The gross profit must cover these types of costs

1

Widget Co. has the following data available relative to its investment in materials:

Number of units of material used annually 20,000

Number of workdays in a year 250

Cost of placing an order $20

Annual carrying cost per unit of inventory $5

Requirements:

1. Compute the economic order quantity (please show your work).

2. Give some examples of order costs and carrying costs.

Order costs:

Carrying costs:

3. Using the above data, compute the order size that results in the minimum total order and carrying cost by completing the following table.

Order Size Number of Orders Total Order Cost Average Inventory Total Carrying Cost Total Order and Carrying Costs

100

200

300

400

500

600

700

800

4. If the company requires a safety stock of 200 units and has an anticipated lead time of 5 days, what is the order point (please show your work)?

2

Widget Construction, Inc., is a home builder in New Mexico. Widget uses a job order costing

system in which each house is a job. Because it constructs houses, the company uses accounts

titled Construction wages and Construction overhead. The following events occurred during

August:

a. Purchased Materials on account $470,000

b. Incurred Contrstucion wages of $230,000. Requisitioned direct materials and used direct labor in construction:

Direct Materials Direct Labor

House 402 $ 58,000 $ 40,000

House 403 $ 63,000 $ 34,000 $ 177,000

House 404 $ 60,000 $ 52,000 $ 221,000

House 405 $ 89,000 $ 51,000

c. Deprectaion of construction equipment $6,800

d. Other overhead costs incurred on houses 402 through 405.

Indirect Labor $ 44,000

Equipment rentals in cash $ 33,000

Worker liability insurance expired $ 7,000

e. Allocated overhead to jobs at the predetermined rate of 40% of direct labor cost

f. Houses completed 402 and 404

g. House 404 Sold for $220,000

Deliverables

1. Record the events in the general journal

2. Post the appropriate entries to the T-accounts, identifying each entry by letter. Determine the

ending account balances, assuming that the beginning balances were zero.

3. Add the costs of the unfinished houses, and show that this total amount equals the ending

balances in the Work in process inventory account.

4. Add the cost of the completed house that has not yet been sold, and show that this equals

the ending balance in Finished goods inventory.

5. Compute gross profit on the house that was sold. What costs must gross profit cover for

Sherborn Construction?

Deliverable 1

Record the events in the general journal. Start with the entry from event (a).

Journal Entry

Date Accounts Debit Credit

a.

Event (b) has two journal entries to record. First record the construction wages.

Journal Entry

Date Accounts Debit Credit

b.

Now record the requisitioned direct materials and direct labor used.

Journal Entry

Date Accounts Debit Credit

b.

Next record the depreciation of construction equipment, $6,800.

Journal Entry

Date Accounts Debit Credit

c.

Record the overhead costs incurred on houses 402 through 405.

Journal Entry

Date Accounts Debit Credit

d.

Record the allocated overhead to jobs at the predetermined rate of 40% of direct labor cost.

Journal Entry

Date Accounts Debit Credit

e.

Record the completed houses 402 and 404 in event (f).

Journal Entry

Date Accounts Debit Credit

f.

Begin by recording the revenue from the sale of house 404.

Journal Entry

Date Accounts Debit Credit

g.

Next record the cost of goods sold from the sale of house 404.

Journal Entry

Date Accounts Debit Credit

g.

Deliverable 2

Post the appropriate entries to the Work in process inventory and Finished goods

inventory T-accounts. Identify each entry by letter and determine the ending account

balances. The sharded area is for the letter.

Work in process inventory

(b) (f)

(e)

Bal.

Finished goods inventory

(f) (g)

Bal. - 0

Deliverable 3

Show how the costs of the unfinished houses equals the ending balance in

Work in process inventory.

Widget Construction, Inc.

Reconciliation of Work in process inventory Subsidiary

and Control Accounts

House #403 House #405 Total WIP Balance

Unfinished houses:

Direct materials

Direct labor

Manufac. overhead -40% of labor

Total costs = Work in Process

Deliverable 4

Show how the costs of the completed houses equals the ending balance in

Finished goods inventory.

Widget Construction, Inc.

Reconciliation of Finished goods inventory Subsidiary

and Control Accounts

House#402 Total Finished Goods Bal.

Completed, unsold house:

Direct materials

Direct labor

Manufac. overhead -40% of labor

Total cost = Finished Goods bal.

Deliverable 5

Compute the gross profit for the house that was sold.

Widget Construction, Inc.

Gross profit on Homes Sold in August

House #404

Sales revenue

Less: Cost of goods sold

Gross profit

The gross profit must cover these types of costs:

3

Widget Design, Inc., is a web site design and consulting firm. The firm uses a job order costing

system, in which each client is a different job. Widget Design traces direct labor, licensing costs,

and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined

indirect cost allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2011, managing partner Judi Johnson prepared the following budget:

Direct Labor Hours 10,000 hours

Direct Labor Costs $ 1,400,000

Support Staff Salaries $ 170,000

Computer Leases $ 49,000

Office Supplies $ 29,000

Office Rent $ 60,000

In November 2011, Widget Design served several clients. Records for two clients appear here:

Dining Coop Root Chocolates

Direct labor hours 740 hours 65 hours

Software licensing costs $ 2,100 $ 300

Travel costs $ 9,000 $ - 0

Deliverables

1. Compute Widget Design's predetermined indirect cost allocation rate for 2011.

2. Compute the total cost of each job.

3. If Widget wants to earn profits equal to 20% of sales revenue, how much (what fee) should

it charge each of these two clients?

4. Why does Widget Design assign costs to jobs?

Deliverable 1

The predetermined indirect cost allocation rate =

HINT: Do this with a formula showing indirect costs to total direct labor costs

Deliverable 2

First enter in the direct costs for each job. Then enter in the indirect costs and total

costs for the jobs.

Make sure to enter "0" in the appropriate column. Enter percentage amounts as a whole

number. Round your answers to the nearest whole dollar.

Widget Design, Inc.

Estimated Cost of Dining Coop and Root Chocolates Jobs

Dining Coop Root Chocolates

Direct Costs:

Direct labor

Software licensing costs

Travel

Total Direct Costs

Indirect Costs:

$ - 0

$ - 0

Total Cost $ - 0 $ - 0

Deliverable 3

Determine the amount Robin Design, Inc. should charge these clients.

(Round your answers to the nearest whole dollar.)

Dining Coop:

Root Chocolates:

Deliverable 4

Widget Designs, Inc. assigns costs to jobs to help the company

Assigning costs to:

4

Statement of cost of goods manufactured

The following data relate to Widget Company:

Inventories

Ending Beginning

Work in Process $ 30,000 $ 25,000

Materials* $ 10,000 $ 15,000

Costs incurred during the period:

Materials purchases $ 22,000

Indirect materials used $ 3,000

Direct Labor $ 30,000

indirect Labor $ 8,000

Other Factory overhead $ 7,500

*Includes both direct and indirect

Instructions: Prepare a statement of cost of goods manufactured for Widget Company for the year ended December 31, 2011.

The Widget Company

Cost of Goods Manufactured

Year Ended December 31, 2011

Direct Materials:

Inventory

Purchases

Total Costs of available materials

Less Inventory 12/31

Cost of Materials used

Less indirect materials used

Cost of direct materials used in production

Direct Labor

Factory Overhead:

Indirect Materials

Indirect Labor

Other factory overhead

Total factory overhead

Total Manufacturing cost

Add work-in-process inventory, January 1

Total

Less work-in-process inventory, December 31

Cost of goods manufactured