The following data refer to Solaris Power Ltd for the financial year ending 31 December 2021: Sales $5,900,000 Raw material inventory, 1 January 2021 160,000 Purchases of raw material 2,000,000 Raw material inventory, 31 December 2021 120,000 Direct labour cost incurred 1,400,000 Other selling and administrative expenses 240,000 Indirect labour cost (65% for factory; 35% for selling & admin) 800,000 Other manufacturing expenses 300,000 Depreciation of building (85% for factory; 15% for selling & admin) 400,000 Depreciation of equipment (90% for factory; 10% for selling & admin) 320,000 Income tax expense 80,000 Indirect material used (all for factory) 60,000 Insurance on factory & equipment (80% for factory; 20% for selling & admin) 100,000 Electricity (75% for factory; 25% for selling & admin) 200,000 Work in process, 1 January 2021 40,000 Work in process, 31 December 2021 60,000 Finished goods inventory, 1 January 2021 100,000 Finished goods inventory, 31 December 2021 140,000 The company uses normal costing and manufacturing overhead is applied at the rate of 120% of direct labour cost. Required: (a) Compute the manufacturing costs incurred for the current year. (b) Compute the cost of goods manufactured (COGM) for the current year. (c) Compute the manufacturing overhead variance. (sub parts to be solved:) (d) Compute the cost of goods sold (COGS) if the company closes overapplied or underapplied overhead cost into the cost of goods sold. (e) Present Solaris Power Ltd’s Income statement for the year. (f) Present the journal entry to close the manufacturing overhead control account if Solaris Power Ltd disposed the manufacturing overhead variance as described in (d). (g) Present the journal entry to close off the balance in the
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.
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The following data refer to Solaris Power Ltd for the financial year ending 31 December 2021: Sales |
$5,900,000 |
|
Raw material inventory, 1 January 2021 |
160,000 |
|
Purchases of raw material |
2,000,000 |
|
Raw material inventory, 31 December 2021 |
120,000 |
|
Direct labour cost incurred |
1,400,000 |
|
Other selling and administrative expenses |
240,000 |
|
Indirect labour cost (65% for factory; 35% for selling & admin) |
800,000 |
|
Other manufacturing expenses |
300,000 |
|
|
400,000 |
|
Depreciation of equipment (90% for factory; 10% for selling & admin) |
320,000 |
|
Income tax expense |
80,000 |
|
Indirect material used (all for factory) |
60,000 |
|
Insurance on factory & equipment (80% for factory; 20% for selling & admin) |
100,000 |
|
Electricity (75% for factory; 25% for selling & admin) |
200,000 |
|
Work in process, 1 January 2021 |
40,000 |
|
Work in process, 31 December 2021 |
60,000 |
|
Finished goods inventory, 1 January 2021 |
100,000 |
|
Finished goods inventory, 31 December 2021 |
140,000 |
The company uses normal costing and manufacturing
Required:
(a) Compute the
(b) Compute the cost of goods manufactured (COGM) for the current year.
(c) Compute the manufacturing overhead variance.
(sub parts to be solved:)
(d) Compute the cost of goods sold (COGS) if the company closes overapplied or underapplied overhead cost into the cost of goods sold.
(e) Present Solaris Power Ltd’s Income statement for the year.
(f) Present the
(g) Present the journal entry to close off the balance in the manufacturing overhead account if instead of (d), Solaris Power Ltd closed off the manufacturing overhead variance by pro-rating the amount to the work in process, finished goods inventory and cost of goods sold.
(h) Explain the effect on profit between the two methods of closing off the manufacturing overhead described in (d) and (g).
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