Questions

1- identify Direct Material, Indirect material, Direct Labor, indirect Labor cost for your business.

2- Prepare inventory costing sheet.

3-Calculate Breakeven in units and dollars.

(Information provided)

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Information provided I hope that now these images are cleared

This is my finals project and make a project file do it on ms Word it's all based on your assumption there's is no any statement or equation just do it step by step suppose you're going to start a new business with manufacturing concern make or identify all of these things step by step make a cost sheet and tell us each and every thing about your business and also find things which is mentioned

Sapphire Company-Setting the Stage Sapphire Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows: $ 15,000 Sapphire Company Balance Sheet January 1 Assets Cash... Raw materials Work in process Finished goods Prepaid expenses. Property, plant, and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Retained earnings Total liabilities and stockholders' equity $8,000 5,000 13.000 26,000 3,000 240.000 $284.000 $ 4.000 280,000 $284.000 Exhibit 3A-1 contains a Microsoft Excel spreadsheet that includes the beginning balances shown in the balance sheet above. Notice that column "J" of the spreadsheet contains "="signs (see cells JI and J2). This means that after we record each of the forth- coming transactions, the amounts on the left-hand side of column "J" will always need to equal the amounts on the right-hand side of column "J." Also, notice that the spreadsheet contains all of the accounts shown in the January 1 balance sheet plus an account called Manufacturing Overhead. As discussed earlier in the chapter, Manufacturing Overhead is a clearing account that always has a beginning and ending balance of zero. This account is used to record two things--all actual overhead costs and the amount of manufacturing overhead applied to production using the prede- termined overhead rate. The difference between the actual overhead cost and the amount of overhead applied to production is the underapplied or overapplied overhead. Finally, to conserve space, the Excel spreadsheet abbreviates Property, Plant, and Equipment (net) as PP&E (net). The term net implies that the acquisition cost of property, plant, and equipment is being reported net of accumulated depreciation. Sapphire Company-Transaction Analysis The remainder of the appendix proceeds in three steps. First, it lists Sapphire Company's transactions for the month of January. Second, it explains how each of these transac- tions is recorded in the Microsoft Excel spreadsheet. Finally, it explains how to use the EXHIBIT 3A-1 Sapphire Company: Transaction Analysis 0 Sapphire Company 2 Transaction Analysis 3 For the Month Ended January 31 Row Work in Finished Manufacturing Prepaid Accounts Retained 5 Transactions Cash Materials Process Goods Overhead Expenses PP&E (net) - Payable Earnings 0 Beginning balances @1/1 $ 15,000 $8,000 $ 5,000 $ 13,000 $ $ 3,000 $240,000 $4,000 $280,000 7 D... BAS information depicted in the spreadsheet to prepare a schedule of cost of goods manufac- tured, a schedule of cost of goods sold, and an income statement for the month of January To begin our illustration, let's assume that Sapphire Company has a predetermined overhead rate of $25 per direct labor hour that was based on a cost formula that estimated $100,000 in manufacturing overhead cost for an estimated allocation base of 4,000 direct labor-hours. During January, the company completed the following transactions: a. Purchased raw materials on account, $80,000 b. Raw materials used in production, $78,000 ($70,000 was direct materials and $8,000 was indirect materials). c. Paid $135,000 of salaries and wages in cash ($68.000 was direct labor, S45,000 was indirect labor, and $22,000 was related to employees responsible for selling and administration). d. Utility costs incurred on account) to support production, $15,000. e. Depreciation recorded on property, plant, and equipment, $40,000 (70% related to man ufacturing equipment and 30% related to assets that support selling and administration), f. Advertising expenses paid in cash, $18,000, 3. Prepaid insurance expired during the month, $1,000 (80% related to production, and 20% related to selling and administration), h. Manufacturing overhead applied to production, S102,500. This amount was com puted by multiplying 4.100 direct labor-hours worked in January by the predeter- mined overhead rate of $25 per direct labor-hour i. Cost of goods manufactured, S235,000. 