Question

On January 1, 2020, John Smith launched a computer services company, Technology Business Solutions that is organized as a corporation and provides computer consulting services and computer system installations. Smith adopts the calendar year for reporting purposes. After the initial success of the company, John Smith continues to operate Technology Business Solutions and has expanded into computer systems manufacturing and sales. They are currently contracting with several large businesses to develop and construct their IT systems. They are several months into the planning and production of these systems and the information for the current month is as follows: Beginning balance Ending balance Raw materials Work in process Finished goods $19,000 $32,000 $46,500 $8,000 $55,950 $54,275 The company applies overhead to jobs using a predetermined overhead rate based on direct labor hours. At the beginning of the year, the company estimated that it would work 15,000 direct labor hours and incur $315,000 in manufacturing overhead cost. The following transactions were recorded for the current month: 1. Raw materials were purchased on account in the amount of $78,000. 2. Raw materials requisitioned for use in production totaled $89,000 ($68,000 direct and $21,000 indirect). 3. The following employee costs were incurred: direct labor was $77,000; indirect labor was $12,000, and executive salaries were $24,000. 4. Selling costs, consisting of commissions for a contracted sales staff and advertising, were incurred in the amount of $48,000. 5. Utility costs were incurred in the amount of $15,000, $9,500 of which was for the factory and the rest for the administrative offices. 6. Depreciation for the month was $28,000 of which $22,000 is related to factory operations and the rest is related to selling and administrative activities. 7. Manufacturing overhead was applied to jobs. The actual level of activity for this month was 2,825 direct labor hours. 8. Sales for the month on account totaled $343,000.

Answer 1

	INCOME STATEMENT
	Sales		$                  343,000
	Cost of Goods Sold
	Opening Finished Goods Inventory	$                      46,500
	Cost of Goods Manufactured (W.N 1)	$                    180,375
	Total Goods Available for Sale	$                    226,875
Less:	Closing Finished Goods Inventory	$                    (54,275)
Add:	Under applied Manufacturing Overheads (W.N 2)	$                        5,175
	Cost of Goods Sold		$                (177,775)
	Gross Profit		$                  165,225
Less:	Operating Expenses
	Selling expenses	$                    (48,000)
	General & Administrative expenses
	Executive Salaries	$                      24,000
	Depreciation Expense: Office Equipment	$                        6,000
	Utility cost	$                        5,500
		$                    (35,500)
	Total Operating Expenses		$                  (83,500)
	Net Income		$                    81,725

Pre-determined manufacturing overhead rate = Estimated manufacturing overhead / Estimated direct labor hours

= $315,000 / $ 15,000

= $ 21 per hour

W.N 1

	Cost of Goods Manufactured Schedule
	Opening Raw Material Inventory	$                      19,000
Add:	Raw material purchases	$                      78,000
	Raw Material Available for Use	$                      97,000
Less:	Closing Raw Material Inventory	$                      (8,000)
	Raw Material Used in Production	$                      89,000
	Direct Material		$                    68,000
	Direct Labor		$                    77,000
	Manufacturing Overhead Applied ($ 21 * 2825 hrs)	$                      59,325	$                    59,325
	Total Manufacturing Cost		$                  204,325
Add:	Opening Work in Progress (Jan 1)		$                    32,000
Less:	Closing Work in Progress (Dec 31)		$                  (55,950)
	Cost of Goods Manufactured		$                  180,375

W.N 2

Under- applied overhead

	Actual Manufacturing Overhead
	Depreciation: Factory Equipment	$    22,000
	Indirect materials used	$    21,000
	Indirect labor	$    12,000
	Factory utilities	$      9,500
		$    64,500
Less	Applied Manufacturing Overheads	$ (59,325)
	Under applied Overheads	$      5,175

g)

1. Product Cost = Direct Material + Direct Labour + Manufacturing Overhead

= 68000 + 77000 + 59325

= $ 204,325

2.

Period cost
Sales Salaries Expense	$                      48,000
Administrative Salaries Expense	$                      24,000
Depreciation Expense: Office Equipment	$                        6,000
Utility cost	$                        5,500
	$                      83,500

3. Prime Cost = Direct Material + Direct Labor

= 68000 + 77000

= $ 145,000

4. Conversion Cost = Total Manufacturing Cost - Direct Material

= $204,325 - $ 68,000

= $ 136,325