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Cost Identification and Analysis, Cost Assignment, Income Statement Melissa Vassar has decided to open a printing shop. She has secured two contracts. One is a 5-year contract to print a popular regional magazine. This contract calls for 5,000 copies each month. The second contract is a 3-year agreement to print tourist brochures for the state. The state tourist office requires 10,000 brochures per month. Melissa has rented a building for $1,400 per month. Her printing equipment was purchased for $40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to a period based on the hours of usage. Melissa has scheduled the delivery of the products so that two production runs are needed. In the first run, the equipment is prepared for the magazine printing. In the second run, the equipment is reconfigured for brochure printing. It takes twice as long to configure the equipment for the magazine setup as it does for the brochure setup. The total setup costs per month are $600. Insurance costs for the building and equipment are $140 per month. Power to operate the printing equipment is strongly related to machine usage. The printing equipment causes virtually all the power costs. Power costs will run $350 per month. Printing materials will cost $0.40 per copy for the magazine and $0.08 per copy for the brochure. Melissa will hire workers to run the presses as needed (part-time workers are easy to hire). She must pay $10 per hour. Each worker can produce 20 copies of the magazine per printing hour or 100 copies of the brochure. Distribution costs are $500 per month. Melissa will receive a salary of $1,500 per month. She is responsible for personnel, accounting, sales, and production—in effect, she is responsible for administering all aspects of the business. Required: 1. What are the total monthly manufacturing costs? 2. What are the total monthly prime costs? What are the total monthly prime costs for the regional magazine? For the brochure? 3. What are the total monthly conversion costs? Suppose Melissa wants to determine monthly conversion costs for each product. Assign monthly conversion costs to each product using direct tracing and driver tracing whenever possible. For those costs that cannot be assigned using a tracing approach, you may assign them using direct labor hours. 4. Melissa receives $1.80 per copy of the magazine and $0.45 per brochure. Prepare an income statement for the first month of operations.

BuyFind

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773
BuyFind

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773

Solutions

Chapter 2, Problem 60P
Textbook Problem
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Cost Identification and Analysis, Cost Assignment, Income Statement

Melissa Vassar has decided to open a printing shop. She has secured two contracts. One is a 5-year contract to print a popular regional magazine. This contract calls for 5,000 copies each month. The second contract is a 3-year agreement to print tourist brochures for the state. The state tourist office requires 10,000 brochures per month.

Melissa has rented a building for $1,400 per month. Her printing equipment was purchased for $40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to a period based on the hours of usage. Melissa has scheduled the delivery of the products so that two production runs are needed. In the first run, the equipment is prepared for the magazine printing. In the second run, the equipment is reconfigured for brochure printing. It takes twice as long to configure the equipment for the magazine setup as it does for the brochure setup. The total setup costs per month are $600.

Insurance costs for the building and equipment are $140 per month. Power to operate the printing equipment is strongly related to machine usage. The printing equipment causes virtually all the power costs. Power costs will run $350 per month. Printing materials will cost $0.40 per copy for the magazine and $0.08 per copy for the brochure. Melissa will hire workers to run the presses as needed (part-time workers are easy to hire). She must pay $10 per hour. Each worker can produce 20 copies of the magazine per printing hour or 100 copies of the brochure. Distribution costs are $500 per month. Melissa will receive a salary of $1,500 per month. She is responsible for personnel, accounting, sales, and production—in effect, she is responsible for administering all aspects of the business.

Required:

  1. 1. What are the total monthly manufacturing costs?
  2. 2. What are the total monthly prime costs? What are the total monthly prime costs for the regional magazine? For the brochure?
  3. 3. What are the total monthly conversion costs? Suppose Melissa wants to determine monthly conversion costs for each product. Assign monthly conversion costs to each product using direct tracing and driver tracing whenever possible. For those costs that cannot be assigned using a tracing approach, you may assign them using direct labor hours.
  4. 4. Melissa receives $1.80 per copy of the magazine and $0.45 per brochure. Prepare an income statement for the first month of operations.

Expert Solution

1.

To determine

Calculate the amount of total monthly manufacturing costs.

Explanation of Solution

Manufacturing Costs:

Manufacturing costs can be defined as the total amount of costs incurred in producing a product. Manufacturing costs involve the cost of direct materials, cost of direct labor and manufacturing overheads.

The below table represents the total manufacturing cost:

 Amount ($)Amount ($)
Direct materials:  
Magazine2,000 
Brochure8002,800
Direct labor:  
Magazine2,500 
Brochure1,0003,500
Manufacturing overhead:  
Rent1,400 
Depreciation700 
Setups600 
Insurance140 
Power3503,190
Cost of goods manufactured 9,490

Table (1)

The total monthly manufacturing cost is $9,490.

Working Notes:

1.

Calculation of direct material-magazine:

Direct material-Magazine=Number of copies×Cost to print magazine=5,000×$0.40=$2,000

Hence, the amount of direct material-magazine is $2,000.

2.

Calculation of direct material-brochure:

Direct material-Brochure=Number of copies×Cost to print magazine=10,000×$0.08=$800

Hence, the amount of direct material-brochure is $800.

3.

Calculation of direct labor-magazine:

Direct labor-Magazine=Number of copies×(Payment for each hourNumber of copies a worker produces)=5,000×($1020)=$2,500

Hence, the amount of direct labor-magazine is $2,500

Expert Solution

2.

To determine

Calculate the amount of monthly prime costs, magazine’s and brochure’s monthly prime costs.

Expert Solution

3.

To determine

Calculate the amount of total monthly conversion cost. Also, assign the conversion costs to each product with the help of direct tracing and driver tracing.

Expert Solution

4.

To determine

Prepare an income statement for the first month of operations.

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Chapter 2 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making
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