ACCY112

S1 2013

Tutorial SOLUTIONS

MANAGING COSTS

2.

Accounting for cost of sales in a manufacturing entity creates no more problems than those encountered in a retail entity. Discuss. In manufacturing entities it is necessary to accumulate and record costs for three levels of inventory to determine the costs of sales. These inventories are: raw materials, work in process and finished goods. In a retail entity, costs are recorded and reported for only one level of inventory finished goods, which are bought in a condition where they can be immediately resold. Determining cost of sales, therefore, involves only knowledge of the cost of finished goods. In accounting for costs of inventories, both manufacturing and retail activities must select either the periodic or perpetual costing system. Total costs or unit costs of inventory movements can be determined under both types of activities. However, more has to be done in a manufacturing entity where accounting for three different levels of inventory requires more effort in terms of recognising and recording costs. In manufacturing, a problem arises in determining which costs to assign to work in process, and hence finished goods. In handling factory overheads, it is necessary to introduce pre-determined overhead application rates. This is not necessary for a retailing entity. In summary, it can be argued that the accounting procedures are similar in both forms of activity, however more detail and a wider range of costing activities is necessary for a manufacturing entity. An additional problem arises in assigning factory overheads in a manufacturing entity.

10.

All production costs fall logically into a direct or indirect classification since the distinction is based on direct physical identification with the product. Discuss. In practical terms, costs do fall into a direct/indirect classification. Defining what costs are direct and what costs are indirect can be problematic. Direct costs such as materials are usually seen as forming a physical part of a finished product and can be traced and costed to the product or batches of products. Direct expenses such as materials will not, however, include items such as glue, nails, screws, and other consumable materials normally included in the manufacture of finished products. Likewise direct labour, which employees perform, can be identified specifically with the conversion of direct materials into finished goods, and is regarded as direct cost. Other essential labour costs incurred by maintenance personnel, quality control personnel, production supervisors, etc. regarded as indirect labour are costs.

The above approaches to the classification of direct and indirect costs can become problematic when one realises that it is physically feasible to cost glue used in the production of chairs since the amount of glue can be traced to the particular product. The issue becomes one of the costs that need to be incurred to be able to trace the particular identification of materials and costs to a particular product. A similar situation arises with indirect labour. A point of discussion can be the realisation that all costs can feasibly be traced directly to products of output and hence theoretically be classified as direct costs. Cost v benefits considerations become important.

Exercise 8.2

Product and period costs

TEN GREEN BOTTLES PTY LTD Required: A. Explain what some of the qualitative factors are that may arise from each of the two options being considered and whether these may favour one option over the other. B. Calculate the Direct Labour cost per bottle under the current conditions and each of the two proposed options. C. Using the qualitative factors from part A and the quantitative factors from part B explain which option you would consider the best for Ten Green Bottles Pty Ltd. A. Option 1: This option could lead to a loss of quality due to the reduction in quality control checks. This in turn would lead to more bottles being returned. A loss of reputation with regards reliability of the bottles could damage the reputation of the company and lead to a loss of long term profit even though short term profits may initially improve. Option 2: The loss of sales and possible inability to meet customers demand could lead to the loss of some customers who may seek an alternative supplier who can sell them all the bottles they need. There may be both a short term and a long term decrease in profits as a result of this option. B. Current conditions: DL cost/ bottle = = Option 1: DL cost/bottle = = Option 2: DL cost/bottle = =

($120 000 + $140 000 + $400 000)/1 200 000 $0.55 DL cost/bottle

($120 000 + $70 000 + $440 000)/1 200 000 $0.525 DL cost/bottle

($120 000 + $140 000 + $320 000)/1 100 000 $0.527 DL cost/bottle

C.

Option 1 reduces the direct labour cost per bottle more than option 2 and doesnt lead to a reduction in production levels so this would result in the best short term profit increase. Both options may have negative long term profit impacts but the extent of this is uncertain. On balance, option 1 would appear to be the best for Ten Green Bottles Pty Ltd.

Exercise 8.7

Cost of goods manufactured statement and analysis

LEE YEW TAN MANUFACTURING PTY LTD

Required: A. Prepare a cost of goods manufactured statement for the year ended 30 June 2010. B. Calculate the raw materials turnover ratio. C. Calculate ratios relating the cost of the major manufacturing costs to total cost of manufactured goods.

A. LEE YEW TAN MANUFACTURING PTY LTD Cost of Goods Manufactured Statement for the year ended 30 June 2010 Direct materials: Beginning raw materials $ 93 600 Purchases 248 304 341 904 Ending raw materials (90 720) Direct materials used Direct labour Factory overhead Total manufacturing costs for the period Beginning work in process Total work in process Ending work in process Cost of goods manufactured

$251 184 603 300 359 436 1 213 920 72 000 1 285 920 (63 360) $1 222 560

B.

Raw materials turnover ratio:

Cost of raw materials used Average raw materials inventory 251184 251184 2.73 (93600 90720 ) / 2 92160
C. Cost of raw materials ratio:

251184 0 .20 or 20% 1213920

Cost of direct labour ratio:

603300 0.50 or 50% 1213920

Cost of factory overhead costs:

359436 0.30 or 30% 1213920

Exercise 8.11

Manufacturing statement with missing data

Required: For company X, Y and Z, fill in the missing data. Each company is independent.

