Chapter 14, Problem 3PSA

1.

To determine

The cost of goods manufactured.

Explanation of Solution

Given,

Raw material in the beginning is $166,500.

Raw material in the end is $182,000.

Work in progress in the beginning is $15,700.

Work in progress in the end is $19,380.

Finished goods in the beginning are $167,350.

Finished goods in the end are $136,490.

Calculation of the cost of goods manufactured,

L Company
Particular	Amount ($)	Amount ($)
Raw material, opening balance	166,850
Add: Raw materials purchases	925,000
Raw material available for use	1,091,850
Less: Raw materials, ending balance	182,000
Direct material used		909,850
Direct labor		675,480
Factory overhead:
Depreciation expense-factory equipment	33,550
Factory supervision	102,600
Factory supplies used	7,350
Factory utilities	33,000
Indirect labor	56,875
Miscellaneous production costs	8,425
Rent expense-factory building	76,800
Maintenance expense - factory building	35,400
Total factory overhead		354,000
Total manufacturing costs		1,939,330
Add: work in progress inventory, opening balance		15,700
Total cost of work in process		1,955,030
Less: work I process ending balance		19,380
Cost of goods manufactured		1,935,650

Table (1)

Hence, cost of goods manufactured is $1,935,650.

2.

Prepare the income statement.

Income statement	Amount ($)	Amount ($)
Sales		4,462,500
Less: cost of goods sold
Cost of goods manufactured	1,935,650
Add: finished goods inventory, beginning	167,350
Goods available for sale	2,103,000
Less: finished goods inventory	136,490
Cost of goods sold		(1,966,510)
Gross profit		2,495,990
Less: Selling expense:
Advertisement expense	28,750
Depreciation expense	8,600
Sales salaries expense	392,560
Rent expense	26,100
Total selling expense		(456,010)
Less: General and administrative expenses:
Depreciation expense-office equipment	7,250
Office salaries expense	63,000
Rent expenses	22,000
Total General and administrative expenses:		(92,250)
Net income before income tax expense		1,947,730
Income tax expense		(233,725)
Net income after income tax		1,714,005

Table (2)

Hence, net income after income tax is $1,714,005.

3.

To determine

(a) Inventory turnover and (b) day’s sales in inventory.

Explanation of Solution

(a)

For finished goods inventory

Given,

Cost of goods sold is $1,966,510.

Average inventory is $151,920.

Formula to calculate inventory turnover ratio,

$\text{Inventory}\text{turnover}=\frac{\text{Cost}\text{of}\text{goods}\text{sold}}{\text{Average}\text{inventory}}$

Substitute $1,966,510 for the cost of goods sold and $151,920 for average inventory.

$\begin{array}{c}\text{Inventory}\text{turnover}=\frac{\$1,966,510}{\$151,920}\\ =12.9\end{array}$

Hence, inventory turnover is 12.9.

Working note:

Given,

Inventory in the beginning is $167,350.

Inventory at the end is $136,490.

Calculation of average inventory,

$\begin{array}{c}\text{Average}\text{inventory}=\frac{\text{Opening}\text{inventory}+\text{Closing}\text{inventory}}{2}\\ =\frac{\$167,350+\$136,490}{2}\\ =\$151,920\end{array}$

For raw material inventory

Given,

Raw material used is $909,850.

Average raw material inventory $174,425.

Compute the raw material turnover

$\text{Raw}\text{material}\text{turnover}=\frac{\text{Raw}\text{material}\text{used}}{\text{Average}\text{raw}\text{material}\text{inventory}}$

Substitute $909,850 for raw material used and $174,425 for average raw material inventory.

$\begin{array}{c}\text{Raw}\text{material}\text{turnover}=\frac{\$909,850}{\$174,425}\\ =5.2\end{array}$

Hence, raw material turnover is 5.2.

Working notes:

Given,

Inventory in the beginning is $166,850.

Inventory at the end is $182,000.

Calculate the average inventory,

$\begin{array}{c}\text{Average}\text{inventory}=\frac{\text{Opening}\text{inventory}+\text{Closing}\text{inventory}}{2}\\ =\frac{\$166,850+182,000}{2}\\ =\$174,425\end{array}$

(b)

For finished goods inventory

Given,

Closing inventory is $136,490.

Cost of goods sold is $1,966,510.

Formula to calculate day’s sale in inventory,

$\text{Day's}\text{sale}\text{in}\text{inventory}=\frac{\text{Closing}\text{inventory}}{\text{Cost}\text{of}\text{goods}\text{sold}}\times 365$

Substitute, $136,490 for closing inventory and $1,966,510 for cost of goods sold.

$\begin{array}{c}\text{Day's}\text{sale}\text{in}\text{inventory}=\frac{\$136,490}{\$1,966,510}\times 365\\ =25.3\text{days}\end{array}$

Hence, the day’s sale for the finished goods are 25.3 days.

For raw material inventory

Given,

Closing raw material is $182,000.

Raw material used is $909,850.

Formula to calculate day’s sales in raw material inventory,

$\text{Day's}\text{sales}\text{in}\text{inventory}=\frac{\text{Closing}\text{raw}\text{material}}{\text{Raw}\text{material}\text{used}}\times 365$

Substitute $182,000 for closing raw material and $909,850 for raw material used.

$\begin{array}{c}\text{Day's}\text{sales}\text{in}\text{inventory}=\frac{\$182,000}{\$909,850}\times 365\\ =73\text{days}\end{array}$

Hence, the day’s sale for the raw material are 73 days.