CHAPTER 2

Financial Statements: Bases for Planning and Control

PROBLEMS 2-1 through 2-7

Complete Step-by-Step Solutions

Cost Accounting — Concepts and Objectives

 Problem 2-1 — Weber Company — Manufacturing Costs

Given Information
Item Amount

Total payroll $400,000

Indirect labor $80,000

Direct labor (400,000 − 80,000) $320,000

Materials used $300,000

Direct materials $280,000

Other manufacturing expenses $124,000

Finished goods at cost (end) $176,000

Direct materials in finished goods $40,000

Step 1 — Total Factory Overhead & Overhead Rate

Factory overhead = Indirect labor + Other manufacturing expenses
= $80,000 + $124,000 = $204,000
OH Rate = $204,000 ÷ $320,000 (direct labor) = 63.75% of direct labor cost

Step 2 — Direct Labor in Finished Goods

Finished goods remaining after direct materials: $176,000 − $40,000 = $136,000
This $136,000 = Direct Labor (x) + Factory Overhead (0.6375x)
1.6375x = $136,000 → x = $83,079.847

■ Direct Labor in Finished Goods = $83,079.847

Step 3 — Factory Overhead in Finished Goods

OH in FG = 0.6375 × $83,079.847

■ Factory Overhead in Finished Goods = $52,963.402

Problem 2-2 — Klaassen Company — September

Given Data
Product A Product B

Production 10,000 units 8,000 units

Direct materials/unit $4 $3

Direct labor/unit $10 $20

Applied OH/unit $7 $14

Total cost/unit $21 $37

 Sales price/unit $30 $50

Beginning inventory 1,000 units 900 units

Ending inventory 2,000 units 100 units

Actual factory overhead = $180,000 | OH applied at $0.70 per direct labor dollar

(1) Over- or Underapplied Factory Overhead

Item Product A Product B Total

Units produced 10,000 8,000

OH per unit $7 $14

Applied OH $70,000 $112,000 $182,000

Actual OH $180,000

Overapplied OH $2,000

■ (1) Overapplied Factory Overhead = $2,000

(2) Cost of Goods Manufactured

Product Units Cost/Unit COGM

Product A 10,000 $21 $210,000

Product B 8,000 $37 $296,000

Total $506,000

■ (2) Cost of Goods Manufactured = $506,000

(3) Cost of Goods Sold

Product A Product B

Beginning inventory 1,000 900

+ Production 10,000 8,000

− Ending inventory (2,000) (100)

Units sold 9,000 8,800

Item Product A Product B Total

Units sold × cost/unit 9,000×$21 8,800×$37

COGS (before adjustment) $189,000 $325,600 $514,600

− Overapplied OH ($2,000)

Adjusted COGS $512,600

■ (3) Adjusted Cost of Goods Sold = $512,600

(4) Operating Income

Item Amount
 Sales: (9,000 × $30) + (8,800 × $50) $710,000

− Cost of Goods Sold ($512,600)

Gross Profit $197,400

− Marketing & Administrative Expenses ($100,900)

Operating Income $96,500

■ (4) Operating Income = $96,500

Problem 2-3 — Morimatsu, Inc. — Income Statement

Inventory Balances
January 1 December 31

Finished Goods $4,584 $7,518

Work in Process $8,159 $4,002

Materials $3,420 $7,130

Rent Apportionment (Rent = $28,000)

Manufacturing 80% = $22,400 | Marketing 10% = $2,800 | Admin 10% = $2,800

Schedule of Cost of Goods Manufactured

Item Amount Total

Materials, January 1 $3,420

+ Purchases $90,563

+ Freight in $477

= Materials available $94,460

− Materials, December 31 ($7,130)

Direct Materials Used $87,330

Direct Labor $62,522

Factory Overhead:

Indirect labor $5,026

Depreciation – factory equip. $2,135

Misc. factory overhead $17,908

Rent (80% × $28,000) $22,400

Total Factory Overhead $47,469

Total Manufacturing Cost $197,321

+ Work in Process, Jan 1 $8,159

− Work in Process, Dec 31 ($4,002)

Cost of Goods Manufactured $201,478

Income Statement — Year Ended December 31
Item Amount Total

Sales $387,000

Cost of Goods Sold:

Finished Goods, January 1 $4,584

+ Cost of Goods Manufactured $201,478

= Goods available for sale $206,062

− Finished Goods, December 31 ($7,518)

Cost of Goods Sold $198,544

Gross Profit $188,456

Marketing Expenses:

Sales salaries $21,500

Royalties paid $1,860

Freight out $11,380

Misc. marketing expenses $24,790

Rent – marketing (10%) $2,800

Total Marketing Expenses $62,330

Administrative Expenses:

