Question

Flow of Costs and Income Statement

Technology Accessories Inc. is a designer, manufacturer, and distributor of accessories for consumer electronic products. Early in 20Y3, the company began production of a leather cover for tablet computers, called the iLeather. The cover is made of stitched leather with a velvet interior and fits snugly around most tablet computers. In January, $762,000 was spent on developing marketing and advertising materials. For the first six months of 20Y3, the company spent an additional $1,405,000 promoting the iLeather. The product was ready for manufacture on January 21, 20Y3.

Technology Accessories Inc. uses a job order cost system to accumulate costs for the iLeather. Direct materials unit costs for the iLeather are as follows:

Leather$10.00

Velvet5.00

Packaging0.40

Total$15.40

The actual production process for the iLeather is fairly straightforward. First, leather is brought to a cutting and stitching machine. The machine cuts the leather and stitches an exterior edge into the product. The machine requires one hour per 130 iLeathers.

After the iLeather is cut and stitched, it is brought to assembly, where assembly personnel affix the velvet interior and pack the iLeather for shipping. The direct labor cost for this work is $0.50 per unit.

The completed packages are then sold to retail outlets through a sales force. The sales force is compensated by a 20% commission on the wholesale price for all sales.

Total completed production was 500,000 units during the year. Other information is as follows:

Number of iLeather units sold in 20Y3460,000

Wholesale price per unit$40

Factory overhead cost is applied to jobs at the rate of $1,300 per machine hour. There were an additional 20,000 cut and stitched iLeathers waiting to be assembled on December 31, 20Y3.

In your computations, if required, round interim per unit costs to two decimal places and final answers to the nearest whole dollar.

Required:

1. Prepare an annual income statement for the iLeather product.

Technology Accessories Inc.

Income Statement

For the Year Ended December 31, 20Y3

Sales $

Cost of Goods Sold

Gross Profit $

Selling Expenses:

Salespersons Commissions $

Advertising Design

Advertising Expenses

Total Selling Expenses

Operating income $

Feedback

1.

a. Calculate the sales revenue.

b. Calculate the manufacturing cost per unit (direct and indirect costs).

c. Assign all the manufacturing costs per unit to the number of units sold.

2. Determine the balances in the finished goods and work in process inventories for the iLeather product on December 31, 20Y3.

Finished Goods$

Work in Process$

Answer 1

1.

Technology Accessories Inc.
Income Statement
For the Year Ended December 31, 20Y3
Sales (460000 x $40)		18400000
Cost of goods sold (460000 x $25.90)*		11914000
Gross profit		6486000
Selling Expenses:
Salespersons Commissions (20% x $18400000)	3680000
Advertising Design	762000
Advertising Expenses	1405000
Total Selling Expenses		5847000
Operating income $		639000

*Cost per unit

Direct materials (460000 x $15.40)	15.40
Direct labor (460000 x $0.50)	0.50
Overheads (460000/130 x $1300)	10.00
Cost per unit $	25.90

2. Finished goods = (500000 - 460000) x $25.90 = 40000 x $25.90 = $1036000

Work in process = 20000 x ($10 + $10) = 20000 x $20 = $400000

Since the 20000 units are waiting to be assembled, the cost of velvet, packaging, and direct labor is yet to be incurred on the same. The work in process will thus be valued only at the cost of leather and overheads.