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Chapter 18: Problem 7

The following information is available for the first month of operations of Native Arts Inc., a manufacturer of art and craft items: \(\begin{array}{lr}\text { Sales } & \$ 850,000 \\ \text { Gross profit } & 235,000 \\ \text { Indirect labor } & 65,000 \\ \text { Indirect materials } & 27,000 \\ \text { Other factory overhead } & 13,500 \\ \text { Materials purchased } & 305,000 \\ \text { Total manufacturing costs for the period } & 640,000 \\ \text { Materials inventory, end of period } & 20,000\end{array}\) Using the above information, determine the following missing amounts: a. Cost of goods sold b. Direct materials cost c. Direct labor cost

Short Answer

Expert verified
a. COGS: $615,000 b. Direct Materials Cost: $285,000 c. Direct Labor Cost: $249,500

Step by step solution

01

Calculate Cost of Goods Sold

The cost of goods sold (COGS) can be determined using the formula:\[ \text{COGS} = \text{Sales} - \text{Gross profit} \]Substitute the given values:\[ \text{COGS} = 850,000 - 235,000 = 615,000 \]
02

Determine Direct Materials Used

To find the direct materials used, we use the formula:\[ \text{Direct Materials Used} = \text{Materials Purchased} - \text{Materials Inventory, End of Period} \]Substitute in the given values:\[ \text{Direct Materials Used} = 305,000 - 20,000 = 285,000 \]
03

Calculate Direct Labor Cost

Direct labor cost can be calculated by subtracting indirect costs from total manufacturing costs. Using the formula:\[ \text{Direct Labor Cost} = \text{Total Manufacturing Costs} - (\text{Indirect Labor} + \text{Indirect Materials} + \text{Other Factory Overhead} + \text{Direct Materials Used}) \]Substitute the known values:\[ \begin{align*} \text{Direct Labor Cost} &= 640,000 - (65,000 + 27,000 + 13,500 + 285,000) \&= 640,000 - 390,500 \&= 249,500 \end{align*} \]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost of Goods Sold
The 'Cost of Goods Sold' (COGS) represents the direct costs associated with producing the goods that a company sells. It includes expenses like direct materials, direct labor, and any other direct manufacturing costs. Understanding COGS is crucial because it directly impacts a company's profitability. In simple terms, COGS is the total cost of creating products that were sold during a specific period.

To calculate COGS, the formula used is:
  • COGS = Sales - Gross Profit
In our example, with sales of $850,000 and a gross profit of $235,000, the calculated COGS is:
  • COGS = 850,000 - 235,000 = 615,000
This means $615,000 was the cost incurred to produce the goods that were sold during this period. Properly calculating the COGS helps businesses price their products appropriately and manage profitability.
Direct Materials Cost
'Direct Materials Cost' refers to the cost of raw materials and supplies that can be directly traced to the production of specific goods. It's an essential component of total production costs. Calculating it accurately helps businesses understand how much they're spending on raw materials and allows for the more efficient use of resources.

To determine the 'Direct Materials Used', we use this formula:
  • Direct Materials Used = Materials Purchased - Materials Inventory, End of Period
In our scenario, Native Arts Inc. purchased $305,000 worth of materials and had $20,000 left in their inventory at the end of the period.
  • Direct Materials Used = 305,000 - 20,000 = 285,000
Hence, the direct materials cost for the period was $285,000. Tracking this number is vital for budgeting and forecasting future material requirements.
Direct Labor Cost
The 'Direct Labor Cost' is the expense incurred from the work of employees who are directly involved in the manufacturing process. This cost is crucial as it affects the overall manufacturing budget and impacts product pricing.

To find the 'Direct Labor Cost,' indirect costs must first be subtracted from total manufacturing costs:
  • Direct Labor Cost = Total Manufacturing Costs - (Indirect Labor + Indirect Materials + Other Factory Overhead + Direct Materials Used)
For this calculation, the total manufacturing costs are $640,000 and the sum of indirect costs along with direct materials used is $390,500.
  • Direct Labor Cost = 640,000 - 390,500 = 249,500
Thus, the direct labor cost for Native Arts Inc. was $249,500. This figure is vital for understanding the human resource cost directly connected to production and is pivotal in cost accounting for setting accurate product prices.

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Most popular questions from this chapter

The following events took place for Mercury Shoe Company during May 2006, the first month of operations as a producer of athletic shoes: \- Purchased \(\$ 155,300\) of materials. \- Used \(\$ 145,800\) of direct materials in production. \- Incurred \(\$ 94,500\) of direct labor wages. \- Applied factory overhead at a rate of \(75 \%\) of direct labor cost. \- Transferred \(\$ 304,300\) of work in process to finished goods. \- Sold goods with a cost of \(\$ 300,100\). \- Sold goods for \(\$ 510,000\). \- Incurred \$116,000 of selling expenses. \- Incurred \(\$ 48,400\) of administrative expenses. a. Prepare the May income statement for Mercury Shoe Company. Assume that Mercury Shoe uses the perpetual inventory method. b. Determine the inventory balances at the end of the first month of operations.

