ALABAMA CORPORATION

. manufactures a single product, cleverly named Product X. The following information is available for the calendar year 2018 just completed, during which they produced and sold 200,000 units. Sales for the year was $2,400,000. During the year, the company paid a sales commission of 5 percent of sales. The corporate income tax rate was 30%. Also assume that the per-unit manufacturing cost in 2018 was the same as in the previous year, 2017.

Raw materials purchases

$300,000

Direct labor

140,000

Depreciation - factory equipment

45,000

Depreciation - factory building

30,000

Depreciation - headquarters building

50,000

Factory insurance

15,000

Property taxes:

Factory

20,000

Headquarters

18,000

Utilities - factory

34,000

Utilities - sales/other

1,800

Administrative salaries

150,000

Indirect labor salaries

156,000

Sales office salaries

90,000

Inventory Information

12/31/2017

12/31/2018

Raw materials

$124,000

$152,000

Work in process

124,000

130,000

Finished Goods

109,000

119,000

REQUIRED:

Post all of the above a summary entries in T accounts.

Compute the direct materials used in production.

Compute the prime cost.

Compute the conversion cost.

Prepare the Schedule of Raw Materials Used

Prepare the Schedule of Cost of Goods Manufactured

Prepare the Schedule of Cost of Goods Sold

Calculate the manufacturing cost per unit

Prepare an income statement for 2018, in good form.

As part of the annual audit you notice that Indirect labor salaries included the $20,000 salary paid to Ken, who actually works in the advertising department of the company.

Does this seem reasonable? Why or why not?

Does this make a difference in terms of the net operating income? Why or why not?

What incentive would management have to include the advertising costs as indirect labor? (That is, what would their motivation be to do this?)