1. Cash sales, $320,000 k Cost of goods sold, S245,000. I Cash payments to creditors, $92,000 m Close overapplied overhead of $5,700 to cost of goods sold. Exhibit 3A-2 summarizes how each of the transactions just described would be recorded in the Microsoft Excel spreadsheet. The underlying explanations for each trans- action are as follows (each transaction includes a parenthetical reference to its row within the Microsoft Excel spreadsheet): a (row 7) Purchasing raw materials on account for $80,000 will increase Raw Materi- als and Accounts Payable by $80,000. b. (row 8) When raw materials are used in production, it decreases Raw Materials by $78,000. The direct materials of $70,000 are added to Work in Process, whereas the EXHIBIT 3A-2 Sapphire Company: Completed Transaction Analysis D Sapphire Company Transaction Analysis For the Month Ended January 31 Row Work in Finished Monufacturing Prepaid Accounts Retained 5 Transactions Cosh Materials Process Goods Overhead Expenses Peet) - Puyable Fornings Beginning balances @ 1/1 $ 15,000 $2,000 $ 5,000 $ 13,000 $ $ 2,000 $240,000 $4,000 $280,000 7 (a) Raw material purchases 30,000 80,000 (b) Raw materials used in production (78,000) 70,000 9 (6) Salaries and wages (185,000) 68,000 45,000 (22,0001 10 (d) Ut costs 15,000 15,000 11 (0) Depreciation 28.000 140,000) (12,0001 12 Advertising (18,000) (18,0001 13 (6) Expiration of prepaid insurance 800 (1,000) (2001 14 th) Manufacturing overhead applied 102,500 1102,5001 15 ) Cost of goods manufactured (235,000) 235,000 100) Sales 320,000 320,000 17 ) Cost of goods sold (245,000) (245,000) 18 () Payments to creditors 192,000) 192,000) 10 (m) Overapplied overhead 5,700 5,700 20 Ending balances 01/31 90,000 $ 10,000 10,500,000 $2,000 $200,000 $7,000 $20,500 21 ht 2 3 8,000 Job-Order Costing: Cost Flows and External Reporting 14 indirect materials of $8.000 are added to Manufacturing Overhead Notice that actual manufacturing overhead costs, such as the $8,000 of indirect materials, are not added to Work in Process. As you will see in a later transaction, manufacturing overhead is applied to Work in Process using the predetermined overhead rate. c. (row 9) The salaries and wages decrease Cash by $135.000. The direct labor cost of $68,000 increases Work in Process, whereas the indirect labor cost of $45,000 increases Manufacturing Overhead. The $22,000 paid to employees working in sell- ing and administrative roles is a period cost that should be recorded on January's income statement. Because the income statement is embedded in Retained Earnings. we decrease Retained Earnings by $22,000. d. (row 10) The utility costs support production, so they are treated as a product cost rather than a period cost. Thus, Manufacturing Overhead increases by $15.000 and Accounts Payable increases by the same amount. e (row 11) The depreciation reduces Property, Plant, and Equipment (net) by $40,000. This is equivalent to recording accumulated depreciation of $40,000. The deprecia- tion on manufacturing equipment of $28,000 (a product cost) increases Manufac- turing Overhead, whereas the depreciation on selling and administrative assets of $12,000 (a period cost) decreases Retained Earnings. f (row 12) Advertising is a period cost so Cash and Retained Earnings decrease by $18,000. g. (row 13) The expired insurance coverage decreases Prepaid Expenses by $1,000. The insurance related to production (a product cost) increases Manufacturing Overhead by $800. The insurance related to selling and administration of $200 (a period cost) decreases Retained Earnings by $200. h. (row 14) The manufacturing overhead applied increases Work in Process and decreases Manufacturing Overhead by $102,500. Notice that manufacturing over- head is applied to Work in Process using the predetermined overhead rate. Actual manufacturing overhead costs are not recorded in Work in Process. In a later transac- tion, the actual overhead costs will be compared to the applied overhead to determine the amount of underapplied or overapplied overhead for the month. i. (row 15) The cost of goods manufactured refers to the cost of the