Chapter 16: 14RQ (page 884)
What are product costs?
The product cost is the cost of purchasing or producing goods.
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Becky Knauer recently resigned from her position as controller for Shamalay Automotive, a small, struggling foreign car dealer in Upper Saddle River, New Jersey. Becky has just started a new job as controller for Mueller Imports, a much larger dealer for the same car manufacturer. Demand for this particular make of car is exploding, and the manufacturer cannot produce enough to satisfy demand. The manufacturer’s regional sales managers are each given a certain number of cars. Each sales manager then decides how to divide the cars among the independently owned dealerships in the region. Because of high demand for these cars, dealerships all want to receive as many cars as they can from the regional sales manager.
Becky’s former employer, Shamalay Automotive, receives only about 25 cars each month. Consequently, Shamalay is not very profitable.
Becky is surprised to learn that her new employer, Mueller Imports, receives more than 200 cars each month. Becky soon gets another surprise. Every couple of months, a local jeweler bills the dealer $5,000 for “miscellaneous services.” Franz Mueller, the owner of the dealership, personally approves payment of these invoices, noting that each invoice is a “selling expense.” From casual conversations with a salesperson, Becky learns that Mueller frequently gives Rolex watches to the manufacturer’s regional sales manager and other sales executives. Before talking to anyone about this, Becky decides to work through her ethical dilemma. Put yourself in Becky’s place.
Requirements
1. What is the ethical issue?
2. What are your options?
3. What are the possible consequences?
4. What should you do?
Determining the flow of costs through a manufacturer’s inventory accounts
True Fit Shoe Company makes loafers. During the most recent year, True Fit incurred total manufacturing costs of \(21,900,000. Of this amount, \)2,600,000 was direct materials used and \(14,800,000 was direct labor. Beginning balances for the year were Direct Materials, \)700,000; Work-in-Process Inventory, \(1,500,000; and Finished Goods Inventory, \)1,100,000. At the end of the year, balances were Direct Materials, \(800,000; Work-in-Process Inventory, \)2,000,000; and Finished Goods Inventory, $1,080,000.
Requirements Analyze the inventory accounts to determine:
1. Cost of direct materials purchased during the year.
2. Cost of goods manufactured for the year.
3. Cost of goods sold for the year.
Selected data for three companies are given below. All inventory amounts are ending balances and all amounts are in millions.
Company A Company B Company C
Cash \( 6 Wages Expense \) 12 Administrative Expenses $ 4
Net Sales Revenue 48 Equipment 32 Cash 25
Finished Goods Inventory 10 Accounts Receivable 8 Net Sales Revenue 75
Cost of Goods Sold 23 Service Revenue 65 Selling Expenses 8
Selling Expenses 4 Cash 34 Merchandise Inventory 12
Equipment 67 Rent Expense 12 Equipment 55
Work-in-Process Inventory 9 Accounts Receivable 19
Accounts Receivable 14 Cost of Goods Sold 25
Cost of Goods Manufactured 23
Administrative Expenses 7
Raw Materials Inventory 6
Identifying differences between service, merchandising, and manufacturing companies Using the data on the previous page, calculate operating income for each company.
Identifying product costs and period costs Classify each cost of a paper manufacturer as either a product cost or a period cost:
h. Cost to purchase wood pulp.
Identify the following characteristics as primarily related to financial accounting (FA) or managerial accounting (MA):
4. Has a focus on the future.
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