Chapter 1, Problem 20PSA

a.

To determine

The total product cost and average cost per unit.

Explanation of Solution

Product cost:

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

Given information:

• The raw material is $26,000.
• The wages for production workers are $21,000.
• Manufacturing equipment is $40,000, its salvage value is $4,000, and an expected life is 6 years.
• The completed production of Company S is 10,000 units.

The calculation of total product cost for the year 2018 is as follows:

Hence, the total cost of the product for the year 2018 is $53,000.

The calculation average cost per unit for the year 2018 is as follows:

$\begin{array}{c}\text{Average cost per unit}=\text{Total cost of the product}\times \text{Completed production units}\\ =\$53,000÷10,000\text{ units}\\ =\$5.30\end{array}$

Hence, the average cost per unit for the year 2018 is $5.30.

Working notes:

The calculation of manufacturing overheads is as follows:

$\begin{array}{c}\text{Manufacturing overheads}=\frac{\left(\text{Manufacturing equipments}-\text{Salvage value}\right)}{\text{Number of years}}\\ \text{=}\frac{\left(\$40,000-\$4,000\right)}{6}\\ =\frac{\$36,000}{6}\\ =\$6,000\end{array}$

Hence, the manufacturing overheads are $6,000.

(1)

b.

To determine

The cost of goods sold that appears in 2018 income statement.

Explanation of Solution

Cost of goods sold

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

Given information:

• The total number of units sold by Company S is 8,000 units.

The calculation of total cost of goods sold for the year 2018 is as follows:

$\begin{array}{c}\text{Total cost of goods sold}=\text{Average cost per unit}\times \text{Sold units}\\ =\$5.30\times 8,000\text{ units}\\ \text{=\$41,400}\end{array}$

Hence, the total cost of goods sold is $41,400.

c.

To determine

The cost of ending inventory that appears on 31^st December 2018 balance sheet.

Explanation of Solution

Inventory:

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

Given information:

• The total number of units sold by Company S is 8,000 units.
• The completed production of Company S is 10,000 units.

The calculation of ending inventory for the year 2018 is as follows:

$\begin{array}{c}\text{Ending inventory}=\text{Average cost per unit}\times \left(\text{Completed production units}-\text{Sold units}\right)\\ =\$5.30\times \left(10,000\text{ units}-8,000\text{ units}\right)\\ =\$5.30\times \left(2,000\text{ units}\right)\\ =\$10,600\end{array}$

Hence, the ending inventory for the year 2018 is $10,600.

d.

To determine

The total amount of net income for the year 2018.

Explanation of Solution

Financial statement:

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

Given information:

• The raw material is $26,000.
• The wages for production workers is $21,000.
• Manufacturing equipment is $40,000, its salvage value is $4,000, and an expected life is 6years.
• The total number of units sold by Company S is 8,000 units at cost of $9 per unit.
• The completed production of Company S is 10,000 units.
• The common stock of the Company S is $89,000.
• The purchased furniture for office at $32,000 and an expected life is 8years.
• The Company pays $12,000 as salary and $21,000 as wages for the production purpose.
• Company S pays 26,000 for the raw materials.

The calculation of net income of the Company S for the year 2018 is as follows:

Table (2)

Hence, the net income of the Company for the year 2018 is $13,600.

Working note:

The calculation of depreciation value for furniture:

$\begin{array}{c}\text{Depreciation value for furniture}=\frac{\text{Furniture cost}}{\text{Number of useful life}}\\ =\frac{\$32,000}{8}\\ =\$4,000\end{array}$

Hence, the depreciation value of furniture is $4,000.

(1)

The calculation of depreciation value for manufacturing equipment’s:

$\begin{array}{c}\text{Depreciation value for manufacturing equipments}=\frac{\left(\begin{array}{l}\text{manufacturing equipments}-\\ \text{Salvage value}\end{array}\right)}{\text{Number of useful life}}\\ =\frac{\$40,000-\$4,000}{6}\\ =\frac{\$36,000}{6}\\ =\$6,000\end{array}$

Hence, the depreciation value of the manufacturing equipment is $6,000.

(2)

The calculation of total units sold at the rate of $9 per unit.

$\begin{array}{c}\text{Total units sold}=\text{Number of units sold}\times \text{Per unit cost}\\ =\$8,000\text{ units}\times \$9\\ =\$72,000\end{array}$

The total units sold by the Company S are 72,000.

(3)

The calculation of total inventory at the average cost per unit.

$\begin{array}{c}\text{Total inventory cost}=\text{Number of units sold}\times \text{Average cost per unit}\\ =\$8,000\text{ units}\times \$5.30\\ =\$42,400\end{array}$

The total inventory at the average cost is 42,400.