goods that were trans- ferred from work in process to finished goods during the period. This transaction decreases Work in Process by $235,000 and increases Finished Goods by the same amount. ji (row 16) The sales will increase Cash by $320,000, and given that sales appear on the income statement, Retained Earnings will increase by the same amount k (row 17) The cost of goods sold must be removed from finished goods: therefore, Finished Goods decreases by $245,000. Because cost of goods sold appears on the income statement, Retained Earnings decreases by the same amount. L. (row 18) The cash payments to creditors decrease Cash and Accounts Payable by $92,000. m. (row 19) The manufacturing overhead applied of $102,500 is $5.700 greater than the actual overhead costs incurred during the month of $96,800 (= $8,000 + $45,000 + $15,000 + $28,000 + $800). Therefore, manufacturing overhead is overapplied by $5,700. We record this transaction by increasing Manufacturing Overhead by $5,700 and increasing Retained Earnings by the same amount. The increase in Retained Earnings reflects the fact that we are decreasing Cost of Goods Sold (which increases net operating income). Once we have recorded all transactions, the company's balance sheet at January 31 can be derived by summing each column in the spreadsheet (see row 20 for the ending balances that would be reported on Sapphire Company's balance sheet at January 31). Sapphire Company-Schedules of Cost of Goods Manufactured and Cost of Goods Sold The transactions recorded in Exhibit 3A-2 can be used to create schedules of cost of goods manufactured and cost of goods sold. Exhibit 3A-3 shows Sapphire Company's schedule of cost of goods manufactured. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. 148 Chapter 3 B c EXHIBIT 3A-3 Sapphire Company: Schedule of Cost of Goods Manufactured 1 Sapphire Company 2 Schedule of Cost of Goods Manufactured 3 For the Month Ended January 31 5 Direct materials: 6 Beginning raw materials inventory (06) 7 Add: Purchases of raw materials (07) 8 Total raw materials available 9 Deduct: Ending raw materials inventory (D20) 10 Raw materials used production 11 Deduct: Indirect materials included in manufacturing overhead (GS) 12 Direct labor (59) 13 Manufacturing overhead applied to work in process (E14) 14 Total manufacturing costs 15 Add: Beginning work in process inventory (E6) $ 8,000 80,000 88,000 10,000 78,000 8,000 $ 70,000 68,000 102,500 240,500 5,000 245,500 10,500 $ 235,000 16 17 Deduct: Ending work in process inventory (E20) 18 Cost of goods manufactured 19 BALAR Exhibit Notice that the cost of goods manufactured of $235,000 as shown in Exhibit 3A-3 equals the cost of goods manufactured mentioned in transaction and recorded in row 15 of Exhibit 3A-2. Exhibit 3A-4 shows Sapphire Company's schedule of cost of goods sold. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. B EXHIBIT 3A-4 Sapphire Company: Schedule of Cost of Goods Sold 2 1 Sapphire Company 2 Schedule of Cost of Goods Sold 3 For the Month Ended January 31 5 Beginning finished goods inventory (F6) 6 Add: Cost of goods manufactured (F15) 7 Cost of goods available for sale 8 Deduct: Ending finished goods inventory (F20) 9 Unadjusted cost of goods sold 10 Deduct: Overapplied overhead (G19) 11 Adjusted cost of goods sold 12 $ 13,000 235,000 248,000 3,000 245,000 5,700 $ 239,300 Job-Order Costing: Cost Flows and External Reporting 149 EXHIBIT 3A-5 Sapphire Company: Income Statement $ 320,000 239,300 80,700 1 Sapphire Company 2 Income Statement 3 For the Month Ended January 31 5 Sales (L.16) 6 Cost of goods sold 7 Gross margin 8 Selling and administrative expenses: 9 Salaries expense (19) $ 22,000 10 Depreciation expense (L11) 12,000 11 Advertising expense (112) 18,000 12 Insurance expense (L13) 200 13 Net operating income 23.A.M. 52,200 $ 28,500 14 In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700 from unadjusted cost of good sold because overapplied overhead means that too much overhead was added to production during the period, and hence, the cost of goods sold was overstated. In Exhibit 3A-2, we add overapplied overhead to retained earnings (see row 19) because lowering cost of goods sold increases net operating income, which in turn increases retained earnings, Sapphire Company-Income Statement Exhibit 3A-5 shows Sapphire Company's income statement for the