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Problem 14-3A, 14-8A, Cost classification, Inventory

Problem 14-3A
Cost classification and explanation
Assume that you must make a presentation to the marketing staff explaining the difference between product and period costs. Your supervisor tells you the marketing staff would also like clarification regarding prime and conversion costs and an explanation of how these terms fit with product and period cost. You are told that many on the staff are unable to classify costs in their merchandising activities.
Required
Prepare a one-page memorandum to your supervisor outlining your presentation to the marketing staff.
Problem 14-6A
Inventory computation and reporting
Shown here are annual financial data at December 31, 2011, taken from two different companies.

Required
1. Compute the cost of goods sold section of the income statement at December 31, 2011, for each company. Include the proper title and format in the solution.
2. Write a half-page memorandum to your instructor (a) identifying the inventory accounts and (b) describing where each is reported on the income statement and balance sheet for both companies.
Check
(1) Slope Board's cost of goods sold, $686,000

Problem 14-8A
Manufacturing and income statements; inventory analysis
The following calendar year-end information is taken from the December 31, 2011, adjusted trial balance and other records of Plaza Company.

Required
1. Prepare the company's 2011 manufacturing statement.
2. Prepare the company's 2011 income statement that reports separate categories for (a) selling expenses and (b) general and administrative expenses.
Check
(1) Cost of goods manufactured, $1,955,650
Analysis Component
3. Compute the (a) inventory turnover, defined as cost of goods sold divided by average inventory, and (b) days' sales in inventory, defined as 365 times ending inventory divided by cost of goods sold, for both its raw materials inventory and its finished goods inventory. (To compute turnover and days' sales in inventory for raw materials, use raw materials used rather than cost of goods sold.) Discuss some possible reasons for differences between these ratios for the two types of inventories. Round answers to one decimal place.

Solution Preview

Problem 14-3A
Cost classification and explanation
Assume that you must make a presentation to the marketing staff explaining the difference between product and period costs. Your supervisor tells you the marketing staff would also like clarification regarding prime and conversion costs and an explanation of how these terms fit with product and period cost. You are told that many on the staff are unable to classify costs in their merchandising activities.
Required
Prepare a one-page memorandum to your supervisor outlining your presentation to the marketing staff.

Dear Mr. Turnkey,
In order to help the marketing department and staff that are having difficulty classifying costs, I have created this tutorial that translates the terms into everyday language suitable for non-technical managers.

Product vs Non-product costs. Product costs are those that are specifically needed to create the finished product. In other words, these are costs that create the product. A good way to decide if a cost is a product cost or not is to ask yourself, "Would you need this if you outsourced the manufacturing of the product?" If you wouldn't need it, then it is likely a product cost. Think about Home Depot. They only have one product cost, the cost of the purchased inventory. All their other business costs are non-product! For a manufacturer, this is not so clear cut. The typically product costs include raw materials (ingredients), direct labor (hours assembling the product), and factory overhead (not general business overhead). The factory overhead would typically include small supplies, ...

Solution Summary

Your tutorial 652 words plus Excel spreadsheets and schedules (see attached, click in cells to see computations). The presentation includes a manufacturing statement, an income statement, a cost of goods sold section for a retailer and manufacturer, and discussion about product versus non-product costs and the types of inventory accounts. The excel schedules are linked to the data so you have a template for similar future problems.

$2.19