Sales Beginning finished goods Cost of goods manufactured Ending finished goods Cost of sales Gross profit Operating Expenses Net profit Beginning work in process Direct labour Raw materials used Factory overhead Ending work in process

Income statement Company X Company Y $194 600 (1) 154 400 36 300 29 800 (2) 96 200 86 000 38 000 50 800 88 000 71 500 106 600 82 900 61 200 36 600 (3) 70 000 21 700 25 800 28 400 36 500 50 800 22 000 42 800 28 800 36 600 16 900 (4) 72 600

(5) (6) (7) (8)

Company Z 80 300 8 500 32 600 5 800 35 300 45 000 21 000 24 000 9 100 12 500 11 800 13 400 14 200

(9) (10) (11) (12)

(See explanations below) (1) (2) (3) (4) (5) (6) (7) (8) $88 000 + 106 600 $88 000 + 38 000 96 200 $106 600 70 000 25 800 + 36 500 + 22 000 + 28 800 96 200 $28 400 + 50 800 + 42 800 + 36 600 72 600 $36 300 + 86 000 50 800 $154 400 71 500 $82 900 61 200 = $194 600 = $29 800 = $36 600 = $16 900 = $86 000 = $71 500 = $82 900 = $21 700

(9) (10) (11) (12)

$8 500 + 32 600 35 300 $80 300 35 300 $45 000 21 000 $32 600 + 14 200 (12 500 + 11 800 + 13 400)

= $5 800 = $45 000 = $24 000 = $9 100

Exercise 8.11

Manufacturing statement with missing data

Required: For company X, Y and Z, fill in the missing data. Each company is independent.

Sales Beginning finished goods Cost of goods manufactured Ending finished goods Cost of sales Gross profit Operating Expenses Net profit Beginning work in process Direct labour Raw materials used Factory overhead Ending work in process

Income statement Company X Company Y $194 600 (1) 154 400 36 300 29 800 (2) 96 200 86 000 38 000 50 800 88 000 71 500 106 600 82 900 61 200 36 600 (3) 70 000 21 700 25 800 28 400 36 500 50 800 22 000 42 800 28 800 36 600 16 900 (4) 72 600

(5) (6) (7) (8)

Company Z 80 300 8 500 32 600 5 800 35 300 45 000 21 000 24 000 9 100 12 500 11 800 13 400 14 200

(9) (10) (11) (12)

(See explanations below) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) $88 000 + 106 600 $88 000 + 38 000 96 200 $106 600 70 000 25 800 + 36 500 + 22 000 + 28 800 96 200 $28 400 + 50 800 + 42 800 + 36 600 72 600 $36 300 + 86 000 50 800 $154 400 71 500 $82 900 61 200 $8 500 + 32 600 35 300 $80 300 35 300 $45 000 21 000 $32 600 + 14 200 (12 500 + 11 800 + 13 400) = $194 600 = $29 800 = $36 600 = $16 900 = $86 000 = $71 500 = $82 900 = $21 700 = $5 800 = $45 000 = $24 000 = $9 100

Problem 8.6

Missing data for manufacturing entities

Required: A. Calculate the missing amounts for the letters (a) to (l). B. Using the data in Case 1, prepare a cost of goods manufactured statement. C. Using the data in Case 1, prepare an income statement. D. Using the data in Case 2, and additional data consisting of cash at bank $70 000, accounts receivable $200 000, raw materials inventory $9 900 and prepaid expenses $800, prepare the current assets section of the balance sheet/statement of financial position.

A. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) B. Cost of Goods Manufactured Statement Direct materials cost Direct labour Factory overhead Manufacturing costs for the period Beginning work in process Ending work in process Cost of goods manufactured $108 500 96 500 83 500 288 500 28 000 (51 500) $265 000 $288 500 (108 500 + 96 500 + 83 500) $51 500 (28 000 + 288 500 265 000) $66 500 (331 500 265 000) $296 500 (331 500 35 000) $115 500 (412 000 296 500) $56 750(115 500 58 750) $147 500 (348 000 67 500 133 000) $37 500(334 000 + 51 500 348 000) $80 000(118 000 38 000) $391 500 (57 500 + 334 000) $350 250 (391 500 41 250) $468 250 (118 000 + 350 250)

(a) (b)

C. Income statement SALES REVENUE Cost of sales: Beginning inventory (c) Cost of goods manufactured Cost of goods available for sale Ending inventory GROSS PROFIT EXPENSES 412 000 $66 500 265 000 331 500 (35 000)

(d) 296 500 (e) 115 500 58 750

PROFIT D. Balance Sheet / Statement of Financial Position CURRENT ASSETS: Cash at bank $70 000 Accounts receivable 200 000 Raw materials inventory 9 900 Work in process 51 500 Finished goods inventory 41 250 Prepaid expenses 800 TOTAL CURRENT ASSETS

(f) $56 750

$373 450