Question

Houston Houston Office Equipment manufactures and sells metal shelving. It began operations on January​ 1,2014.

Costs incurred for 2014 are as follows​ (V stands for​ variable; F stands for​ fixed):

Direct materials used

$149,500

V

Direct manufacturing labor costs

31,500

V

Plant energy costs

3,000

V

Indirect manufacturing labor costs

15,000

V

Indirect manufacturing labor costs

12,000

F

Other indirect manufacturing costs

10,000

V

Other indirect manufacturing costs

32,000

F

Marketing, distribution, and customer-service costs

126,000

V

Marketing, distribution, and customer-service costs

48,000

F

Administrative costs

57,000

F

Variable manufacturing costs are variable with respect to units produced. Variable​ marketing, distribution, and​ customer-service costs are variable with respect to units sold.

Inventory data are as follows​:

Beginning:

Ending:

January 1, 2014

December 31, 2014

Direct materials

0

lb

1,900

lbs

Work in process

0

units

0

units

Finished goods

0

units

?

units

Production in 2014 was 115,000 units. Two pounds of direct materials are used to make one unit of finished product.

Revenues in 2014 were $583,200.The selling price per unit and the purchase price per pound of direct materials were stable throughout the year. The​ company's ending inventory of finished goods is carried at the average unit manufacturing cost for 2014.

​Finished-goods inventory at December​ 31,2014​, was $15,400.

Requirements

1. Calculate direct materials​ inventory, total​ cost, December​ 31,2014.

2. Calculate​ finished-goods inventory, total​units, December​ 31,2014.

3. Calculate selling price in 2014.

4. Calculate operating income for 2014.

Requirement:

Calculate direct materials​inventory, total​ cost, December​ 31,2014.

Determine the​ formula, then calculate ending direct materials total cost.

Answer 1

Solution:

1) If 2 pounds of direct materials are used to make one unit of finished product, then 115,000 units × 2 lbs, or 230,000 lbs were used at $0.65 per lb of direct materials i.e. ($149,500 ÷ 230,000 lbs.).

The Formula for calculating Ending Direct Material Cost =  [Ending Direct Material Inventory * Cost per lb]

Therefore, Ending Direct Materials cost is 1,900 lbs. * $0.65 = $1,235.

2) Manufacturing Costs for 115,000 units  

   Variable Fixed Total

   Direct materials costs – $149,500  + Direct manufacturing labor costs – 31,500  + Plant energy costs – 3,000  + Indirect manufacturing labor costs

 

   (Variable + Fixed) i.e. 15,000+12,000 - 27,000  + Other indirect manufacturing costs

 

   (Variable + Fixed) i.e. 10,000+32,000 - 42,000

    So, Cost of goods manufactured - $253,000

Average unit manufacturing cost = $253,000 ÷ 115,000 units

                                                       = $2.20 per unit

Finished Goods Inventory at Dec. 31, 2014 = $15,400

Therefore Finished goods inventory total units = $15400 / $2.20

                                                                                = 7,000 units

3) Units sold in 2014 = Beginning inventory + Production – Ending inventory

                                   = 0 + 115,000 –7,000

                                 = 108,000 units

Therefore, Selling price in 2014 = Total Revenues / Units Sold

                                                      = $583,200 ÷ 108,000

                                                      = $5.40 per unit

4) Operating Income for 2014

            Revenues(108,000 units sold × $5.40) = $583,200

           Cost of units sold:

            Beginning finished goods, Jan. 1, 2014 = $0

            Cost of goods manufactured = $253,000

           Cost of goods available for sale = $253,000

           Ending finished goods, Dec. 31, 2014 = $15,400

           So, Cost of Units sold ($253000 - $15400) = $237,600

Therefore, Gross margin = Total Revenue - Cost of Units Sold

                                          = $583,200 - $237,600

                                         = $345,600

Operating costs:  Marketing, distribution, and customer-service costs

Variable + Fixed i.e. ($126,000 + $48,000) = $174,000

Administrative costs = $57000

Total Operating Costs = $231,000

Therefore Operating income for 2014 = $345600 - $231,000

                                                                = $114600