Chapter 2, Problem 38P

The following selected information was extracted from the 20x1 accounting records of Lone Oak Products:

*Seventy-five percent of the company’s building was devoted to production activities; the remaining 25 percent was used for selling and administrative functions.

Inventory data:

*The January 1 and December 31 finished-goods inventory consisted of 1,350 units and 1,190 units, respectively.

Required:

1. 1. Calculate Lone Oak’s manufacturing overhead for the year.
2. 2. Calculate Lone Oak’s cost of goods manufactured.
3. 3. Compute the company’s cost of goods sold.
4. 4. Determine net income for 20x1, assuming a 30% income tax rate.
5. 5. Determine the number of completed units manufactured during the year.
6. 6. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements. Show how the solution will change if the following data change: indirect labor is $115,000 and other factory costs amount to $516,000.

To determine

Calculate the manufacturing overhead for L company.

Explanation of Solution

Manufacturing overhead: Manufacturing overhead includes all manufacturing cost except direct material and direct labor costs.

Calculate the manufacturing overhead.

$\begin{array}{c}\text{Manufacturing overhead = }\left(\begin{array}{l}\text{Indirect labour + Building depreciation}\\ \text{+ Other factory costs}\end{array}\right)\\ =\$109,000+\$60,000+\$344,000\\ =\$513,000\end{array}$

$\begin{array}{c}\text{Building depreciation = Building value}\times \text{Percentage of depreciation}\\ \text{=\$80,000}\times \text{75\%}\\ \text{=\$60,000}\end{array}$

To determine

Calculate the cost of goods manufactured by L Company.

Explanation of Solution

Cost of goods manufactured: cost of good manufactured is the total cost of direct material, direct labor, and manufacturing overhead transferred from Work-in-Process to Finished-Goods during an accounting period.

Calculate the cost of goods manufactured.

Cost of goods manufactured by L company
Particulars	Amount ($)	Amount ($)
Direct material:
Raw-material inventory, January 1	$15,800
Add: Purchases of raw material	175,000
Raw material available for use	$190,800
Deduct: Raw material inventory, December 31	(18,200)
Raw material used		$172,600
Direct labor		254,000
Manufacturing overhead		513,000
Total manufacturing costs		$939,600
Add: Work in process inventory, January 1		35,700
Sub total		$975,300
Deduct: Work in progress inventory, December 31		(62,100)
Cost of goods manufactured		$913,200

Table (1)

To determine

Calculate the Cost of goods sold by L Company.

Explanation of Solution

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

Calculate the cost of goods sold.

Cost of goods sold
Particulars	Amount ($)
Finished goods inventory, January 1	$111,100
Add: Cost of goods manufactured	913,200
Cost of goods available for sale	$1,024,000
Deduct: Finished goods inventory, December 31	97,900
Cost of goods sold	$926,400

Table (2)

To determine

Calculate the net income for L Company and assume income tax rate as 30%.

Explanation of Solution

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Calculate the net income for L Company

Net income for L Company
Particulars	Amount ($)	Amount ($)
Sales revenue		$1,495,000
Less: Cost of goods sold		926,400
Gross margin		$568,600
Selling and administration expenses:
Salaries	$133,000
Building depreciation ($80,000*25%)	20,000
Other	195,000	348,000
Income before taxes		$220,000
Income tax expense ($220,600*30%)		66,180
Net income		$154,420

Table (3)

To determine

Calculate the number of finished units manufactured during the year.

Explanation of Solution

Calculate the number of finished units manufactured during the year.

$\begin{array}{c}\begin{array}{l}\text{Number of finished units}\\ \text{manufactured during the year}\end{array})\text{ = }\left(\begin{array}{l}\text{Total units sold}-\text{Units came from }\\ \text{finished goods inventory}\end{array}\right)\\ =11,500-160\\ =11,340\text{ units}\end{array}$

Calculate the total units sold during the year.

$\begin{array}{c}\text{Total units sold = Sales revenue}÷\text{ Sale price per unit}\\ \text{=\$1,495,000}÷\text{\$130}\\ \text{=11,500 units}\end{array}$

Calculate the units came from finished goods inventory.

$\begin{array}{c}\begin{array}{l}\text{Units came from finished}\\ \text{goods inventory sold}\end{array})\text{ = }\left(\begin{array}{l}\text{Opening balance of finished goods inventory}\\ -\text{ Closing balance of finished goods inventory}\end{array}\right)\\ =1,350-1,190\\ =160\end{array}$

To determine

Prepare the excel spread sheet to solve the preceding requirements.

Explanation of Solution

Table (4)