Question Set: In The Income Statement Of A Manufacturing Inc ✓ Solved

Question set: In the income statement of a manufacturing inc

In the income statement of a manufacturing company, answer the following questions. Options are provided for each item and you should use foundational cost accounting concepts to determine the correct choice.

1) In the income statement of a manufacturing company, what replaces purchases in the cost of goods section of a retail company? Options: Finished goods; Cost of merchandise available; Cost of goods manufactured; Work in process completed.

2) Which of the following accounts will be found on the income statement? Options: inventory; work in process; finished goods; cost of merchandise sold.

3) Cost of Materials Used $40,000; Direct Labor costs $55,000; Factory Overhead $32,000; Work in Process, beg. $28,000; Work in Process, end. $18,000. What is Cost of Goods Manufactured? Options: $173,000; $97,000; $117,000; $137,000.

4) Cost of Materials Used $40,000; Direct Labor costs $55,000; Factory Overhead $32,000; Work in Process, beg. $28,000; Work in Process, end. $18,000; Finished Goods, beg. $28,000; Finished Goods, end. $18,000. What is Cost of Goods Sold? Options: $147,000; $137,000; $10,000; $128,000.

5) Beginning Raw Materials Inventory $75,000; Materials purchased $20,000; Ending Raw Materials Inventory $30,000. How much are Raw Materials Used? Options: $25,000; $45,000; $65,000; $20,000.

6) A company manufactured 50,000 units of a product at a cost of $250,000. They sold 40,000 units for $10 each. What is Gross Margin? Options: $150,000; $200,000; $400,000; $250,000.

7) The cost of a manufactured product generally consists of direct materials cost, direct labor cost, and factory overhead cost. True or False.

8) Only the value of the inventory that is sold will appear in the income statement. True or False.

Paper For Above Instructions

Question 1: Replacement of Purchases with COGM in Manufacturing Income Statements

In manufacturing, the purchases figure used by retailers is replaced by the Cost of Goods Manufactured (COGM) when preparing the cost of goods manufactured section. This shift reflects the fact that a manufacturer does not purchase finished goods for resale; instead, it converts raw materials into finished goods. COGM represents the total production cost of goods that were completed during the period and transferred from Work in Process to Finished Goods. This aligns with standard cost accounting practice, where COGM serves as the bridge between the accumulating costs in the production accounts and the cost of goods available for sale (Horngren, Datar, Rajan; Garrison, Noreen, Brewer) (Horngren et al., 2021; Garrison et al., 2020).

Key takeaway: For manufacturing entities, the equivalent of “purchases” used by retailers is replaced in the cost flow by COGM, because the focus shifts from purchases of finished goods to the cost of converting raw materials into completed goods (Horngren et al., 2021).

Question 2: Accounts Found on the Income Statement

On the income statement, typically only the cost-related measure for goods sold appears as a line item: Cost of Goods Sold (COGS) or, in the phrasing of the options provided, “cost of merchandise sold.” Inventory, Work in Process (WIP), and Finished Goods (FG) are balance sheet accounts that track value at a point in time rather than representing a period expense. The income statement captures the flow of costs that have been expensed through sales during the period, culminating in COGS. This distinction is a fundamental principle in managerial and financial accounting (Kimmel, Weygandt, Kieso; Garrison et al.) (Kimmel et al., 2019; Garrison et al., 2020).

Therefore, among the options given, the account that will be found on the income statement is cost of merchandise sold (COGS) corresponding to the period expense for goods sold (Horngren et al., 2021).

Question 3: Cost of Goods Manufactured (COGM) Calculation

The calculation uses the standard COGM formula: COGM = Direct Materials Used + Direct Labor + Factory Overhead + Beginning Work in Process − Ending Work in Process. Here, Direct Materials Used = $40,000; Direct Labor = $55,000; Factory Overhead = $32,000; Beginning WIP = $28,000; Ending WIP = $18,000. Substituting gives COGM = 40,000 + 55,000 + 32,000 + 28,000 − 18,000 = 137,000. This aligns with conventional cost accounting treatments that aggregate manufacturing costs and adjust for WIP changes (Horngren et al., 2021; Hansen & Mowen, 2013).

Hence, the correct option is $137,000. COGM represents the total manufacturing cost of goods completed during the period and transferred out of WIP to Finished Goods (Horngren et al., 2021).

