Chapter 18, Problem 3BPSB

To determine

Introduction:-

Cost of goods manufactured refers to the cost allocated to the units which have either been produced or is in the process of being produced. Main elements of cost of goods manufactured are direct materials used, direct labour, manufacturing overheads and work in process.

1. To determine:-

Here, in the given problem we are required to ascertain the cost of goods manufactured for Best Bikes for the year ended December 31, 2017.

Answer to Problem 3BPSB

Solution:-

The cost of goods manufactured for Best Bikes for the year ended December 31, 2017 is $18, 16,995.

Explanation of Solution

Explanation:-

Following is the schedule of cost of goods manufactured for Best Bikes:-

Particulars	Amount
Direct materials
Beginning raw materials inventory (A)	40375
Purchases of raw materials (B)	894375
Ending raw materials inventory (C)	70430
Direct materials used in production (D=A+B-C)	864320
Direct labour (E)	562500
Manufacturing overheads (F) NOTE 1	391775
Total Manufacturing costs (G=D+E+F)	1818595
Beginning work in process inventory (H)	12500
Ending work in process inventory (I)	14100
Cost of goods manufactured during the year (G+H-I)	$1816995

Note 1:- Manufacturing overheads

Depreciation expense (Factory equipment)	35400
factory supervision	121500
factory supplies used	6060
Factory utilities	37500
indirect labour	59000
Miscellaneous production costs	8440
Rent expense (factory building)	93500
Maintenance expense (factory equipment)	30375
Total manufacturing overheads	391775

Conclusion

Conclusion:-

Hence, this cost of goods manufactured figure is then used to calculate the cost of goods sold and then the net income.

To determine

2. To determine:-

Now, we are required to prepare Best Bikes income statement for the year ended December 31, 2017 showing therein selling expenses and general and administrative expenses.

Answer to Problem 3BPSB

Solution:-

Best Bike income statement shows a net income of $2497865.

Explanation of Solution

Explanation:-

Following is the income statement of best bike for the year ended December 31, 2017:-

Particulars	Amount
Sales		4942625
LESS Cost of Goods sold
Cost of goods manufactured	1816995
ADD Opening finished goods	177200
LESS Ending finished good	141750	1852445
LESS Selling expenses NOTE 2		352675
LESS General and administrative expenses NOTE 3		102940
Income before income tax expense		2634565
LESS Income tax expense		136700
Net Income		$2497865

Note 2:- Selling expenses

Advertising expense	20250
Depreciation expense (Selling equipment)	10125
Rent expense (Selling space)	27000
Sales salaries expense	295300
Total selling expenses	352675

Note 3:- General and administrative expenses

Depreciation expense (Office equipment)	8440
Rent expense (Office space)	23625
Office salaries expense	70875
Total general and administrative expense	102940

Conclusion

Conclusion:-

Hence, income statement is prepared by deducting from the sales figure the cost of goods sold, selling expenses and general and administrative expenses.

To determine

3. To determine:-

Now, we are required to ascertain the inventory turnover and day’s sales in inventory for Best Bikes.

Answer to Problem 3BPSB

Solution:-

Here, the inventory turnover is 11.62 times and days sales in inventory (raw materials) is 13.87 days and days sales in inventory (finished goods) are 27.93 days.

Explanation of Solution

Explanation:-

Inventory turnover is defined as ratio wherein it is shown as to how many times an organisation’s inventory is sold and replaces over the reporting period.

$Inventory turnover=COGS÷Average Inventory$

$Average inventory=\left(177200+141750\right)÷2$

$Average inventory=\$159475$

$Inventory turnover=1852445÷159475$

$=11.62 times$

Days’ sales in inventory are defined as the time period taken by an organisation to convert its inventory into sales.

$Day{s}^{\prime }sales in inventory=365\times \left(ending inventory ÷COGS\right)$

$Days sales in inventory \left(raw materilas inventory\right)=365\times \left(70430÷1852445\right)$

$=13.87 day{s}^{\prime }sales in raw material inventory$

$Days sales in inventory \left(Finished goods inventory\right)=365\times \left(141750÷1852445\right)$

$=27.93 day{s}^{\prime }sales in finished goods inventory$

Conclusion

Conclusion:-

Hence, inventory turnover is used by an organisation to determine as to the amount of inventory they buy matches the demand for their product.

Similarly, days’ sales in inventory are used to give an indication as to how many days it takes for an organisation to convert its inventory into sales.