Question

1.   Smith Company manufactures lawn mowers. The firm had the following inventories.

Jan 1, 2019 Dec 31, 2019
       Finished goods       $142,000   $ 92,000
       Work in process       $262,000   $426,000
       Materials           $114,000   $ 90,000

   The following additional data pertains to operations.
   Material purchased       $150,000   Property Taxes Factory   $ 7,500
   Direct labor           $400,000   Utilities-Factory       $15,000
   Depreciation-Factory Equip   $ 25,000   Insurance-Factory       $ 4,500
   Factory Supervisor Salaries   $227,500   Selling and Admin Expense   $200,000

Alex Company applies manufacturing overhead at the rate of 60 percent of direct-labor cost.

   Required:
   Compute the following amounts for the year of 2019.
a.   Create a Statement of Cost of Goods Manufactured in good form (use the format presented in Chapter 15).
b.   Compute Cost of Goods Sold for 2019.
c.   Assume Smith Company wants to achieve a Gross Profit of 30% of Sales -- Compute the total dollar amount of Sales needed.
d.   Show Smith Company's Income Statement for 2019 using the answers you derived in (b) and (c).
e.   Was overhead under or over applied and by how much?
f.   Show the journal entry for (e) assuming the amount is considered to be small.
g.   What effect, if any, will the amount in (e) have on net income. Explain and show the computation.
h.   Why does overhead need to be applied? Explain.
i.   If Smith estimated overhead for the year to be $252,000, what amount was the original estimate for direct labor cost?

Answer 1

a)

STATEMENT OF COST OF GOODS MANUFACTURED
Raw material-beginning	114000
purchase	150000
less:Raw material -ending	(90000)
Raw material used		174000
Direct labor		400000
Manufacturing overhead applied (400000*60%)		240000
Total manufacturing cost incurred during the period		814000
Work in process -Beginning		262000
		1076000
less:work in process -ending		(426000)
cost of goods manufactured		650000

b)

cost of goods sold =Finished goods inventory beginning + cost of goods manufactured - Finished goods inventory ending

           = 142000+650000-92000

             = 700000

c)Total dollar sales needs = cost of goods sold /(1-Gross profit %)

            = 700000/(1-.30)

              = 700000/.70

              =$ 1,000,000

d)

SMITH COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31,2019
Sales	1000000
less:cost of goods sold	(700000)
Gross margin	300000
less: Selling and Admin Expense	(200000)
net operating income	100000