BRIEF EXERCISE 16.1

Product vs. Period Costs

During the year, Coronado Boat Yard has incurred manufacturing costs of $420,000 in building three large sailboats. At year-end, each boat is about 70 percent complete. How much of these manufacturing costs should be recognized as expense in Coronado Boat Yard’s income statement for the current year? Explain.

BRIEF EXERCISE 16.2

Direct Materials Used

During the current year, the cost of direct materials purchased by a manufacturing firm was $325,000, and the direct materials inventory increased by $65,000. What was the cost of direct materials used during the year?

BRIEF EXERCISE 16.3

Cost of Goods Sold

A company that assembles trucks produces 60 trucks during the current year and incurs $3 million of material, labor, and overhead costs. Fifty-three trucks were sold during the year and each is allocated the same amount of costs. How much of the $3 million assembly costs should

appear on the company’s income statement for the current year?

BRIEF EXERCISE 16.6

Manufacturing Overhead

During the current year, CF Manufacturing Co. incurred $370,000 of indirect labor costs, $15,000 of indirect materials costs, $125,000 of rent costs, and $163,000 of other overhead costs. How much did CF Manufacturing assign to the Work in Process Inventory account from the Manufacturing Overhead account?

BRIEF EXERCISE 16.9

Prime vs. Conversion Costs

Star Repairs Co. does all the repair work for a medium-sized manufacturer of handheld computer games. The games are sent directly to Star, and after the games are repaired, Star bills the game

manufacturer for cost plus a 20 percent markup. In the month of February, purchases of parts (replacement parts) by Star amounted to $97,000, the beginning inventory of parts was $38,500,and the ending inventory of parts was $15,250. Payments to repair technicians during the month of February totaled $52,500. Overhead incurred was $121,000.

a.     What was the cost of materials used for repair work during the month of February?

b.     What was the prime cost for February?

c.      What was the conversion cost for February?

d.     What was the total repair cost for February?

Reference Information for Each Exercise

For BE 16.1 see ( LOI 16-3 )

For BE 16.2 see ( LOI 16-4 )

For BE 16.3 see ( LOI 16-3 thru LOI 16-4 )

For BE 16.6 see ( LOI 16-4 thru LOI 16-5 )

For BE 16.9 see ( LOI 16-3 thru LOI 16-5 )

LO16-2 Describe the three basic types of

manufacturing costs.

Direct materials used consist of

the parts and mate-rials that become part of the finished

products. Direct labor cost consists of the wages paid

to factory employees who work directly on the products

being manufactured. Manufacturing overhead includes all

manufacturing costs other than the cost of materials used and

direct labor. Examples of manufacturing overhead include

depreciation of machinery and the plant security service

LO16-3 Distinguish between product costs and

period costs.

Product costs are the costs of creating inventory.

They are treated as assets until the related goods are sold, at

which time the product costs are deducted from revenue as the

cost of goods sold. Thus, goods manufactured this year but not

sold until next year are deducted from next year’s revenue.

Period costs are charged to expense in the accounting

period in which they are incurred. Period costs are not related

to production of goods; consequently, they are deducted from

revenue on the assumption that the benefits obtained from

the expenditures are received in the same period as the costs

are incurred. Period costs include general and administrative

expense, selling expense, and income taxes expense.

END-OF-CHAPTER REVIEW

SUMMARY

 OF LEARNING OBJECTIVES

LO16-4 Describe how manufacturing costs flow

through perpetual inventory accounts.

Manufacturing

costs originally are recorded in three controlling accounts:

Materials Inventory, Direct Labor, and Manufacturing

Overhead. As these costs become applicable to goods placed

into production, they are transferred from these manufacturing

cost accounts to the Work in Process Inventory account. As

units are completed, their cost is transferred from the Work

in Process account to Finished Goods Inventory. Then, when

units are sold, their costs are transferred from Finished Goods

Inventory to the Cost of Goods Sold account.

LO16-5 Distinguish between direct and indirect

costs.

Direct manufacturing costs (direct materials and

direct labor) can be identified with specific products. Indirect

manufacturing costs are the many elements of manufacturing

overhead that apply to factory operations as a whole and cannot

be traced to specific products.