Chapter 1, Problem 2ATC

a.

To determine

Classify the items that will come under the product cost and calculate the amount of cost of goods sold for the year 2017 income statement.

Answer to Problem 2ATC

The items that will be classified under the product cost are as follows:

Table (1)

Hence, the total product cost of Company VH is $2,776,000.

The calculation of cost of goods sold is as follows:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of units sold}\\ =\$40(3)\times 60,000\text{ units}\\ =\$2,400,000\end{array}$

Hence, the cost of goods sold is $2,400,000.

Explanation of Solution

The cost of goods sold:

The cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

Working notes:

Calculate the per square foot as follows:

$\begin{array}{c}\text{Per square foot}=\frac{\text{Utility cost}}{\text{Total square footage cost }}\\ =\frac{\$160,000}{\$100,000}\\ =\$1.60\end{array}$

Hence, the per square foot value is $1.60.

Calculate the utility cost for manufacturing as follows:

$\begin{array}{c}\text{Utility cost (manufacturing)}=\text{Manufacturing cost}\times \text{Per square foot}\\ =\$60,000\times \$1.60\\ =\$96,000\end{array}$

Hence, the utility cost for manufacturing is $96,000.

(1)

Calculate the depreciation on manufacturing equipment as follows:

$\begin{array}{c}\text{Depreciation}=\frac{\text{Manufacturing equipment cost}-\text{Salvage value }}{\text{Number of useful life}}\\ =\frac{\$10,000,000-\$2,000,000}{8}\\ =\frac{\$8,000,000}{8}\\ =\$1,000,000\end{array}$

Hence, the depreciation cost is $1,000,000.

(2)

Calculate the cost per unit as follows:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Total product cost }}{\text{Total number of units produced}}\\ =\frac{\$2,776,000}{69,400\text{ units}}\\ =\$40\end{array}$

Hence, the cost per unit is $40.

(3)

To determine

Classify the items that will come under the upstream cost and calculate the amount of upstream cost expensed for the year 2017 income statement.

Answer to Problem 2ATC

The items that will be classified under the upstream cost are as follows:

Table (2)

Hence, the total upstream expenses are $608,000.

Explanation of Solution

Upstream cost:

This cost is incurred before starting the manufacturing process. For example: research and development, and product design.

Working notes:

Calculate the per square foot as follows:

$\begin{array}{c}\text{Per square foot}=\frac{\text{Utility cost}}{\text{Total square footage cost }}\\ =\frac{\$160,000}{\$100,000}\\ =\$1.60\end{array}$

Hence, the per square foot value is $1.60.

Calculate the utility cost for manufacturing as follows:

$\begin{array}{c}\text{Utility cost (research and development)}=\text{reseacrch development cost}\times \text{Per square foot}\\ =\$10,000\times \$1.60\\ =\$16,000\end{array}$

Hence, the utility cost for manufacturing is $16,000

(4)

Calculate the amount of prepaid insurance as follows:

$\begin{array}{c}\text{Prepaid insurance}=\frac{\text{Total policy amount }}{\text{Number of months}}\times \text{Closing month}\\ =\frac{\$72,000}{12}\times 8\\ =\$6,000\times 8\\ =\$48,000\end{array}$

Hence, the prepaid insurance is $48,000.

Calculate the rate for insurance expenses as follows:

$\begin{array}{c}\text{Insurance expenses (per employee)}=\frac{\text{Prepaid insurance cost }}{\text{Number of months}}\\ =\frac{\$48,000}{12}\\ =\$4,000\end{array}$

Hence, the rate for insurance expenses per employee is $4,000.

Calculate the insurance expenses on research and development as follows:

$\begin{array}{c}\text{Insurance expenses (research and development)}=\left(\begin{array}{l}\text{Number of employees}\times \\ \text{Cost per employee}\end{array}\right)\\ =4\times \$4000\\ =\$16,000\end{array}$

Hence, the insurance expenses on research and development is $16,000.

(5)

Note:

The accrued engineer’s salary $10,000 comes under the upstream cost but it is not considered for calculating the upstream cost because it is previous year’s cost.

To determine

Classify the items that will come under the downstream cost and calculate the amount of downstream cost expensed for the year 2017 income statement.

Answer to Problem 2ATC

The items that will be classified under the downstream cost are as follows:

Table (3)

Hence, the total downstream expenses are $824,000.

Explanation of Solution

Downstream:

This cost is incurred after starting the manufacturing process. For example: marketing, distribution, and customer service.

Working notes:

Calculate the per square foot as follows:

$\begin{array}{c}\text{Per square foot}=\frac{\text{Utility cost}}{\text{Total square footage cost }}\\ =\frac{\$160,000}{\$100,000}\\ =\$1.60\end{array}$

Hence, the per square foot value is $1.60.

Calculate the utility cost for selling and administrative as follows:

$\begin{array}{c}\text{Utility cost (selling and administrative)}=\text{Selling and administrative cost}\times \text{Per square foot}\\ =\$30,000\times \$1.60\\ =\$48,000\end{array}$

Hence, the utility cost for selling and administrative cost is $48,000.

(6)

Calculate the amount of prepaid insurance as follows:

$\begin{array}{c}\text{Prepaid insurance}=\frac{\text{Total policy amount }}{\text{Number of months}}\times \text{Closing month}\\ =\frac{\$72,000}{12}\times 8\\ =\$6,000\times 8\\ =\$48,000\end{array}$

Hence, the prepaid insurance is $48,000.

Calculate the total salary as follows:

$\begin{array}{c}\text{Total salary}=\text{Cash}+\text{Accrued salary}\\ =\$658,000+\$16,000\\ =\$674,000\end{array}$

Hence, the total salary is $674,000.

(7)

Calculate the rate for insurance expenses as follows:

$\begin{array}{c}\text{Insurance expenses (per employee)}=\frac{\text{Prepaid insurance cost }}{\text{Number of months}}\\ =\frac{\$48,000}{12}\\ =\$4,000\end{array}$

Hence, the rate for insurance expenses per employee is $4,000.

Calculate the insurance expenses on selling and administrative as follows:

$\begin{array}{c}\text{Insurance expenses (selling and administrative)}=\left(\begin{array}{l}\text{Number of employees}\times \\ \text{Cost per employee}\end{array}\right)\\ =8\times \$4000\\ =\$32,000\end{array}$

Hence, the insurance expenses on selling and administrative is $32,000.

(8)

b.

To determine

Prepare the income statement.

Answer to Problem 2ATC

The calculation of the income statement is as follows:

Table (4

Hence, the net income of Company VH is $368,000.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Working notes:

Calculate the revenue as follows:

$\begin{array}{c}\text{Revenue}=\text{Number of units sold}\times \text{Price of each}\\ =\$60,000\times \$70\\ =\$4,200,000\end{array}$

Hence, the revenue is $4,200,000.

(9)

Calculate the cost of goods sold as follows:

The calculation of cost of goods sold is as follows:

$\begin{array}{c}\text{Cost of goods sold}=\text{Cost per unit}\times \text{Number of units sold}\\ =\$40(3)\times 60,000\text{ units}\\ =\$2,400,000\end{array}$

Hence, the cost of goods sold is $2,400,000.

(10)

Calculate the upstream expenses as follows:

Table (5)

Hence, the total upstream expenses are $608,000.

(11)

Calculate the downstream expenses as follows:

Table (6)

Hence, the total downstream expenses are $824,000.

(12)