Solutions Guide: Please do not present as your own.

This is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else. PROBLEM 221 Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior [ LO2 , LO3 , LO4 , LO5 , LO6 ] Selected account balances for the year ended December 31 are provided below for Superior Company: Selling and administrative salaries 110,000 Purchases of raw materials 290,000 Direct labor ? Advertising expense 80,000 Manufacturing overhead 270,000 Sales commissions 50,000 Inventory balances at the beginning and at the end of the year as follows: Beginning of year End of year Raw Materials 40,000 10,000 Work in process ? 35,000 Finished goods 50,000 ? The total manufacturing costs for the year were $683,000; the goods available for sale totaled $740,000; and the cost of goods sold totaled $660,000. Required: 1. Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the companys income statement for the year. 2. Assume that the dollar amounts given above are for the equivalent of 40,000 units produced during the year. Compute the average cost per unit for direct materials used and the average cost per unit for manufacturing overhead. 3. Assume that in the following year the company expects to produce 50,000 units and manufacturing overhead is fi xed. What average cost per unit and total cost would you expect to be incurred for direct materials? For manufacturing overhead? (Assume that direct materials is a variable cost.) 4. As the manager in charge of production costs, explain to the president the reason for any difference in average cost per unit between (2) and (3) above. 1. Superior Company Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning (given).................... Add: Purchases of raw materials (given)......................... Raw materials available for use....................................... Deduct: Raw materials inventory, ending (given)........... Raw materials used in production.................................... Direct labor.......................................................................... Manufacturing overhead (given)......................................... Total manufacturing costs (given)....................................... $40,000 290,000 330,000 10,000 $320,000 93,000 * 270,000 683,000

Add: Work in process inventory, beginning........................ Deduct: Work in process inventory, ending (given)............ Cost of goods manufactured................................................ The cost of goods sold section of the income statement follows: Finished goods inventory, beginning (given)...................... Add: Cost of goods manufactured....................................... Goods available for sale (given).......................................... Deduct: Finished goods inventory, ending.......................... Cost of goods sold (given)..................................................

42,000 * 725,000 35,000 $690,000

$50,000 690,000 * 740,000 80,000 * $660,000

* These items must be computed by working backwards up through the statements. 2. Direct materials: $320,000 40,000 units = $8.00 per unit. Manufacturing overhead: $270,000 40,000 units = $6.75 per unit. 3. Direct materials: $8.00 per unit. Manufacturing overhead: $270,000 50,000 units = $5.40 per unit. 4. The average cost per unit for manufacturing overhead dropped from $6.75 to $5.40 because of the increase in production between the two years. Because fixed costs do not change in total as the activity level changes, the average cost per unit will decrease as the activity level rises.