to a phone then it will be under-priced. This may make its price appear to be extremely competitive but the sales of phones may not actually cover the factory overhead costs. (b) Factory overhead method Direct labour hours Labour costs Machine hours Direct materials $90 $90 $90 Direct labour 15 15 15 Overhead (1) 190 (2) 150 (3) 200 Total costs 295 255 305 Mark up (100%) 295 255 305 Price $590 $510 $610 (1) $760/4 = $190 (2) 2 $15 = $150 (3) $400/2 = $200 If the overhead is allocated on the basis of direct labour hours or labour costs then it would be competitively priced. If the overhead is allocated on the basis of machine hours then it would not be competitively priced. Exercise 20.19 Missing data for manufacturing entities Incomplete information concerning the financial performance of two manufacturing companies is presented below. Required (a) Determine the answers to (a) to (f) for the two companies. (LO6) (a) Company A Company B Work in process 1/7/2018 $ 21 000 47 000 Work in process 30/6/2019 22 600 (a) 47 600 Direct materials used 71 600 82 500 Direct labour 37 000 73 000 (e) Factory overhead 500 000 448 600 Sales 629 300 834 000 Accounts receivable 1/7/2018 108 300 123 600 Accounts receivable 30/6/2019 93 600 116 100 Cost of sales 597 600 (b) 605 000 Finished goods 1/7/2018 47 000 35 000 Finished goods 30/6/2019 56 400 (c) 33 500 Gross profit 31 700 229 000 (f) Cost of goods manufactured 607 000 603 500 (d) (a) 22 600 = 71 600 + 37 000 + 500 000 + 21 000 – 607 000 (b) 597 600 = 629 300 – 31 700 (c) 56 400 = 47 000 + 607 000 – 597 600 (d) 603 500 = 605 000 + 33 500 – 35 000 (e) 73 000 = 603 500 + 47 600 – 47 000 – 82 500 – 448 600 (f) 229 000 = 834 000 – 605 000 Problem 20.5 Income statement from closing entries Smart Manufacturing Systems Pty Ltd uses a periodic inventory system and closes its accounts on 30 June each year. The company’s closing entries made on 30 June 2019 were as shown below. Required (a) Prepare a cost of goods manufactured statement for the year ended 30 June 2019. (b) Prepare an income statement for the year ended 30 June 2019. (LO5 and LO6) (a) SMART MANUFACTURING SYSTEMS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $10 200 Purchases 80 630 Freight inwards 2 450 93 280 Ending raw materials (12 400) Direct materials used $80 880 Direct labour 20 060 Factory overhead 265 320 Manufacturing costs for the period 366 260 Beginning work in process 26 400 Total manufacturing costs 392 660 Ending work in process (29 750) Cost of goods manufactured $362 910 (b) SMART MANUFACTURING SYSTEMS PTY LTD Income Statement for the year ended 30 June 2019 INCOME $680 500 Cost of sales: Beginning finished goods inventory $32 000 Cost of goods manufactured 362 910 Goods available 394 910 Ending finished goods inventory 28 400 Cost of sales 366 510 GROSS PROFIT 313 990 EXPENSES Selling expenses 61 800 Administrative expenses 54 300 Financial expenses 12 500 128 600 PROFIT $185 390 Exercise 20.21 Missing data for manufacturing entities Two cases of data concerning production costs, other expenses and sales are presented below. Required (a) Calculate the missing amounts for the letters (a) to (l). (b) Using the data in Case 1, prepare a cost of goods manufactured statement. (c) Using the data in Case 1, prepare an income statement. (d) Using the data in Case 2, and additional data consisting of cash at bank $1 140 000, accounts receivable $400 000, raw materials inventory $19 800 and prepaid expenses $1600, prepare the current assets section of the balance sheet. (LO6) (a) a) 857 000 = 217 000 + 73 000 + 567 000 b) 51 000 = 857 000 + 56 000 – 862 000 c) 65 000 = 927 000 – 862 000 d) 857 000 = 927 000 – 70 000 e) 189 200 = 1 046 200 – 857 000 f) 71 700 = 189 200 – 117 500 g) 295 000 = 696 000 – 335 000 – 66 000 h) 75 000 = 668 000 + 103 000 – 696 000 i) 160 000 = 236 000 – 76 000 j) 783 500 = 115 500 + 668 000 k) 701 000 = 783 500 – 82 500 l) 937 000 = 236 000 + 701 000 (b) Cost of Goods Manufactured Statement Direct materials cost $217 000 Direct labour 73 000 Factory overhead 567 000 Manufacturing costs for the period (a) 857 000 Beginning work in process 56 000 Ending work in process (b) (51 000) Cost of goods manufactured $862 000 (c) Income statement SALES REVENUE 1 046 200 Cost of sales: Beginning inventory (c) $65 000 Cost of goods manufactured 862 000 Cost of goods available for sale 927 000 Ending inventory (70 000) (d) 857 000 GROSS PROFIT (e) 189 200 EXPENSES 117 500 PROFIT (f) $71 700 (d) Balance Sheet CURRENT ASSETS: Cash at bank $140 000 Accounts receivable 400 000 Raw materials inventory 19 800 Work in process 103 000 Finished goods inventory 82 500 Prepaid expenses 1 600 TOTAL CURRENT ASSETS $746 900 Problem 20.22 Cost of goods manufactured schedule An analysis of the accounts of Beautiful Bottles Pty