Chapter 2, Problem 12E

1)

To determine

Product Cost

• Product cost consists of direct and indirect costs.

• The direct costs include cost of materials used to produce goods, direct labor involved in manufacturing etc.

• The indirect costs include selling and distribution costs, administrative costs etc.

To Determine:

Cost of batteries as on April 30^th under:

1. Raw Materials
2. Work in Progress
3. Finished Goods
4. Cost of Goods Sold
5. Selling Expense

Answer to Problem 12E

Solution:

Cost of batteries as on April 30^th under:

1. Raw Materials = $ 32,000
2. Work in Progress = $ 60,000
3. Finished Goods = $162,000
4. Cost of Goods Sold = $ 640,000
5. Selling Expense = $ 8,000

Explanation of Solution

• Given:

Purchased 8000 batteries at $80 per battery

Withdrew 7600 batteries

Used 100 batteries to replace travelling sales staff car batteries

90% of goods in production transferred to finished goods

30% of completed cars unsold

• Formula Used:

Closing stock = Opening Stock + Purchases − Sales

• Calculations:

Raw Materials
Inwards	Quantity	Rate per unit	Total	Outwards	Quantity	Rate per unit	Total
Opening Stock	0	0	$ -	Work in Progress	7600	80	$608,000
Cost of Goods Sold	8000	80	$640,000	Closing Balance	400		$ 32,000
Work in Progress
Inwards	Quantity	Rate per unit	Total	Outwards	Quantity	Rate per unit	Total
Opening Stock	0	0	$ -	Selling Expense	100	80	$ 8,000
Raw Materials	7600	80	$608,000	Finished Goods	6750	80	$540,000
				Closing Balance	750		$ 60,000
Selling Expense
Inwards	Quantity	Rate per unit	Total	Outwards	Quantity	Rate per unit	Total
Opening Stock	0	0	$ -	Closing Balance	100		$ 8,000
Work In Progress	100	80	$ 8,000
Finished Goods
Inwards	Quantity	Rate per unit	Total	Outwards	Quantity	Rate per unit	Total
Work in Progress	6750	80	$540,000	Sales	4725	80	$378,000
				Closing Balance	2025		$162,000

• The closing balance of each account is given on the right hand side
• The left hand side depicts the inward movement of the goods and the right hand side indicates the outward movement
• Since the company Purchased 8000 batteries at $80 per battery, the balance of raw materials is increased by that amount
• Since the company withdrew 7600 batteries, work in progress is increased by that amount
• Since 100 batteries were used to replace travelling sales staff car batteries, the selling expense is increased by that amount.
• Since 90% of goods in production transferred to finished goods, finished goods is increased by that amount
• Since 30% of completed cars remained unsold, the same will appear as closing inventory

Conclusion

Hence the amounts have been calculated.

2)

To determine

Balance sheet and Income statement accounts

• Balance Sheet accounts refer to assets and liabilities. The balances for these accounts are carried forward from one financial year to another.

• Assets include finished goods, work in progress of goods manufactured, raw materials etc. Liabilities include Trade payables, Loans etc.

• Income statement accounts refer to incomes and expenses. The balances for these accounts are not carried forward from one financial year to another and are instead closed by transferring them to the income statement.

• Examples of such accounts include cost of goods sold and sales revenue.

To Determine:

If the following accounts are balance sheet or income statement accounts.

1. Raw Materials
2. Work in Progress
3. Finished Goods
4. Cost of Goods Sold
5. Selling Expense

Answer to Problem 12E

Solution:

1. Raw Materials − Balance Sheet Account
2. Work in Progress − Balance Sheet Account
3. Finished Goods − Balance Sheet Account
4. Cost of Goods Sold − Income Summary Account
5. Selling Expense− Income Summary Account

Explanation of Solution

• In the case of expense accounts and revenue accounts, balances are not carried forward. They are instead transferred to the Income Summary

• Balances of Incomes and expenses are transferred to the Income statement to close the accounts for the year. The balance of retained earnings is then transferred to the capital account.

• Assets and Liabilities of similar nature are grouped and valued together. Example: Current Assets, Long term Liabilities etc. Doing so ensures consistency in financial statements and also indicates where the funds of the business are being utilized

• Balance sheet for the year is prepared by compiling the list of assets and liabilities of the entity at the end of the reporting period and classifying them as per their nature.

• Raw materials, Finished goods, and work in progress are all balance sheet accounts as the balance of the current year is carried forward.

• Cost of goods sold and selling expenses are income summary accounts since the balances are not carried forward and are instead transferred to the income summary and these accounts are closed.

Conclusion

Hence the accounts have been classified.