Question

Celestin Manufacturing Company incurred $5,000 of depreciation on its manufacturing equipment during its first year of operation. During this year the company made 2,500 units of product and sold 2,000 units of product. Based on this information alone the company would show:

Answer 1

Answer:

$4,000 of cost of goods sold expense on their statement of income.

Explanation:

Depreciation on manufacturing equipment is an overhead cost which is therefore a product cost. The amount of the depreciation is first placed in the Inventory account and then transferred to the Cost of Goods Sold account when the units are sold. Since the company made 2,500 units of product and sold 2,000 units of the product , the amount of the Cost of Goods Sold account is:

$4,000

(5,000 depreciation / 2,500 units = $2 per unit

$2 per unit x 2,000 units sold = $4,000 cost of goods sold.

The remaining $1,000 of depreciation would remain in the inventory account until the time the remaining goods are sold.