Question

Laworld Inc. manufactures small camping tents. Last year, 200,000 tents were made and sold for $60 each. Each tent includes the following costs: Direct materials $18 Direct labor 12 Manufacturing overhead 16 The only selling expenses were a commission of $2 per unit sold and advertising totaling $100,000. Administrative expenses, all fixed, equaled $300,000. There were no beginning or ending finished goods inventories. There were no beginning or ending work-in-process inventories. Required: 1. Calculate (a) the product cost for one tent and (b) the total product cost for last year. 2. CONCEPTUAL CONNECTION: (a) Prepare an income statement for external users. (b) Did you need to prepare a supporting statement of cost of goods manufactured? Explain. 3. CONCEPTUAL CONNECTION: Suppose 200,000 tents were produced (and 200,000 sold) but that the company had a beginning finished goods inventory of 10,000 tents produced in the prior year at $40 per unit. The company follows a first-in, first-out policy for its inventory (meaning that the units produced first are sold first for purposes of cost flow). (a) What effect does this have on the income statement? (b) Prepare a cost of goods sold statement.

Answer 1

Answer:

1. Calculate (a) the product cost for one tent

• $46

and (b) the total product cost for last year.

• $9,200,000

2. (a) Prepare an income statement for external users.

                                    Laworld Inc.

                                Income Statement

Total revenue                                                          $12,000,000

Cost of goods sold:

• Direct materials $3,600,000
• Direct labor $2,400,000
• Manufacturing overhead $3,200,000        

Total COGS                                                             ($9,200,000)

Gross profit                                                               $2,800,000

Operating expenses:

• Sales commissions $400,000
• Advertising expenses $100,000
• Administrative expenses $300,000

Total operating expenses                                        ($800,000)

Net profit from operations                                      $2,000,000

(b) Did you need to prepare a supporting statement of cost of goods manufactured? Explain.

• No, since the COGS were fairly simple (no beginning or ending inventory) you can just squeeze the information.

3. Suppose 200,000 tents were produced (and 200,000 sold) but that the company had a beginning finished goods inventory of 10,000 tents produced in the prior year at $40 per unit. The company follows a first-in, first-out policy for its inventory (meaning that the units produced first are sold first for purposes of cost flow). (a) What effect does this have on the income statement?

• Both gross profit and net profit would increase since COGS would be lower: COGS = (10,000 x $40) + (190,000 x $46) = $9,140,000, which is $60,000 less.

(b) Prepare a cost of goods sold statement.

Incurred costs:

Direct materials                                                            $3,600,000

Direct labor                                                                   $2,400,000

Manufacturing overhead                                             $3,200,000

Cost of goods manufactured                                      $9,200,000

Beginning inventory of finished units                            $400,000

Ending inventory of finished units                                ($460,000)

Cost of goods sold                                                       $9,140,000

Explanation:

revenue = 200,000 x $60 = $12,000,000

manufacturing costs:

• Direct materials $18 x 200,000 = $3,600,000
• Direct labor $12 x 200,000 = $2,400,000
• Manufacturing overhead $16 x 200,000 = $3,200,000
• total = $9,200,000

product cost per unit = $18 + $12 + $16 = $46

S&A expenses:

• sales commission of $2 x 200,000 = $400,000
• advertising totaling $100,000
• administrative expenses $300,000
• total $800,000