Baber, Inc., manufactures custom scaffolding used in construction projects. The following data pertain to its operations for the most recent year:
Raw materials beginning inventory ……. $23,000
Raw materials ending inventory ………. $42,000
WIP beginning inventory ……………… $98,500
WIP ending inventory …………………. $76,400
Finished goods beginning inventory ….. $124,350
Finished goods ending inventory ……… $138,750
Raw materials purchased ………………. $190,000
Labor cost ……………………………… $145,000
Selling and administration expenses …….. $87,600
Revenues ……………………………….. $694,740
You also know that Baber, Inc., uses two allocation bases to charge overhead to products.
It calculates a rate of 20% of materials cost for materials-related overhead. The rate for all other manufacturing overhead is 150% of labor cost.
Required:
a. Calculate the cost of raw materials issued to WIP during the year.
b. Calculate the cost of manufacturing overhead charged to production.
c. Calculate the cost of goods manufactured during the year.
d. Calculate the cost of goods sold during the year.
e. Prepare a GAAP income statement.
f. For a particular custom truss, Baber informs you that it incurred $7,800 toward materials and $12,300 toward labor costs. What is the inventoriable cost of this truss?
g. Comment on whether the value of the units as reported in the ending inventory account is a good estimate of the products’ costs for decisions such as setting pricing.
SOLUTION
a. The accounting equation for the raw materials account is:
Ending balance = Beginning balance + raw materials purchased – raw materials issued to production.
$42,000 = $23,000 + 190,000 – Issued out
Therefore, raw materials issued = $171,000.
b. Total material costs charged to production = $171,000.
The materials related overhead charged to WIP
= 20% of $171,000 = $34,200
Labor costs charged to production = $145,000.
The labor related overhead charged to WIP
= 150% of $145,000 = $217,500
Therefore,
Total manufacturing overhead charged to production = $34,200+$217,500 = $251,700.
c. The accounting equation for the work-in-process account is:
Ending balance = Beginning balance + costs charged to operations – cost of goods manufactured.
Costs charged to operations include materials, labor and overhead.
Costs added to WIP (i.e., operations) = $171,000 + 145,000 + $251,700 = $567,700.
Thus,
$76,400 = $98,500 + 567,700 - Cost of goods manufactured.
Cost of goods manufactured = $589,800.
d. We can express cost flows through the finished goods account using the following accounting equation:
Ending balance = Beginning balance + Cost of goods manufactured – Cost of goods sold.
$138,750 = $124,350 + $589,800 – Cost of goods sold.
Cost of goods sold = $575,400
e. The following is the required gross margin statement.
| Baber, Inc. Income Statement for Year Ended 12/31/xx |
|---|
| Revenue | | $694,740 |
| Beginning FG inventory | $124,350 | |
| + Cost of Goods Manufactured | $589,800 | |
| - Ending FG inventory | $138,750 | |
| = Cost of Goods Sold | | $575,400 |
| Gross margin | | $119,340 |
| Selling & Administration | | 87,600 |
| Profit before taxes | | $31,740 |
| f. | Inventoriable costs is the sum of all manufacturing costs charged to the product. We have: | |
| Materials cost | $7,800 |
| Labor cost | 12,300 |
| Materials related overhead (20% of materials) | 1,560 |
| Other overhead (150% of labor cost) | 18,450 |
| Total inventoriable cost | $40,110 |
| g. | No, the amount of inventoriable costs in not enough for making effective decisions. From a decision making view, we must consider all controllable costs, regardless of business function, when evaluating a product’s profit. We need to do this because changing a product’s volume will change, for example, sales commissions. This means that we need to consider sales commission when evaluating profitability. The point to remember is that the product/period cost classification (which leads to inventoriable costs) is useful from a financial accounting purpose. It often is NOT useful from a decision making perspective. | |