Problem 2 - Accounting

Question

The following information is available for the first month of operations of Url Inc., a manufacturer of art and craft items: \(\begin{array}{lr}\text { Sales } & \$ 1,200,000 \\ \text { Gross profit } & 320,000 \\ \text { Indirect labor } & 110,000 \\ \text { Indirect materials } & 45,000 \\ \text { Other factory overhead } & 20,000 \\ \text { Materials purchased } & 610,000 \\ \text { Total manufacturing costs for the period } & 1,325,000 \\ \text { Materials inventory, end of period } & 45,000\end{array}\) Using the above information, determine the following missing amounts: a. Cost of goods sold b. Direct materials cost c. Direct labor cost

Step-by-Step Solution

Answer

a. COGS: 880,000 b. Direct Materials: 565,000 c. Direct Labor: 585,000

Step 1: Determine the Cost of Goods Sold

To find the cost of goods sold (COGS), use the formula: \[\text{COGS} = \text{Total Sales} - \text{Gross Profit}\]Given that the Sales are \(1,200,000\) and the Gross Profit is \(320,000\), we calculate:\[\text{COGS} = 1,200,000 - 320,000 = 880,000\]

Step 2: Calculate Direct Materials Cost

We know the total manufacturing costs for the period, which include direct materials, direct labor, and factory overhead.Given that:\[\text{Total Manufacturing Costs} = \text{Direct Materials} + \text{Direct Labor} + \text{Factory Overhead}\]With the values provided:\[1,325,000 = \text{Direct Materials} + \text{Direct Labor} + (110,000 + 45,000 + 20,000)\]\[1,325,000 = \text{Direct Materials} + \text{Direct Labor} + 175,000\]Now, let's express direct materials using purchases and ending inventory:\[\text{Direct Materials Used} = \text{Materials Purchased} - \text{Ending Inventory}\]\[\text{Direct Materials Used} = 610,000 - 45,000 = 565,000\]

Step 3: Find Direct Labor Cost

Given the manufacturing costs and known values, you can isolate direct labor:\[1,325,000 = 565,000 + \text{Direct Labor} + 175,000\]\[1,325,000 - 565,000 - 175,000 = \text{Direct Labor}\]\[585,000 = \text{Direct Labor}\]

Key Concepts

Cost of Goods Sold

The Cost of Goods Sold (COGS) is a crucial component in manufacturing cost accounting. It represents the total cost of manufacturing the goods that were sold during a specific period. Understanding how to calculate COGS helps businesses evaluate their profitability.
To determine COGS, you subtract the Gross Profit from the Total Sales. In our case with Url Inc., we know that Total Sales amounted to \(1,200,000 and their Gross Profit was \)320,000. By applying the formula:

• \( \text{COGS} = \text{Total Sales} - \text{Gross Profit} \)
• \( \text{COGS} = 1,200,000 - 320,000 \)
• \( \text{COGS} = 880,000 \)

This means the total cost to produce the items sold by Url Inc. was $880,000 for the month. COGS is essential for evaluating the cost efficiency of a company's production process.

Direct Materials Cost

Direct Materials Cost refers to the expense incurred on raw materials used in the production of goods. It's pivotal to differentiate direct materials from indirect materials. Direct materials are integral to the finished product. For Url Inc., calculating the Direct Materials Cost requires knowing what was purchased and the ending inventory for the period.
The calculation steps involve:

• \( \text{Direct Materials Used} = \text{Materials Purchased} - \text{Ending Inventory} \)
• \( \text{Direct Materials Used} = 610,000 - 45,000 \)
• \( \text{Direct Materials Used} = 565,000 \)

This $565,000 indicates the cost of materials incorporated into products that went into production within the period. Discerning direct from indirect expenses helps in accurately assigning costs to production.

Direct Labor Cost

Direct Labor Cost accounts for the wages of workers directly involved in the manufacturing of products. These workers physically transform the direct materials into the final products. Therefore, accurately calculating Direct Labor Cost is vital for financial management.
To find the Direct Labor Cost for Url Inc., recognize it as a part of Total Manufacturing Costs, which also includes Direct Materials and Factory Overhead. The formula used is:

• \( \text{Total Manufacturing Costs} = \text{Direct Materials} + \text{Direct Labor} + \text{Factory Overhead} \)
• \( 1,325,000 = 565,000 + \text{Direct Labor} + 175,000 \)
• \( 585,000 = \text{Direct Labor} \)

This indicates the direct labor cost to be $585,000 for Url Inc. during this period. Understanding these costs helps in controlling the direct labor efficiency and profitability as they reflect the investment in the workforce producing goods.