Chapter 18, Problem 3APSA

To determine

Introduction:-

Cost of goods manufactured refers to the cost allocated to the units which have either been produced or is in the process of being produced. Main elements of cost of goods manufactured are direct materials used, direct labour, manufacturing overheads and work in process.

1. To determine:-

Here, in the given problem we are required to ascertain the cost of goods manufactured for Leone Company for the year ended December 31, 2017.

Answer to Problem 3APSA

Solution:-

The cost of goods manufactured for Leone Company for the year ended December 31, 2017 is $19, 35,650.

Explanation of Solution

Explanation:-

Following is the schedule of cost of goods manufactured for Leone Company:-

Particulars	Amount
Direct materials
Beginning raw materials inventory (A)	166850
Purchases of raw materials (B)	925000
Ending raw materials inventory (C)	182000
Direct materials used in production (D=A+B-C)	909850
Direct labour (E)	675480
Manufacturing overheads (F) {NOTE 1}	354000
Total Manufacturing costs (G=D+E+F)	1939330
Beginning work in process inventory (H)	15700
Ending work in process inventory (I)	19380
Cost of goods manufactured during the year (G+H-I)	$1935650

NOTE 1:- Manufacturing overheads are calculated as follows:-

Depreciation expense (factory equipment)	33550
Factory supervision	102600
factory supplies used	7350
Factory utilities	33000
Indirect labour	56875
Rent expense (factory building)	8425
Maintenance expense (factory equipment)	76800
Miscellaneous production costs	35400
Total manufacturing overheads	354000

Conclusion

Conclusion:-

Hence, this cost of goods manufactured figure is then used to calculate the cost of goods sold and then the net income.

To determine

2. To determine:-

Now, we are required to prepare Leone Company’s income statement for the year ended December 31, 2017 showing therein selling expenses and general and administrative expenses.

Answer to Problem 3APSA

Solution:-

Leone Company’s income statement shows a net income of $1714005

Explanation of Solution

Explanation:-

Following is the income statement of Leone Company for the year ended December 31, 2017:-

Particulars	Amount
Sales		4462500
LESS Cost of Goods sold
Cost of goods manufactured	1935650
ADD Opening finished goods	167350
LESS Ending finished good	136490	1966510
LESS Selling expenses {NOTE 2}		456010
LESS General and administrative expenses {NOTE 3}		92250
Income before income tax expense		1947730
LESS Income tax expense		233725
Net Income		$1714005

NOTE 2:- Selling expenses

Advertising expense	28750
Depreciation expense (selling equipment)	8600
Rent expense (Selling space)	26100
Sales salaries expense	392560
	456010

NOTE 3:-General and administrative expenses

Depreciation expense (office equipment)	7250
Rent expense (office space)	63000
Office salaries expense	22000
	92250

Conclusion

Conclusion:-

Hence, income statement is prepared by deducting from the sales figure the cost of goods sold, selling expenses and general and administrative expenses.

To determine

3. To determine:-

Now, we are required to ascertain the inventory turnover and day’s sales in inventory for Leone Company.

Answer to Problem 3APSA

Solution:-

Here, the inventory turnover is 12.94times and days’ sales in inventory (raw materials) are 33.78 Days and days sales in inventory (finished goods) are 25.33 days.

Explanation of Solution

Explanation:-

Inventory turnover is defined as ratio wherein it is shown as to how many times an organisation’s inventory is sold and replaces over the reporting period.

$Inventory turnover=COGS÷Average Inventory$

$Average inventory=\left(167350+136490\right)/2$

$Average inventory=\$151920$

$Inventory turnover=1966510÷151920$

$=12.94 times$

Days’ sales in inventory are defined as the time period taken by an organisation to convert its inventory into sales.

$Day{s}^{\prime }sales in inventory=365\times \left(ending inventory ÷COGS\right)$

$Days sales in inventory \left(raw material inventory\right)=365\times \left(182000÷1966510\right)$

$=33.78 day{s}^{\prime }sales in raw material inventory$

$Days sales in inventory \left(Finished goods inventory\right)=365\times \left(136490÷1966510\right)$

$=25.33 day{s}^{\prime }sales in finished goods inventory$

Conclusion

Conclusion:-

Hence, inventory turnover is used by an organisation to determine as to the amount of inventory they buy matches the demand for their product.

Similarly, days’ sales in inventory are used to give an indication as to how many days it takes for an organisation to convert its inventory into sales.