ACC 250 Lecture Notes - Lecture 11: Income Statement, Cost Accounting

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emeraldleopard234

10 Jun 2018

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Comparing Income Statements

Both merchandising and manufacturing firms earn revenue from selling goods. The essential

difference between the two is that the merchandising business buys the foods it sells the

manufacturing business makes the goods it sells. This difference, while important, will not

affect the basic calculation of net income.

Important distinctions between merchandising and manufacturing firms do appear when you

closely examine a particular part of the above calculation. It should be easy for you to guess

what part this is. If you remember that one of these firms buys the goods it sells while the

other makes the goods it sells, you can expect that significant variations will exist in the cost

of goods sold section.

The manufacturer starts with raw materials and ends with a good ready to be sold. Along the

way, a great variety of costs can be attached to the manufacture of that good. It is vital that

management knows what these costs are and how they can control them. In fact,

management’s need to know about costs has created an entire branch of accounting known as

cost accounting. Cost accounting is a specialized rea of accounting that concentrates on

determining, controlling, and reporting the costs of doing business.

The cost of goods manufactured requires a detailed calculation. Normally, the calculation is

too long to fit easily on an income statement. Therefore, a separate manufacturing statement

is prepared and only the final amount is reported on the income statement.

To understand how to calculate the cost of goods manufactured, observe the three important

items shown in boldface: raw materials used, direct labour and factory overhead. These are

three important costs common to manufacturing businesses.

Raw materials are essential components that become part of the finished product.

Direct labour represents the wages for those employees who have a specific role in the

making of the finished goods. Wages to workers on an assembly line is a good example of

direct labour.

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Document Summary

Both merchandising and manufacturing firms earn revenue from selling goods. The essential difference between the two is that the merchandising business buys the foods it sells the manufacturing business makes the goods it sells. This difference, while important, will not affect the basic calculation of net income. Important distinctions between merchandising and manufacturing firms do appear when you closely examine a particular part of the above calculation. It should be easy for you to guess what part this is. If you remember that one of these firms buys the goods it sells while the other makes the goods it sells, you can expect that significant variations will exist in the cost of goods sold section. The manufacturer starts with raw materials and ends with a good ready to be sold. Along the way, a great variety of costs can be attached to the manufacture of that good.

Related Questions

1. X Company currently buys a part from a supplier for $13.70 per unit but is considering making the part itself next year. This year, they purchased 3,100 units of this part; next year, they think they will need 3,400 units. Estimated costs to make the part are:

	Per-Unit	Total
Direct materials	$2.35	$7,285
Direct labor	4.93	15,283
Variable overhead	4.10	12,710
Fixed overhead	5.40	16,740
Total	$16.78	$52,018

Of the estimated fixed overhead, $7,700 are common costs that would be allocated to the part; the rest would be additional fixed overhead costs. X Company currently rents unused factory space for $2,200; it will have to use this space to make the part. If X Company continues to buy the part instead of making it, it will save ( )

3 and 4. X Company currently makes a part and is considering buying it from a company has offered to supply it for $16.00 per unit. This year, per-unit production costs to produce 57,000 units were:

Direct materials	$5.80
Direct labor	4.30
Overhead	6.00
Total	$16.10

$228,000 of the total overhead costs were variable; $33,060 of the fixed overhead costs can be avoided if X Company buys the part. In addition, the resources that were used for production can be rented to another company for $70,000. Production next year is expected to increase to 61,700 units.

3. If X Company continues to make the part instead of buying it, it will save

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4. X Company is uncertain about next year's production level. At what production level will the company be indifferent between making and buying the part?

Questions 5 and 6 refer to the following information

At the end of the year, a company offered to buy 4,920 units of a product from X Company for a special price of $12.00 each instead of the company's regular price of $19.00 each. The following information relates to the 61,200 units of the product that X Company made and sold to its regular customers during the year:

	Per-Unit	Total
Cost of goods sold	$7.61	$465,732
Period costs	2.30	140,760
Total	$9.91	$606,492

Fixed cost of goods sold for the year were $113,832, and fixed period costs were $70,380. Variable period costs include selling commissions equal to 2% of revenue.

5. Profit on the special order is

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6. Assume the following two changes for the special order: 1) variable cost of goods sold will decrease by $0.80 per unit, and 2) there will be no selling commissions. What will be the effect of these two changes on the special order profit?

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blushmoose330

1) All of the following are examples of product costs except:

depreciation on the company's administrative offices.

salary of the plant manager.

insurance on the factory equipment.

rental costs of the factory facility.

