Chapter 18, Problem 3BP

1.

To determine

Prepare its schedule of cost of goods manufactured for the year ended December 31, 2015.

Explanation of Solution

Cost of goods manufactured refers to the cost incurred for a making a product, that are available for sales at the end of the accounting period. Thus, cost of goods manufactured is determined as the sum of direct materials, direct labor, and factory overhead costs incurred in producing products.

Prepare schedule of cost of goods manufactured.

B Bikes
Schedule of Cost of Goods Manufactured
For Year Ended December 31, 2015
Particulars		Amount ($)	Amount ($)
Direct materials
Raw materials inventory, December 31, 2014		40,375
Raw materials purchases		894,375
Raw materials available for use		934,750
Less raw materials inventory, December 31, 2015		70,430
Direct materials used			864,320
Direct labor			562,500
Factory overhead
Depreciation expense—Factory equipment		35,400
Factory supervision		121,500
Factory supplies used		6,060
Factory utilities		37,500
Indirect labor		59,000
Miscellaneous production costs		8,440
Rent expense—Factory building		93,500
Maintenance expense—Factory equipment		30,375
Total factory overhead costs			391,775
Total manufacturing costs			1,818,595
Work in process inventory, December 31, 2014			12,500
Total cost of work in process			1,831,095
Less: Work in process inventory, December 31, 2015			14,100
	Cost of goods manufactured		1,816,995

Note:

1. 1. $\text{Total manufactuirng costs = Direct material used + Direct labor + Total factory overhead }$
2. 2. $\text{Total cost of work in process }=\left(\begin{array}{l}\text{Total manufacturing costs }\\ \text{+ Beginning work in process inventory}\end{array}\right)$
3. 3. $\text{Cost of goods manufactured = }\left(\begin{array}{l}\text{Total cost of work in process}\\ \text{ – Ending work in process inventory}\end{array}\right)$

2.

To determine

Prepare the company’s 2015 income statement that reports separate categories for (a) selling expenses and (b) general and administrative expenses.

Explanation of Solution

The income statement is a 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.

Prepare income statement for the year ended December 31, 2015.

B BIKES
Income Statement
For Year Ended December 31, 2015
Particulars	Amount ($)	Amount ($)
Sales		$4,942,625
Cost of goods sold
Finished goods inventory, December 31, 2014	$ 177,200
Cost of goods manufactured	1,816,995
Goods available for sale	1,994,195
Less: Finished goods inventory, December 31, 2015	141,750
Cost of goods sold		1,852,445
Gross profit from sales		3,090,180
Operating expenses
Selling expenses
Advertising expense	20,250
Depreciation expense—Selling equipment	10,125
Rent expense—Selling space	27,000
Sales salaries expense	295,300
Total selling expenses		352,675
General and administrative expenses
Depreciation expense—Office equipment	8,440
Office salaries expense	70,875
Rent expense—Office space	23,625
Total general and administrative expenses		102,940
Total operating expenses		455,615
Income before taxes		2,634,565
Income taxes expense		136,700
Net income			$2,497,865

Table (2)

3.

To determine

Compute the (a) inventory turnover, defined as cost of goods sold divided by average inventory, and (b) days’ sales in inventory.

Answer to Problem 3BP

Inventory turnover ratio and days’ sales in inventory is as below:

S.no	Particulars	Raw Materials	Finished Goods
(a)	Inventory turnover	15.6	11.6
(b)	Days’ sales in inventory	29.7		27.9

Table (3)

Explanation of Solution

Inventory turnover and days’ sales in inventory is calculated for raw materials and finished goods. In place cost of goods sold, raw materials inventory and finished goods inventory is used to determine the ratios.

Thus, calculation of average inventory is shown as below:

Particulars	Raw Materials	Finished Goods
Beginning inventory	40,375	177,200
Ending inventory	70,430	141,750
Total inventory	110,805	318,950
Average inventory	55,403	159,475

Table (3)

Note:

1. $\text{Total inventory = Beginning inventory + Ending inventory}$

2. $\text{Average inventory = }\frac{\text{Total inventory}}{2}$

Inventory turnover ratio: This is a financial measure that is used to evaluate as to how many times a company sells or uses its inventory during an accounting period. It is calculated by using the following formula:

$\text{Inventory}\text{turnover}\text{=}\frac{\text{Cost}\text{of}\text{goods}\text{sold}}{\text{Average inventory}}$

Days’ sales in inventory: Days’ in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them.

$\text{Days'}\text{in}\text{inventory}\text{=}\frac{\text{Ending Inventory}}{\text{Cost of goods sold}}\times 365$

Next, determine inventory turnover and days’ sales in inventory as below:

S.no	Particulars	Raw Materials	Finished Goods
(a)	Inventory turnover	15.6	11.6
(b)	Days’ sales in inventory	29.7	27.9

Discussion:

• The determined inventory turnover ratio for the raw materials inventory is lower than the turnover ratio for the finished goods.
• The main reason for the difference might be because of undependability of the sources of raw material supply.
• Management has a larger inventory to make them sustain when there is a fall in inventory levels.
• Inventory levels of raw materials were too high that reduced the harming level in the operations.
• The items manufactured were so quickly sold in the market and thus, turnover ratio for the finished goods becomes higher. This evidently shows that the product is demanded at high level.