Question

Note:

Questions (l) through (n) are based on the following information pertaining to Hailey’s manufacturing operations:

Inventories January 1, 2019 December 31, 2020

Direct materials € 30,000 € 20,000

Work in progress 30,000 25,000

Finished goods 28,000 35,000

Additional information for 2019:

Direct materials purchased € 110,000

Direct manufacturing labour payroll 90,000

Direct manufacturing labour rate per hour 10

Factory overhead rate per direct manufacturing labour-hour 7

l. For 2019, what was the prime cost?

1) € 90,000

2) €120,000

3) €170,000

4) €210,000

m. For 2020, what was the conversion cost?

1) € 90,000

2) €153,000

3) €183,000

4) €200,000

n. For 2019, what was the cost of goods manufactured?

1) € 35,000

2) €268,000

3) €273,000

4) €278,000

o. In the preparation of the schedule of cost of goods manufactured, the accountant incorrectly excluded as part of manufacturing overhead the janitorial expense of the firm’s factory. What impact will this error have on the financial statements?

1) It will overstate period expenses on the income statement.

2) It will overstate the cost of goods sold on the income statement.

3) It will understate the cost of goods manufactured.

4) It will have no effect on the cost of goods manufactured.

Answer 1

Inventories	January 1, 2019	December 31, 2020
Direct materials	30,000.00	20,000.00
Work in progress	30,000.00	25,000.00
Finished goods	28,000.00	35,000.00
Raw material
Particulars	Amount	Particulars	Amount
To balance b/d	30,000	By Work- in progress /C	1,20,000
To Purchases A/C	1,10,000	(Bal.fig)-Raw Material Applied)
		By Balance C/d	20,000
	1,40,000.00		1,40,000.00
Work -in -progress
Particulars	Amount	Particulars	Amount
To Balance b/d	30,000.00	By Cost of goods manufactured	2,78,000
To Raw material	1,20,000.00
To Direct labour	90,000.00
To Manufacturing overhead	63,000.00	By Balance c/d	25,000
(9000 hrs *7)
	3,03,000.00		3,03,000.00

I.(4)
Prime cost
Prime cost = direct materials cost + direct labour cost
Direct materials	1,20,000.00
Direct labour	90,000.00
Prime cost	2,10,000.00
m.(2)
Conversion costs are the costs incurred for turning raw materials into finished products. If you add direct labour costs and manufacturing costs, the sum that you get will be the conversion cost
Conversion cost                =	Direct labour costs + Manufacturing overheads
	90000+63000
	1,53,000.00
n.(4)
Cost of goods manufactured
	2,78,000.00
Refer Work-in -progress account
o.(3)
If the manufacturing cost has been excluded for computing cost of goods manufactured means cost has been reduced which means understatement of cost of goods manufactured
It will understate the period expenses and gross profit will be more