Question

Flow of Costs and Income Statement

Ginocera Inc. is a designer, manufacturer, and distributor of low-cost, high-quality stainless steel kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 20Y8. In January, the company spent $588,600 to develop a late-night advertising infomercial for the new product. During 20Y8, the company spent $1,373,400 advertising the product through these infomercials. In addition, the company incurred $589,000 in legal costs. The knives were ready for manufacture on January 1, 20Y8.

Ginocera uses a job order cost system to accumulate costs associated with the kitchen knife. The unit direct materials cost for the knife is as follows:

Hardened steel blanks (used for knife shaft and blade)	$1.40
Wood (for handle)	0.50
Packaging	0.50

The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 1,560 knives.

After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife in a decorative box. The direct labor cost is $0.20 per unit.

The knives are sold to stores. Each store is given promotional materials such as posters and aisle displays. Promotional materials cost $30 per store. In addition, shipping costs average $0.2 per knife.

Total completed production was 654,000 units during the year. Other information is as follows:

Number of customers (stores)	27,800
Number of knives sold	555,900
Wholesale price (to store) per knife	$12

Factory overhead cost is applied to jobs at the rate of $780 per stamping machine hour after the knife blanks are stamped. There were an additional 163,500 stamped knives, handles, and cases waiting to be assembled on December 31, 20Y8.

In your computations, if required, round interim per unit costs to two decimal places.

Required:

1. Prepare an annual income statement for the Kitchen Ninja knife series.

Ginocera Inc.
Income Statement
For the Year Ended December 31, 20Y8
			$
			$
Selling Expenses:
	$
Total Selling Expenses		$
Administrative Expenses:
Total Operating Expenses
Income from Operations			$

2. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 20Y8.

Finished Goods	$
Work in Process	$

Answer 1

1.

Ginocera Inc.
Income Statement
For the Year Ended December 31, 20Y8
Sales (555900 x $12)			6670800
Cost of goods sold*			1723290
Gross profit			4947510
Selling expenses:
Informercial campaign ($588600 + $1373400)	1962000
Promotional materials (27800 x $30)	834000
Shipping expense (555900 x $0.20)	111180
Total selling expenses		2907180
Administrative expenses:
Legal expenses		589000
Total operating expenses			3496180
Income from operations			1451330

Working:

Manufacturing cost per unit:

Direct materials ($1.40 + $0.50 + $0.50)	2.40
Direct labor	0.20
Factory overhead ($780/1560)	0.50
Total cost per unit	3.10

2.

Finished Goods	$       304,110
Work in Process	$       474,150

Working:

Finished goods balance = 654000 - 555900 = 98100 knives

Finished goods = 98100 x $3.10 = $304110

Work in process = 163500 x ($2.40 + $0.50) = 163500 x $2.90 = $474150

Since the 163500 units are waiting to be assembled, direct labor cost is not yet incurred on the same and hence, they are valued at material cost $2.40 + overhead cost $0.50.