review of the accounting records of Benson Manufacturing indicated that the company incurred the following payroll costs during the month of March. Assume the company's financial statements are prepared in accordance with GAAP. Salary of the company president—$31,300. Salary of the vice president of manufacturing—$16,800. Salary of the chief financial officer—$18,000. Salary of the vice president of marketing—$15,800. Salaries of middle managers (department heads, production supervisors) in manufacturing plant—$192,000. Wages of production workers—$940,000. Salaries of administrative secretaries—$110,000. Salaries of engineers and other personnel responsible for maintaining production equipment—$168,000. Commissions paid to sales staff—$256,000.

b. Assuming that Baird made 5,000 units of product and sold 4,000 of them during the month of March, determine the amount of payroll cost that would be included in cost of goods sold. (Do not round intermediate calculations.)

a. Payroll cost to be included in SG&A cost.

b. Payroll cost to be included in cost of goods sold.

Solution:

a. General sales and administrative costs are those that can not be traced back to the sale of each commodity. This is not part of COGS, in other words. When the cost of SG&A is viewed as an immediate cost, the cost can only be attributed on the income statement to the price of the goods sold.

In this case, since it is directly related to selling of the drug, it is appropriate to transfer commission payable to sales staff of COGS.

The following pay roll cost would be classified as SG&A expense:

Salary of the company president — $31,300

Salary of the chief financial officer— $18,000

Salary of the vice president of marketing— $15,800

Salaries of administrative secretaries— $110,000

Commissions paid to sales staff— $256,000

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Total payroll cost to be classified as SG&A expense = $431100

Hence Total SG&A payroll cost is $431100

b. COGS include those costs which are incurred in relation to manufacturing or production of goods. It includes direct labour costs of workers who produce the goods and factory overhead

i.e. the costs which are ancillary to produce the goods

Calculate the total payroll cost:

Salary of the vice president of manufacturing— $16,800

Salaries of middle managers in manufacturing plant— $192,000

Wages of production workers— $940,000

Salaries of engineers and maintaining production equipment—$168,000

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Total payroll cost $1316800

Hence total payroll cost is $1,31,6800

Calculate payroll cost that are included in cost of goods sold are:

Payroll cost that are included in cost of goods sold

= $1316800 ( 4000 / 5000 )

= $1053440

Hence payroll cost that are included in cost of goods sold are $1,053,440