Chapter 10, Problem 19P

a.

To determine

Compute 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 $49,000, its salvage value is $4,000, and an expected life is 6 years.
• • The completed production of Company I is 8,000 units.

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

Particulars	Amount $
Direct materials	$26,000
Direct labor	21,000
Manufacturing overhead (1)	9,000
Total product cost	56,000

Table (1)

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

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

$\begin{array}{c}\text{Average cost per unit}=\frac{\text{Total cost of the product}}{\text{Completed production units}}\\ =\frac{\$56,000}{8,000\text{ units}}\\ =\$7.00\end{array}$

Hence, the average cost per unit for the year 2014 is $7.00.

Working note (1):

Calculate the  manufacturing overheads.

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

Hence, the manufacturing overheads are $9,000.

b.

To determine

Compute the cost of goods sold that appears in 2014 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 I is 7,200 units.

The 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

Compute the cost of ending inventory that appears on 31^st December 2014 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 I is 7,200 units.
• • The completed production of Company I is 8,000 units.

The 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

Compute the total amount of net income for the year 2014.

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.

The calculation of net income of 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 (2):

The calculation of depreciation value for furniture:

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

Working note (3):

The calculation of depreciation value for manufacturing equipment’s:

$\begin{array}{c}\text{Depreciation value for manufacturing equipments}=\frac{\left(\begin{array}{l}\text{manufacturing equipments}-\\ \text{Salvage value}\end{array}\right)}{\text{Number of useful life}}\\ =\frac{\$49,000-\$4,000}{5}\\ =\frac{\$45,000}{6}\\ =\$9,000\end{array}$

Working note (4):

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

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

Working note (5):

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

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

e.

To determine

Compute the total amount of retained earnings for the year 2014.

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.

The 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

Compute the total assets that appear 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.

The table showing calculation of assets:

Event No.	Assets
	Cash	+	Investment	+	Office Furniture	+	Manufacturing Equipment
1	78,000	+		+		+
2a	(21,000)	+		+	21,000	+
2b (2)		+		+	(3,000)	+
3a	(49,000)	+		+		+	49,000
3b (3)		+	9,000	+		+	(9,000)
4	(12,000)	+		+		+
5	(21,000)	+	21,000	+		+
6	(26,000)	+	26,000	+		+
7a (4)	108,000	+		+		+
7b (5)		+	(50,400)	+		+
Total	57,000	+	5,600	+	18,000	+	40,000

Table (4)

The calculation of total assets is as follows:

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

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