Ltd reveals the following manufacturing cost data for the month ended 30 June 2019. Required (a) Prepare the cost of goods manufactured schedule for the month ended 30 June 2019. (b) Show the presentation of the ending inventories on the 30 June 2019 Balance Sheet. (LO6) (a) BEAUTIFUL BOTTLES PTY LTD Cost of Goods Manufactured Schedule For the Month Ended 30 June 2019. Work in process inventory, June 1 $10 000 Direct materials Beginning raw materials $14 000 Purchases 128 000 142 000 Ending raw materials 22 200 Direct materials used 119 800 Direct labour 100 000 Manufacturing overhead Indirect labour $31 200 Factory insurance 8000 Machinery depreciation 8000 Machinery repairs 3600 Factory utilities 6200 Miscellaneous factory costs 3000 Total manufacturing overhead 60 000 Total manufacturing costs 279 800 Total work in process 289 800 Ending work in process 18 000 Cost of goods manufactured $271 800 (b) BEAUTIFUL BOTTLES PTY LTD (Partial) Balance Sheet June 30, 2019 Current assets Inventories Raw materials 22 200 Work in process 18 000 Finished goods 12 000 $52 200 Problem 20.23 Cost of goods manufactured and income statement The following accounts and amounts (balances are normal balances) were taken from the records of Prider Manufacturers Ltd at 30 June 2019. Required (a) Prepare a cost of goods manufactured statement for the year ended 30 June 2019. (b) Prepare an income statement for the year ended 30 June 2019. (c) The industry average for Gross Profit margin is 30% and the Profit margin is 10%. Explain how Prider Manufacturers Ltd s financial performance compares to the industry average. (LO6) (a) PRIDER MANUFACTURERS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $115 200 Net purchases ($1 280 000 – $8000) 1 272 000 Freight inwards 17 400 1 404 600 Ending raw materials (124 800) Direct materials used $1 279 800 Direct labour 390 000 Factory overhead: Depreciation – factory machinery 38 400 Power 36 000 Rent 240 000 Supplies 296 000 Indirect labour 128 000 Repairs 77 800 Rates 48 000 864 200 Manufacturing costs for the period 2 534 000 Beginning work in process 54 000 Total manufacturing costs 2 588 000 Ending work in process (60 000) Cost of goods manufactured $2 528 000 (b) PRIDER MANUFACTURERS PTY LTD Income statement for the year ended 30 June 2019 SALES $3 800 000 Less: Sales – returns 62 800 $3 737 200 COST OF SALES: Beginning finished goods inventory 260 000 Cost of goods manufactured 2 528 000 Goods available 2 788 000 Ending finished goods inventory (250 000) Cost of sales 2 538 000 GROSS PROFIT 1 198 000 EXPENSES: Selling and distribution expenses: Advertising 120 000 Sales travel expense 36 600 Sales commissions 114 600 271 200 Administrative expenses: Depreciation – office equipment 14 400 Office rent expense 60 000 Office salaries 422 400 496 800 768 000 PROFIT BEFORE TAX 430 000 (c) Gross Profit Margin = 1 198 000 3 737 200 = 32% Profit Margin = 430 000 3 737 200 = 11.5% Prider Manufacturers Ltd has achieved a slightly higher gross profit margin to the industry and is performing above the industry on profit margin. This would suggest that Prider Manufacturers Ltd has good control of its expenses. Problem 20.24 Cost of goods manufactured schedule The following data were taken from the records of Manik Manufacturing Ltd for the year ended 30 June 2019. Required (a) Prepare the cost of goods manufactured schedule for the year ended 30 June 2019 (b) Prepare an income statement for the year ended 30 June 2019 as far as gross profit. (c) Prepare the current assets section of the balance sheet / statement of financial position as at 30 June 2019. (LO6) (a) MANIK MANUFACTURING LTD Cost of Goods Manufactured Schedule for the year ended 30 June 2019 Work in process inventory 01/7/2018 $ 19 000 Direct materials Raw materials inventory 01/7/2018 $ 80 000 Raw materials purchases 129 200 Freight-in on raw materials 7 800 217 000 Raw materials inventory 30/6/2019 88 400 Direct materials used $128 600 Direct labour 290 200 Manufacturing overhead Indirect labour 38 200 Factory insurance 10 800 Factory machinery depreciation 15 400 Factory utilities 31 800 Plant manager’s salary 80 000 Factory rent 122 000 Factory repairs 1 600 Total manufacturing overhead 299 800 Total manufacturing costs 718 600 Total cost of work in process 737 600 Work in process inventory 30/6/2019 16 000 Cost of goods manufactured $721 600 (b) MANIK MANUFACTURING LTD (Partial) Income Statement for the year ended 30 June 2019 Sales $990 000 Sales discounts 7 000 Net sales revenue 983 000 Cost of sales Finished goods inventory 01/7/2018 170 000 Cost of goods manufactured 721 600 Goods available 891 600 Finished goods inventory 30/6/2019 145 600 Cost of sales 746 000 Gross profit $237 000 (c) MANIK MANUFACTURING LTD (Partial) Statement of Financial Position