Performance Valve, Inc. is a job shop. The management of Performance uses the cost information from the job sheets to assess their cost performance. Information on the total cost, product type, and quantity of items produced is as follows: \begin{tabular}{lrrrr} Date & Job No. & Quantity & Product & Amount \\ \hline Jan. 1 & 1 & 400 & XXY & \(\$ 7,600\) \\ Jan. 29 & 26 & 1,200 & AAB & 18,000 \\ Feb. 15 & 43 & 600 & AAB & 9,600 \\ Mar. 10 & 64 & 450 & XXY & 7,650 \\ Mar. 31 & 75 & 900 & MM & 7,200 \\ May 10 & 91 & 1,000 & MM & 12,000 \\ June 20 & 104 & 400 & XXY & 4,800 \\ Aug. 2 & 112 & 1,500 & MM & 24,000 \\ Sept. 20 & 114 & 400 & AAB & 6,000 \\ Nov. 1 & 126 & 600 & XXY & 6,000 \\ Dec. 3 & 133 & 850 & MM & 17,850 \end{tabular} a. Develop a graph for eacb product (three graphs), with Job No. (in date order) on the horizontal axis and unit cost on the vertical axis. Use this information to determine Performance's cost performance over time for the three products. b. What additional information would you require to investigate Performance's cost performance more precisely?

Lincoln Homes Inc. manufactures log homes. Lincoln uses a job order cost system. The time tickets from September jobs are summarized below. \(\begin{array}{lr}\text { Job } 502 & \$ 1,470 \\ \text { Job } 503 & 896 \\\ \text { Job } 504 & 602 \\ \text { Job } 505 & 868 \\ \text { Factory supervision } & 1,730\end{array}\) Factory overhead is applied to jobs on the basis of a predetermined overhead rate of \(\$ 18\) per direct labor hour. The direct labor rate is \(\$ 14\) per hour. a. Journalize the entry to record the factory labor costs. b. Journalize the entry to apply factory overhead to production for September.

The AutoDoctor Body Shop uses a job order cost system to determine the cost of performing automotive body and repair work. Estimated costs and expenses for the coming period are as follows: \begin{tabular}{lr} Auto parts & \(\$ 675,500\) \\ Shop direct labor & 490,000 \\ Shop and repair equipment depreciation & 16,900 \\ Shop supervisor salaries & 95,200 \\ Shop property tax & 19,200 \\ Shop supplies & 12,200 \\ Advertising expense & 17,300 \\ Administrative office salaries & 63,400 \\ Administrative office depreciation expense & 10,300 \\ Total costs and expenses & \(\$ 1,400,000\) \\ \hline \hline \end{tabular} The average shop direct labor rate is \(\$ 14\) per hour. Determine the predetermined shop overhead rate per direct labor hour.

Image Media, Inc. provides advertising services for clients across the nation. Image Media is presently working on four projects, each for a different client. Image Media accumulates costs for each account (client) on the basis of both direct costs and allocated indirect costs. The direct costs include the charged time of professional personnel and media purchases (air time and ad space). Overhead is allocated to each project as a percentage of media purchases. The predetermined overhead rate is \(30 \%\) of media purchases. On June 1 , the four advertising projects had the following accumulated costs: \begin{tabular}{lr} & March 1 Balances \\ \hline Fizz4U Beverage & \(\$ 105,000\) \\ First Security Bank & 175,000 \\ All-Right Rentals & 54,000 \\ SleepEzz Hotel & 14,000 \end{tabular} During June, Image Media, Inc. incurred the following direct labor and media purchase costs related to preparing advertising for each of the four accounts: \begin{tabular}{lrr} & Direct Labor & Media Purchases \\ \hline Fizz4U Beverage & \(\$ 36,000\) & \(\$ 160,000\) \\ First Security Bank & 15,000 & 140,000 \\ All-Right Rentals & 78,000 & 130,000 \\ SleepEzz Hotel & 101,000 & 80,000 \\ Total & \(\$ 230,000\) & \(\$ 510,000\) \\ \hline \end{tabular} At the end of June, both the Fizz煤U Beverage and First Security Bank campaigns were completed. The cost of completed campaigns are debited to the cost of services account. Journalize the summary entry to record each of the following for the month: a. Direct labor costs b. Media purchases c. Overhead applied d. Completion of Fizz谩U Beverage and First Security Bank campaigns
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