Chapter 14, Problem 3PSB

1.

To determine

To prepare:

Schedule of cost of goods manufactured.

Explanation of Solution

Given,

Raw material in the beginning is $40375.

Raw material in the end is $70,430.

Work in progress in the beginning is $12,500.

Work in progress in the end is $14,100.

Finished goods in the beginning are $177,200.

Finished goods in the end are $141,750.

Calculation of the cost of goods manufactured,

L Company
Particular	Amount ($)	Amount ($)
Raw material, opening balance	40,375
Add: Raw materials purchases	897,375
Raw material available for use	934,750
Less: Raw materials, ending balance	70,430
Direct material used		864,320
Direct labor		562,500
Factory overhead:
Depreciation expense-factory equipment	35,400
Factory supervision	121,500
Factory supplies used	6,060
Factory utilities	37,500
Indirect labor	59,000
Miscellaneous production costs	8,440
Rent expense-factory building	93,500
Maintenance expense - factory building	30,375
Total factory overhead		391,775
Total manufacturing costs		1,818,595
Add: work in progress inventory, opening balance		12,500
Total cost of work in process		1,831,095
Less: Work in process ending balance		14,100
Cost of goods manufactured		1,816,995

Table (1)

Hence, cost of goods manufactured is $1,816,995.

2.

To determine

To prepare:

Income statement.

Explanation of Solution

Prepare the income statement:

Particulars	Amount ($)	Amount ($)
Sales		4,942,625
Less: Cost of goods sold
Cost of goods manufactured	1,816,995
Add: Finished goods inventory, beginning	177,200
Goods available for sale	1,994,195
Less: finished goods inventory	141,750
Cost of goods sold		(1,852,445)
Gross profit		3,090,180
Less: Selling expense:
Advertisement expense	20,250
Depreciation expense	10,125
Sales salaries expense	295,300
Rent expense	27,000
Total selling expense		(352,675)
Less: General and administrative expenses:
Depreciation expense-office equipment	8,440
Office salaries expense	70,875
Rent expenses	23,625
Total General and administrative expenses:		(102,940)
Net income before income tax expense		2,634,565
Income tax expense		(136,700)
Net income after income tax		2,497,865

Table (1)

Hence, net income after income tax is $2,497,865.

3.

(a)

To determine

Inventory turnover.

Explanation of Solution

Given,

Cost of goods sold is $1,852,445.

Average inventory is $159,475.

Formula to calculate inventory turnover ratio:

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

Substitute $1,852,445 for the cost of goods sold and $159,475 for average inventory,

$\begin{array}{c}\text{Inventory}\text{turnover}=\frac{\$1,852,445}{\$159,475}\\ =11.6\end{array}$

Hence, inventory turnover is 11.6.

Working Note:

Given,

Inventory in the beginning is $167,350.

Inventory at the end is $136,490.

Calculate the average inventory,

$\begin{array}{c}\text{Average}\text{inventory}=\frac{\text{Opening}\text{inventory}+\text{Closing}\text{inventory}}{2}\\ =\frac{\$177,200+\$141,750}{2}\\ =\$159,475\end{array}$

(b)

To determine

The day’s sale in inventory for raw material inventory and finished goods inventory.

Explanation of Solution

Given,

Closing inventory is $141,750.

Cost of goods sold is $1,852,445.

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 $141,750 for closing inventory and $1,852,445 for cost of goods sold.

$\begin{array}{c}\text{Day's}\text{sale}\text{in}\text{inventory}=\frac{\$141,750}{\$1,852,445}\times 365\\ =27.9\text{days}\end{array}$

Hence, the day’s in inventory is 27.9 days.

Compute the raw material turnover.

Given,

Raw material used is $864,320.

Average raw material inventory $55,402.5.

Formula to calculate 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 $864,320 for raw material used and $55,402.5for average raw material inventory,

$\begin{array}{c}\text{Raw}\text{material}\text{turnover}=\frac{\$864,320}{\$55,402.5}\\ =15.6\end{array}$

Hence, raw material turnover is 15.6.

Compute the day’s in inventory for raw material used

Given,

Closing raw material is $70,430.

Raw material used is $864,320.

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 $70,430 for closing raw material and $864,320 for raw material used,

$\begin{array}{c}\text{Day's}\text{sales}\text{in}\text{inventory}=\frac{\$70,430}{\$864,320}\times 365\\ =29.7\text{days}\end{array}$

Hence, the day’s in inventory is 29.7 days.

Working Notes:

Given,

Inventory in the beginning is $40,375.

Inventory at the end is $170,430.

Calculate the average inventory:

$\begin{array}{c}\text{Average}\text{inventory}=\frac{\text{Opening}\text{inventory}+\text{Closing}\text{inventory}}{2}\\ =\frac{\$40,375+\$70,430}{2}\\ =\$55,402.5\end{array}$