LAMBETH CUSTOM CABINETS: Jack Lambeth, a master cabinetmaker, owned and operated a shop where he sold custom-made cabinets. At the beginning of September, he had no outstanding debts, and the following amounts were on his books: 1. Raw-Material Inventory, $4,950 2. Supplies inventory, $1,175 3. WIP inventory, $5,900. 3. Job A-3: Materials $1,000, Labor: $1,100, OH (50% of Labor) $550. Job A-4: Materials: $900 Labor: $650, OH (50% of Labor): $325. Job A-5: Materials:$325, Labor: $700, OH (50% of Labor): $350. 4. All other assets as of September 1: $19,850. During the month, Lambeth's woodworking crew finished jobs A-3, A-4, and A-6, but did not finish A-5. Job A-7 was started but did not finish during September. Overhead Costs (pertaining primarily to equipment and shop depreciation, cleaning supplies and insurance) were applied to every job at the end of the month unless the job was finished during the month, in which case overhead was applied when the job was finished. During September, the following direct-materials and direct-labor costs were incurred: A-3: DM $280 DL $750, A-4 DM $350 DL $1,300, A-5: DM $180 DL $550, A-6 DM $375 DL $490. A-7 DM $590 DL $370. Other important financial factors in September were as follows: 1. Raw materials costing $1,950 were purchased during the month. 2. Supplies costing $875 were purchased, of which $490 were used and thus transferred to the manufacturing-OH account. 3. Total increases to the labor-general ledger account were $5,460 ( apparently $2,000 of indirect-labor costs were charged. 4.General and administrative expenses for the month were $3.420. 5. Collections received from customers on jobs A-3, A-4, and A-6 amounted to $6,125, $8,600, and $1,750, respectively, for a total of $16,475. 6. At the end of the month, Lambeth Custom Cabinets had no outstanding debts.

While Lambeth was reviewing the September Data, he became concerned about the manufacturing OH variance (MOV). Because he never wanted to lay off an employee, the MOV was always large in months when business was slow. (lambeth assigned idle workers to general cleanup and repair work, and charged their wages to indirect labor). Of course, Lambeth knew why the MOV was so large. What he was worried about, however, was Mrs. Carter.

Mrs. Carter, a neighbor, had stopped by the shop one day in early September to get a price on some cabinets she wanted built. Lambeth's 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. He studied Mrs. Carter's plans, and estimated the cost of building her cabinets to be $1,626. His job-estimation sheet showed the following: Lumber: $590, Finishing Materials: $75, Direct-Labor cost: $640, Overhead: $320.

When Jack Jr. quoted a price of $1,900 (1,625 cost plus 275 profit) to Mrs. Carter she said that she could get the same thing built by Walworth Custom Kitchens for $1,500. Furthermore, she informed him, "I would throw the dumb economics books away before I wold pay a penny more than $1,500 for book cabinets to store them."

Jack Jr. simply told her that his best price was $1,900. He explained all about labor, materials, profit, overhead, and competitive capitalism. In addition, he told Mrs. Carter that Walworth could not make money on a $1,500 price, and if Walworth was really willing to build the shelves for $1,500, 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 can't build stuff that cost $1,625 and sell it at a price of $1,600, let alone $1,500, can we?" At the time, Lambeth did not 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." Walworth had just delivered Mrs. Carter's new cabinets, for which she paid $1,500. Lambeth wondered who was right, Jack Jr. or Walworth?

a. Show in a series of ledger accounts, the transactions for September, use a T-account format. Make sure to cross reference your entries and provide a brief explanation. Use alphabet letters for cross referencing.

b. In the greatest detail possible, prepare balance sheets as of September 1st and September 30th and an income statement for September. Ignore taxes.

c. What is the WIP balance for jobs A-5 and A-7? Show computation

d.Jack Jr. calculated his estimate of the cost of the Carter job on a full absorption costing basis. Will the cabinets really "cost" Lambeth $1,625 to make? In his costing estimate, is Jack Jr, assuming some cost as being unit variable, that really isn't? Should he be including overhead in this order? Would you have taken the order from Mrs. Carter at a selling price of $1,500? Why or why not? Under what conditions would you have taken the order and at what price?

e. Would the business be better or worse off if Lambeth had taken the order at $1,500? use variable costing/ contribution margin analysis here.

f.Let's assume that businesses need to cover their fixed costs, but does each product or job that is produced need to contribute at the same rate for a company to be profitable? if a job generates some contribution margin, does that mean that we can ignore fixed costs altogether and exclude them from job or product costs?