Question

Problem 2-40 Financial Statement Elements; Cost Behavior (LO 2-5, 2-6, 2-8)

[The following information applies to the questions displayed below.]

Mason Corporation began operations at the beginning of the current year. One of the company’s products, a refrigeration element, sells for $185 per unit. Information related to the current year’s activities follows.

Variable costs per unit:
Direct material	$	20
Direct labor		36
Manufacturing overhead		46
Annual fixed costs:
Manufacturing overhead	$	600,000
Selling and administrative		860,000
Production and sales activity:
Production (units)		24,000
Sales (units)		20,000

Mason carries its finished goods inventory at the average unit cost of production and is subject to a 30 percent income tax rate. There was no work in process at year-end.

Problem 2-40 Part 1

Required:

1. Determine the cost of the December 31 finished goods inventory.

2. Compute Mason’s net income for the current year ended December 31.

3. If next year’s production decreases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on:

a. The direct-labor cost of $36 per unit?

• No change

• Increase

• Decrease

b. The fixed manufacturing overhead cost of $600,000?

• No change

• Increase

• Decrease

c.  The fixed selling and administrative cost of $860,000?

• No change

• Increase

• Decrease

d. The average unit cost of production?

• No change

• Increase

• Decrease

Answer 1

1. Cost of finished goods inventory as on Dec 31 = $508000

Solution :

Total cost of production = total variable cost of production + fixed manufacturing overhead

= [($20+$36+$46)×24000] + $600000

= [$102×24000] + $600000

= $2448000 + $600000

= $3048000

Average unit cost of production = total cost of production /units produced.

= $3048000/24000 units

= $127 per unit.

Number of finished goods inventory as on Dec 31= units at the beginning of the year + units produced - units sold

= 0 + 24000 -20000

= 4000 units

Therefore,

Cost of finished goods inventory as on Dec 31 = 4000 units × $127

= $508000

2. Net income for the year = $210000

Solution :

2. Net income for the year = $210000 Solution: Amount $3700000 $2540000 $1160000 $860000 Sales (-) cost of goods sold Gross profit (-) fixed selling and administrative cost Profit before tax (-) tax Profit after tax $300000 $90000 $210000

Note 1: calculation of sales amount- = 2000 units * $185 = $3700000 Note 2: calculation of cost of goods sold = 20000 units *$127 = 2540000 Note 3: tax amount = profit before tax * 30% = $300000*30% = $90000

3.

a. no change

Because, when general cost behavior patterns remain same per unit cost do not change. Moreover, per unit cost do not alter because of change in production levels.

b. no change

Because, fixed costs remain same even when there is change in production levels. fixed costs are incurred even if the production is zero units.

c. no change

  Because, fixed costs remain same even when there is change in sales levels. fixed costs are incurred even if sales is zero units.

d. increases

Because, the variable cost per unit remains same but fixed cost per unit increases. As a result, total cost per unit (average unit cost of production) increases. When production units reduces the burden of fixed manufacturing cost increases.