BBA – 5B Ghayoor Zafar 01-111182-151

ASSIGNMENT 3
Managerial Accounting

Submitted by- Ghayoor Zafar

Submitted to – Dr Mohsin
BBA – 5B Ghayoor Zafar 01-111182-151

Problem 1
BBA – 5B Ghayoor Zafar 01-111182-151

SOLUTION

1
Work in process inventory, Jan 1 180,000
Direct materials
Raw materials inventory, January 1 90,000
Add: Purchases of raw materials 750,00
0
Raw materials available for use 840,00
0
Less: Raw materials inventory, Dec 31 60,000
Raw materials used in production 780,000
Direct labor 150,000
Manufacturing overhead
Utilities, factory 36,000
Depreciation, factory 162,000
Insurance, factory 40,000
Supplies, factory 15,000
Indirect labor 300,000
Maintenance, factory 87,000
Total overhead costs 640,000
Total manufacturing costs 1,570,000
Total cost of work in process 1,750,000
Deduct: Work in process inventory, Dec 31 100,000
Cost of goods manufactured $ 1,650,000

2
Finished goods inventory, Jan 1 260,000
Add: cost of goods manufactured 1,650,000
Goods available for sale 1,910,000
Deduct: Finished goods inventory, Dec 31 210,000
Cost of goods sold $ 1,700,000

3
Klear-Seal Company
Income Statement
For the year ended December 31

Sales 2,500,000
Less: cost of goods sold 1,700,000
Gross margin 800,000
Less selling and administrative expenses:
Selling expenses 140,000
Administrative expenses 270,000
Total expenses 410,000
BBA – 5B Ghayoor Zafar 01-111182-151

Operating income $ 390,000

Problem 2-27 Schedule of Cost of Goods

Manufactured: Income Statement: Cost Behavior

The total manufacturing costs for the year were $675,000; the goods available for sale totaled
$720,000; and the cost of goods sold totaled $635,000.

Required:

1. Prepare a schedule of cost of goods manufactured and then the cost of goods sold section
of the company’s income statement for the year.

2. Assume that the dollar amounts given above are for the equivalent of 30,000 units
produced during the year. Compute the average cost per unit for direct materials used,
and compute the average cost per unit for rent on the factory building.

3. Assume that in the following year the company expects to produce 50,000 units. What
average cost per unit and total cost would you expect to be incurred for direct materials?
For rent on the factory building? (Assume that direct materials are a variable cost and that
rent is a fixed cost.

4. As the manager in charge of production costs, explain to the president the reason for any
difference in the average costs per unit between (2) and (3) above.
BBA – 5B Ghayoor Zafar 01-111182-151

Solution (1)

Let’s first find the missing amounts:

To calculate Direct Labor:

Raw Materials used in production + Direct Labor + Total Overhead Costs = Total manufacturing costs

therefore:
$675,000 (total manufacturing costs) - $340,000 (total overhead costs) - $270,000) (total raw
Materials used in production) = $65,000.

To calculate Beginning Work In Progress Inventory:

Total Manufacturing costs + Beginning WIP Inventory - Ending WIP Inventory = Cost of Goods
Manufactured

Therefore:

$690,000 (Cost of Goods Manufactured) + $33,000 (Ending WIP) - $675,000 (Total Manufacturing Costs)
= $48,000.

Valenko Company
Schedule of Cost of Goods Manufactured

Direct Materials:        
Beginning Raw materials inventory $50,000  
Add: Purchases of raw materials   260,000  
Raw materials available for use   $310,000  
Less: Ending Raw materials inventory 40,000  
Raw materials used in production     $270,000
Direct Labor       65,000
Manufacturing Overhead:      
Insurance, factory   8,000  
Rent, factory building   90,000  
Utilities, factory     52,000  
Cleaning supplies, factory   6,000  
Depreciation, factory equipment   110,000  
Maintenance, factory   74,000  
Total overhead costs     340,000
Total manufacturing costs     675,000
Beginning Work in Progress Inventory   48,000
        723,000
Less: Ending Work in Progress Inventory   33,000
Cost of Goods Manufactured     690,000
BBA – 5B Ghayoor Zafar 01-111182-151

Now, let’s look at how to complete the Cost of Goods Sold section:

Beginning Finished Goods inventory     $30,000

Add: Cost of Goods Manufactured     690,000
Goods Available for Sale     $720,000
Less: Ending Finished Goods Inventory   85,000
Cost of Goods Sold     $635,000

To determine the Ending Finished Goods Inventory:

Beginning F/G Invent + Cost of Goods Manufactured - X (which represents Ending F/G Invent) = COGS.

Therefore:

$30,000 + $690,000 – X = $635,000

$720,000 - X = $635,000

$720,000 - $635,000 = X

$85,000 = X

Solution (2)
BBA – 5B Ghayoor Zafar 01-111182-151

Direct materials: $270,000 ÷ 30,000 units = $9.00 per unit.