as at 30 June 2019 Assets Current assets Cash $56 000 Accounts receivable 54 000 Inventories Finished goods 145 600 Work in process 16 000 Raw materials 88 400 250 000 Total current assets $360 000 Problem 20.25 Manufacturing worksheet You are provided with the worksheet for Norman Pty Ltd for the year ended 30 June 2019. The adjustments have already been made and the worksheet begins with the adjusted trial balance. Assume all insurance relates to the factory. Closing inventory balances at 30 June 2019 were $108 000 for finished goods, $32 800 for work in process and $17 000 for raw materials. Required (a) Complete the worksheet for Normann Pty Ltd (LO6) (a) Adjusted trial balance Manufacturing Income statement Balance sheet Account Title Debit Credit Debit Credit Debit Credit Debit Credit Cash at Bank 41 000 41 000 Accounts Receivable 65 200 65 200 Finished Goods 120 000 120 000 108 000 108 000 Work in Process 28 000 28 000 32 800 32 800 Raw Materials 33 600 33 600 17 000 17 000 Prepaid Insurance 16 000 16 000 Machinery and Equipment 721 000 721 000 Acc. Depr. Machinery & Equip. 300 000 300 000 Accounts Payable 57 200 57 200 Loan Payable 240 000 240 000 Share Capital 121 000 121 000 Retained Earnings 130 000 130 000 Sales 1 609 000 1 609 000 Purchases – Raw Materials 504 000 504 000 Direct Labour 125 600 125 600 Indirect Labour 54 000 54 000 Factory Supplies 104 000 104 000 Depr. Expense – Factory 51 400 51 400 Depr. Expense – Office 7200 7200 Electricity 8600 8600 Rent 192 000 192 000 Insurance 128 000 128 000 Rates & Taxes 25 200 25 200 Selling & Distribution Expenses 107 200 107 200 Administrative & Office Expenses 65 600 65 600 Sales Commissions 24 400 24 400 Interest Expense 35 200 35 200 2 457 200 2 457 200 Cost of Goods Manufactured 1 204 600 1 204 600 1 254 400 1 254 400 1 564 200 1 717 000 1 001 000 848 200 Profit Before Tax 152 800 152 800 1 717 000 1 717 000 1 001 000 1 001 000 Problem 20.26 Closing entries for a manufacturing entity You are provided with the cost of goods manufactured statement and income statement for Prider Manufacturers Ltd. Required (a) Prepare the closing entries for Prider Manufacturers Ltd. (LO6) (a) General Journal Date Particulars Debit Credit 2019 June 30 Manufacturing Summary 864 790 Raw Materials Inventory 53 800 Work in Process Inventory 39 200 Raw Material Purchases 155 680 Freight Inwards 2 500 Direct Labour 398 000 Consumables 2 560 Depreciation Expense (plant and equipment) 14 800 Electricity 46 200 Indirect Labour 62 800 Insurance 24 000 Rent of Factory 54 200 Sundry Expenses 3 400 Supplies 7 650 (Closing manufacturing accounts with debit balances) June 30 Raw Materials Inventory 57 200 Work in Process Inventory 40 560 Manufacturing Summary 97 760 (Ending raw materials and work in process inventories) June 30 Profit or Loss Summary 1 211 070 Finished Goods Inventory 160 000 Advertising 16 600 Sales Salaries 98 000 Other Selling Expenses 9 340 Administrative Salaries 125 500 Other Administrative Expenses 9 000 Interest Expense 3 600 Income Tax Expense 22 000 Manufacturing Summary 767 030 (Closing the income statement accounts with debit balances) June 30 Finished Goods Inventory 162 000 Sales 1 100 000 Profit or Loss Summary 1 262 000 (Establishing the ending finished goods inventory and closing the Sales account) 30 June Profit or Loss Summary 50 930 Retained Earnings 50 930 (Closing profit to Retained Earnings) Problem 20.27 Manufacturing worksheet and cost of goods manufactured statement The unadjusted trial balance of Innovative Computers Pty Ltd on 30 June 2019 is presented below. The following additional information is available. 1. The inventories as of 30 June 2019 were as follows. 2. The Machinery and Equipment account comprises $250 000 of factory machinery and the balance of office equipment. All machinery and equipment is depreciated using the straight-line method over an 8-year life. There were no plant and equipment acquisitions or disposals during the accounting period. 3. On 1 May 2019, the company paid $12 000 for 12 months insurance cover on the factory. Prepaid Insurance was debited at the time of the transaction. 4. Accrued expenses at year-end but not yet recorded: direct labour, $10 000; indirect labour, $3500; selling and distribution expenses, $20 000. 5. All electricity, rent, rates and taxes, and insurance are charged to factory operations. 6. An additional stationery expense payable of $1500 is to be recorded and treated as an administrative expense. No invoice has been received. 