Information about Hannah Industries for the month ending December 31, 2019, is as follows: Sales $450,000 Cost of goods sold 329,000 Net operating income 22,000 Beginning inventories: Direct materials 70,000 Work in process 28,000 Finished goods 90,000 Ending direct materials is 10 percent smaller than beginning direct materials. Ending work in process is 75 percent of the beginning work in process. Ending finished goods increased by $15,000 during the year. Prime costs and conversion costs are 60 percent and 80 percent of total manufacturing costs added, respectively. Assume no income taxes or indirect materials.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Information about Hannah Industries for the month ending December 31, 2019, is as follows:
Sales $450,000
Cost of goods sold 329,000
Net operating income 22,000
Beginning inventories:
Direct materials 70,000
Work in process 28,000
Finished goods 90,000
Ending direct materials is 10 percent smaller than beginning direct materials. Ending work in
process is 75 percent of the beginning work in process. Ending finished goods increased by $15,000
during the year. Prime costs and conversion costs are 60 percent and 80 percent of total
manufacturing costs added, respectively.
Assume no income taxes or indirect materials.
Required:
a. Prepare a statement of cost of goods manufactured for December.
b. Prepare an absorption income statement for December.
c. Calculate prime costs.
d. Calculate conversion costs.
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