Question

The following data from the just completed year are taken from the accounting records of Mason Company:

Sales	$	660,000
Direct labor cost	$	81,000
Raw material purchases	$	140,000
Selling expenses	$	103,000
Administrative expenses	$	43,000
Manufacturing overhead applied to work in process	$	201,000
Actual manufacturing overhead costs	$	225,000

Inventories	Beginning of Year		End of Year
Raw materials	$	8,500	$	10,500
Work in process	$	6,000	$	21,000
Finished goods	$	79,000	$	25,600

1) Prepare a schedule of cost of goods manufactured. Assume all raw materials used in production were direct materials.

Mason Company
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory	$8,500
Add: Purchases of raw materials	140,000
Raw materials available for use	148,500
Less: Ending raw materials inventory	10,500
Raw materials used in production		$138,000
Direct labor		81,000
Manufacturing overhead		201,000
Total manufacturing costs		420,000
Add: Beginning work in process inventory		6,000
		426,000
Less: Ending work in process inventory		21,000
Cost of goods manufactured		$405,000

2.Prepare a schedule of cost of goods sold.

Mason Company
Schedule of Cost of Goods Sold
Beginning finished goods inventory	$79,000
Add: Cost of goods manufactured	405,000
Goods available for sale	484,000
Less: Ending finished goods inventory	25,600
Unadjusted cost of goods sold	458,400
Add: Underapplied overhead
Adjusted cost of goods sold	$458,400

3.Prepare an income statement.

Mason Company
Income Statement
Sales		$660,000
Cost of goods sold
Gross margin		660,000
Selling and administrative expenses:
Selling expenses	103,000
Administrative expense	43,000
		146,000
Net operating income		$514,000

Answer 1

Concepts and reason

Assets: Asset is the resource used by the company to generate income. Assets can be classified into different types, Current assets, long term assets and intangible assets. Assets that are expected to be converted into cash within one year are called as current assets. Assets that are expected to be converted into cash more than one year are called as long-term assets. Asset which cannot be touch and see is called as intangible asset. Goodwill, patents etc. are the examples of intangible assets.

Inventory: Inventory is one of the important current assets of a company. Inventory includes raw materials, work in process and finished goods.

Raw materials: Raw materials inventory is a component used by the company to produce finished goods. Raw material is the basic input used for the production function. Metals, woods, plastics etc. are the examples of raw material inventory.

Work-in process: It refers to units that could not convert into the finished goods in the current period. Work-in process is also known as semi manufactured products.

Finished goods: Finished goods are the completely finished products ready for sale.

Fundamentals

Cost of goods manufactured: Cost incurred to manufacture the goods is called as cost of goods manufactured. It is used to calculate the cost of goods sold. Cost of goods manufactured includes the direct material costs, direct labor costs and manufacturing or factory overhead.

Cost of goods sold: The costs which are incurred by a business to sell products in a particular period are called as cost of goods sold. It is also known as cost of sales. It is considered to be as expense of current period.

Income Statement: An income statement is one of the financial statements that display the financial performance of an organization for a specified period. It exhibits the net income earned or net loss incurred during a particular accounting period.

Ending inventory: Ending inventory is the remaining inventory at the end of the period. Some company's desired ending inventory is certain percentage of the next month's expected unit sales. Current years' ending inventory and next years' beginning inventory are same.

Purchases: Purchase is expense amount paid to a company in exchange for acquiring the goods or services.

Direct materials: Direct materials are the raw materials that are directly associated with the production of the goods in the factory. Direct material per unit is the cost of direct material incurred to produce one unit of product.

Direct labor cost: The costs that are related to the labor employed in manufacturing process are known as direct labor costs. The direct labor cost includes not only wages of employees, but also worker’s compensation.

Underapplied overhead: Excess of actual manufacturing overhead costs over the manufacturing overhead applied to work in process is the underapplied overhead of the company.

Manufacturing overhead costs: The costs, which do not relate directly with the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs.

Beginning work-in process: It refers to the units that are yet to be converted into finished goods. It belongs to the previous period’s closing balance that is shown as beginning balance for the current period.

Ending work-in process: It refers to units that could not convert into the finished goods in the current period.

Beginning finished goods: These are goods that have been completed by the manufacturing procedure, or purchase in a complete form, but are not yet sold to customers. It belongs to the previous period’s closing balance that is shown as beginning balance for the current period.

Ending finished goods: It refers to units that have been completed by the manufacturing procedure or purchase in a complete form in the current period.

1)

Prepare schedule of cost of goods manufactured.

Therefore, the cost of goods manufactured is $405,000.

2)

Prepare schedule of cost of goods sold.

Therefore, the adjusted cost of goods sold is $482,400.

Working note:

Calculate underapplied overhead.

$\begin{array}{c}\\{\rm{Underapplied overhead = }}\left( \begin{array}{l}\\{\rm{Actual manufacturing overhead costs }}\\\\ - {\rm{ Manufacturing overhead applied to work in process}}\\\end{array} \right){\rm{ }}\\\\{\rm{ = \$ 225,000 }} - {\rm{ \$ 201,000 }}\\\\{\rm{ = \$ 24,000}}\\\end{array}$

3)

Prepare income statement.

Therefore, the net operating income is $31,600.

Ans: Part 1

Part 2

Part 3