Question

The following costs relate to one month's activity in Martin Company:

Indirect materials	$300
Rent on factory building	$500
Maintenance of equipment	$50
Direct material used	$1,200
Utilities on factory	$250
Direct labour	$1,500
Selling expense	$500
Administrative expense	$300
Work in process inventory, beginning	$600
Work in process inventory, ending	$800
Finished goods inventory, beginning	$500
Finished goods inventory, ending	$250

Required:

a)  Prepare a schedule of cost of goods manufactured in good form.
b)  Determine the cost of goods sold.
c) Assume Martin Company produced the equivalent of 500 units during this particular month. What was the average cost per unit for direct materials? For rent on factory building?

d)  Assume next month Martin Company plans to produce 600 units of product. What average cost per unit and total cost would you expect to be incurred for direct material? for rent?

Answer 1

Ans. A	MARTIN COMPANY
	Schedule of Cost of Goods Manufactured
	Particulars	Amount	Amount
	Direct material used (A)		$1,200
	Direct labor   (B)		$1,500
	Manufacturing overhead applied:
	Indirect materials	$300
	Maintenance of equipment	$50
	Rent on factory building	$500
	Utilities on factory	$250
	Total manufacturing overhead ©		$1,100
	Total manufacturing costs (A+B+C)		$3,800
	Beginning Work in process inventory		$600
	Total cost of work in process		$4,400
	Ending Work in process inventory		-$800
	Cost of goods manufactured		$3,600
Ans. B	MARTIN   COMPANY
	Schedule of Cost of Goods Sold
	Particulars	Amount
	Cost of Goods Manufactured	$3,600
	Add: Beginning finished goods inventory	$500
	Cost of goods available for sale	$4,100
	Less: Ending finished goods inventory	-$250
	Cost of goods sold	$3,850
Ans. C	Average cost per unit for direct materials   =   Direct materials used / Units produced
	$1,200 / 500
	$2.40 per unit
	Average cost per unit for rent on factory building   =   Rent on factory building / Units produced
	$500 / 500
	$1.00 per unit
Ans. D	Direct material is a variable cost and variable cost per unit always remain constant on each level
	of activity (units produced).
	So, Average cost per unit for direct materials for next month will be $2.40 per unit.
	Total direct materials used in next month   =   Cost per unit * Units produced
	$2.40 * 600
	$1,440
	Average cost per unit for rent on factory building   =   Rent on factory building / Units produced
	$500 / 600
	$0.83 per unit
	Total rent on factory cost   =   Rent on factory building is a fixed cost and fixed cost always remain
	same on each level of activity.
	So total rent on factory building will be $500 in next month.