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Gibson Manufacturing uses normal costingfor its job-costing system, which has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost category (manufacturing overhead). The following information is obtained for 2011 : \(\bullet\)Total manufacturing costs, \(\$ 8,000,000\) \(\bullet\)Manufacturing overhead allocated, \(\$ 3,600,000\) (allocated at a rate of \(200 \%\) of direct manufacturing labor costs) \(\bullet\)Work-in-process inventory on January 1, 2011, \$320,000 \(\bullet\)cost of finished goods manufactured, \(\$ 7,920,000\) 1\. Use information in the first two bullet points to calculate (a) direct manufacturing labor costs in 2011 and (b) cost of direct materials used in 2011. 2\. Calculate the ending work-in-process inventory on December 31,2011.

Step by step solution

01

Understanding the Allocation

The problem states that the manufacturing overhead is allocated at a rate of 200% of direct manufacturing labor costs. Given that the total manufacturing overhead allocated is $3,600,000, let's denote the direct manufacturing labor costs as \( x \). Thus, \( 2x = 3,600,000 \).

02

Calculate Direct Manufacturing Labor Costs

Solve for \( x \) using the equation from Step 1: \( 2x = 3,600,000 \). By dividing both sides by 2, we find that \( x = 1,800,000 \). Therefore, the direct manufacturing labor costs for 2011 are \( \$1,800,000 \).

03

Calculate Direct Material Costs

Using the total manufacturing costs \( \\(8,000,000 \), direct manufacturing labor costs \( \\)1,800,000 \), and manufacturing overhead allocated \( \$3,600,000 \), apply the equation: Total manufacturing costs = Direct materials + Direct manufacturing labor + Manufacturing overhead. This gives us \( 8,000,000 = \text{Direct materials} + 1,800,000 + 3,600,000 \). After calculating, Direct materials = \( 8,000,000 - 1,800,000 - 3,600,000 = 2,600,000 \).

04

Calculate Work-in-Process at End of Year

Start with the equation: Beginning WIP + Total Manufacturing Costs - Cost of Finished Goods = Ending WIP. Plug in the values: \( 320,000 + 8,000,000 - 7,920,000 = 400,000 \). Thus, the ending work-in-process inventory on December 31, 2011, is \( \$400,000 \).

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Key Concepts

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

Normal Costing

Normal costing is a common method used in accounting to allocate manufacturing expenses to products or jobs. This method is particularly useful for companies that produce a diverse range of goods, such as Gibson Manufacturing. It ensures that the costs are systematically assigned, considering many elements like direct and manufacturing overhead costs.
This approach uses predetermined overhead rates to allocate indirect costs, giving businesses a way to predict product expenses more accurately. In Gibson’s case, the overhead was allocated at twice the rate of the direct manufacturing labor costs, or 200%.

• This helps in consistent costing throughout the year.
• It allows for better budget estimates and cost control.
• Businesses can align their pricing strategies accordingly to maintain profitability.

By spreading out expenses predictably, businesses don't face drastic financial surprises, which aids in maintaining stable financial health.

Direct Costs

Direct costs are those expenses that can be directly traced to a specific job or product. They mainly include direct materials and direct labor. In the manufacturing industry, direct costs are vital as they directly affect the cost of each item produced.
In our exercise, the direct manufacturing labor costs were determined by understanding the overhead allocation:

• With a known overhead of $3,600,000 at 200% of labor costs, the labor cost was calculated as $1,800,000.
• This becomes an integral part of determining total product costs.
• Accurate labor cost assessment is essential for precise cost management and profit calculation.

Alongside labor, direct materials also play a critical role. After calculations, Gibson's direct material costs for 2011 were $2,600,000, a key figure when evaluating total manufacturing costs. Correctly identifying and calculating these costs will facilitate more accurate financial reporting and planning.

Manufacturing Overhead

Manufacturing overhead includes all the indirect costs of producing a product which can’t be directly traced back to it. These can encompass various operational costs such as utilities, depreciation of equipment, and salaries of supervisors.
In Gibson Manufacturing's system, overhead is crucial for understanding the broader spectrum of manufacturing costs. It was strategically applied at a rate of 200% of the direct manufacturing labor costs.

• This method ensures that overhead expenses are covered and aligned with production efforts.
• It balances the variable nature of manufacturing activities such as personnel or equipment usage.
• Effective overhead allocation aids in comprehensive cost tracking.

Overhead costs are vital since they represent expenses that support the essential activities of manufacturing goods but are not directly linked to the physical production process. Thus, properly managing these costs is crucial for accurate cost analysis and strategic financial planning.