(4)

e.

To determine

The total amount of net income for the year 2018.

Explanation of Solution

Financial statement:

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

Given information:

• The raw material is 26,000.
• The wages for production workers is $21,000.
• Manufacturing equipment is $40,000, its salvage value is $4,000, and an expected life is 6years.
• The total number of units sold by Company S is 8,000 units at cost of $9 per unit.
• The completed production of Company S is 10,000 units.
• The common stock of the Company S is $89,000.
• The purchased furniture for office at $32,000 and an expected life is 8 years.
• The Company pays $12,000 as salary and $21,000 as wages for the production purpose.
• Company S pays 26,000 for raw materials.

The calculation of retained earnings of the Company S for the year 2018 is as follows:

Table (3)

Hence, the net income of the Company for the year 2018 is $13,600.

Working note:

The calculation of depreciation value for furniture:

$\begin{array}{c}\text{Depreciation value for furniture}=\frac{\text{Furniture cost}}{\text{Number of useful life}}\\ =\frac{\$32,000}{8}\\ =\$4,000\end{array}$

Hence, the depreciation value of furniture is $4,000.

(1)

The calculation of depreciation value for manufacturing equipment’s:

$\begin{array}{c}\text{Depreciation value for manufacturing equipments}=\frac{\left(\begin{array}{l}\text{manufacturing equipments}-\\ \text{Salvage value}\end{array}\right)}{\text{Number of useful life}}\\ =\frac{\$40,000-\$4,000}{6}\\ =\frac{\$36,000}{6}\\ =\$6,000\end{array}$

Hence, the depreciation value of manufacturing equipment is $6,000.

(2)

The calculation of total units sold at the rate of $9 per unit.

$\begin{array}{c}\text{Total units sold}=\text{Number of units sold}\times \text{Per unit cost}\\ =\$8,000\text{ units}\times \$9\\ =\$72,000\end{array}$

The total units sold by the Company S are 72,000.

(3)

The calculation of total inventory at the average cost per unit.

$\begin{array}{c}\text{Total inventory cost}=\text{Number of units sold}\times \text{Average cost per unit}\\ =\$8,000\text{ units}\times \$5.30\\ =\$42,400\end{array}$

The total inventory at the average cost is 42,400.

(4)

f.

To determine

The total assets that appears on the balance sheet.

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 an income statement.

Given information:

• The raw material is $26,000.
• The wages for production workers is $21,000.
• Manufacturing equipment is $40,000, its salvage value is $4,000 and an expected life is 6years.
• The total number of units sold by Company S is 8,000 units at cost of $9 per unit.
• The completed production of Company S is 10,000 units.
• The common stock of the Company S is $89,000.
• The purchased furniture for office at $32,000 and an expected life is 8 years.
• The Company pays $12,000 as salary and $21,000 as wages for the production purpose.
• Company S pays 26,000 for raw materials.

The table showing calculation of assets:

Table (4)

The calculation of total assets is as follows:

$\begin{array}{c}\text{Total assets}=\text{Total cash}+\text{Total inventory}+\text{Total furniture}+\text{Total equipments}\\ =\$30,000+\$10,600+\$28,000+\$34,000\\ =\$102,600\end{array}$

Hence, the total amount of assets of the Company for the year 2018 is $102,600.

Working note:

The calculation of depreciation value for furniture:

$\begin{array}{c}\text{Depreciation value for furniture}=\frac{\text{Furniture cost}}{\text{Number of useful life}}\\ =\frac{\$32,000}{8}\\ =\$4,000\end{array}$

Hence, the depreciation value of furniture is $4,000.

(1)

The calculation of depreciation value for manufacturing equipment’s:

$\begin{array}{c}\text{Depreciation value for manufacturing equipments}=\frac{\left(\begin{array}{l}\text{manufacturing equipments}-\\ \text{Salvage value}\end{array}\right)}{\text{Number of useful life}}\\ =\frac{\$40,000-\$4,000}{6}\\ =\frac{\$36,000}{6}\\ =\$6,000\end{array}$

Hence, the depreciation value of manufacturing equipment is $6,000.

(2)

The calculation of total units sold at the rate of $9 per unit.

$\begin{array}{c}\text{Total units sold}=\text{Number of units sold}\times \text{Per unit cost}\\ =\$8,000\text{ units}\times \$9\\ =\$72,000\end{array}$

The total units sold by the Company S are 72,000.

(3)

The calculation of total inventory at the average cost per unit.

$\begin{array}{c}\text{Total inventory cost}=\text{Number of units sold}\times \text{Average cost per unit}\\ =\$8,000\text{ units}\times \$5.30\\ =\$42,400\end{array}$

The total inventory at the average cost is 42,400.

(4)