Chapter 1, Problem 19PSA

a.

To determine

The total product cost and average cost per unit

Given information:

• Raw material $26,000.
• Wages for production workers $21,000.
• Manufacturing equipment’s is $49,000, its salvage value is $4,000 and an expected life is 5years.
• The completed production of Company I is 8,000 units.

Explanation of Solution

Product cost:

It is the cost incurred by the company during the process of manufacturing the product.

Calculation of total product cost for the year 2014 is as follows:

Table (1)

Hence, the total cost of the product for the year 2014 is $56,000.

Calculation average cost per unit for the year 2014 is as follows:

$\begin{array}{c}\text{Average cost per unit}=\frac{\text{Total cost of the product}}{\text{Completed production units}}\\ =\frac{\$56,000}{8,000\text{ units}}\\ =\$7\end{array}$

Hence, the average cost per unit for the year 2014 is $7.

Working notes:

Calculation of manufacturing overheads is as follows:

$\begin{array}{c}\text{Manufacturing overheads}=\frac{\left(\text{Manufacturing equipments}-\text{Salvage value}\right)}{\text{Number of years}}\\ \text{=}\frac{\left(\$49,000-\$4,000\right)}{5}\\ =\frac{\$45,000}{5}\\ =\$9,000\end{array}$

Hence, the manufacturing overheads are $9,000.

…… (1)

b.

To determine

The cost of goods sold that appears in 2014 income statement.

Given information:

• The total number of units sold by Company I is 7,200 units.

Explanation of Solution

Cost of goods sold

Cost of goods sold is the accumulation of all the direct costs incurred in the process of producing a product. It excludes indirect expenses.

Calculation of total cost of goods sold for the year 2014 is as follows:

$\begin{array}{c}\text{Total cost of goods sold}=\text{Average cost per unit}\times \text{Sold units}\\ =\$7\times 7,200\text{ units}\\ \text{=\$50,400}\end{array}$

Hence, the total cost of goods sold is $50,400.

c.

To determine

The cost of ending inventory that appears on 31^st December 2014 balance sheet.

Given information:

• The total number of units sold by Company I is 7,200 units.
• The completed production of Company I is 8,000 units.

Explanation of Solution

Inventory:

It is the term for products ready for sale and raw materials used in making the final product.

Calculation of ending inventory for the year 2014 is as follows:

$\begin{array}{c}\text{Ending inventory}=\text{Average cost per unit}\times \left(\text{Completed production units}-\text{Sold units}\right)\\ =\$7\times \left(8,000\text{ units}-7,200\text{ units}\right)\\ =\$7\times \left(800\text{ units}\right)\\ =\$5,600\end{array}$

Hence, the ending inventory for the year 2014 is $5,600.

d.

To determine

The total amount of net income for the year 2014

Given information:

• Raw material $26,000.
• Manufacturing equipment’s is $49,000, its salvage value is $4,000 and an expected life is 5years.
• The total number of units sold by Company I is 7,200 units at cost of $15 per unit.
• The completed production of Company I is 8,000 units.
• Common stock of the Company I is $78,000.
• Purchased furniture for office at $21,000 and an expected life is 7years.
• The Company pays $12,000 as salary and $21,000 as wages for production purpose.

Explanation of Solution

Financial statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Calculation of net income of the Company I for the year 2014 is as follows:

Table (2)

Hence, the net income of the Company for the year 2014 is $42,600.

Working note:

Calculation of depreciation value for furniture:

$\begin{array}{c}\text{Depreciation value for furniture}=\frac{\text{Furniture cost}}{\text{Number of useful life}}\\ =\frac{\$21,000}{7}\\ =\$3,000\end{array}$

Hence, the depreciation value of furniture is $3,000.

…… (2)

Calculation of depreciation value for manufacturing equipment’s:

$\begin{array}{c}\text{Depreciation value for manufacturing equipments}=\frac{\left(\begin{array}{l}\text{manufacturing equipments}-\\ \text{Salvage value}\end{array}\right)}{\text{Number of useful life}}\\ =\frac{\$49,000-\$4,000}{5}\\ =\frac{\$45,000}{5}\\ =\$9,000\end{array}$

Hence, the depreciation value of manufacturing equipment’s is $9,000.

…… (3)

Calculation of total units sold at the rate of $15 per unit.

$\begin{array}{c}\text{Total units sold}=\text{Number of units sold}\times \text{Per unit cost}\\ =\$7,200\text{ units}\times \$15\\ =\$108,000\end{array}$

The total units sold by the Company I is 108,000.

…… (4)

Calculation of total inventory at the average cost per unit.

$\begin{array}{c}\text{Total inventory cost}=\text{Number of units sold}\times \text{Average cost per unit}\\ =7,200\text{ units}\times \$7\\ =\$50,400\end{array}$

The total inventory at the average cost is $50,400.

…… (5)

e.

To determine

The total amount of retained earnings for the year 2014

Given information:

• Raw material $26,000.
• Manufacturing equipment’s is $49,000, its salvage value is $4,000 and an expected life is 5years.
• The total number of units sold by Company I is 7,200 units at cost of $15 per unit.
• The completed production of Company I is 8,000 units.
• Common stock of the Company I is $78,000.
• Purchased furniture for office at $21,000 and an expected life is 7years.
• The Company pays $12,000 as salary and $21,000 as wages for production purpose.

Explanation of Solution

Financial statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Calculation of retained earnings of the Company I for the year 2014 is as follows:

Table (3)

Hence, the retained earnings of the Company for the year 2014 are $42,600.

f.

To determine

The total assets that appears on the balance sheet

Given information:

• Raw material $26,000.
• Manufacturing equipment’s is $49,000, its salvage value is $4,000 and an expected life is 5years.
• The total number of units sold by Company I is 7,200 units at cost of $15 per unit.
• The completed production of Company I is 8,000 units.
• Common stock of the Company I is $78,000.
• Purchased furniture for office at $21,000 and an expected life is 7years.
• The Company pays $12,000 as salary and $21,000 as wages for production purpose.

Explanation of Solution

Financial statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Table showing calculation of assets:

Table (4)

Calculation of total assets is as follows:

$\begin{array}{c}\text{Total assets}=\text{Total cash}+\text{Total inventory}+\text{Total furniture}+\text{Total equipments}\\ =\$57,000+\$5,600+\$18,000+\$40,000\\ =\$120,600\end{array}$

Hence, the total amount of assets of the Company for the year 2014 is $120,600.