PROBLEM 20-3A Crystal Company produces large quantities of a standardized product. The following information is available for its production activities for March: Raw materials Beginning inventory $ 26,000 Raw materials purchased (on credit) 255,000 Direct materials used (172,000) Indirect materials used (81,000) Ending inventory $27,000 Factory payroll Direct labor used $207,720 Indirect labor used 50,000 Total payroll cost (paid in cash) $257,720 Factory overhead incurred Indirect materials used $ 81,500 Indirect labor used 50,000 Other overhead costs 159,308 Total factory overhead incurred $290,808 Factory overhead applied (140% of direct labor cost) Total factory overhead applied $290,808 Additional information about units and costs of production activities follows. Units Beginning in process inventory 2,200 Started 30,000 Ending in process inventory 5,900 Status of ending goods in process inventory Materials – percent complete 50% Labor and overhead -percent complete 65% Costs Beginning in process inventory Direct materials $ 3,500 Direct labor 3,225 Factory overhead 4,515 $11,240 Direct materials added 172,000 Direct labor added 207,720 Overhead applied (140% of direct labor) 290,808 Total costs $681,768 Ending in process inventory $82,128 During March, 25,000 units of finished goods are sold for $85 cash each. Cost information regarding finished goods follows. Beginning finished goods inventory $155,000 Cost transferred in 599,640 Cost of goods sold (612,500) Ending finished goods inventory $142,140 Required 1. Prepare journal entries dated March 31 to record the following March activities: (a) raw materials purchases, (b) direct materials usage, (c) indirect materials usage, (d) factory payroll costs, (e) direct labor costs used in production, (f) indirect labor costs, (g) other overhead costs – credit Other accounts, (h) overhead applied, (i) goods transferred to finished goods, (j) sale of finished goods. 2. Prepare a process cost summary report for this company, showing costs charged to production, units cost information, equivalent units of production, cost per EUP, and its cost assignment and reconciliation. Analysis Component 3. The company provides incentives to its department managers by paying monthly bonuses based on their success in controlling costs per equivalent unit of production. Assume that the production department underestimates the percentage of completion for units in ending inventory with the result that its equivalent units of production in ending inventory for March are understated. What impact does this error have on the March bonuses paid to the production managers? What impact, if any, does this error have on April bonuses? Book check: 2. Cost per equivalent unit: materials $6.00; labor $7.00; overhead $9.80.
Teller Co. sold 20,000 units of its only product and incurred a $70,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2010’s activities, the production manager notes that variable costs can be reduced 50% by installing a new machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $210,000. The maximum output capacity of the company is 40,000 units per year.
Contribution Margin Income Statement
For Year Ended December 31, 2009
Variable costs 800,000
Contribution margin $ 200,000
Fixed costs 270,000
Net loss $ (70,000)
1. Compute the break-even point in dollar sales for year 2009.
2. Compute the break-even point in dollar sales for year 2010 assuming the machine is installed and there is no change in unit sales price.
3. Prepare a forecasted contribution margin income statement for 2010 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change and no income taxes.
4. Compute the sales level required in both dollars and units to earn $210,000 of after-tax income in 2010 with the machine installed and no change in unit sales price. The income tax rate is 30%. (Hint: Use procedures in Exhibits 22.18 and 22.20.)
5. Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part (4). Assume an income tax rate of 30%.
Exhibits 22.18: Income relations in CVP Analysis
– Variable costs
– Fixed costs
3. Net income, $120,000
4. Required sales, $1,300,000 or 26,000 units
5. Net income: $210,000