Question

The Cycle More Company manufactures high end bicycles. The controller for the company Ima Sewsique, spent much of the past quarter at home due to a lingering illness. As a result the company records are incomplete.

The Cycle More Company manufactures high end bicycles. The controller for the company Ima Sewsique, spent much of the past qarter at home due to a lingering illness. As a result the company records are incomplete. The existing records are presented below Beginning Balances 1/1/2018 Raw Materials Inventory $7,500 $7,500 Finished Goods Inventory Ending Balances 12/31/2018 Raw Materials Inventory Work in Process Finished Goods Inventory $1,525 $1,025 Additional Information: $98,000 $305,000 $103,000 $143,000 400% Raw Materials Purchased Raw Materials Used in Production Prime Costs Overhead Rate based on Direct Labor Dollars Required: 1. Prepare T-accounts for all of the Manufacturing Inventory Accounts and Cost of Goods Sold. Determine Conversion costs for the period and the total manufacturing costs added to the Work In Process. List any direct costs and explain how your determination was made. 2. 3. Consider the composition of manufacturing overhead. Label the items listed as either a variable cost, a fixed cost, or a mixed cost. 4. The owners of Cycle More have chosed to apply overhead based on direct labor dollars. Given the composition of your list of overhead items in your response to question 3 (above), when would direct labor be an accurate predictor of the cost of overhead? 5.

Answer 1

Working Note:

COST OF GOODS MANU. & COGS:		Amount $
Ope WIP		7500
RM:
OB	6525
PUR	98000
LESS CB	-1525
RM USED		103000
DL		40000
PRIME COST		143000
OVERHEAD		160000
MANUF.COST INCURRED		303000
TOTAL MANUFACTURING		310500
LESS WIP CB		-1025
COST OF GOODS MANUFACTURED		309475
FG OB		7500
FG AVAILABLE		316975
LESS: FG CB		11975
COGS		305000

1)
WIP INVENTORY A/c
Debit	amount $	Credit	amount $
OB	7500	FG	309475
DM	103000	CB	1025
DL	40000
OVERHEAD	160000
TOTAL	310500	TOTAL	310500
RAW MATERIAL A/c
OB	6525	WIP	103000
PURCH.	98000	CB	1525
TOTAL	104525	TOTAL	104525
FG INVENTORY A/c
OB	7500	COGS	305000
WIP	309475	CB	11975
TOTAL	316975	TOTAL	316975
COGS A/c:
FG INVEN.	305000

2)
Conversion costs = DL + overhead = 40000 + (40000*400%) = $200000
Total Manufacturing costs added to WIP = DM + CONVER. COSTS = 103000+200000 = $303000
3)
Direct Costs = DM + DL + OVERHEAD = $303000
Direct costs are production costs recoginsed at the factory level to Finish Goods.
4) Composition of manufacturing overhead:
indirect material	variable
indirect labor	variable
depreciation	fixed
utilities	semi-variable or mixed costs
5) The direct labor would be a accurate predictor of cost of overhead when
the production is a labor intensive manufacturing where labor constitutes
major portion of Production costs.