Chapter 2, Problem 28P

Brody Company makes industrial cleaning solvents. Various chemicals, detergent, and water are mixed together and then bottled in 10-gallon drums. Brody provided the following information for last year:

Last year, Brody completed 100,000 units. Sales revenue equaled $1,200,000, and Brody paid a sales commission of 5 percent of sales.

Required:

1. 1. Calculate the direct materials used in production for last year.
2. 2. Calculate total prime cost.
3. 3. Calculate total conversion cost.
4. 4. Prepare a cost of goods manufactured statement for last year. Calculate the unit product cost.
5. 5. Prepare a cost of goods sold statement for last year.
6. 6. Prepare an income statement for last year. Show the percentage of sales that each line item represents.

To determine

Calculate the direct materials used by B Company for last year.

Explanation of Solution

Direct material cost: A cost indicates the payment of cash or the obligation to pay the cash in the future period for the generation of revenue or the service performed. A direct material cost is the cost of raw materials used for producing a product. Example: The cost of plastic is the direct material for manufacturing a bottle.

Calculate the direct materials.

$\begin{array}{c}\text{Direct materials= }\left[\begin{array}{l}\text{Begining balance of raw materials}\\ \text{+Purchase of materials}\\ -\text{Ending balance of materials}\end{array}\right]\\ \text{=\$124,000+\$250,000}-\$102,000\\ =\$374,000-\$102,000\\ =\$272,000\end{array}$

To determine

Calculate the total prime cost for B Company.

Explanation of Solution

Prime cost: Prime cost refers to a cost which is directly involved in the process of manufacturing an item. Prime cost includes direct material, and direct labor costs.

Calculate the total prime cost.

$\begin{array}{c}\text{Prime cost=Direct materials}\left(\text{refer requirement }\left(1\right)\right)\text{+Direct labor}\\ \text{=\$272,000+\$140,000}\\ \text{=\$412,000}\end{array}$

To determine

Calculate the total conversion cost for B Company.

Explanation of Solution

Conversion cost: A conversion cost refers to the cost of converting the raw materials into a finished product. Conversion cost includes direct labor as well as factory overhead costs.

Calculate the total conversion cost.

$\begin{array}{c}\text{Conversion cost=Direct labor+Overhead}\left(\text{refer table}\left(1\right)\right)\\ \text{=\$140,000+\$300,000}\\ \text{=\$440,000}\end{array}$

Working notes:

a) Calculate the total overhead cost.

Particulars	Amount ($)
Depreciation on the factory equipment	$45,000
Depreciation on factory building	30,000
Factory insurance	15,000
Factory property taxes	20,000
Factory utilities	34,000
Indirect labor salaries	156,000
Total overhead	$300,000

Table (1)

To determine

Prepare the statement of cost of goods manufactured and calculate the unit product cost for B Company.

Explanation of Solution

Cost of goods manufactured: Cost of goods manufactured refers to the cost incurred for a making a product, that are available for sales at the end of the accounting period.

Prepare the statement of cost of goods manufactured.

B company
Statement for the cost of goods manufactured
For the last year
Particulars	Amount ($)
Direct materials	$272,000
Direct labor	140,000
Overhead	300,000
Total manufacturing cost	$712,000
Add: Beginning work in progress	124,000
Less: Ending work in progress	(130,000)
Cost of goods manufactured	$706,000

Table (2)

Calculate the unit product cost for B.

$\begin{array}{c}\text{Unit product cost=}\frac{\text{Cost of goods manufactured}\left(\text{refer table}\left(2\right)\right)}{\text{Units completed}}\\ =\frac{\$706,000}{100,000\text{ Units}}\\ =\$7.06\end{array}$

To determine

Prepare the statement of cost of goods sold.

Explanation of Solution

Cost of goods sold: Cost of goods sold is the accumulated total of all the costs incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Prepare the statement of cost of goods sold.

B company
Statement of cost of goods sold
For Last year
Particulars	Amount ($)
Cost of goods manufactured	$706,000
Add: Beginning inventory, finished goods	84,000
Less: Ending inventory, finished goods	(82,000)
Cost of goods sold	$708,000

Table (3)

To determine

Prepare the income statement including sales percentage for B Company.

Explanation of Solution

Income statement: The income statement is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned, and expenses incurred by the company over a specific period of time. An income statement is also known as an operation statement, an earning statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

Prepare the income statement.

B company
Income statement
For last year
Particulars	Amount ($)	Percentage
Sales	$1,200,000	100
Cost of goods sold [requirement (5)]	708,000	59
Gross margin	$492,000	41
Less: Operating expenses
Selling expenses	151,800	12.65
Administrative expenses	218,000	18.17
Operating income	$122,200	10.18

Table (4)