Chapter 1, Problem 19PSB

a.

To determine

The total product cost and average cost per unit

Explanation of Solution

Product cost:

It is the cost incurred by the company during the process of manufacturing the product.

Calculation of total product cost for the year 2014 is as follows:

Table (1)

Hence, the total cost of the product for the year 2014 is $72,000.

Calculation average cost per unit for the year 2014 is as follows:

$\begin{array}{c}\text{Average cost per unit}=\frac{\text{Total cost of the product}}{\text{Total units produced}}\\ =\frac{\$72,000}{12,000\text{ units}}\\ =\$6\end{array}$

Hence, the average cost per unit for the year 2014 is $6.

Working notes:

Calculation of manufacturing overheads is as follows:

$\begin{array}{c}\text{Manufacturing overheads}=\frac{\left(\text{Manufacturing equipments}-\text{Salvage value}\right)}{\text{Number of years}}\\ \text{=}\frac{\left(\$62,000-\$2,000\right)}{6}\\ =\frac{\$60,000}{6}\\ =\$10,000\end{array}$

Hence, the manufacturing overheads is $10,000.

…… (1)

b.

To determine

The cost of goods sold that appears in 2014 income statement.

Explanation of Solution

Cost of goods sold

Cost of goods sold is the accumulation of all the direct costs incurred in the process of producing a product. It excludes indirect expenses.

Calculation of total cost of goods sold for the year 2014 is as follows:

$\begin{array}{c}\text{Total cost of goods sold}=\text{Average cost per unit}\times \text{Sold units}\\ =\$6\times 10,000\text{ units}\\ \text{=\$60,000}\end{array}$

Hence, the total cost of goods sold is $60,000.

c.

To determine

The cost of ending inventory that appears on 31^st December 2014 balance sheet.

Explanation of Solution

Inventory:

It is the term for products ready for sale and raw materials used in making the final product.

Calculation of ending inventory for the year 2014 is as follows:

$\begin{array}{c}\text{Ending inventory}=\text{Average cost per unit}\times \left(\text{Total units produced}-\text{Sold units}\right)\\ =\$6\times \left(12,000\text{ units}-10,000\text{ units}\right)\\ =\$6\times \left(2,000\text{ units}\right)\\ =\$12,000\end{array}$

Hence, the ending inventory for the year 2014 is $12,000.

d.

To determine

The total amount of net income for the year 2014.

Explanation of Solution

Financial statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Calculation of net income of the Company K for the year 2014 is as follows:

Table (2)

Hence, the net income of Company K for the year 2014 is $52,500.

Working note:

Calculation of depreciation value for furniture:

$\begin{array}{c}\text{Depreciation value for furniture}=\frac{\text{Furniture cost}}{\text{Number of useful life}}\\ =\frac{\$30,000}{4}\\ =\$7,500\end{array}$

Hence, the depreciation value of furniture is $7,500.

…… (2)

Calculation of total units sold at the rate of $14 per unit.

$\begin{array}{c}\text{Total units sold}=\text{Number of units sold}\times \text{Per unit cost}\\ =10,000\text{ units}\times \$14\\ =\$140,000\end{array}$

The total units sold by the Company K is $140,000.

…… (3)

Calculation of total inventory at the average cost per unit.

$\begin{array}{c}\text{Total inventory cost}=\text{Number of units sold}\times \text{Average cost per unit}\\ =10,000\text{ units}\times \$6\\ =\$60,000\end{array}$

The total inventory at the average cost is $60,000.

…… (4)

e.

To determine

The total amount of retained earnings for the year 2014.

Explanation of Solution

Financial statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

The retained earnings of Company K for the year 2014 is $52,500. (Refer table (2))

f.

To determine

The total assets that appears on the balance sheet.

Explanation of Solution

Financial statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Table showing calculation of assets:

Table (3)

Calculation of total assets is as follows:

$\begin{array}{c}\text{Total assets}=\text{Total cash}+\text{Total inventory}+\text{Total furniture}+\text{Total equipments}\\ =\$86,000+\$12,000+\$22,500+\$52,000\\ =\$172,500\end{array}$

Hence, the total amount of assets of Company K for the year 2014 is $172,500.