Lambeth Custom Cabinets (B)

Jack Lambeth, a master cabinet maker, owns and operates a shop where he sells custom-made cabinets. At the beginning of September his business had no outstanding debt and the following amounts were on his books:

Raw materials inventory, $3,350.

Supplies inventory, $920.

Work-in-process inventory, $7,200.

Job	Materials		Labor		Overhead (50% of Labor)
A-3	$ 950		$ 1,300		$ 650
A-4	1,050		850		425
A-5	625		900		450
Total	$ 2,625		$ 3,050		$ 1,525		$ 7,200

Cash as of September 1 were $16,890.

During the month, Lambeths woodworking crew finished jobs A-3, A-4, and A-6 but did not finish A-5. Job A-7 and A-8 was started but not finished during September. Overhead costs (pertaining primarily to equipment and shop depreciation, cleaning supplies, and insurance) are applied to every job at the end of the month unless the job is finished during the month, in which case overhead is applied when the job is finished.

During September, the following direct materials and direct labor costs were incurred:

Job Direct Materials Labor

A-3 $280 $750

A-4 350 1,300

A-5 180 550

A-6 375 490

A-7 590 370

A-8 900 870

Total $2,675 $4,330

Other financial factors of importance pertaining to September were:

$2,675 of raw materials were purchased during the month.

Supplies of $780 were purchased while $590 were used and thus transferred to the manufacturing overhead account.

Total increases to the labor general ledger account were $6,850. (Apparently there was $2,520 indirect labor charged.)

General and administrative expenses for the month were $3,420.

Collections received from customers on jobs A-3, A-4, and A-6 amounted to $7,125, $10,600, and $2,750, respectively, for a total of $20,475.

At the end of the month, Lambeth Custom Cabinets had no outstanding debts.

While Jack was reviewing the September data he became very concerned about the manufacturing overhead variance (MOV). Since Jack never wanted to lay off an employee, the MOV was always large in months when business was slow. (Jack assigned unoccupied workers to general clean-up and repair work and charged their wages to indirect labor.) Of course, Lambeth realized why the MOV was so large. What he worried about, however, was Mrs. Carter.

Mrs. Carter, a neighbor, had stopped in the shop one day in early September to get a price on some cabinets she wanted built. Jacks son, Jack Jr., spoke with her. Jack Jr. was working in the shop while on summer vacation between his first and second year of graduate business school. Jack Jr. studied the plans that Mrs. Carter had and estimated the cost to build her cabinets at $2,050. His job estimation sheet showed:

Lumber	$990
Finishing materials	100
Direct labor cost	640
Overhead	320
	$2,050

When Jack Jr. quoted a price of $2,560 ($2,050 cost $510 profit) to Mrs. Carter, she said that she could get the same thing built by Walworth Custom Kitchens for $1,950. Furthermore, she informed Jack Jr. that, I would throw the dumb economics books away before I would pay a penny more than $1,950 for book cabinets to store them.

Jack Jr. simply told her that his best price would be $2,560. He explained all about labor, materials, profit, overhead, and competitive capitalism. In addition, he told Mrs. Carter that Walworth couldnt make money on a $1,950 price and if Walworth was really willing to build the shelves for $1,950 she would be stealing from Mr. Walworth!

Mrs. Carter was very angry when she left. Jack Jr. later told his father the whole story and laughed as he said, Heck, we cant build stuff that costs $2,050 and sell it at a price of $1,950, let alone $2,000 can we? At that time Lambeth didnt think much about the incident but he began to wonder whether Jack Jr. had learned anything at graduate business school. Lambeth became especially concerned when he saw Bob Walworth, who said, Mrs. Carter saved me last month. It seems that Walworth had just delivered Mrs. Carters new cabinets for which she paid $1,950. Jack Lambeth wondered who was right Jack Jr. or Walworth?

Prepare journal entries for the transaction for September.

Record the beginning balances in the General Ledger. Post the September transaction from #1 into the General Ledger.

Prepare a Balance Sheet and Income Statement for September 30^th.

Prepare a Variable Costing Income Statement for September 30^th.

Based on what you know about the cost structure of Lambeth Custom Cabinets, could Lambeth make a profit and/or a positive contribution margin on Mrs. Carters order at a selling price of $1,950?

Hint: Use Excel to complete requirements 1-4.