Exercise 2-11

Mason Company for the year just completed:

Cost Incurred:
Direct Labor Cost .......................................... $ 70,000
Purchases of raw materials ............................ 118,000
Manufacturing overhead ................................ 80,000
Advertising expense ...................................... 90,000
Sales salaries ................................................ 50,000
Depreciation, office equipment ....................... 3,000

Direct materials: Beginning End of

of the Year the Year
Inventories
Raw Materials ................................................ $ 7,000 15,000
Work in process ............................................. 10,000 5,000
Finished Goods .............................................. 20,000 35,000

1. Prepare a schedule of cost of goods manufactured:

Mason Company
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory .................. $
Add: Purchases of raw materials .....................
Raw materials available for use .......................
Deduct: Ending raw materials inventory ..........
Raw materials used in production ................... $
Direct labor ......................................................
Manufacturing overhead ...................................
Total manufacturing costs .................................
Add: Beginning work in process inventory ..........

Deduct: Ending work in process inventory ..........

Cost of goods manufactured.............................. $
Exercise 2-11 (continued)

2. Prepare the cost of goods sold section of Mason’s Company’s income

statement for the year:

The cost of goods sold section of Mason Company’s income statement:

Beginning finished goods inventory ............. $
Add: Cost of goods manufactured ...............
Goods available for sale .............................
Deduct: Ending finished goods inventory .....
Cost of goods sold ..................................... $
Problem 2-18
Cost and sales date for Meriwell Company for just completed year.
Finished goods inventory, beginning ............. $20,000
Finished goods inventory, ending .................. $40,000
Administrative expenses ............................... $110,000
Manufacturing Overhead .............................. $105,000
Purchase of raw materials ............................ $125,000
Raw materials inventory, beginning .............. $9,000
Raw materials inventory, ending ................... $6,000
Direct labor ................................................. $70,000
Work in process inventory, beginning ............ $17,000
Work in process inventory, ending ................ $30,000
Sales ........................................................... $500,000
Selling expenses .......................................... $80,000
Of the $105,000 of manufacturing overhead, $15,000 is variable and
$90,000 is fixed.

1. Prepare a schedule of cost of goods manufactured:

Meriwell Company
Schedule of Cost of Goods Manufactured

Direct materials:
Raw materials inventory, beginning ............ $
Add: Purchases of raw materials ................
Raw materials available for use ..................
Deduct: Raw materials inventory, ending....
Raw materials used in production .............. $
Direct labor .................................................
Manufacturing overhead ..............................
Total manufacturing costs ............................
Add: Work in process inventory, beginning....

Deduct: Work in process inventory, ending ...

Cost of goods manufactured......................... $

2. Prepare an income statement:

 Meriwell Company
Income Statement

Sales .......................................................... $
Cost of goods sold:
Finished goods inventory, beginning .......... $
Add: Cost of goods manufactured ..............
Goods available for sale .............................
Deduct: Finished goods inventory, ending ..
Gross margin...............................................
Selling and administrative expenses:
Selling expenses .......................................
Administrative expenses ............................
Net operating income .................................. $

3. At 10,000 units, what is average cost per unit for:

Direct materials:

Fixed manufacturing overhead:

4. At 15,000 units (assume DM is a variable cost)

Direct materials:
Unit cost:

Total cost:
Fixed manufacturing overhead:
Unit cost:

Total cost:

5. Explain differences between average costs in (3) and (4).

Case 2-27

Solar Technology, Inc.

Income Statement
For the Quarter Ended March 31
Sales (32,000 batteries) ................................ $960,000
Less operating expenses
SG&A ......................................................... $290,000
Manufacturing overhead .............................. 410,000
Purchase of raw materials ........................... 360,000
Direct labor ................................................ 70,000 $1,130,000
Net Operating loss ......................................... $ (170,000)

Insurance claim of $226,000 for batteries lost in a fire at end of Q1

8,000 batteries destroyed of 40,000 completed in Q1
Insurance policy will reimburse for the “cost” of finished batteries

Costs were computed as followed:

Beginning of the End of the

Quarter Quarter
Raw Materials ............................................. $0 $10,000
Work in Process .......................................... $0 $50,000
Finished Goods ............................................ $0 ?

1. What conceptual errors were there?

Case 2-27 (continued)

2. Prepare a schedule of cost of goods manufactured for Q1:

Solar Technology, Inc.

Schedule of Cost of Goods Manufactured
For the Quarter Ended March 31

Direct materials:
Raw materials inventory, beginning .............. $
Add: Purchases of raw materials ...................
Raw materials available for use ....................
Deduct: Raw materials inventory, ending ......
Raw materials used in production ................. $
Direct labor ....................................................
Manufacturing overhead .................................
Total manufacturing costs...............................
Add: Work in process inventory, beginning ......

Deduct: Work in process inventory, ending ......

Cost of goods manufactured ........................... $
Case 2-27 (continued)
3. Prepare corrected income statement for Q1:

Solar Technology, Inc.

Income Statement
For the Quarter Ended March 31
Sales (32,000 batteries) .............................. $
Cost of goods sold:
Finished goods inventory, beginning.......... $
Add: Cost of goods manufactured ............
Goods available for sale ............................
Deduct: Finished goods inventory, ending .
Gross margin ..............................................
Selling and administrative expenses .............
Net operating income.................................. $

4. Do you agree with the $226,000 claim?