Module 1 Review Questions: Cost Analysis And Identification

Module 1 Review Questions I Cost Analysis And Identification

Classify each cost of Georgia Pacific as either a product or a period cost. If a product cost, identify it as a prime or a conversion cost. Classify each product cost as either a direct cost or an indirect cost using the product as the cost object. Prepare Randa Company’s manufacturing statement for the year ended December 31, 2013, using provided account balances, including overhead account balances. Using this information, prepare an income statement for Randa Company assuming a cost of goods manufactured of $546,390. Compute the cost of goods sold section of the income statement for two companies based on given ending inventories, purchases, and manufacturing costs, and write a memo explaining inventory accounts and their reporting locations. Analyze cost flows at Racing Wheels, Inc., calculating raw materials requisitioned, direct labor costs, and predetermined overhead rate, along with costs transferred to finished goods. Complete amounts related to direct materials, labor, manufacturing, and cost of goods sold for Lock-Down Company, and prepare journal entries for materials, labor, and overhead activities. Calculate the predetermined overhead rate for Red Wing Company, determine inventory costs based on ending balances, and allocate costs between direct materials, direct labor, and overhead.

Paper For Above instruction

Cost analysis and identification are fundamental processes in managerial accounting, providing valuable insights into the costs associated with production and how they influence decision-making. The classification of costs into categories such as product and period costs, direct and indirect costs, and prime versus conversion costs enables businesses to analyze their expenses accurately and allocate resources efficiently. This paper explores the cost classification methods using Georgia Pacific as a case study, the preparation of manufacturing statements and income statements through Randa Company's data, and the detailed computation of costs for two different companies to demonstrate inventory management and reporting. Furthermore, the analysis of cost flows tailored to Racing Wheels, Inc., highlights the process of job costing, while the scenario involving Lock-Down Company illustrates the preparation of journal entries and calculation of manufacturing costs. Lastly, Red Wing Company's application of factory overhead provides a comprehensive understanding of cost allocation methodologies.

Cost Classification: Georgia Pacific Case Study

In cost accounting, determining whether a cost is a product or a period expense is critical. Product costs are directly associated with the manufacturing of goods and include direct materials, direct labor, and manufacturing overhead. These costs are capitalized as inventory and expensed as cost of goods sold when the product is sold. Period costs, such as selling, general, and administrative expenses, are charged directly to expense in the period incurred. For Georgia Pacific, costs like raw materials, factory supplies, and factory wages are classified as product costs, with warehouse wages being prime costs if directly related to manufacturing, or conversion costs if used to convert raw materials into finished goods. Advertising and administrative expenses are period costs, as they do not directly contribute to manufacturing.

Product costs can be further distinguished into direct and indirect costs. Direct costs are traceable to a specific product, such as raw materials used explicitly for a particular product. Indirect costs, like factory rent and indirect labor, cannot be traced directly and are allocated to products using predetermined overhead rates.

Preparation of Manufacturing Statements

The manufacturing statement, or manufacturing cost statement, presents a detailed account of raw materials used, manufacturing costs incurred, and the cost of goods manufactured. Using Randa Company’s balances, we start with raw materials inventory, add purchases, and subtract ending inventory to determine raw materials used. Direct labor and manufacturing overhead are accumulated to produce total manufacturing costs, which, when added to beginning work-in-process inventory, give total manufacturing costs incurred. Deducting ending work-in-process inventory yields the cost of goods manufactured. This statement ensures clear tracking of costs and production efficiency.

For Randa Company, the various overhead costs detailed—factory supplies, indirect labor, factory repairs, and rent—are accumulated and assigned based on predetermined rates to compute the total manufacturing cost accurately. The inclusion of ending inventories for raw materials, work-in-process, and finished goods balances out the statement and supports income statement preparation.

Income Statement Preparation

Using the manufacturing costs and inventories from the previous section, Randa Company’s income statement begins with sales revenue. The cost of goods sold is calculated by adjusting the beginning inventory, adding the cost of goods manufactured, and subtracting ending inventory. The gross profit is then derived by subtracting cost of goods sold from sales. Operating expenses, including advertising and general administrative expenses, are deducted from gross profit to arrive at net income. This comprehensive statement provides insight into the company's profitability and operational efficiency during the period.

Inventory Computation and Reporting

The calculation of cost of goods sold (COGS) involves beginning inventory, purchases or manufacturing costs, and ending inventory. For Pinnacle Retail, beginning inventory of merchandise and finished goods, plus purchases and manufacturing costs, are used to compute COGS using the formula:

Beginning Inventory + Purchases / Manufacturing Costs – Ending Inventory = COGS

Applying this formula to both Pinnacle Retail and Slope Board Manufacturing provides their respective COGS, which are essential for accurate income statement reporting. The proper presentation includes title, date, and clear formatting to enhance clarity and compliance with accounting standards.

Analysis of Cost Flows

At Racing Wheels, Inc., the analysis of job costs involves summing direct materials, direct labor, and applied overhead to each job. Calculating the costs for jobs 102, 103, and 104 involves reviewing direct costs assigned initially and applying the predetermined overhead rate based on direct labor costs. The total raw materials requisitioned can be determined by considering direct materials used on each job, which are typically identified via job cost sheets. Overhead application is based on a fixed rate, ensuring a systematic distribution across jobs. The completion status of jobs informs the transfer of costs from work-in-process to finished goods, demonstrating effective job costing techniques.

Cost Flows in Job Order Cost System

For Lock-Down Company, the calculation of indirect and direct costs involves summing raw materials used, labor costs, and overhead applied. The journal entries are then prepared for each activity, reflecting purchases, usage, payroll costs, and overhead application. This process ensures traceability of costs and proper recording of activities according to accounting standards, enabling accurate financial reporting.

Factory Overhead Calculation and Allocation

Red Wing Company applies factory overhead based on direct labor costs, with an overhead rate calculated as:

Overhead Rate = Total Overhead Costs / Total Direct Labor Costs

For 2013, this results in a predetermined rate of 40% (Overhead / Direct Labor). Using this rate, the overhead allocation for ending inventory is calculated by multiplying direct labor costs within that inventory by the rate. Allocating costs between direct materials, direct labor, and overhead for ending inventories involves analyzing the costs contained in ending balances and proportionally distributing expenses based on direct labor costs and other allocation bases. This ensures accurate inventory valuation and consistency with accounting standards.

Conclusion

Cost analysis and management are vital for operational success and financial reporting accuracy. Proper classification of costs, detailed manufacturing statements, precise inventory computations, and systematic cost flow analysis all contribute to comprehensive cost control and profit maximization. These processes, demonstrated through various company scenarios, underpin effective managerial decision-making and financial transparency.

References

• Drury, C. (2013). Management and Cost Accounting (9th ed.). Cengage Learning.