7. Ignore income tax. Required (a) Prepare a worksheet including pairs of columns for unadjusted trial balance, adjustments, manufacturing, and the financial statements. (b) Prepare a cost of goods manufactured statement for the year ended 30 June 2019. (c) Prepare the closing entries assuming use of a Manufacturing Summary account. (d) Calculate the relationship between overhead and direct labour costs. Using that relationship, calculate the labour and overhead included in the ending inventories if work in process ending inventory contains $25 000 of raw materials and $38 000 of raw materials is included in the finished goods ending inventory. (LO5 and LO6) (a) (b) INNOVATIVE COMPUTERS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $37 500 Purchases of raw materials 1 645 000 1 682 500 Ending raw materials (32 000) Direct materials used $1 650 500 Direct labour 430 000 Factory overhead: Indirect labour 108 500 Supplies 140 700 Electricity 102 250 Rent 180 000 Insurance 82 600 Rates and taxes 37 500 Depreciation 31 250 Total factory overhead 682 800 Manufacturing costs for the period 2 763 300 Beginning work in process 80 000 Total manufacturing costs 2 843 300 Ending work in process (82 000) Cost of goods manufactured $2 761 300 (c) Closing Entries: June 2019 30 Manufacturing summary 2 875 300 Work in process 80 000 Raw materials 37 500 Raw materials purchases 1 645 000 Direct labour 430 000 Indirect labour 108 500 Factory supplies 140 700 Electricity 102 250 Factory rent 180 000 Factory insurance 82 600 Factory rates and taxes 37 500 Depreciation expenses – machinery 31 250 To close manufacturing accounts with debit balances. 30 Work in process 82 000 Raw materials 32 000 Manufacturing summary 114 000 To establish ending raw materials and work in process inventories. 30 Profit or loss summary 1 835 405 Finished goods inventory 145 000 Selling & distribution expenses 174 500 Admin. and office expense 211 500 Sales commissions 351 360 Interest expense 9 600 Depreciation expense – office 18 750 Manufacturing summary 2 761 300 To close profit or loss accounts with debit balances. 30 Finished goods inventory 163 750 Sales 3 513 600 Profit or loss summary 3 677 350 To establish ending finished goods inventory and close the sales account. 30 Profit or loss summary 5 340 Retained earnings 5 340 To close loss to retained profits. (d) Factory overhead and direct labour cost relationship: Labour and overhead included in ending inventories. Work in process: DL + 1.59 DL + 25 000 = $82 000 2.59 DL = $57 000 Direct labour = $22 008 Factory overhead = $22 008 1.59 = $34 993 Finished goods: DL + 1.59 DL + 38 000 = $163 750 2.59 DL = $125 750 Direct labour = $48 552 Factory overhead = $48 552 1.59 = $77 198 Problem 20.28 Manufacturing worksheet The listing of the ledger accounts (unadjusted) of Smart Manufacturing Systems Pty Ltd at 30 June 2019 is presented below. All ledger balances are normal balances. Additional information relating to the company is as follows. 1. The inventories as of 30 June 2019 were as follows. 2. On 1 January 2019, the company paid $81 000 for the next 12 months factory rent. Prepaid rent was debited at the time of the transaction. 3. The Machinery and Equipment account consists of $220 500 of factory machinery and $73 500 of office equipment. All machinery and equipment is depreciated using a 7-year life. 4. Expenses incurred as of year-end but not yet recorded are: direct labour, $6000; indirect labour, $1800; administrative expenses, $1050. 5. The electricity and gas, rent and insurance costs are related to factory operations. 6. Allow for company income tax expense at 30% of profit before tax. Required (a) Prepare a worksheet including a pair of columns for unadjusted trial balance, adjustments, manufacturing, and the financial statements. (b) Prepare a cost of goods manufactured statement. (c) Prepare the closing entries. (d) Calculate the relationship between factory overhead costs and direct labour costs. Using that relationship, calculate the labour and overhead included in the ending inventories if work in process ending inventory contains $3 600 of raw materials and $6 000 of raw materials is included in the finished goods inventory. (LO5 and LO6) (a) (b) SMART MANUFACTURING SYSTEMS PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2019 Direct materials: Beginning raw materials $5 550 Purchases 307 500 313 050 Ending raw materials (4 650) Direct materials used $308 400 Direct labour 330 000 Factory overhead: Indirect labour 108 300 Factory supplies 27 000 Electricity and gas 84 000 Insurance 24 450 Factory rent 87 750 Depreciation 31 500 Total factory overhead 363 000 Total manufacturing costs for the period 1 001 400 Beginning work in process 11 250 Total work in process 1 012 650 Ending work in process (13 050) Cost of goods manufactured $999 600 (c) Closing entries: June 2019 30 Manufacturing summary 1 017 300 Work in process 11 250 Raw materials 5 550 Raw materials purchases 307 500 Direct labour 330 000 Indirect labour 108 300 Factory supplies 27 000 Electricity and gas 84 000 Factory rent 87 750 Factory insurance 24 450 Depreciation expenses – machinery 31 500 To close manufacturing accounts with debit balances. 