Question 4: Cost of Goods Sold (COGS) Calculation

Using the COGM computed in Question 3, COGS is determined by COGS = Beginning Finished Goods + COGM − Ending Finished Goods. Given Beginning FG = $28,000, Ending FG = $18,000, COGM = $137,000, we obtain COGS = 28,000 + 137,000 − 18,000 = 147,000. This is consistent with the standard flow of costs from production to sale (Horngren et al., 2021; Drury, 2013). The correct option is $147,000.

Question 5: Raw Materials Used

Raw Materials Used is calculated as Beginning Raw Materials + Purchases − Ending Raw Materials. Here, Beginning RM = $75,000; Purchases = $20,000; Ending RM = $30,000. Thus Raw Materials Used = 75,000 + 20,000 − 30,000 = 65,000. This reflects the amount of raw materials that actually flowed into production during the period (AccountingTools; Khan Academy) (AccountingTools, 2020; Khan Academy, 2021).

Question 6: Gross Margin Calculation

First determine the cost per unit: Total manufacturing cost = $250,000 for 50,000 units, so cost per unit = 250,000 / 50,000 = $5. COGS for 40,000 units sold = 40,000 × $5 = $200,000. Sales revenue = 40,000 × $10 = $400,000. Gross Margin = Sales − COGS = 400,000 − 200,000 = 200,000. The correct choice is $200,000. This illustrates how gross margin depends on the relationship between production cost and selling price, a core concept in managerial accounting (Horngren et al., 2021; Hilton et al., 2009).

Question 7: Composition of Product Cost

The statement that a manufactured product’s cost generally consists of direct materials, direct labor, and factory overhead is true. These three components—direct materials, direct labor, and manufacturing overhead—constitute the full manufacturing cost of a product, excluding selling and administrative expenses which are period costs (Garrison et al., 2020; Drury, 2013). Therefore, the correct answer is True.

Question 8: Inventory and the Income Statement

The assertion that only the value of inventory that is sold appears on the income statement is generally true in the sense that COGS reflects the cost of goods that were sold during the period. Inventory that remains unsold remains on the balance sheet as an asset. Thus, the income statement captures the expensed costs related to goods sold, while the remaining inventory is carried as an asset until sold (Kimmel et al., 2019; Kieso et al., 2019). The true/false framing aligns with standard financial reporting conventions.

Synthesis and Practical Implications

Collectively, these items underscore the way cost flows operate in a manufacturing environment. The journey begins with raw materials, moves through work in process, and ends with finished goods that may be sold or carried forward. The conversion costs—direct materials, direct labor, and overhead—aggregate into COGM and then into COGS as finished goods are sold. Understanding these relationships is critical for accurate product costing, budgeting, and performance measurement (Horngren et al., 2021; Hansen & Mowen, 2013). The knowledge also supports managerial decisions about pricing, make-or-buy analyses, and process improvements that influence cost behavior and profitability (Garrison et al., 2020).

References and Further Reading

To deepen understanding of manufacturing cost flows, the following sources offer foundational theory, practice cases, and worked examples relevant to the topics discussed above:

References

  • Horngren, C. T., Datar, S. M., & Rajan, M. (2021). Cost Accounting: A Managerial Emphasis (17th ed.). Pearson.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Drury, C. (2013). Management and Cost Accounting (8th ed.). Cengage.
  • Hilton, R. W., Maher, M. W., & Selto, F. (2009). Cost Management: Strategies for Business Decisions (3rd ed.). McGraw-Hill/Irwin.
  • Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Financial Accounting: Tools for Business Decision Making (6th ed.). Wiley.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial Accounting (10th ed.). Wiley.
  • Kieso, D. E., Weygadt, J. J., & Warfield, J. (2019). Intermediate Accounting (16th ed.). Wiley.
  • AccountingTools. (2020). Cost of Goods Manufactured. Retrieved from https://www.accountingtools.com/articles/cost-of-goods-manufactured.html
  • Investopedia. (2024). Cost of Goods Sold (COGS). Retrieved from https://www.investopedia.com/terms/c/cogs.asp
  • Khan Academy. (2021). Cost accounting: Cost of goods sold and inventory flow. Retrieved from https://www.khanacademy.org/

Note: The above discussion integrates core accounting principles with practical calculations drawn from standard texts and educational resources. The calculations shown for COGM, COGS, raw materials used, and gross margin align with widely taught frameworks in managerial and cost accounting and are consistent with the references listed.

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