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