Question

Hawthorn Corporation manufactures custom all-terrain vehicles (ATVs) and uses a job costing system to as- sign and track costs. March's beginning inventory consisted of the following components:

Raw materials             Work in process          Finished goods

$65,000                            27,000                       80,000

The above beginning work in process consisted only of Job #02.778. The finished goods inventory consisted of Job #01.987 ($42,500) and Job #02.665 ($37,500).

The following transactions occurred during March:

Purchased $112,000 of raw materials.

Used $117,000 of raw materials in the production process. Of this amount, $95,000 con- sisted of parts and other materials "directly" incorporated into ATVs. The remainder was "indirect" material for shop supplies and small dollar items that are not otherwise traceable to specific ATVs.

Total wages and salaries were $225,000. This total was 60% attributable to direct labor, 10% to indirect labor, 5% to sales commissions, and 25% to general and administrative activities.

Depreciation for the period totaled $28,000. Of this amount, 75% related to factory and factory related equipment, and is contemplated in the factory overhead rates. The other 25% is related to general and administrative activities.

Other general and administrative costs, excluding wages and depreciation, totaled $15,000.

Other factory overhead costs, excluding indirect materials, wages, and depreciation, totaled $35,500. Hawthorn applies factory overhead at 75% of direct labor costs.

The ending work in process consisted of two jobs: Job #03.004 ($25,500) and Job #03.772 ($21,500). All completed units had been delivered to customers, and there was no ending finished goods inventory. Sales for the month amounted to $625,000. All sales are for cash at time of shipment.

Prepare (a) a Statement of Cost of Goods Manufactured (b) Cost of Goods Sold (c) Income Statement

Answer 1

Solution:

Part a) Statement of Cost of Goods manufactured

Statement of Cost of Goods manufactured
	$$
Cost of raw material used in production	$95,000
Direct labor cost (225,000*60%)	$135,000
Applied Manufacturing Overhead (75% of Direct Labor Cost $135,000)	$101,250
Total Manufacturing Cost	$331,250
Add: Beginning Work in Process	$27,000
	$358,250
Less: Ending Work in Process (25500+21500)	$47,000
Cost of Goods manufactured	$311,250

Part b – Statement of Cost of Goods Sold

Statement of Cost of Goods Sold
	$$
Cost of Goods Manufactured	$311,250
Add: Beginning Finished Goods Inventory	$80,000
Cost of goods available for sale	$391,250
Less: Ending Work In Process	$0
Cost of Goods Sold Unadjusted	$391,250
Less: Over Applied Overhead	-$250
Cost of Goods Sold adjusted	$391,000

Note 1 – Calculation of Over or Under Applied Manufacturing Overhead

Actual Manufacturing Overhead Incurred	$$
Indirect Materials (117,000 - 95,000)	$22,000
Indirect Labor (225,000*10%)	$22,500
Depreciation - Factory (28,000*75%)	$21,000
Other factory overhead	$35,500
Total Manufacturing Overhead Incurred	$101,000

Applied Manufacturing Overhead (Part 1) = $101,250

Here, applied manufacturing overhead is higher than actual incurred manufacturing overhead, it means overheads are OVER APPLIED by $250 (101,250 – 101,000)

These over applied overheads are deduced from Cost of Goods Sold in order to find out the correct cost of goods sold.

Part C – Income Statement

Income Statement
	$$
Sales Revenue	$625,000
Less: Cost of Goods Sold Adjusted	$391,000
Gross Profit	$234,000
General, Selling and Administrative Expenses:
Commission (225,000*5%)	$11,250
General and admin Salaries (225,000*25%)	$56,250
Depreciation (28,000*25%)	$7,000
other general and administrative expense	$15,000
Total Other general, selling and admn expenses	$89,500
Operating Profit	$144,500

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