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Need help Lawrence Grasso and Cindy Moeckel The small faucet to the right of your desk emitted a sputtering sound and bursts of white foam,
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Lawrence Grasso and Cindy Moeckel The small faucet to the right of your desk emitted a sputtering sound and bursts of white foam, rather than the liquid gold you'd become accustomed to. Well, I guess that means I can retire the Downstream Brewery file, kegs and all, you thought. You could not have been more wrong. Well, technically, yes, you could. But this was wrong enough, because as you turned off the tap you had installed in your office, you noticed a distraught C.D. Cervesa entering your office door. It had been about six months since you had last seen C.D. Cervesa of Downstream Brewery fame. You had set up a system of job order costing, given C.D. a brief training session in how to keep it working, and taken delivery of the product you'd settled on as your fee. Sure, money would have been nicer. But once you'd installed the refrigerator and tap, entertaining prospective clients was much cheaper. Your business was picking up. Even you assistant was happy since your paychecks were showing less elasticity at the bank with the increase in business. You had figured the rest, as they say, would be history. But here was C.D., back again, and you could tell at once that this was not a social call. "Remember those contract negotiations I talked to you about?" C.D. asked. Well, armed with the numbers from the accounting system you helped me set up, I went into negotiations feeling pretty good, but when I came out, my entire business had evaporated! When I figured out what it was costing me to fill the Lowerbrow contract, I jacked up the price to include a 40% profit. Not gouging certainly, when you consider that they turn around and get closer to 60%. But they did not see it that way, and cancelled the contract. They said I was too small to deal with. Can you believe it? I bail them out when they're short, now I want a fair price and I'm too small to deal with!" "What about Olde Mclrish?" you asked. "Oh yeah, that's even worse! Listen to this. Olde Mclrish told me that they've decided franchising is the way to make big bucks. They're opening a series of franchises in the Rocky Mountain and Western regions, calling them McBreweries. Can you believe it!? McBreweries, for gosh sake! They offered me the Phoenix area franchise, but I'll be a rag picker before I do business under a golden spout with the notice "Billions of Gallons Sold." I decided to rely on my local reputation as a quality operation and to try cranking out my own brand of ale. So for the last three months, I've been making Froth, as I call it and selling it out of a friend's pub. "Can you help me figure out what it costs me for each barrel I brew? I keep thinking that it should be just the same as when I was brewing for Lowerbrow and Olde Mclrish. But things are a little different now. E.E. Phlunke and I just keep the production of Froth going constantly. We always have some brewing, some fermenting and some cooling. We don't have contracts to finish anymore. I'm baffled at how I can tell exactly what my costs are when there is always some brew in the process. I learned my lesson the last time around, and I want to keep track of my costs right along. I knew you were just the one to help me because you did such a great job last time, so I brought all my cost information in this box here." [If you learned your lesson, C.D.," you wondered, "why did you vanish for six months, only to reappear three months after dramatically changing your business with an orange crate full of little scraps of paper?"] C.D. left you a complimentary gallon jug of Froth and the pile of papers. You harkened back to Oliver Hardy's complaint "Another fine mess you've gotten me into!" But unlike Ollie, you did not have any Stan Laurel to serve as a contrapoint to your competence. Looking at the stack of receipts and other scraps of paper on your desk, you figured you understood how someone must feel when the pie lands SMACK on the old kisser - a mess indeed. The circus life still was unappealing, but the navy was beginning to look like a viable alternative to a career in accounting. After you got through C.D.'s information, you went by the brewery and filled in some blanks in your picture of what had been going on. From the bits of flotsam in C.D.'s orange crate you were able to learn the following: $ 48,600 $ 4,200 2,750 2,400 140 105 3,000 12,000 Cash Receipts 1944 half-kegs (972 barrels sold at $50 each) Cash Disbursements Malted-Barley extract (2,000 lbs @ $2.10/1b) Wheat extract (1,000 lbs @ $2.75/lb) Hops (240 bushels at $10/bushel) Brewer's Yeast (50 bricks at $2.80/brick) Water (116,667 @ $.0009/gal) Half kegs (200 @ $15) Keg washing machine Payroll (including taxes and benefits): C.D. Cervesa E.E. Phlunke (520 hours) Gas and Electricity (25% Gas) Rent Excise taxes ($10 per barrel sold) Miscellaneous manufacturing costs Miscellaneous general & administrative expenses Loan payments: Principal Interest Total cash disbursements Beginning Inventories Barley extract (500 lbs) Wheat extract (100 lbs) Hops (4 bushels) Yeast (5 bricks) 8,000 5,200 160 3,000 9,720 130 2,285 3,600 56,690 $ 1,050 275 40 14 Downstream Brewery had fulfilled its contracts with Lowerbrow and Olde McIrish at the end of last quarter. There was no work in process or finished goods on hand at the end of the last quarter. At the very beginning of this quarter, C.D. Cervesa had purchased an additional 200 half-kegs, making a total of 1000 half-kegs to hold the Froth production. Since Olde Mclrish would no longer be cleaning and returning the empty half-kegs, C.D. also purchased a $12,000 machine to wash and sterilize the kegs. All equipment, including the half-kegs and the keg washing machine was depreciated on a straight line basis over 10 years with no salvage value. The $12,000, one-year insurance policy that Downstream had prepaid remained in effect during the quarter. Ninety percent of C.D.'s time was still devoted directly to brewing ale, and the