Question

Question: SP 14 Santana Rey, owner of Business Solutions, decides to diversify her business by also manufacturing computer workstation furniture.

Required

1. Classify the following manufacturing costs of Business Solutions as either (a) variable (V) or fixed (F), and (b) direct (D) or indirect (I).

Manufacturing cost	a. Variable or fixed	b. Direct or indirect
1. Monthly flat fee to clean workshop
2. Laminating coverings for desktops
3. Taxes on assembly workshops
4. Glue to assemble workstation components parts
5. Wages of desk assembler
6. Electricity for workshop
7. Depreciation on manufacturing tools

2. Prepare a schedule of cost of goods manufactured for Business Solutions for the month ended January 31, 2018. Assume the following manufacturing costs:

Direct materials: \(2,200

Factory overhead: \)490

Direct labor: \(900

Beginning work in process: none (December 31, 2017)

Ending work in process: \)540 (January 31, 2018)

Beginning finished goods inventory: none (December 31, 2017)

Ending finished goods inventory: $350 (January 31, 2018)

3. Prepare the cost of goods sold section of a partial income statement for Business Solutions for the month ended January 31, 2018.

Short answer

Answer

1. Classification of cost:

Manufacturing cost	a. Variable or fixed	b. Direct or indirect
1. Monthly flat fee to clean workshop	Fixed	Indirect
2. Laminating coverings for desktops	Variable	Direct
3. Taxes on assembly workshops	Fixed	Direct
4. Glue to assemble workstation components parts	Variable	Direct
5. Wages of desk assembler	Variable	Direct
6. Electricity for workshop	Variable	Indirect
7. Depreciation on manufacturing tools	Fixed	Direct

1. Cost of goods manufactured:$3,050.
2. Cost of goods sold:$2,700.

Step-by-step solution

Definition of Cost of Goods Manufactured

The total cost incurred by the business entity in manufacturing the finished goods is reported as the cost of goods manufactured. It is used for calculating the cost of goods sold by adjusting the ending and beginning inventory of the finished goods.

Cost classification

Manufacturing cost	Reason
1. Monthly flat fee to clean workshop	It is classified as a fixed and indirect cost because this is a flat fee and is not directly engaged with the production.
2. Laminating coverings for desktops	It is classified as a variable and direct cost because it depends upon the number of desktops produced and is directly related to the basic business operations.
3. Taxes on assembly workshops	It is classified as fixed and direct because the taxes on the workshop will be charged according to the area covered that will remain fixed, and it is also directly related to the production process.
4. Glue to assemble workstation components parts	It is classified as variable and direct because this cost depends on the glue used by the business entity and is directly related to the operation of the business entity.
5. Wages of desk assembler	Wages of desk assemblers are variable and direct because they depend upon the number of hours and are also directly used in the operating activities.
6. Electricity for workshop	It is classified as variable and indirect because it depends upon the total consumption of units. It is also indirect because it is impossible to allocate the number of units to each machine or department.
7. Depreciation on manufacturing tools	It is classified as fixed and direct because the depreciation remains fixed when the business entity uses the straight-line method of depreciation, and it is direct cost because it is allocated to manufacturing tools used in the production process.

Schedule of cost of goods manufactured

Particular	Amount $
Direct material	$2,200
Add: Factory overhead	490
Add: Direct labor	900
Total manufacturing cost	$3,590
Add: beginning work-in-process	0
Less: Ending work-in-process	(540)
Cost of goods manufactured	$3,050

Calculation of cost of goods sold

Particular	Amount $
Sales
Cost of goods manufactured	$3,050
Add: Beginning inventory of finished goods	0
Less: Ending inventory of finished goods	(350)
Cost of goods sold		($2,700)
Gross profit