Manufacturing Statements And Cost Behavior At Tampa Foundry

5 Manufacturing Statements And Cost Behaviortampa Foundry Began Opera

Manufacturing statements and cost behavior Tampa Foundry began operations during the current year, manufacturing various products for industrial use. One such product is light-gauge aluminum, which the company sells for $36 per roll. Cost information for the year just ended follows. Per Unit Variable Cost Fixed Cost Direct materials $4.50 $ — Direct labor 6.5 — Factory overhead 9 50,000 Selling — 70,000 Administrative — 135,000 Production and sales totaled 20,000 rolls and 17,000 rolls, respectively There is no work in process.

Tampa carries its finished goods inventory at the average unit cost of production. Instructions: Determine the cost of the finished goods inventory of light-gauge aluminum. Prepare an income statement for the current year ended December 31. On the basis of the information presented: Does it appear that the company pays commissions to its sales staff? Explain. What is the likely effect on the $4.50 unit cost of direct materials if next year's production increases? Why?

Paper For Above instruction

The Tampa Foundry's production and sales activities during the current fiscal year provide insight into its manufacturing costs, inventory valuation, and overall financial performance. This analysis will determine the finished goods inventory value, prepare a comprehensive income statement, and interpret the implications of certain operational aspects, including sales compensation practices and the impact of increased production on material costs.

Calculating the Cost of Finished Goods Inventory

The first step involves computing the total manufacturing costs incurred during the year and deriving the average cost per unit, which will then be used to value the ending inventory. The provided costs include direct materials, direct labor, factory overhead, and fixed costs. Since direct materials are exclusively variable at $4.50 per unit, and direct labor and factory overhead are also variable and fixed respectively, the total variable manufacturing cost per unit can be calculated as follows:

• Direct materials: $4.50
• Direct labor: $6.50
• Factory overhead: $9.00

Thus, the total variable cost per unit sums to $20.00 ($4.50 + $6.50 + $9.00). Given that 20,000 units were produced and sold, the total variable manufacturing cost amounts to $400,000 (20,000 units × $20.00 per unit).

Next, we account for fixed manufacturing overheads, which total $50,000. When distributed across the 20,000 units produced, the fixed overhead per unit is:

Adding this to the variable cost per unit yields the total manufacturing cost per unit:

Since Tampa inventories its finished goods at the average unit cost, the ending inventory at December 31, based on 17,000 units sold out of 20,000 produced, reflects 3,000 units remaining in inventory.

Therefore, the ending inventory valuation is:

This figure represents the cost of the finished goods inventory on the balance sheet at year's end.

Preparing the Income Statement

The income statement summarizes the company's revenues, costs, and profits for the year. Selling and administrative expenses are given as fixed costs of $70,000 and $135,000, respectively, totaling $205,000.

Total sales revenue:

Cost of Goods Sold (COGS):

The cost of goods sold is based on the number of units sold (17,000) multiplied by the unit cost ($22.50):

Gross profit:

Subtracting operating expenses:

Net income:

The income statement indicates a profitable operation with net earnings of $24,500 for the year.

Analysis of Sales Commissions

Based on the information provided, there is no specific mention of commissions paid to sales staff. Typically, commissions are included as part of selling expenses if they are paid directly to sales personnel or agencies on a commission basis. Since the total selling expense is reported as $70,000 without detailed breakdowns, it is not explicitly clear whether part of this amount comprises sales commissions.

However, the absence of specific commission expenses suggests that Tampa Foundry may not pay significant commissions, or it handles sales compensation differently, perhaps through fixed salaries rather than commissions. Alternatively, the company might allocate selling expenses broadly, including advertising and other promotional activities, without explicitly identifying commissions. Without concrete evidence, the most reasonable conclusion is that the company does not heavily rely on commissions for its sales staff, or such expenses are embedded within the total selling expense without itemization.

Impact of Increased Production on Direct Materials Cost

The per-unit direct materials cost is calculated as $4.50, based on variable costs. If the next year's production volume increases significantly, several effects could influence this cost:

1. Economies of scale: Higher production volumes might lead to bulk purchasing discounts, thus reducing the per-unit cost of materials. Bulk purchasing often results in better negotiation leverage with suppliers, lowering unit prices.

2. Supplier efficiency: Increased demand might enable suppliers to offer better pricing or more favorable terms, further decreasing the per-unit cost.

3. Material yield improvements: As production processes mature and improve, wastage may decrease, effectively reducing the material cost per unit.

Conversely, if the supply of raw materials becomes scarce or if prices increase due to market volatility, the per-unit cost could rise despite higher production volumes.

In summary, generally, increased production volume tends to decrease the per-unit direct material cost due to economies of scale and supplier leverage, provided that raw material prices remain stable or decrease.

Conclusion

The Tampa Foundry's financial analysis demonstrates effective cost management, robust profitability, and a clear understanding of cost behavior. The manufacturing costs, inventory valuation, and income calculation reveal a well-structured costing system. The absence of explicit sales commissions suggests cost efficiency or internal handling without significant external brokerage fees. Moreover, scaling production is likely to reduce the per-unit direct material cost, enhancing profitability margin and operational efficiency. Continuous monitoring of supplier prices and production processes will be essential to sustain these economic advantages and support future growth.

References

• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.
• Blocher, E., Stout, D. E., Juras, P., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
• Hilton, R. W., & Troyer, J. D. (2015). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Anthony, R. N., & Govindarajan, V. (2013). Management Control Systems. McGraw-Hill Education.
• Williams, J. R., Haka, S. F., Bettner, M. S., & Carcello, J. V. (2018). Financial & Managerial Accounting. McGraw-Hill Education.
• Libby, T., Libby, R., & Short, D. G. (2014). Financial Accounting. McGraw-Hill Education.
• Horngren, C. T., et al. (2012). Introduction to Management Accounting. Pearson Education.