Problem 1: Cost Terminology, Cost Flows and Cost Behavior
Part 1: The Miami Company suffered major losses in a fire on October 23, 2007. In addition to destroying several buildings, the blaze destroyed the company’s work in process inventory for an entire product line. Fortunately, the company was insured. However, the company needs to substantiate the amount of the claim. To this end, the company has gathered the following information that pertains to the production and sales of the affected product line:
1. The company’s sales for the first 23 days of October amounted to $230,000. Normally, this product line generates a gross profit equal to 30% of sales.
2. Finished goods inventory was $29,000 on October 1 and $42,500 on October 23.
3. On October 1, work in process inventory was $48,000
4. During the first 23 days of October, the company incurred the following costs:
Direct materials used $76,000
Direct labor 44,000
Manufacturing overhead 42,000
Required:
(1) Total Cost of Goods Manufactured for the first 23 days of October 2007
(2) The cost of Work in Process Inventory that was destroyed by the fire (i.e., the cost of Work in Process Inventory, 10/23/2007)
Part 2: The following inventory information is from the records of McMechen & Sons for 2006.
Inventories
Beginning Ending
Finished goods $110,000 $95,000
Work in Process 70,000 85,000
Direct materials 90,000 75,000
Other information:
Cost of direct materials used (variable) $ ?
Cost of direct manufacturing labor (variable) 224,000
Manufacturing overhead costs (variable) 66,800
Manufacturing overhead costs (fixed) 100,200
Marketing and distribution cost (variable) 80,000
Marketing and distribution cost (fixed) 50,000
Administrative costs (fixed) 60,000
Total Prime costs 417,000
Revenue 800,000
Required:
(1) Total Cost of Direct Materials Purchased during 2006
(2) Total Contribution Margin (in terms of dollars)
(3) Total Operating Income (in terms of dollars)
Problem 2 – Cost Estimation
Dave’s “Golden Brown” Pancake Restaurant features sourdough pancakes made form a strain of sourdough dating back to the Alaskan gold rush. To plan for the future, Dave needs to figure out his cost behavior patterns. He has the following information about his operating costs and the number of pancakes served:
|
Month
|
Number of Pancakes
|
Total Operating Costs
|
|
July
|
3,600
|
$2,360
|
|
August
|
3,900
|
$2,390
|
|
September
|
3,200
|
$2,320
|
|
October
|
3,300
|
$2,330
|
|
November
|
3,850
|
$2,385
|
|
December
|
3,620
|
$2,362
|
Required:
1. Use the high-low method to determine Dave’s operating cost equation.
2. Predict the total monthly operating costs if Dave serves $4,000 pancakes one month.