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# Cost Flows, Prime Cost and Conversion Costs

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Custom Fiberglass Products had the following inventory balances at the beginning and ending of August 2007:

August 1 August 31

Raw materials inventory \$16,900 \$21,700
Work-in-Process inventory 32,100 29,600
Finished goods inventory 25,800 22,600

During August, the company purchased \$90,000 of raw materials. All, raw materials are considered direct materials. Total labor payroll for the month was \$78,000. Direct labor employees were paid \$9 per hour and worked 6,800 hours in August. Total factory overhead charges for the period were \$109,300.
Required:

1. Determine the prime cost added to production during August.
2. Determine the conversion cost added to production during August.
3. Determine the cost of goods manufactured in August.
4. Determine the cost of goods sold in August.

#### Solution Preview

1. Determine the prime cost added to production during August.

Prime Cost = Direct Material + Direct Labor
Material used = Opening inventory + purchases - ending inventory
Material used = 16,900+90,000-21,700=85,200
Direct Labor = 6,800X 9 = 61,200
Prime Cost = ...

#### Solution Summary

The solution explains how to calculate the prime cost, conversion cost, cost of goods manufactured and cost of goods sold.

\$2.19

## Managerial questions: Types of costs, activity levels, contribution margin, break even

See attached file.

Please show all steps and reasoning behind selected answers for problems 11 thru 14.
1. Wages paid to a timekeeper in a factory are a:
Prime Cost YES.....Conversion Cost NO
Prime Cost YES.....Conversion Cost YES
Prime Cost NO....Conversion Cost NO
Prime Cost NO.....Conversion Cost YES

2. Fixed costs expressed on a per unit basis:
will increase with increases in activity.
will decrease with increases in activity.
are not affected by activity.
should be ignored in making decisions since they cannot change.

3. Inventoriable costs are also known as:
variable costs
conversion costs
product costs
fixed costs

4. When the activity level is expected to decline within the relevant range, what effects would be anticipated with respect to each of the following?
Fixed Costs per Unit Increase and Variable Costs per Unit Increase
Fixed Costs per Unit Increase and Variable Costs per Unit do not change
Fixed Costs per Unit do not change and Variable Costs per Unit do not change
Fixed Costs per Unit do not change and Variable Costs per Unit Increase

5. Emco Company uses direct labor cost as a basis for computing its predetermined overhead rate. In computing the predetermined overhead rate for last year, the company misclassified a portion of direct labor cost as indirect labor. The effect of this misclassification will be to:
have no effect on the predetermined overhead rate
cannot be determined from the information given

6. A process cost system is employed in those situations in which:
many different products, jobs, or batches of production are being produced each period
where manufacturing involves a single, homogeneous product that flows evenly through the production process on a continuous basis
a service is performed such as in a law firm or an accounting firm
full or absorption cost approach is not employed

7. Equivalent units for a process costing system using the FIFO method would be equal to:
units completed during the period, plus equivalent units in the ending work in process inventory
units started and completed during the period, plus equivalent units in the ending work in process inventory
units completed during the period and transferred out
units started and completed during the period, plus equivalent units in the ending work in process inventory, plus work needed to complete units in the beginning work in process inventory

8. The contribution margin ratio always decreases when the:
break-even point increases
break-even point decreases
variable expenses as a percentage of net sales increase
variable expenses as a percentage of net sales decrease

9. The break-even point in unit sales is found by dividing total fixed expenses by:
the contribution margin ratio
the variable expenses per unit
the sales price per unit
the contribution margin per unit

10. Under variable costing:
net operating income will tend to move up and down in response to changes in levels of production
inventory costs will be lower than under absorption costing
net operating income will tend to vary inversely with production changes
net operating income will always be higher than under absorption costing

11. The following data (in thousands of dollars) have been taken from the accounting records of Larklin Corporation for the just completed year.
Sales \$820
Purchases of raw materials \$180
Direct labor \$130
Selling expenses \$140
Raw materials inventory, beginning \$60
Raw materials inventory, ending \$20
Work in process inventory, beginning \$50
Work in process inventory, ending \$20
Finished goods inventory, beginning \$110
Finished goods inventory, ending \$150
Required: Prepare a Schedule of Cost of Goods Manufactured statement in the text box below.

12. The Michigan Company manufactures a product that goes through three processing departments. Information relating to activity in the first department during June is given below:
Percent completed
Units Materials Conversion
Work in process, June 1 40,000 65% 45%
Work in process, Jun 30 35,000 75% 65%
The department started 175,000 units into production during the month and transferred 180,000 completed units to the next department.
REQUIRED: Compute the equivalent units of production for the first department for June, assuming that the company uses the weighted-average method of accounting for units and costs.
13. A cement manufacturer has supplied the following data:
Tons of cement produced and sold 220,000
Sales revenue \$924,000
Variable manufacturing expense \$297,000
Fixed manufacturing expense \$280,000
Variable selling and admin expense \$165,000
Fixed selling and admin expense \$82,000
Net operating income \$100,000
Required:
a. Calculate the company's unit contribution margin
b. Calculate the company's unit contribution ratio
c. If the company increases its unit sales volume by 5% without increasing its fixed expenses, what would the company's net operating income be?

14. Maffei Company, which has only one product, has provided the following data concerning its most recent month of operations:
Selling Price \$ 138

Units in beginning Inventory 0
Units Produced 7200
Units sold 7000
Units in ending Inventory 200

Variable Costs per unit:
Direct materials \$ 42
Direct labor \$ 32