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I am hoping for a step-by-step solution for this problem. (Horngren’s Cost Accounting 16th Edition – Chapter 2, number 45)
Atlanta Office Equipment manufactures and sells metal shelving. It began operations on January 1, 2017. Costs incurred for 2017 are as followed (V=variable, F=fixed):
Direct marterials used – 140,000 V
Direct manfacturing labor costs – 22,000 V
Plant Energy Costs – 5,000 V
Indirect Manufacturing labor costs – 18,000 V & 14,000 F
Other indirect manufacturing costs – 8,000 V & 26,000 F
Marketing & distribution costs – 120,000 V & 43,000 F
Admin costs – 54,000 F
Inventory data:
Direct materials: beg inv = 0, end inv = 2,300 lbs
Work in process: beg inv = 0, end inv = 0 units
Finished goods: beg inv = 0, end inv = ?
Production in 2017 was 100,000 units. 2 pounds of direct materials are used for 1 unit. Revenues were 473,200. Selling price and purchase price remained stable throughout the year. Ending inventory of finished goods is carried at average unit manufacturing cost for 2017. Finished goods inventory at December 31, 2017 was 20,970.
1. Calculate direct materials inventory, total cost, December 31, 2017
2. Calculate finished goods inventory, total cost, December 31, 2017
3. Calculate selling price in 2017
4. Calculate operating income for 2017
Expert Answer
1. As 2 pounds of direct material are used for 1 unit of finished product, for 100,000 units it is 100,000 x 2 = 200,000 lbs of direct material used.
Cost of direct materials used = 140,000
Cost per pound = 140,000/200,000 = $ 0.70
Direct materials inventory at December 31, 2017 = 2300 lbs
Total cost = 2300 x 0.70 = $ 1610
2. Average unit manufacturing cost:
=(140,000 + 22,000 + 5,000 + 18,000 + 14,000 + 8,000 + 26,000) / 100,000 units
= $ 233,000/ 100,000 units
= $2.33 per unit
Finished goods total cost on December 31, 2017 = $ 20,970
Finished goods inventory in units = $20,970 / $2.33 = 9,000 units
3. Units sold in 2017:
Opening inventory + Production – Closing inventory = 0 + 100,000 – 9,000 = 91,000 units
Selling price in 2017 = Total Revenues/ Total Sales = $ 473,200 / 91,000 = $ 5.20 per unit
4. Computation of Operating Income for 2017:
Revenues (91,000 units sold x $5.20) $ 473,200
Cost of units sold:
Opening Finished goods as on January 1, 2017 $0
Cost of goods manufactured and available for sale $ 233,000
Ending Finished goods as on December 31, 2017 $ 20,970 $ 212,030
Gross Margin $ 261,170
Operating Costs:
Marketing and Distribution Costs (120,000+43,000) $ 163,000
Admin Costs $ 54,000 $ 217,000
Operating Income for 2017 $ 44,170