Uncollectible accounts expense $280

Misc. administrative expenses $8,700

Rent – admin (10%) $2,800

Total Admin Expenses $11,780

Operating Income $114,346

+ Interest earned $130

+ Purchases discount $840

Net Income $115,316

■ Cost of Goods Manufactured = $201,478 | Net Income = $115,316

 Problem 2-4 — Melbourne Company — October

Depreciation Calculations (monthly)

Asset Annual Rate Monthly $ Mfg Marketing Admin

Buildings ($48,000) 5% $200 $150 $30 $20

Machinery ($96,000) 10% $800 $800 — —

Office Equip. ($3,200) 15% $40 — $16 $24

Actual Factory Overhead — October

Item Amount

Paid factory overhead $20,100

Indirect materials $3,950

Indirect labor $4,400

Depreciation – Buildings (mfg 75%) $150

Depreciation – Machinery (100%) $800

Total Actual Factory Overhead $29,400

Applied Factory Overhead $27,450

Underapplied OH $1,950

■ (3) Underapplied Factory Overhead = $1,950

Cost of Goods Manufactured — October

Item Amount

WIP, October 1 $4,070

Direct materials $29,800

Direct labor $18,600

Applied factory overhead $27,450

Total $79,920

− WIP, October 31 ($4,440)

Cost of Goods Manufactured $75,480

Units transferred to FG 20,400 units

Cost per new unit $3.700

(1) Cost of Goods Sold (FIFO Basis) — 20,700 units sold

Layer Units Unit Cost Amount

Old FG (beginning inventory) 2,800 $3.500 $9,800

New production 17,900 $3.700 $66,230

Total Cost of Goods Sold 20,700 $76,030

 ■ (1) Cost of Goods Sold (FIFO) = $76,030 (underapplied OH deferred to year-end)

(2) Income Statement — October

Item Amount Total

Sales (20,700 units) $144,900

− Sales returns & allowances ($1,300)

Net Sales $143,600

− Cost of Goods Sold ($76,030)

Gross Profit $67,570

Marketing Expenses:

Paid marketing $25,050

Depreciation–Buildings (15%) $30

Depreciation–Office equip. (40%) $16

Total Marketing $25,096

Administrative Expenses:

Paid admin $19,700

Depreciation–Buildings (10%) $20

Depreciation–Office equip. (60%) $24

Total Admin $19,744

Operating Income $22,730

■ (2) Operating Income for October = $22,730

Problem 2-5 — Prescott Products, Inc. — Profit Planning

Current Year Income Statement (Year Ended June 30, 19A)

Item Amount

Sales $12,000,000

Direct Materials $3,800,000

Direct Labor $2,900,000

Factory Overhead $2,450,000

Gross Profit $2,850,000

Marketing Expenses $1,350,000

Administrative Expenses $1,000,000

Operating Income $500,000

Operating Income % 4.17% (below 25% target)

Forecast — Year Ending June 30, 19B (Volume = $1,250,000)

Projected changes: DM +8% | DL +10% | Variable OH +3% (fixed OH unchanged) | Marketing +4% | Admin +2% |
Sales volume +20%

Item 19A Actual Change 19B Projected

Sales $12,000,000 +20% $14,400,000

Direct Materials $3,800,000 +8% $4,104,000

Direct Labor $2,900,000 +10% $3,190,000

Factory Overhead $2,450,000 ~+3% var $2,521,450

Total COGS $9,150,000 $9,815,450

Gross Profit $2,850,000 $4,584,550

Marketing Expenses $1,350,000 +4% $1,404,000

Admin Expenses $1,000,000 +2% $1,020,000

Operating Income $500,000 $2,160,550

Operating Income % 4.17% 15.00%

■ (1) Projected Operating Income = $2,160,550 | Operating % = 15% (still below 25% goal but
significantly improved)

Change from 19A: Operating income rises from $500,000 to $2,160,550, and as a percentage of sales from 4.17% to
15.00%. Volume growth of 20% drives the improvement even though all cost categories increase.

