Assignment Question 1

Cost classifications; schedule of costs of good manufactured and sold; income statement; product costs: manufacturer

Colonial Tap Company (CTC) is a manufacturer of taps and fittings for the plumping trade, located in Brisbane. CTC manufactures an extensive range of high quality brass and chrome taps. The business is small and has never been able to employ an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses. Prices are based on rough estimates of cost of direct materials and direct labour plus a 50% markup. With the decline in profit and constant pressure on prices, Michael Hall, CTC's manager, began to feel uneasy about the way costs and profits are calculated. The results for the month just ended were:

Sales	$ 980 000
Less Expenses
Materials purchased Factory wages Production supervisor's salary Rent Council rates Sales staff Advertising Equipment depreciation Factory utilities Manager's salary Truck's lease	$ 300 000 250 000 35 000 80 000 5 000 110 000 18 000 25 000 12 000 80 000 10 000
Total expenses	925 000
Net profit	$ 55 000

Additional information:

• There was no beginning inventory.
• At the end of the month, 10% of inventory purchased remained on hand, work-in-process amounted to 20% of manufacturing costs incurred during the month, and finish goods inventory was negligible.
• The factory occupies 80% of the premises, the sales and administration areas 20%.
• Most of equipment is used for manufacturing, with only 5% being used for sales functions.
• Michael Hall spends about one-half of his time on factory management, one-third in the sales area and the rest on administration.

Required:

1. Define the following: direct materials costs, direct labour costs, manufacturing overhead costs, prime costs and conversion costs.
2. Distinguish between inventoriable costs and period costs.
3. Estimate the cost of goods manufactured and sold for CTC.
4. Prepare a revised income statement for the month. Explain the differences between your income statement and the one above.
5. Make recommendations for changes to be made to the company's approach to product costing, product pricing and reporting income.