remainder was spent dealing with general and administrative duties. You toured the warehouse and learned more about the brewing process, and about the stage that C.D.'s product was in at the end of the quarter. To keep things straight in your mind, you made a chart of the entire process. Fermenting Department Shipping Department Boiling Department Add extract, Remove hops, water hops Add yeast Remove yeast Ship additional 200 half-kegs, making a total of 1000 half-kegs to hold the Froth production. Since Olde Mclrish would no longer be cleaning and returning the empty half-kegs, C.D. also purchased a $12,000 machine to wash and sterilize the kegs. All equipment, including the half-kegs and the keg washing machine was depreciated on a straight line basis over 10 years with no salvage value. The $12,000, one-year insurance policy that Downstream had prepaid remained in effect during the quarter. Ninety percent of C.D.'s time was still devoted directly to brewing ale, and the remainder was spent dealing with general and administrative duties. You toured the warehouse and learned more about the brewing process, and about the stage that C.D.'s product was in at the end of the quarter. To keep things straight in your mind, you made a chart of the entire process. Fermenting Department Shipping Department Boiling Department Add extract, Remove hops, water hops Add yeast Remove yeast boil with gas cool with elec. cool with elec. (4 days) Ship clean kegs and refill (10% elec.) ferment with elec. (3 days) (50% elec.) (8 hrs.) (16 hrs.) (15% elec.) (25% elec.) C.D. estimated that about 30% of all labor was required for the Boiling operation, 60% for the Fermenting operation, and 10% for cleaning and refilling the half-kegs. You discussed the ins and outs of overhead allocation and decided that all overhead items should be allocated based on direct labor cost. You noted that other than the keg washing machine, no additions had been made to the $130,000 worth of brewing equipment you remembered from your previous engagement with Downstream. At the end of the quarter you did an inventory, and found that C.D. had one batch (12 barrels) that had just completed boiling and needed to have the hops strained out (virtually complete in the Boiling operation), and one batch in the middle of the Fermenting operation (the yeast had already been added). The recipe for each 12 barrel batch of Froth calls for 20 pounds of barley extract, ten pounds of wheat extract, one brick of yeast (each of which can be used in four batches), two bushels of hops, and 372 gallons of water. Ninety-six half kegs (48 barrels) that had just been filled and stabilized were in the refrigerator ready to be taken to the friend's pub where it would be sold. Required: In answering the following questions, give C.D. sufficient details so that you can retire from this job in the near future and C.D. can continue without you. 1. Using three processes of Boiling, Fermenting, and Shipping, what journal entries should be made to record this period's activities? 2. What is Downstream's income statement for the period? 3. What is C.D.'s cost per barrel? 4. What is the value of the inventory? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Using three processes of Boiling, Fermenting, and Shipping, what journal entries should be made to record this period's activities? (If no Journal entry worksheet Entry to record cash sales. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursements for inventory. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursements for water. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursement towards labor and salaries. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursement towards factory overheads. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record purchase of equipment and payment of interest and other administrative expenses. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record depreciation and insurance expenses. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record the transfer of direct materials to work-in-process. Note: Enter debits before credits. Journal entry worksheet Entry to record the transfer of yeast to work-in-process. Note: Enter debits before credits. Journal entry worksheet Entry to record the application of factory overhead. Note: Enter debits before credits. Journal entry worksheet 1 6 7 8 9 10 11 14 Entry to record the transfer of the balances in Boiling work-in-process to Fermenting work-in-process. Note: Enter debits before credits. Journal entry worksheet Entry to record the transfer of the balances in Shipping work-in-process to Finished goods inventory. Note: Enter debits before credits. Journal entry worksheet Entry to record cash sales. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursements for inventory. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursements for water. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursement towards labor and salaries. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record cash disbursement towards factory overheads. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record purchase of equipment and payment of interest and other administrative expenses. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record depreciation and insurance expenses. Note: Enter debits before credits. Transaction General Journal Debit Credit Journal entry worksheet Entry to record the transfer of direct materials to work-in-process. Note: Enter debits before credits. Journal entry worksheet Entry to record the transfer of yeast to work-in-process. Note: Enter debits before credits. Journal entry worksheet Entry to record the application of factory overhead. Note: Enter debits before credits. Journal entry worksheet 1 6 7 8 9 10 11 14 Entry to record the transfer of the balances in Boiling work-in-process to Fermenting work-in-process. Note: Enter debits before credits. Journal entry worksheet Entry to record the transfer of the balances in Shipping work-in-process to Finished goods inventory. Note: Enter debits before credits. Journal entry worksheetStep by Step Solution
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