Quarter raw material purchases of 1200000 labor costs

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quarter: raw material purchases of $1,200,000; labor costs of $845,000; and manu- facturing overhead of $760,500. Mason also informs you that it had $240,000; $50,000; and $375,000 as its beginning inventories for raw materials, work in process, and finished goods, respectively. The corresponding ending inventory values were $320,000; $100,000; and $294,500, respectively. Verify that (1) the cost of raw material used is $1,120,000, (2) cost of goods manufactured is $2,675,500, and (3) cost of goods sold is $2,756,000. Check It! Exercise #2 Solution at end of chapter. account: merchandise inventory. A manufacturing firm, however, has three inven- tory accounts: raw materials, work in process, and finished goods. Yet the final income statement looks the same for service, merchandising, and manufacturing firms. To download more slides, ebooks, solution manual, and test bank, visit
88 Chapter 3 Cost Flows and Cost Terminology We next turn to an issue of how firms assign overhead costs, for example, when multiple products exist. In such cases, a firm will have multiple work-in-process and finished goods accounts, one for each product. We can directly assign the costs of materials and labor to each WIP and FG account because we can trace these costs to each product. However, assigning manufacturing overhead to individual work-in-process accounts poses a problem. Overhead costs are indirect and, as such, are not trace- able to each product. We did not face this issue with Vulcan Forge because it has one WIP account and one FG account related to its one product, 5-ton hooks. Firms with multiple products resolve this issue by allocating overhead costs to products on some justifiable basis. In this section, we describe the cost allocation procedures com- monly used in organizations. A cost allocation is a procedure that allocates, or distributes, a common cost. Sup- pose two families share a $60 meal. The Smith family has three persons—an adult couple and their child. The Jones family has two persons—an adult couple. How might we allocate the $60 cost of their meal? Exhibit 3.13 illustrates the allocation process we might follow. We start by considering four elements that are in every cost allocation: cost pools, cost objects, cost drivers, and allocation volume. Cost Pool— the total costs to allocate. Our cost pool is $60, the cost of the meal. Cost Objects— the items or entities to which we allocate the costs in the cost pool. In our example, we have two cost objects: the Smith family and the Jones family. Cost Driver (Allocation Basis)— attributes that we can measure for each cost object. For example, we could use the number of persons in each family as the attribute, or the number of adults, the number of males, the number of left- handed people, and so forth. For our example, if we select the number of persons as the allocation basis, then the Smith family has three units of the cost driver, and the Jones family has two units. Suppose the restaurant had a “kids eat free” promotional special. Then we might select the number of adults as the

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