Which of the following costs is included in the cost of a manufactured product?

Chapter 2 Class Exercises

2-31 Flow of Inventoriable Costs.

Renka’s Heaters selected data for October 2014 are presented here (in millions):

Required: Calculate the following costs:

1. Direct materials inventory 10/31/
2. Fixed manufacturing overhead costs for October 2014
3. Direct manufacturing labor costs for October 2014
4. Work-in-process inventory 10/31/
5. Cost of finished goods available for sale in October 2014
6. Finished goods inventory 10/31/

SOLUTION

(All numbers below are in millions).

1. Direct materials inventory 10/1/2014 $ 105 Direct materials purchased 365 Direct materials available for production 470 Direct materials used (385) Direct materials inventory 10/31/2014 $ 85

2. Total manufacturing overhead costs $ 450 Subtract: Variable manufacturing overhead costs (265) Fixed manufacturing overhead costs for October 2014 $ 185

3. Total manufacturing costs $ 1, Subtract: Direct materials used (from requirement 1) (385) Total manufacturing overhead costs (450)

Direct materials inventory 10/1/2014 $ 105 Direct materials purchased 365 Direct materials used 385 Total manufacturing overhead costs 450 Variable manufacturing overhead costs 265 Total manufacturing costs incurred during October 2014 1, Work-in-process inventory 10/1/2014 230 Cost of goods manufactured 1, Finished goods inventory 10/1/2014 130 Cost of goods sold 1,

Direct manufacturing labor costs for October 2014 $ 775

1. Work-in-process inventory 10/1/2014 $ 230 Total manufacturing costs 1 , Work-in-process available for production 1, Subtract: Cost of goods manufactured (moved into FG) (1 ,660 ) Work-in-process inventory 10/31/2014 $ 180

2. Finished goods inventory 10/1/2014 $ 130 Cost of goods manufactured (moved from WIP) 1 , Cost of finished goods available for sale in October 2014 $ 1 ,

3. Finished goods available for sale in October 2014 (from requirement 5) $ 1, Subtract: Cost of goods sold (1 ,770 ) Finished goods inventory 10/31/2014 $ 20

SOLUTION

Howell Corporation Income Statement for the Year Ended December 31, 2014 (in millions)

Revenues $ Cost of goods sold Beginning finished goods, Jan. 1, 2014 $ 70 Cost of goods manufactured (below) 645 Cost of goods available for sale 715 Ending finished goods, Dec. 31, 2014 55 660 Gross margin 290 Marketing, distribution, and customer-service costs 240 Operating income $ 50

Howell Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2014 (in millions)

Direct materials costs Beginning inventory, Jan. 1, 2014 $ 15 Purchases of direct materials 325 Cost of direct materials available for use 340 Ending inventory, Dec. 31, 2014 20 Direct materials used $ Direct manufacturing labor costs 100 Indirect manufacturing costs Indirect manufacturing labor 60 Plant supplies used 10 Plant utilities 30 Depreciation––plant and equipment 80 Plant supervisory salaries 5 Miscellaneous plant overhead 35 220 Manufacturing costs incurred during 2014 640 Add beginning work-in-process inventory, Jan. 1, 2014 10 Total manufacturing costs to account for 650 Deduct ending work-in-process, Dec. 31, 2014 5 Cost of goods manufactured $

2-29 Computing cost of goods purchased and cost of goods sold.

The following data are for Marvin Department Store. The account balances (in thousands) are for 2014.

Marketing, distribution, and customer-service costs $ 37, Merchandise inventory, January 1, 2014 27, Utilities 17, General and administrative costs 43, Merchandise inventory, December 31, 2014 34, Purchases 155, Miscellaneous costs 4, Transportation-in 7, Purchase returns and allowances 4, Purchase discounts 6, Revenues 280,

Required:

1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.
2. Prepare the income statement for 2014.

2-28 (20–30 min.) Inventoriable costs versus period costs.

Each of the following cost items pertains to one of these companies: Star Market (a merchandising-sector company), Maytag (a manufacturing-sector company), and Yahoo! (a service-sector company):

a. Cost of lettuce and tomatoes on sale in Star Market’s produce department b. Electricity used to provide lighting for assembly-line workers at a Maytag refrigerator- assembly plant c. Depreciation on Yahoo!’s computer equipment used to update its Website d. Electricity used to provide lighting for Star Market’s store aisles e. Depreciation on Maytag’s computer equipment used for quality testing of refrigerator components during the assembly process f. Salaries of Star Market’s marketing personnel planning local-newspaper advertising campaigns g. Perrier mineral water purchased by Yahoo! for consumption by its software engineers h. Salaries of Yahoo!’s marketing personnel selling advertising i. Depreciation on vehicles used to transport Maytag refrigerators to retail stores

Required:

1. Distinguish between manufacturing-, merchandising-, and service-sector companies.
2. Distinguish between inventoriable costs and period costs.
3. Classify each of the cost items (a–h) as an inventoriable cost or a period cost. Explain your answers.

SOLUTION

1. Manufacturing-sector companies purchase materials and components and convert them into different finished goods. Merchandising-sector companies purchase and then sell tangible products without changing their basic form. Service-sector companies provide services or intangible products to their customers—for example, legal advice or audits. Only manufacturing and merchandising companies have inventories of goods for sale.

2. Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory (they are “inventoried”) to build up the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.

3. (a) Lettuce and tomatoes purchased for resale by Star market—inventoriable cost of a merchandising company. It becomes part of cost of goods sold when the lettuce and tomatoes are sold. (b) Electricity used for lighting at Maytag refrigerator assembly plant—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (c) Depreciation on Yahoo!’s computer equipment used to update directories of websites —period cost of a service company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost. (d) Electricity used to provide lighting for Star Market’s store aisles—period cost of a merchandising company. It is a cost that benefits the current period, and it is not traceable to goods purchased for resale. (e) Depreciation on Maytag’s assembly testing equipment—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (f) Salaries of Star Market’s marketing personnel—period cost of a merchandising company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future benefits). (g) Perrier mineral water consumed by Yahoo!’s software engineers—period cost of a service company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost. (h) Salaries of Yahoo!’s marketing personnel—period cost of a service company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost.

2-17 (15 min.) Direct, indirect, fixed, and variable costs.

Wonder Bakery manufactures two types of bread, which it sells as wholesale products to various specialty retail bakeries. Each loaf of bread requires a three-step process. The first step is mixing. The mixing department combines all of the necessary ingredients to create the dough and processes it through high-speed mixers. The dough is then left to rise before baking. The second step is baking, which is an entirely automated process. The baking department molds the dough into its final shape and bakes each loaf of bread in a high-temperature oven. The final step is finishing, which is an entirely manual process. The finishing department coats each loaf of bread with a special glaze, allows the bread to cool, and then carefully packages each loaf in a specialty carton for sale in retail bakeries.

Required:

1. Costs involved in the process are listed next. For each cost, indicate whether it is a direct variable, direct fixed, indirect variable, or indirect fixed cost, assuming “units of production of each kind of bread” is the cost object.

Costs: Yeast Mixing department manager

 Machine Maintenance personnel (of the Mixing Department)  Maintenance supplies (if separately identified for the Mixing Department)

Of course the yeast and flour will also be a direct cost of the Mixing Department, but it is already a direct cost of each kind of bread produced.

2 (20 min.) Cost drivers and value chain.

Roxbury Mobile Company (RMC) is developing a new touch-screen smartphone to compete in the cellular phone industry. The company will sell the phones at wholesale prices to cell phone companies, which will in turn sell them in retail stores to the final customer. RMC has undertaken the following activities in its value chain to bring its product to market: Identify customer needs (What do smartphone users want?) Perform market research on competing brands Design a prototype of the RMC smartphone Market the new design to cell phone companies Manufacture the RMC smartphone Process orders from cell phone companies Package the RMC smartphones Deliver the RMC smartphones to the cell phone companies Provide online assistance to cell phone users for use of the RMC smartphone Make design changes to the smartphone based on customer feedback

During the process of product development, production, marketing, distribution, and customer service, RMC has kept track of the following cost drivers: Number of smartphones shipped by RMC Number of design changes Number of deliveries made to cell phone companies Engineering hours spent on initial product design Hours spent researching competing market brands Customer-service hours Number of smartphone orders processed Number of cell phone companies purchasing the RMC smartphone Machine hours required to run the production equipment Number of surveys returned and processed from competing smartphone users

Required:

1. Identify each value chain activity listed at the beginning of the exercise with one of the following value-chain categories: a. Design of products and processes b. Production c. Marketing d. Distribution e. Customer service
2. Use the list of preceding cost drivers to find one or more reasonable cost drivers for each of the activities in RMC’s value chain.

SOLUTION

1. Identify customer needs (what do smartphone users want?)—Design of products and processes Perform market research on competing brands—Design of products and processes Design a prototype of the RMC smartphone—Design of products and processes Market the new design to cell phone companies—Marketing Manufacture the RMC smartphone—Production Process orders from cell phone companies—Distribution Package the RMC smartphones—Production Deliver the RMC smartphones to the cell phone companies—Distribution Provide online assistance to cell phone users for use of the RMC smartphone—Customer Service Make design changes to the RMC smartphone based on customer feedback—Design of products and processes
2. Value Chain Category Activity Cost Driver Design of products and processes

Identify customer needs Number of surveys returned and processed from competing smartphone users

Perform market research on competing brands

Hours spent researching competing market brands Number of surveys returned and processed from competing smartphone users Design a prototype of the RMC smartphone

Engineering hours spent on initial product design Make design changes to the smartphone based on customer feedback

Number of design changes

Production Manufacture the RMC smartphones

Machine hours required to run the production equipment Package the RMC smartphones Number of smartphones shipped by RMC

Marketing Market the new design to cell phone companies

Number of cell phone companies purchasing the RMC smartphone

Distribution Process orders from cell phone companies

Number of smartphone orders processed Number of deliveries made to cell phone companies Deliver the RMC smartphones to cell phone companies

Number of deliveries made to cell phone companies

Customer service

Provide on-line assistance to cell phone users for use of the RMC smartphone

Number of smartphones shipped by RMC Customer service hours

What all is included in manufacturing costs?

What are the costs of manufacturing the product?

What is included in manufacturing costs quizlet?

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