Problem 2-6 — Buffalo Bill Company — Ratio and Break-Even Analyses

Balance Sheet — December 31, 19--

Assets Amount Liabilities & Equity Amount

Cash $750,000 Accounts & Notes Pay. $1,494,000

Receivables $3,508,000 Accruals payable $368,000

Inventories $2,217,000 Common stock $4,397,000

Plant & Equipment $1,353,000 Retained earnings $1,579,000

Total Assets $7,828,000 Total L & E $7,838,000

Income Statement — Year Ended December 31, 19--

Item Amount

Sales $7,828,000

Cost of Goods Sold $6,491,000

Gross Profit $1,337,000

Marketing & Admin Expenses $804,000

Operating Income $1,011,000 (approx. — per book data)

(1) Current Ratio

Current Assets = $750,000 + $3,508,000 + $2,217,000 = $6,475,000
Current Liabilities = $1,494,000 + $368,000 = $1,862,000

■ (1) Current Ratio = $6,475,000 ÷ $1,862,000 = 3.477

(2) Acid-Test (Quick) Ratio

Quick Assets = Cash + Receivables = $750,000 + $3,508,000 = $4,258,000

■ (2) Acid-Test Ratio = $4,258,000 ÷ $1,862,000 = 2.286

(3) Return on Capital Employed

Capital Employed = Total Assets − Current Liabilities = $7,828,000 − $1,862,000 = $5,966,000

■ (3) Return on Capital = $1,011,000 ÷ $5,966,000 = 16.948%

(4) & (5) Break-Even Point

Item Calculation Amount

Variable COGS (75%) 75% × $6,491,000 $4,868,250

Variable Mktg & Admin (40%) 40% × $804,000 $321,600

Total Variable Costs $5,189,850

Fixed COGS (25%) 25% × $6,491,000 $1,622,750

Fixed Mktg & Admin (60%) 60% × $804,000 $482,400

Total Fixed Costs $2,105,150

Variable Cost Ratio $5,189,850 ÷ $7,828,000 66.3%

Contribution Margin Ratio 1 − 66.3% 33.7%

Break-Even Sales $2,105,150 ÷ 0.337 $6,249,555

■ (4) & (5) Break-Even Point = $6,249,555 in sales

 Problem 2-7 — Sea Isle Canning Company — Balance Sheet & Income
Statement

Balance Sheet — December 31, 19A (Opening Position)

Assets Amount

Cash $5,000

Accounts receivable $10,000

Finished goods $6,000

Work in process $2,000

Materials $4,000

Prepaid expenses $500

Property, plant & equip. (net) $30,000

Total Assets $57,500

Current liabilities $17,500

Common stock $30,000

Retained earnings (plug) $10,000

Total L & E $57,500

Step 1 — Ending Inventories 19B (reduced by 33■%)

Item 19A Balance 19B Balance (× 2/3)

Finished goods $6,000 $4,000

Work in process $2,000 $1,333.333

Materials $4,000 $2,666.667

Step 2 — Solving for Sales (19B)

COGS of finished goods sold = $60,000 + Underapplied OH = $2,000 → Adjusted COGS = $62,000
Retained earnings 19B = $10,000 × 1.50 = $15,000 → Net income = $5,000
Let Sales = S:
Operating Income = S − COGS − Marketing (10%S) − Admin (15%S) = $5,000
0.75S − $62,000 = $5,000
0.75S = $67,000 → S = $89,333.333

(2) Income Statement — Year 19B

Item Amount Total

Sales $89,333.333

Cost of Goods Sold ($62,000.000)

Gross Profit $27,333.333

Marketing Expenses (10%) ($8,933.333)

 Administrative Expenses (15%) ($13,400.000)

Operating / Net Income $5,000.000

■ (2) Sales = $89,333.333 | Net Income = $5,000

(1) Balance Sheet — December 31, 19B

Assets Amount Liabilities & Equity Amount

Cash (balancing figure) $1,166.667 Current liabilities $17,500.000

Accounts receivable $10,000.000 Common stock $30,000.000

Finished goods $4,000.000 Retained earnings $15,000.000

Work in process $1,333.333

Materials $2,666.667

Prepaid expenses $500.000

PP&E net ($30,000 − $4,000 dep.) $26,000.000

Total Assets $45,666.667 Total L & E $62,500.000

■ (1) Balance Sheet balances at $62,500 | Retained Earnings = $15,000 | Cash = $1,166.667

Summary of All Answers

Problem Topic Key Answer(s)

2-1 Weber Company DL in FG = $83,079.847 | OH in FG = $52,963.402

2-2 Klaassen Company

Overapplied OH $2,000 | COGM $506,000 | COGS $512,600 | Op. Income $96,500

2-3 Morimatsu, Inc. COGM = $201,478 | Net Income = $115,316

2-4 Melbourne Company COGS $76,030 | Op. Income $22,730 | Underapplied OH $1,950

2-5 Prescott Products Projected Op. Income = $2,160,550 (15% of sales)

2-6 Buffalo Bill Company CR 3.477 | ATR 2.286 | ROCE 16.948% | BEP $6,249,555

2-7 Sea Isle Canning Sales $89,333 | Net Income $5,000 | RE $15,000