Exercise 1-6

1. Traditional income statement

Cherokee Inc.

Traditional Income Statement

Sales ($30 per unit × 20,000 units)................... $600,000

Cost of goods sold

($24,000 + $180,000 – $44,000).................... 160,000

Gross margin .................................................. 440,000

Selling and administrative expenses:

Selling expenses

(($4 per unit × 20,000 units) + $40,000)...... $120,000

Administrative expenses

(($2 per unit × 20,000 units) + $30,000)...... 70,000 190,000

Net operating income....................................... $250,000

2. Contribution format income statement

Cherokee Inc.

Contribution Format Income Statement

Sales ($30 per unit × 20,000 units)................... $600,000

Variable expenses:

Cost of goods sold

($24,000 + $180,000 – $44,000) ................. $160,000

Selling expenses ($4 per unit × 20,000 units).. 80,000

Administrative expenses

($2 per unit × 20,000 units) ........................ 40,000 280,000

Contribution margin ......................................... 320,000

Fixed expenses:

Selling expenses ........................................... 40,000

Administrative expenses ................................ 30,000 70,000

Net operating income....................................... $250,000

1a. The total direct manufacturing cost incurred is computed as follows:

Direct materials per unit............................ $7.00

Direct labor per unit.................................. 4.00

Direct manufacturing cost per unit (a) ........ $11.00

Number of units sold (b) ........................... 20,000

Total direct manufacturing cost (a) × (b) .... $220,000

1b. The total indirect manufacturing cost incurred is computed as follows:

Variable manufacturing overhead per unit ... $1.50

Fixed manufacturing overhead per unit....... 5.00

Indirect manufacturing cost per unit (a)...... $6.50

Number of units sold (b) ........................... 20,000

Total indirect manufacturing cost (a) × (b).. $130,000

Note: The average fixed manufacturing overhead cost per unit of $5.00

is valid for only one level of activity—20,000 units produced.

2a. The total manufacturing cost that is directly traceable to the

Manufacturing Department is computed as follows:

Direct materials per unit............................ $7.00

Direct labor per unit.................................. 4.00

Variable manufacturing overhead per unit ... 1.50

Fixed manufacturing overhead per unit....... 5.00

Total manufacturing cost per unit (a).......... $17.50

Number of units sold (b) ........................... 20,000

Total direct costs (a) × (b) ........................ $350,000

2b. None of the manufacturing costs should be treated as indirect costs

when the cost object is the Manufacturing Department.

3a. The first step in calculating the total direct selling expense is to

determine the fixed portion of the sales representatives’ compensation

Fixed selling expense per unit (a)............... $3.50

Number of units sold (b) ........................... 20,000

Total fixed selling expense (a) × (b)........... $70,000

Total fixed selling expense (a).................... $70,000

Advertising expenditures (b)...................... $50,000

Total fixed portion of the sales

representatives’ compensation (a) ‒ (b) ... $20,000

The second step is to calculate the total direct selling expense that is

traceable to individual sales representatives as follows:

Sales commissions per unit (a) .................. $1.00

Number of units sold (b) ........................... 20,000

Total sales commission (a) × (b)................ $20,000

Fixed portion of sales representatives’

compensation ........................................ 20,000

Total direct selling expense........................ $40,000

3b. The total indirect selling expense that cannot be traced to individual

sales representatives is $50,000. The advertising expenditures cannot

be traced to specific sales representatives.

4. No. Kubin’s administrative expenses could be direct or indirect

depending on the cost object. For example, the chief financial officer’s

salary would be an indirect cost if the cost object is units of production;

however, his salary would be a direct cost if the cost object is the

Finance Department that he oversees.

Exercise 1-8

1. Direct materials ......................................... $ 7.00

Direct labor............................................... 4.00

Variable manufacturing overhead ................ 1.50

Variable manufacturing cost per unit (a) ...... $12.50

Number of units produced (b)..................... 20,000

Total variable manufacturing cost (a) × (b).. $250,000

Average fixed manufacturing overhead per

unit (c) .................................................. $5.00

Number of units produced (d)..................... 20,000

Total fixed manufacturing cost (c) × (d) ...... 100,000

Total product cost...................................... $350,000

Note: The average fixed manufacturing overhead cost per unit of $5.00

is valid for only one level of activity—20,000 units produced.

2. Sales commissions..................................... $1.00

Variable administrative expense .................. 0.50

Variable selling and administrative per unit... $1.50

Variable selling and admin. per unit (a)........ $1.50

Number of units sold (b) ............................ 20,000

Total variable selling and admin. expense

(a) × (b) ............................................. $30,000

Average fixed selling and administrative

expense per unit ($3.50 fixed selling +

$2.50 fixed administrative) (c).................. $6.00

Number of units sold (d) ............................ 20,000

Total fixed selling and administrative

expense (c) × (d) ................................... 120,000

Total period cost........................................ $150,000

Note: The average fixed selling and administrative expense per unit of

$6.00 is valid for only one level of activity—20,000 units sold.

3. Direct materials ......................................... $ 7.00

Variable manufacturing overhead ................ 1.50

Variable manufacturing cost per unit ........... $12.50

Variable manufacturing cost per unit (a) ...... $12.50

Number of units produced (b)..................... 22,000

Total variable manufacturing cost (a) × (b).. $275,000

Total fixed manufacturing cost (see

requirement 1) ....................................... 100,000

Total product cost...................................... $375,000

4. Sales commissions..................................... $1.00

Variable administrative expense .................. 0.50

Variable selling and administrative per unit... $1.50

Variable selling and admin. per unit (a)........ $1.50

Number of units sold (b) ............................ 18,000

Total variable selling and admin. expense

(a) × (b) ............................................. $27,000

Total fixed selling and administrative

expense (see requirement 2) ................... 120,000

Total period cost........................................ $147,000

Exercise 1-12

1. The computations for parts 1a through 1e are as follows:

a. The cost of batteries in Raw Materials:

Beginning raw materials inventory............. 0

Plus: Battery purchases............................ 8,000

Batteries available ................................... 8,000

Minus: Batteries withdrawn ...................... 7,600

Ending raw materials inventory (a)............ 400

Cost per battery (b)................................. $80

b. The cost of batteries in Work in Process:

Beginning work in process inventory ......... 0

Plus: Batteries withdrawn for production.... 7,500

Batteries available ................................... 7,500

Minus: Batteries transferred to finished

goods (7,500 × 90%)............................ 6,750

Ending work in process inventory (a)......... 750

Cost per battery (b)................................. $80

Work in process on April 30th (a) × (b) ...... $60,000

c. The cost of batteries in Finished Goods:

Beginning finished goods inventory ........... 0

Plus: Batteries transferred in from work in

process (see requirement b) .................. 6,750

Batteries available ................................... 6,750

Minus: Batteries transferred out to cost of

goods sold (6,750 × (100% ‒ 30%)) ...... 4,725

Ending finished goods inventory (a) .......... 2,025

Cost per battery (b)................................. $80

Finished goods on April 30th (a) × (b)........ $162,000

d. The cost of batteries in Cost of Goods Sold:

Number of batteries (see requirement c)

(a)....................................................... 4,725

Cost per battery (b)................................. $80

Cost of goods sold for April (a) × (b)......... $378,000

e. The cost of batteries included in selling expense:

Number of batteries (a) ........................... 100

Cost per battery (b)................................. $80

2. Raw Materials, Work in Process, and Finished Goods would appear on

the balance sheet. Cost of Goods Sold and Selling Expense would

appear on the income statement.