2) Period costs:

are treated as expenses in the period they are incurred

are directly traceable to products

include direct labor

are also referred to as manufacturing overhead costs

3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:

Direct materials $30

Direct manufacturing labor 5

Variable manufacturing overhead 10

Fixed manufacturing overhead 40

Total manufacturing costs $85

The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?

a. $85,000

b. $170,000

c. $107,500

d. $102,500

4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:

overstate period expenses on the income statement.

overstate the cost of goods sold on the income statement.

understate the cost of goods manufactured.

have no effect on the cost of goods manufactured.

5) In CVP analysis, focusing on target net income rather than operating income:

a. will increase the breakeven point

b. will decrease the breakeven point

c. will not change the breakeven point

d. does not allow calculation of breakeven point

6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.

a. True

b. False

7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.

a. True

b. False

8) Which of the following statements is correct with regard to a CVP graph?

A CVP graph shows the maximum possible profit.

A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

A CVP graph assumes that total expense varies in direct proportion to unit sales.

A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?

	Cost of purchasing clothing	Sales commissions
a.	Product	Product
b.	Product	Period
c.	Period	Product
d.	Period	Period

10) The principal difference between variable costing and absorption costing centers on:

whether variable manufacturing costs should be included as product costs.

whether fixed manufacturing costs should be included as product costs.

whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

none of these.

11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?

3,300 hot dogs

3,000 hot dogs

2,727.27 hot dogs

2,728 hot dogs

12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

	Unit product cost under variable costing..........................	$5.20 per unit
	Fixed manufacturing overhead cost for the year..............	$260,000
	Fixed selling and administrative cost for the year............	$180,000
	Units (calculators) produced and sold..............................	400,000

What is Shun's unit product cost under absorption costing for last year?

$4.10

$4.55

$5.85

$6.30.

Use the following information to answer questions 13 to 15:

Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.

13) Calculate the number of equivalent units for materials.

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

14) Calculate the number of equivalent units for conversion?

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:

	Materials	Conversion
Work in process 5/1.......................	$13,800	$3,740
Costs added during May................	$42,000	$26,260

The total cost per equivalent unit for May was:

$5.02

$5.10

$5.12

$5.25

pearbat350

1.A time interest earned ratio of 0.90 to 1 means:

A. The time the firm will default on its interest payment.

B. That net income is less than the interest expense.

C. That the cash flow is less than the net income

D. That the cash floe exceed the net income

E. None of the answer are correct.

2. Statements in which all items are expressed only in relativeterms (percentages on base) are termed;

A. Vertical Statement

B. Horizontal statement

C. Funds Statements

D. Common-sized statements

E. None of the answer are correct

3. A manufacturing firm would begin preparation of its masterbudget by constructing a:

A. Sales budget

B. Product budget

C. Cash Budget

D. Capital Budget

E. Set of pro-forma financial statements.

4. For a company that uses responsibility center accounting,which of the following costs is least likely to appear on aperformance report of an assembly-line supervisor.

A. Direct material used

B. Departmental Supplies

C. Assembly-line labor

D. Repairs and maintenance

E. Assembly-line facilities depreciation

5. which of the folling methods ignores the fact thar someservice department provide service to other service department;

a. Direct Method

B. Indirect method

C. Step down method

D. Reciprocal method

E. Dual cost allocation method

6.A division's return on investment may be improved byincreasing:

A. Cost of goods sold

B. Sales margin and cost of capital

C. Sales revenue and cost of capital

D. Capital turnover or sale margin

E. Capital turnover or cost of capital

7.Which of the following ratios would generally be used toevaluate a firms overall liquidity position

A. Working Capital

B. Current Ratio

C. Acid test ratio

D. Cash ratio

E. Inventory turnover in days.

8.Flexiable budgets reflect a comapny's anticipated costs basedon variations in;

A. Activity levels

B. Inflation rates

C. managers

D. anticipated capital acquistions

E. standards

9.When the quantity of material purchased is not equal to thequantity of material used, most companies base the calculation ofthe material quantity variance on the :

A. quantity of direct material purchased

B. Quantity of direct material spoiled

C. quantity of direct material that should have been used inacheiving actual production

D quantity of direct material actual used.

10. Which of the following costs should be ignored choosingamong alternatives?

A. Opportunity costs

B. Sunk costs

C. Out of pocket costs

D. Differential costs

E. None of these.

11. Which of the foll should have the strongest casue and effectrelationship with overhead cost;

A. Cost followers

B. Non value added cost

C. Cost drivers

D. Value added cost

E. Unit of output

12. Equivalent unit calculation are necessary to allocatemanaufacturing cost between:

A. Units completed and ending work in process

B.Beginning work in process and units completed

C. Unit sold and eding work in process

D. Cost of goods manufactured and beginnining work inprocess

E. Cost of goods manufactured and cost of goods sold.

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ACC 250 Lecture Notes - Lecture 11: Income Statement, Cost Accounting

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