Question

Ginocera Inc. is a designer, manufacturer, and distributor of low­cost, high­quality stain­ less steel kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 2016. In January, the company spent $600,000 to develop a late­ night advertising infomercial for the new product. During 2016, the company spent $1,400,000 promoting the product through these infomercials, and $800,000 in legal costs. The knives were ready for manufacture on January 1, 2016.
Ginocera uses a job order cost system to accumulate costs associated with the kitchen knife. The unit direct materials cost for the knife is:
Hardened steel blanks (used for knife shaft and blade) $4.00
Wood (for handle) 1.50
Packaging 0.50
The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 250 knives.
After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife into a decorative box. The direct labor cost is $0.50 per unit.
The knives are sold to stores. Each store is given promotional materials, such as post­ ers and aisle displays. Promotional materials cost $60 per store. In addition, shipping costs average $0.20 per knife.
Total completed production was 1,200,000 units during the year. Other information is as follows:
Number of customers (stores) 60,000
Number of knives sold 1,120,000
Wholesale price (to store) per knife $16
Factory overhead cost is applied to jobs at the rate of $800 per stamping machine hour after the knife blanks are stamped. There were an additional 25,000 stamped knives, handles, and cases waiting to be assembled on December 31, 2016.
Instructions
1. Prepare an annual income statement for the Kitchen Ninja knife series, including sup­ porting calculations, from the information provided.
2. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 2016.

Answer 1

Answer:

1. $432,000

2. Finished goods inventory $776,000

Work in process $230,000

Explanation:

1. Preparation of an annual income statement for the Kitchen Ninja knife series

First step is to determine The Total Manufacturing cost per unit

DIRECT MATERIAL

Hardened steel blank $ 4.00

Wood for handle $ 1.50

Packaging $ 0.50

Total direct material $ 6.00

(4.00+1.50+0.50)

Direct labor $ 0.50

Factory overhead (800/250)$3.20

Total manufacturing cost per knife $ 9.70

(6.00+0.50+3.20)

Now let prepare the Income statement

INCOME STATEMENT

Sales $17,920,000

(1120,000 * 16)

Cost of good sold $10,864,000

(1120,000 * 9.7)

Gross profit $7,056,000

($17,920,000-$10,864,000)

Selling expense:

Infomercial campaign $2,000,000

($600,000 +$1400,000 )

Promotional material $3,600,000

(60,000 * $60)

Shipping cost $224,000

(1120,000 * 0.2)

Total selling expense $5,824,000

($2,000,000+$3,600,000+$224,000)

Administrative expense:

Legal expense $800,000

Total selling and administrative expense

$6,624,000

($5,824,000+$800,000)

Income from operation $432,000

($7,056,000-$6,624,000)

Therefore the annual income statement for the Kitchen Ninja knife series will be $432,000

2. Calculation to Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 2016

Calculation for Finished goods inventory

Finished goods inventory=($1,200,000 – $1,120,000) * 9.7

Finished goods inventory=$80,000*9.7

Finished goods inventory= $ 776,000

Calculation for Work in process

Work in process= 25,000 * (6 + 3.20)

Work in process=25,000*9.20

Work in process= $230,000

Therefore the balances in the work in process will be $776,000 and finished goods inventories will be $230,000 for the Kitchen Ninja knife series on December 31, 2016