2-34

(20 min.) Computing cost of goods purchased and cost of goods sold.

1a. Marvin Department Store

Schedule of Cost of Goods Purchased
For the Year Ended December 31, 2017
(in thousands)

Purchases $155,000
Add transportation-in 7,000
162,000
Deduct:
Purchase returns and allowances $4,000
Purchase discounts 6,000 10,000

Cost of goods purchased $152,000

1b. Marvin Department Store

Schedule of Cost of Goods Sold
For the Year Ended December 31, 2017
(in thousands)

Beginning merchandise inventory 1/1/2017 $ 27,000

Cost of goods purchased (see above) 152,000
Cost of goods available for sale 179,000
Ending merchandise inventory 12/31/2017 34,000
Cost of goods sold $145,000

2. Marvin Department Store

Income Statement
Year Ended December 31, 2017
(in thousands)

Revenues $280,000
Cost of goods sold (see above) 145,000
Gross margin 135,000
Operating costs
Marketing, distribution, and customer
service costs $37,000
Utilities 17,000
General and administrative costs 43,000
Miscellaneous costs 4,000
Total operating costs 101,000
Operating income $ 34,000
2-36

(20 min.) Flow of Inventoriable Costs.

(All numbers below are in millions).

1.
Direct materials inventory 10/1/2017 $ 105
Direct materials purchased 365
Direct materials available for production 470
Direct materials used (385)
Direct materials inventory 10/31/2017 $ 85

2.
Total manufacturing overhead costs $ 450
Subtract: Variable manufacturing overhead costs (265)
Fixed manufacturing overhead costs for October 2017 $ 185

3.
Total manufacturing costs incurred during October 2017 $ 1,610
Subtract: Direct materials used (from requirement 1) (385)
Total manufacturing overhead costs (450)
Direct manufacturing labor costs for October 2017 $ 775

4.
Work-in-process inventory 10/1/2017 $ 230
Total manufacturing costs incurred during October 2017 1,610
Work-in-process available for production 1,840
Subtract: Cost of goods manufactured (moved into finished goods) (1,660)
Work-in-process inventory 10/31/2017 $ 180

5.
Finished goods inventory 10/1/2017 $ 130
Cost of goods manufactured (moved from work in process) 1,660
Cost of finished goods available for sale in October 2017 $ 1,790

6.
Cost of finished goods available for sale in October 2017
(from requirement 5) $ 1,790
Subtract: Cost of goods sold (1,770)
Finished goods inventory 10/31/2017 $ 20
2-37

(30–40 min.) Cost of goods manufactured, income statement, manufacturing

company.

1. Peterson Company
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2017
(in thousands)

Direct materials cost  

Beginning inventory, January 1, 2017 $ 21,000  
Purchases of direct materials 74,000  
Cost of direct materials available for use 95,000  
Ending inventory, December 31, 2017 23,000  
Direct materials used $ 72,000

Direct manufacturing labor costs 22,000

Indirect manufacturing costs  
Indirect manufacturing labor 17,000  
Plant insurance 7,000  
Depreciation—plant building & equipment 11,000  
Repairs and maintenance—plant 3,000  
Total indirect manufacturing costs 38,000

Manufacturing costs incurred during 2017 132,000

Add beginning work-in-process inventory, January 1, 2017 26,000
Total manufacturing costs to account for 158,000
Deduct ending work-in-process inventory, December 31, 2017 25,000
Cost of goods manufactured (to Income Statement) $133,000

     

2. Peterson Company
Income Statement
Year Ended December 31, 2017
(in thousands)
 

Revenues $310,000
Cost of goods sold:  
Beginning finished goods, January 1, 2017 $ 13,000  
Cost of goods manufactured 133,000  
Cost of goods available for sale 146,000  
Ending finished goods, December 31, 2017 20,000  
Cost of goods sold 126,000
Gross margin 184,000
Operating costs:  
Marketing, distribution, and customer-service costs 91,000  
General and administrative costs 24,000  
Total operating costs 115,000
Operating income $ 69,000

2-42

(15–20 min.)   Terminology, interpretation of statements (continuation of 2-36).

1. Direct materials used $118 million

Direct manufacturing labor costs 40 million
Prime costs $158 million

Direct manufacturing labor costs $ 40 million

Indirect manufacturing costs 61 million
Conversion costs $101 million

2. Inventoriable costs (in millions) for Year 2017

Plant utilities $ 8
Indirect manufacturing labor 21
Depreciation—plant and equipment 6
Miscellaneous manufacturing overhead 15
Direct materials used 118
Direct manufacturing labor 40
Plant supplies used 9
Property taxes on plant 2
Total inventoriable costs $219
Period costs (in millions) for Year 2017
Marketing, distribution, and customer-service costs $ 90
3. Design costs and R&D costs may be regarded as product costs in case of
contracting with a governmental agency. For example, if the Air Force negotiated to
contract with Lockheed to build a new type of supersonic fighter plane, design costs
and R&D costs may be included in the contract as product costs.

4. Direct materials used = $118,000,000 ÷ 2,000,000 units = $59 per unit

Depreciation on plant and equipment = $6,000,000 ÷ 2,000,000 units = $3 per
unit

5. Direct materials unit cost would be unchanged at $59. Depreciation unit cost
would be $6,000,000 ÷ 3,000,000 = $2 per unit. Total direct materials costs
would increase by 50% to $177,000,000 ($59 per unit × 3,000,000 units). Total
depreciation cost of $6,000,000 would remain unchanged.

6. In this case, equipment depreciation is a variable cost in relation to the unit

output. The amount of equipment depreciation will change in direct proportion to
the number of units produced.
(a) Depreciation will be $3 million ($1.50 × 2 million) when 2 million units are
produced.
(b) Depreciation will be $4.5 million ($1.50 × 3 million) when 3 million units are
produced.

2-43

(20 min.) Labor cost, overtime and idle time.

1.(a) Total cost of hours worked at regular rates

49 hours × $25per hour $1,225
51 hours × $25 per hour 1,275
45 hours × $25 per hour 1,125
47 hours × $25 per hour 1,175
$4,800
Minus idle time
(5.0 hours × $25 per hour) 125
(6.0 hours × $25 per hour) 150
(3.0 hours × $25 per hour) 75
(4.0 hours × $25 per hour) 100
Total idle time 450
Direct manufacturing labor costs $4,350

(b) Idle time = 18 hours × $25 per hour = $ 450

(c) Overtime and holiday premium.

Week 1: Overtime (49 – 40) hours × Premium, $15 per hour $ 135
Week 2: Overtime (51 – 40) hours × Premium, $15 per hour 165
Week 3: Overtime (45 – 40) hours × Premium, $25 per hour 125
 Week 4: Overtime (47 – 40) hours × Premium, $15 per hour 105
Week 4: Holiday 8 hours × 2 days × Premium, $26 per hour 416
Total overtime and holiday premium $ 946

(d) Total earnings in December

Direct manufacturing labor costs $4,350
Idle time 450
Overtime and holiday premium 946
Total earnings $5,746

2. Idle time caused by regular machine maintenance, slow order periods, or

unexpected mechanical problems is an indirect cost of the product because it is not
related to a specific product.
Overtime premium caused by the heavy overall volume of work is also an
indirect cost because it is not related to a particular job that happened to be worked on
during the overtime hours. If, however, the overtime is the result of a demanding
“rush job,” the overtime premium is a direct cost of that job.