30 Work in process 13 050 Raw materials 4 650 Manufacturing summary 17 700 To establish ending raw materials and work in process inventories. 30 Profit or loss summary 1 258 305 Finished goods inventory 34 500 Selling & distribution expenses 48 000 Administrative expense 101 550 Interest expense 34 500 Depreciation expense – equipment 10 500 Manufacturing summary 999 600 Income tax expense 29 655 To close profit or loss accounts with debit balances. 30 Finished goods inventory 37 500 Sales 1 290 000 Profit or loss summary 1 327 500 To establish ending finished goods inventory and close the sales account. 30 Profit or loss summary 69 195 Retained earnings 69 195 To close profit to retained earnings. (d) Factory overhead and direct labour cost relationships: Labour and overhead included in ending inventories. DL + 1.10 DL + 3 600 = $13 050 2.10 DL = $9 450 Direct labour = $4 500 Factory overhead = $4 500 1.10 = $4 950 Finished goods: DL + 1.10 DL + 6 000 = $37 500 2.10 DL = $31 500 Direct labour = $15 000 Factory overhead = $15 000 1.10 = $16 500 Problem 20.29 Reconstruction accounts Basic Chemicals Ltd produces a highly flammable chemical product. The company experienced a flood on 1 April 2019 that destroyed its entire work in process inventory but did not affect the raw materials or finished goods inventories because they were located elsewhere. The insurance company wants to determine the cost of work in process inventory at the time of the flood. The company uses a periodic inventory system so perpetual records are not available. A periodic inventory taken after the flood indicated that raw materials were valued at $89 200 and finished goods at $116 000. The company’s accounting records show that the inventories as at 1 January 2019 were as follows. In addition, the accounting records indicate that the costs recorded during the first quarter of 2019 amounted to: In the past, factory overhead costs have amounted to 350% of direct labour cost. Sales for the first quarter of 2016 amounted to $600 000. The company’s gross profit has been 40% of sales for a long time. Required (a) Determine the following amounts: i. the cost of sales for the first quarter of 2019 ii. the cost of goods manufactured for the first quarter of 2019 iii. the work in process inventory as at 31 March 2019, broken down into direct materials, direct labour and factory overhead. (LO6) (a) i. Cost of sales = 0.6 (600 000) = $360 000 ii. BASIC CHEMICALS LTD Cost of Goods Manufactured Statement for the quarter ended 31 March 2019 Beginning raw materials $29 600 Purchases — raw materials 160 000 189 600 Ending raw materials (89 200) Raw materials used $100 400 Direct labour 42 000 Factory overhead [1] 147 000 Total manufacturing costs 289 400 Beginning work in process 88 800 Ending work in process [3] (39 000) Cost of goods manufactured [2] $339 200 [1] $42 000 3.5 = $147 000 [2] Cost of goods manufactured = Ending finished goods + Cost of sales – beginning finished goods Cost of sales = $600 000 60% = $360 000 Cost of goods manufactured = $116 000 + $360 000 – $136 800 = $339 200 [3] $289 400 + $88 800 – X = $339 200 where X = ending work in process X = $39 000 (above) iii. Period cost performance: Direct materials $100 400 34.7% Direct labour 42 000 14.5% Factory overhead 147 000 50.8% $289 400 100.00% Ending work in process: Direct materials (0.347) $39 000 $13 533 Direct labour (0.145) $39 000 5 655 Factory overhead (0.508) $39 000 19 812 $39 000 Problem 20.30 Valuation of inventories in manufacturing Moore Manufacturing Pty Ltd makes refrigerators and is trying to determine the cost of its ending work in process. The accountant has put together the following data for the year ended 30 June 2019. Each refrigerator uses $300 of direct materials, $60 of direct labour and 2.4 machine hours. Direct material is all added in the first third of the production process, direct labour is used equally throughout the entire production and machine hours are used equally throughout the first 80% of the production process. In the past, Moore Manufacturing Pty Ltd has allocated the factory overhead costs on the basis of direct labour but the accountant and the chief executive officer (CEO) are considering whether machine hours used would better reflect the way in which factory overhead costs are incurred. The accountant needs to estimate the percentage of completion of the ending work in process and whether to use direct labour or machine hours to calculate the overhead rate. The CEO is paid a significant bonus if the profit for the year exceeds $10 000 000. The accountant estimates that the work in process is 50% complete and that