Question

Suppose Jones Company manufactures chairs. One model is the executive chair that sells for $120. Jones Company projects sales of 400 chairs per month. The production costs are as follows: Direct materials per chair $50 Direct labor per chair 20 Manufacturing overhead per chair 10 Jones Company has 20 chairs in inventory at the beginning January and wants to have an ending inventory equal to 20% of next month’s sales. Selling and administrative expenses for this product line are $10,000 per month. What is the budgeted cost of goods sold for January?

Answer 1

Answer:

$32,000

Explanation:

Cost of goods sold refers to all direct expenses incurred in producing goods and excludes all selling and indirect costs.

Cost of goods sold = Sales value - Gross Profit

Gross profit = Sales value - Direct costs - overhead costs

Gross profit per unit = $120 - ($50 + $ 20 + $10)

Gross profit per unit = $40 per unit

Gross profit in value = $40 per unit × No of units = $40 × 400 units = $16,000

Budgeted sales value = Selling price per unit × Budgeted sales units

                                     = $120 × 400 chairs = $48000

Thus, budgeted cost of goods sold = Budgeted sales value - Gross Profit in value

= $48000 - $16000 = $32000

Note: While computing gross profit, selling and administrative expenses would be excluded since those are used while computing net income. Also, cost of goods sold excludes selling and administrative i.e . indirect costs.