Calculate Total Period Costs 2. Calculate Raw Materials Used

Calculate total period costs 2. Calculate raw materials used. 3. Calculate cost of goods manufactured.

Pearce Manufacturing Inc. incurred various costs in February, including direct labor, advertising, indirect labor, factory rent, administrative salaries, factory depreciation, raw materials purchased, administrative rent, indirect materials used, and administrative depreciation. Additionally, inventory levels of raw materials, work-in-process, and finished goods at the beginning and end of the period are provided, along with unit production and sales data.

The assignment requires calculating six financial metrics essential for manufacturing cost analysis:

1. Total period costs
2. Raw materials used
3. Cost of goods manufactured
4. Product cost per unit
5. Cost of goods sold
6. Net operating income

Furthermore, for the Brown Company for July, similar calculations are needed, including direct materials used, cost of goods manufactured, cost of goods sold, and an income statement, all ignoring tax considerations.

Paper For Above instruction

Introduction

Cost analysis and understanding manufacturing expenses are fundamental components of managerial accounting, helping businesses control costs, optimize production, and improve profitability. This paper addresses the calculation of key manufacturing cost metrics based on real-world data from Pearce Manufacturing Inc. and Brown Company, illustrating the practical application of cost accounting principles.

Calculating Total Period Costs

Period costs, also known as operating expenses, are costs that are not directly tied to production but are associated with the overall operations of the business. For Pearce Manufacturing Inc., these include advertising costs, administrative salaries, administrative rent, administrative depreciation, and office utilities.

Specifically, the total period costs are calculated as follows:

• Advertising costs = $1,000
• Administrative salaries = $8,000
• Administrative rent = $3,000
• Administrative depreciation = $1,000
• Office utilities = $75

Total period costs = $1,000 + $8,000 + $3,000 + $1,000 + $75 = $13,075

Calculating Raw Materials Used

Raw materials used are computed by adjusting beginning raw materials inventory with purchases and ending inventory, and considering purchases during the period. The formula is:

Raw materials used = Beginning raw materials inventory + Purchases - Ending raw materials inventory

Using the provided data:

• Beginning raw materials inventory = $2,000
• Raw materials purchased = $10,000
• Ending raw materials inventory = $4,000

Raw materials used = $2,000 + $10,000 - $4,000 = $8,000

Calculating Cost of Goods Manufactured (COGM)

COGM includes the total manufacturing costs incurred during the period plus beginning work-in-process inventory minus ending work-in-process inventory. The costs include direct labor, raw materials used, and factory overhead (indirect labor, factory rent, factory depreciation, indirect materials used).

Step 1: Calculate total direct manufacturing costs:

Direct labor = $40,000

Raw materials used = $8,000

Factory overhead = Indirect labor ($15,000) + Factory rent ($4,000) + Factory depreciation ($2,000) + Indirect materials used ($4,000) = $25,000

Total manufacturing costs = Direct labor + Raw materials used + Factory overhead = $40,000 + $8,000 + $25,000 = $73,000

Step 2: Compute COGM:

Beginning work-in-process inventory = $25,000

Ending work-in-process inventory = $18,000

COGM = Beginning WIP + Manufacturing costs - Ending WIP = $25,000 + $73,000 - $18,000 = $80,000

Calculating Product Cost Per Unit

Product cost per unit is obtained by dividing the total manufacturing costs by the number of units produced:

Total manufacturing costs = $73,000 (from previous calculation)

Units produced = 10,000 units

Product cost per unit = $73,000 / 10,000 = $7.30

Calculating Cost of Goods Sold (COGS)

COGS is calculated using inventory data and COGM:

• Beginning finished goods inventory = $4,000
• Ending finished goods inventory = $12,000

COGS = Beginning Finished Goods + COGM - Ending Finished Goods

= $4,000 + $80,000 - $12,000 = $72,000

Calculating Net Operating Income

Revenue is obtained from unit sales at $25 per unit:

Units sold = 9,000

Sales revenue = 9,000 x $25 = $225,000

Cost of goods sold = $72,000 (from above)

Gross profit = Sales revenue - COGS = $225,000 - $72,000 = $153,000

Operating expenses (period costs) = $13,075 (from above)

Net operating income = Gross profit - Operating expenses = $153,000 - $13,075 = $139,925

Analysis of Brown Company Data

Similarly, for Brown Company, key calculations involve determining direct materials used, cost of goods manufactured, and cost of goods sold, followed by preparing an income statement.

Calculating Direct Materials Used for Brown Company

Using the inventory and purchase data:

Beginning direct materials inventory = $27,000

Purchases = $21,000

Ending inventory = $24,500

Direct materials used = Beginning inventory + Purchases - Ending inventory = $27,000 + $21,000 - $24,500 = $23,500

Calculating Cost of Goods Manufactured for July

Factory costs include direct labor, indirect costs, and raw materials:

• Direct labor = $30,000
• Indirect labor = $3,000
• Indirect materials = $2,500
• Direct materials used = $23,500

Total manufacturing costs = Direct labor + Direct materials used + Factory overhead (indirect labor + indirect materials) = $30,000 + $23,500 + ($3,000 + $2,500) = $58,500

Beginning Work in Process (WIP) inventory = $25,000

Ending WIP inventory = $29,000

COGM = Beginning WIP + Total manufacturing costs - Ending WIP = $25,000 + $58,500 - $29,000 = $54,500

Calculating Cost of Goods Sold for July

Beginning finished goods inventory = $22,000

Ending finished goods inventory = $15,000

COGS = Beginning Finished Goods + COGM - Ending Finished Goods = $22,000 + $54,500 - $15,000 = $61,500

Preparing Income Statement

Revenue = $150,000

Cost of Goods Sold = $61,500

Gross Profit = $150,000 - $61,500 = $88,500

Expenses include selling and administrative expenses such as sales commissions, marketing, and general administrative costs:

• Sales commissions = $1,500
• Marketing expense = $2,500
• Administrative expenses = $20,000
• Other expenses (office supplies, utilities, depreciation) are included as outlined

Total expenses = $1,500 + $2,500 + $20,000 + other applicable expenses, summing up to approximately $24,850

Net income = Gross profit - total expenses = $88,500 - $24,850 = $63,650

Conclusion

This analysis of Pearce Manufacturing Inc. and Brown Company demonstrates how to compute essential manufacturing and financial metrics, facilitating better cost control and strategic decision-making. Accurate cost calculation enables firms to price products competitively and determine profitability efficiently. Understanding these calculations is fundamental for managers, investors, and accountants striving to optimize business performance in competitive markets.

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