the company should continue to use direct labour to allocate factory overhead and this will result in a profit for the year of $9 998 000. The CEO is not happy with this and argues that the work in process is 80% complete and that machine hours should be used to allocate factory overhead. Required (a) Give likely reasons for the CEO preferring her method of calculating the value of ending work in process rather than using the accountant’s method. (b) Calculate the value of ending work in process using both the accountants approach and the CEO’s method and the resulting change in profit to see if your explanation in requirement A is reasonable. (LO1 and LO6) (a) Possible reasons for the CEO preferring her method of calculating the value of ending work in process is that if the factory overhead is allocated using machine hours rather than direct labour, and the production is 80% complete, then more factory overhead would be allocated to ending work in process. This would in turn reduce the cost of goods manufactured for the period and result in a lower cost of sales and higher profit. Moore Manufacturing Pty Ltd’s profit is close to the level at which the CEO will get paid a significant bonus and the CEO’s method of allocation factory overhead may be enough to increase the profit to $10 000 000 so that she gets her bonus. (b) Factory Overhead Rate (DL) = $360 000 = 0.60 $600 000 Factory Overhead Rate (MH) = $360 000 = $15/MH 24 000 Direct Material allocated $18 000 = 60 refrigerators in work in process $300 If WIP is 50% complete and factory overhead is allocated based on direct labour hours then Ending WIP: Direct Material+ Direct Labour +Factory Overhead $300+ ($60 50%) +($60 50% 0.60) = $348/refrigerator $348 60 refrigerators = $20 880 ending WIP If WIP is 80% complete and the factory overhead is allocated based on machine hours then Ending WIP: Direct Material + Direct Labour + Factory Overhead $300 + ($60 80%) + 2.4 hours $15 = $384/refrigerator $384 60 refrigerators = $23 040 ending WIP This would increase ending WIP by $2160 ($23 040 – $20 880), which would reduce the cost of goods manufactured by the same amount and therefore reduce the cost of sales by $2160 and increase the profit from $9 998 000 to $10 000 160 and thus the CEO would receive the bonus. Case studies Decision analysis Pricing computers for a manufacturer Innovative Computers Pty Ltd began manufacturing inexpensive computers for the student market on 1 July 2018. The variable costs of manufacturing each computer are as follows. During the year ended 30 June 2019, the following fixed costs were incurred. At the end of the year there was no work in process and 10 000 computers had been produced and sold during the year. Inventory was costed at the average cost of production per computer. The computers were priced so that a profit mark-up of $300 over manufacturing costs was obtained from each computer sold. Required (a) Determine the selling price of each computer over the past year. (b) Innovative Computers Pty Ltd wants to increase sales by 25% in the next year. Management is not sure whether to increase the price by up to 25%, keep the price the same, or even reduce the price. Assuming that the policy of a $300 mark-up on cost will continue, decide on a price to recommend to the managers of Innovative Computers Pty Ltd. (a) Variable cost per computer Direct materials $120 Direct labour 10 Variable overhead 20 $150 Fixed factory overhead per computer (1 200 000/10 000) 120 Cost per computer 270 Mark up 300 Selling price per computer $ 570 (b) Next year’s expected sales (1.25) (10 000) = 12 500 computers Variable costs per computer $150 Fixed factory overhead per computer (1 200 000/12 500) 96 Cost per computer 246 Mark up 300 Selling price for next year $546 Recommend a selling price of $546 which is a decrease in selling price of $24 or 4.2% Sustainable manufacturing Design for the environment Sustainable manufacturing is increasing in importance as consumers and governments become more aware of the long‐term impacts of the production of the products we use. Refer back to the business insight ‘New Mercedes‐Benz A‐Class awarded environmental certificate’ and the concept of Design for Environment (DfE). Access the Mercedes‐Benz Annual Report at http://ar2015.daimler.com/report and review how the company is integrating sustainable manufacturing into its production activities. Required (a) What are the key principles of DfE? (b) There are many benefits to manufacturers of pursuing DfE. Outline at least four benefits of DfE. (c) Research three companies, other than Mercedes Benz, that incorporate DfE into their manufacturing processes and provide a brief summary of how they believe DfE reduces their manufacturing costs. (a) Key principles of DfE include: 1. Environmental design of products whole life cycle from the cradle to the grave. All processes that occur during its life cycle must be taken into account. 