Rent, factory building: $90,000 ÷ 30,000 units = $3.00 per unit

Solution (3)

Direct materials:
Per unit: $9.00 (unchanged)
Total: 50,000 units × $9.00 per unit = $450,000.

Rent, factory building:

Per unit: $90,000 ÷ 50,000 units = $1.80 per unit.
Total: $90,000 (unchanged).

Solution (4)

The average cost per unit for rent dropped from $3.00 to $1.80, because of the increase in production
between the two years. Since fixed costs do not change in total as the activity level changes, the
average unit cost will decrease as the activity level rises.

Problem – 2-14
BBA – 5B Ghayoor Zafar 01-111182-151

Listed below are costs found in various organizations.

1. Depreciation, executive jet.

2. Costs of shipping finished goods to customers.

3. Wood used in manufacturing furniture.

4. Sales manager’s salary.

5. Electricity used in manufacturing furniture.

6. Secretary to the company president.

7. Aerosol attachment placed on a spray can produced by the company.

8. Billing costs.

9. Packing supplies for shipping products overseas.

10. Sand used in manufacturing concrete.

11. Supervisor’s salary, factory.

12. Executive life insurance.

13. Sales commissions.

14. Fringe benefits, assembly-line workers.

15. Advertising costs.

16. Property taxes on finished goods warehouses.

17. Lubricants for production equipment.

Required:

Prepare an answer sheet with column headings as shown below. For each cost item, indicate whether it
would be variable or fixed with respect to the number of units produced and sold; and then whether it
would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost,
indicate whether it would typically be treated as a direct or indirect cost with respect to units of
product.

Solution
BBA – 5B Ghayoor Zafar 01-111182-151

Manufacturing
Variable or Selling Administrative (Product) Cost
Cost Item Fixed Cost Cost
Direct Indirect

1. Depreciation, executive jet. F X

2. Costs of shipping finished goods to

V X
customers.

3. Wood used in manufacturing furniture. V X

4. Sales manager’s salary. F X

5. Electricity used in manufacturing

V X
furniture.

6. Secretary to the company president. F X

7. Aerosol attachment placed on a spray

V X
can produced by the company.

8. Billing costs. V X

9. Packing supplies for shipping products

V X
overseas.

10. Sand used in manufacturing concrete. V X

11. Supervisor’s salary, factory. F X

12. Executive life insurance. F X

13. Sales commissions. V X

14. Fringe benefits, assembly line workers. V X

15. Advertising costs. F X

16. Property taxes on finished goods

F X
warehouses.

17. Lubricants for production equipment. V X

Problem – 2-16

Several years ago Medex Company purchased a small building adjacent to its manufacturing plant in
order to have room for expansion when needed. Since the company had no immediate need for the
extra space, the building was rented out to another company for rental revenue of $40,000 per year.
BBA – 5B Ghayoor Zafar 01-111182-151

The renter’s lease will expire next month, and rather than renewing the lease, Medex Company has
decided to use the building itself to manufacture a new product.

Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor
to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the
new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all
of the building space, so it will be necessary to rent space in a warehouse nearby in order to store
finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to
rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The
company will continue to depreciate the building on a straight-line basis, as in past years. Depreciation
on the building is $10,000 per year.

Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to
customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit. To have funds
to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary
investments. These investments are presently yielding a return of $6,000 per year.

Required:

Prepare an answer sheet with the following column headings:

Nam Product Cost

e
Period (Selling
Fixe
of Variable Direct Direct Manufacturing and Opportunity Sunk
d
the Materials Labor Overhead
Cost Administrative) Cost Cost
Cost
Cost Cost

List the different costs associated with the new product decision down the extreme left column (under
Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved.
There may be X’s under several column headings for a single cost. (For example, a cost may be a fixed
cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite
the cost.)

Solution
 BBA – 5B Ghayoor Zafar 01-111182-151

Product Cost Period

(Selling
Variable Fixed Opportunity Sunk
Name of the Cost Direct Direct Mfg. and
Cost Cost Cost Cost
Materials Labor Overhead Admin.)
Cost

1. Rental revenue
forgone $40,000 per X
year.

2. Direct materials cost,

X X
$40 per unit.

3. Supervisor’s salary,
X X
$2,500 per month.

4. Direct labor cost, $18

X X
per unit.

5. Rental cost of
warehouse, $1,000 X X
per month.

6. Rental cost of
equipment, $3,000 X X
per month.

7. Depreciation of the
building, $10,000 per X X X
year.

8. Advertising cost,
X X
$50,000 per year.

9. Shipping cost, $10 per

X X
unit.

10. Electrical costs, $2 per

X X
unit.

11. Return earned on

investments, $6,000 X
per year.