Assignment no.

2.39 Missing records, computing inventory costs.

 Finished goods inventory, 3/31/2011 = $210,000
 Work-in-process inventory, 3/31/2011 = $190,000
 Direct materials inventory, 3/31/2011 = $85,000
This problem is not as easy as it first appears. These answers are obtained by working from
the known figures to the unknowns in the schedule below. The basic relationships between
categories of costs are:
Manufacturing costs added during the period (given) $840,000
Conversion costs (given) $660,000
Direct materials used = Manufacturing costs added – Conversion costs
= $840,000 – $660,000
= $180,000
Cost of goods manufactured = Direct Materials Used × 4
= $180,000 × 4 = $720,000
Schedule of Computations
Direct materials, 3/1/2011 (given) $
25,000

Direct materials purchased (given)

240,000

Direct materials available for use

265,000

Direct materials, 3/31/2011 3 = 85,000

Direct materials used

180,000

Conversion costs (given)

660,000
Manufacturing costs added during the period (given)
840,000

Add work in process, 3/1/2011 (given)

70,000

Manufacturing costs to account for

910,000
 Deduct work in process, 3/31/2011 2 =
190,000

Cost of goods manufactured (4 × $180,000)

720,000

Add finished goods, 3/1/2011

320,000

Cost of goods available for sale

1,040,000

Deduct finished goods, 3/31/2011 1 =

210,000

Cost of goods sold (80% × $1,037,500)

$830,000

Some instructors may wish to place the key amounts in a Work in Process T-account. This
problem can be used to introduce students to the flow of costs through the general ledger
(amounts in thousands)

2.40 Comprehensive problem on unit costs, product costs.

1. If 2 pounds of direct materials are used to make each unit of finished product, 123,000
units × 2 lbs., or 246,000 lbs. were used at $0.60 per pound of direct materials ($147,600
÷ 246,000 lbs.). (The direct material costs of $147,600 are direct materials used, not
purchased.) Therefore, the ending inventory of direct materials is 2,400 lbs. × $0.60 =
$1,440.
2. Manufacturing Costs for 123,000 units
Variable Fixed Total
Direct materials costs $147,600 - $147,600
Direct manufacturing 38,400 - 38,400
labor costs
Plant energy costs 2,000 - 2,000
Indirect manufacturing 14,000 19,000 33,000
labor costs
Other indirect 11,000 14,000 25,000
manufacturing costs
Cost of goods $213,000 $33,000 $246,000
manufactured

Average unit manufacturing cost: $246,000 ÷ 123,000 units

= $2.00 per unit
Finished goods inventory in units: = $26,000 / $2.00 per unit
 = 13,000 units
3. Units sold in 2011 = Beginning inventory + Production – Ending inventory
= 0 + 123,000 – 13,000 = 110,000 units
Selling price in 2011 = $594,000 ÷ 110,000
= $5.40 per unit
4. Denver Office Equipment Income Statement Year Ended December 31, 2011 (in
thousands)
Revenues (110,000 units sold × $5.40) $594,000

Cost of units sold: Beginning finished goods, Jan. 1, 2011 $0

Cost of goods manufactured 246,000

Cost of goods available for sale 246,000

Ending finished goods, Dec. 31, 2011 26,000 220,000

Gross margin 374,000

Operating costs:

Marketing, distribution, and customer-service costs 176,000

Administrative costs 56,000 232,000

Operating income $142,000

2.41 Classification of costs; ethics.

1. Warehousing costs per unit = Warehousing costs/ Units produced

= $3, 250,000/200,000 units =$16.25 per unit.

If the $3,250,000 is treated as period costs, the entire amount would be expensed during the year
as incurred. If it is treated as a product cost, it would be “unitized” at $16.25 per unit and expensed
as each unit of the product is sold. Therefore, if only 180,000 of the 200,000 units are sold, only
$2,925,000 ($16.25 per unit × 180,000 units) of the $3,250,000 would be expensed in the current
period. The remaining $3,250,000 – $2,925,000 = $325,000 would be inventoried on the balance
sheet until a later period when the units are sold. The value of finished goods inventory can also be
calculated directly to be $325,000 ($16.25 per unit × 20,000 units).

2. No. With respect to classifying costs as product or period costs, this determination is made by
Generally Accepted Accounting Principles (GAAP). It is not something that can be justified by the
plant manager or plant controller. Even though these costs are in fact related to the product,
they are not direct costs of manufacturing the product. GAAP requires that research and
 development, as well as all costs related to warehousing and distribution of goods be classified
as period costs, and be expensed in the period they are incurred.
3. Scott Hewitt would improve his personal bonus and take-home pay by
10% × $325,000 = $32,500
4. The controller should not reclassify costs as product costs just so the plant can reap shortterm
benefits, including the increase in Hewitt’s personal year-end bonus. Research and development
costs, costs related to the shipping of finished goods and costs related to warehousing finished
goods are all period costs under generally accepted accounting principles, and must be treated
as such. Changing this classification on Old World’s financial statements would violate generally
accepted accounting principles and would likely be considered fraudulent. The idea of costs
being classified as product costs versus period costs is to properly reflect on the income
statement those costs that are directly related to manufacturing (costs incurred to transform
one asset, direct materials into another asset, finished goods) and to properly reflect on the
balance sheet those costs that will provide a future benefit (inventory). The controller should not
be intimidated by Hewitt. Hewitt stands to personally benefit from the reclassification of costs.
The controller should insist that he must adhere to generally accepted accounting principles so
as not to submit fraudulent financial statements to corporate headquarters. If Hewitt insists on
the reclassification, the controller should raise the issue with the chief financial officer after
informing Hewitt that he is doing so. If, after taking all these steps, there is continued pressure
to modify the numbers, the controller should consider resigning from the company rather than
engage in unethical behavior.

2.42 Finding unknown amounts.

Let G = given, I = inferred

Step 1: Use gross margin Case 1 Case 2

formula
Revenues $ 32,000 G $31,800 G
Cost of goods sold 20,700 I 20,000 G
Gross margin $ 11,300 G $11,800 I

Step 2: Use schedule of cost Case 1 Case 2

of goods manufactured
formula
Direct materials used $ 8,000 G $ 12,000 G
Direct manufacturing labor 3,000 G 5,000 G
costs
Indirect manufacturing costs 7,000 G 6,500 I
Manufacturing costs incurred 18,000 I 23,500 I
Add beginning work in 0G 800 G
process, 1/1
Total manufacturing costs to 18,000 I 24,300 I
account for
Deduct ending work in 0G 3,000 G
process, 12/31
Cost of goods manufactured $ 18,000 I $ 21,300 I
Step 3: Use cost of goods sold Case 1 Case 2
formula
Beginning finished goods $ 4,000 G $ 4,000 G
inventory, 1/1
Cost of goods manufactured 18,000 I 21,300 I
Cost of goods available for sale 22,000 I 25,300 I
Ending finished goods 1,300 I 5,300 G
inventory, 12/31
Cost of goods sold $ 20,700 I $ 20,000 G