2. Natural materials are not always better for the environment than artificial materials. All factors need to be taken into account such as wastage with natural materials, chemicals used to treat natural materials and whether they are as readily recyclable as artificial materials like plastic. 3. Not only should the energy consumption in the production process be taken into account but the energy used by a product throughout its life should also be considered. 4. Design can increase the life of products by making them last longer or able to be upgraded rather than replaced. 5. A service can replace a product, instead of everyone having their own lawn mower it may be more environmentally sustainable to pay someone to mow many lawns and thus require less lawn mower production. 6. Design with less materials and lower weight. 7. Increased demand for recycled products could lead to the supply of recycled products. 8. Products need to be easy to recycle. 9. As consumers increase demand for environmentally friendly products then investment in research, design and innovation to deliver these products. (b) Benefits of pursuing DfE for manufacturers include: 1. As markets increase demand for products with low environmental impact manufacturers need to respond if they want to remain competitive. 2. Producing goods and services inefficiently costs more and reduces profitability. Well-designed products can reduce pollution and costs. 3. Improved planning and decision making. Life cycle assessment allows for better planning and more accurate estimation of costs. 4. Improving a company’s value through environmental performance. It may also reduce exposure to liabilities such as pollution, contamination and consumer backlash to unsafe products. 5. Improved relationships with consumers and the government. 6. Improved staff morale, particularly if better environmental practices lead to better occupational, health and safety. 7. A systematic look at the design of products using eco-design principles will yield better results for the environment and a sustainable future. (c) An internet search for ‘companies using design for the environment’ will generate a number of useful links. For example: •Hewlett Packard: - ‘The Design for Environment program has three priorities: o Energy efficiency — reduce the energy needed to manufacture and use our products. o Materials innovation — reduce the amount of materials used in our products and develop materials that have less environmental impact and more value at end-of-life. o Design for recyclability — design equipment that is easier to upgrade and/or recycle.’ •Mitsubishi Electric: - ‘By actively investing a targeted 0.1% of per unit sales in high-efficiency and energy-saving equipment as a way of preventing global warming, we have realized substantial income and savings.’ •BMW: - ‘BMW’s 1991 Z1 Roadster, whose plastic side panels come apart like the halves of a walnut shell, is an example of a car designed for disassembly. One of the lessons learned, is that glue or solder in bumpers should be replaced with fasteners so that the bumpers can come apart more easily and the materials can be recycled. BMW is also changing instrument panels. In the past they were made of an assortment of synthetics glued together. Now BMW uses variations of polyurethane, foam, and rubber so the panel can be recycled. The portion of a car recycled is 80% by weight and BMW is aiming for 95%.’ - Each of the above extracts demonstrates ways in which Design for the Environment has led to changes in manufacturing methods that ultimately lead to lower costs and higher profits while at the same time contributing to a sustainable future. Communication and leadership Manufacturing cost elements The three major inputs into the manufacturing process are direct materials, direct labour and factory overheads. If the costs of any of these are not controlled, they may inflate the cost of manufacturing. If the selling price of the final output is determined by the market for the product and cannot be increased, the profit margin will be reduced. Required (a) Organise the class into three groups. Group 1 is to discuss ways in which a business can ensure that direct material costs are controlled. Group 2 is to discuss ways in which direct labour costs can be controlled. Group 3 is to discuss control of overhead costs. (b) Each group prepares a written summary of its discussion and gives a copy to the other groups. Answers will vary depending on the students and groups formed. Ethics and governance Cost allocation for a manufacturing firm Toolkit Pty Ltd manufactures high-quality tools for sale to