Question

The following information relates to Walnut Ltd. for the year ended December 31, 2013:

Sales                                                                                                         $3,500,000

Purchases:

Direct materials                                                                                   $700,000

Indirect materials                                                                                 $50,000

Office supplies                                                                                     $20,000

      Salaries                                                                                                      $500,000 *

Direct labour                                                                                              $800,000

      Rent                                                                                                          $100,000 *

      Utilities                                                                                                     $80,000 *

      Advertising and promotional                                                                     $30,000

      Inventories:                             Dec. 31, 2012                      Dec. 31, 2013

Direct materials                $45,000                                $62,000

Indirect materials                 -----                                  $ 9,000

Office supplies                  $1,000                                     -----

Work-in-process               $4,100                                   $3,300

Finished goods                  $90,000                                 $81,700

*Of these costs, 80 % are assigned to manufacturing activities and the remainder pertain to selling and administrative functions.

                        (Assume that there is no "over-or-under" applied overhead.)

Instructions:

Prepare in good form a cost of goods manufactured schedule.
	Prepare an income statement through gross profit.

3. How much were the prime costs in 2013?  
4. How much were the conversion costs in 2013?

Answer 1

Solution:

a)Calculation of cost of goods sold

i)Direct Material Used=Opening Balance+Purchases-closing balance

=$45,000+ $700,000-   $62,000

=$683,000

ii)Indirect Material used=0+$50,000- $ 9,000=$41,000

iii)Office Supplies used= $1,000 + $20,000-0=$21,000

iv)Direct labour used=$800,000

v)Manufacturing Overhead=(Salaries+Rent+Utilities)*80%

=($500,000+ $100,000+ $80,000)*80%

=$544,000

Cost of goods Manufactured

	Amount($)
Direct Material Used	683,000
Indirect Material used	41,000
Office Supplies used(not included in Cost of goods manufactured)	0
Direct labour used	800,000
Manufacturing Overhead	544,000
Total	2089,000
Add:Opening work in progress	4,100
Less:Closing work in progress	3,300
Cost of Goods Manufactured	2,068,800

b)Cost of goods sold=Opening Finished Good+Cost of goods Manufactured-Closing inventory

=$90,000+$2,068,800-  $81,700

=$2077,100

Income statement for the year ended Dec. 31, 2013

		Amount($)
	Sales	3,500,000
	Other Revenue	Nil
A	Total Revenue	3500,000
B	Cost of goods sold	2077,100
	Gross Profit(A-B)	14,22,900

c)Calculation of prime costs

Prime costs is the direct costs that the company incurrs in manufacturing a product and typically include the direct production costs of goods including raw material and direct labour costs

Prime Costs=Raw material +labour

=$683,000+$41,000+$800,000

=$1524,000

d)Cost of conversion

Cost of Conversion=Cost of Production-Raw material cost

=$2,068,800-($683,000+$41,000)

=$1,344,800