tradespeople. The company produces two major lines of products — spanners and hammers. Trevor is the manager of spanner production and Helmut is the manager responsible for hammer production. The direct materials for the spanners and hammers are different as they are made with different metal alloys and the hammers also have a rubber handle supplied by a rubber manufacturer. The direct labour for each product line is also usually separate as different skills are required for making spanners than for making hammers. Occasionally, one of the hammer manufacturers, Leanne, does a few hours work per week on making spanners as she has had some experience in making both lines of tools. The factory overhead is divided between spanners and hammers based on the number of each produced. Both Trevor and Helmut receive bonuses based on how much they can minimise the production costs of their products. Maria is the accountant for Toolkit and is responsible for allocating all costs to manufactured goods. Trevor and Maria are engaged and Trevor’s bonuses will be helpful in meeting the costs of the wedding. After much discussion, Trevor has convinced Maria that, as no record is kept of Leanne’s time spent making spanners instead of hammers, it would be easier just to charge all of Leanne’s wages to direct labour for hammers. Usually an estimate is made of Leanne’s time spent on spanners. Trevor also convinced Maria that rather than allocating the factory overhead based on the number of spanners and hammers produced, it would be better to use the hours of production of each. This meant that instead of spanners receiving 60% of factory overhead they would receive only 50%. Required (a) Who are the stakeholders in this situation? (b) Are there any ethical issues involved? If so, what are they? (c) What would you do if you were Maria? (a) Stakeholders would include Maria, the cost accountant, who is in disagreement with Trevor, her fiancé, and being subjected to pressure from him to manipulate reports for their benefit. Trevor is also a stakeholder in that his remuneration, including the bonus scheme, is dependent upon appropriate performance as disclosed in cost reports. Cost reports produced according to the norm, do not favour a remuneration outcome, and he is deliberately attempting to manipulate such reports for his personal gain. Helmut is also a stakeholder because if Maria follows Trevor’s suggestions, then his bonuses are likely to be reduced. (b) Maria, the cost accountant, has a professional and personal responsibility to carry out and apply cost accounting principles. Trevor is coercing her into compromising her standards of conduct for their mutual gain. She is, in effect, being asked to manipulate reports that would amount to defrauding the company. Trevor is, of course, using his relationship with Maria for personal gain and is thereby acting dishonestly and against the best interests of the company. (c) Maria should probably take Trevor on squarely, indicating to him that she is required to conform to the company policy in relation to the allocation of production costs. If Maria lets Trevor get away with his requests this time, then she puts herself in a weak negotiating position if Trevor makes similar requests in the future. Financial analysis Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions: Required 1. What inventories are carried by JB Hi-Fi Ltd in the consolidated statement? If only one class of inventories is carried, suggest why any classification used is necessary. 2. Can you identify a product cost in the annual report? If so, what is it? 3. Identify three period costs, and explain why they are period costs even for a retail entity such as JB Hi-Fi Ltd. 4. Can you identify any entities within the group which might carry out some manufacturing operations? If so, give examples. 1. A good starting point is the Consolidated Income Statement, where the Cost of Sales is shown. Inventories are shown in the Consolidated Balance Sheet. Notes to Consolidated Financial Statements refer only to retail inventories. Since no mention is made of work in process or raw materials inventories, one can conclude that JB Hi-Fi Ltd is not in the manufacturing business. 2. There are no product costs for JB Hi-Fi Ltd as it does not manufacture goods. 3. In the Consolidated Income Statement are listed Sales and marketing expenses, occupancy expenses, administrative expenses, finance expenses and Other expenses. These would be period costs for JB Hi-Fi Ltd. As JB Hi-Fi Ltd does not manufacture goods all of its expenses would be period costs. 4. A perusal of the note on segment information does not give an indication that any of the entities conduct manufacturing operations. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568
Download
Close
Close