month of January The sales and selling and administrative expenses come from the transaction analysis in Exhibit 3A-2 and they each contain a corresponding parenthetical cell reference. The cost of goods sold ($239,300) is carried over from the schedule of cost of goods sold in Exhibit 3A 4 Job-Order Costing: Cost Flows and External Reporting 145 Sapphire Company-Setting the Stage Sapphire Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows: Sapphire Company Balance Sheet January 1 Assets Cash $ 15,000 Raw materials Work in process Finished goods Prepaid expenses Property, plant, and equipment (net) Total assets $8.000 5.000 13.000 26,000 3,000 240,000 $284,000 Liabilities and Stockholders' Equity Accounts payable Retained earnings.......... Total liabilities and stockholders' equity $ 4,000 280,000 $284,000 Exhibit 3A-1 contains a Microsoft Excel spreadsheet that includes the beginning balances shown in the balance sheet above. Notice that column "J" of the spreadsheet contains "=" signs (see cells J1 and 12). This means that after we record each of the forth- coming transactions, the amounts on the left-hand side of column "J" will always need to equal the amounts on the right-hand side of column". Also, notice that the spreadsheet contains all of the accounts shown in the January 1 balance sheet plus an account called Manufacturing Overhead. As discussed earlier in the chapter, Manufacturing Overhead is a clearing account that always has a beginning and costs and the amount of manufacturing overhead applied to production using the prede- overhead rate. The difference between the actual overhead cost and the amount of overhead applied to production is the underapplied or overapplied overhead. Finally, to conserve space, the Excel spreadsheet abbreviates Property, Plant, and Equipment (net) as PP&E (net). The term net implies that the acquisition cost of property, plant, and equipment is being reported net of accumulated depreciation. termined Sapphire Company-Transaction Analysis The remainder of the appendix proceeds in three steps. First, it lists Sapphire Company's transactions for the month of January. Second, it explains how each of these transac- tions is recorded in the Microsoft Excel spreadsheet. Finally, it explains how to use the EXHIBIT 3A-1 Sapphire Company: Transaction Analysis 1 2 3 Sapphire Company Transaction Analysis For the Month Ended January 31 Row Work in Finished Manufacturing Prepaid Accounts Retoined Cash Materials Process Goods Overhead Expenses PP&E (net) - Payable Earnings $ 15,000 $8,000S 5,000 $13,000 S $ 3,000 $240,000 = $ 4,000 $280,000 5 Transactions Beginning balances @ 1/1 7 146 20. $(% , Chapter 3 information depicted in the spreadsheet to prepare a schedule of cost of goods manufac- tured, a schedule of cost of goods sold, and an income statement for the month of January To begin our illustration, let's assume that Sapphire Company has a predetermined overhead rate of $25 per direct labor-hour that was based on a cost formula that estimated $100,000 in manufacturing overhead cost for an estimated allocation base of 4.000 direct labor-hours. During January, the company completed the following transactions: a. Purchased raw materials on account, $80,000. b. Raw materials used in production, $78,000 ($70,000 was direct materials and $8,000 was indirect materials). c. Paid $135,000 of salaries and wages in cash ($68,000 was direct labor, 545,000 was indirect labor, and $22,000 was related to employees responsible for selling and administration). d. Utility costs incurred (on account) to support production, $15,000. e. Depreciation recorded on property, plant, and equipment, S40,000 (70% related to man- ufacturing equipment and 30% related to assets that support selling and administration). f. Advertising expenses paid in cash, $18,000. h. Manufacturing overhead applied to production, $102,500. This amount was com- puted by multiplying 4,100 direct labor-hours worked in January by the predeter- mined overhead rate of $25 per direct labor-hour. i. Cost of goods manufactured, $235,000. j. Cash sales, $320,000. k. Cost of goods sold, $245,000. 1. Cash payments to creditors, $92,000. m. Close overapplied overhead of $5,700 to cost of goods sold. Exhibit 3A-2 summarizes how each of the transactions just described would be recorded in the Microsoft Excel spreadsheet. The underlying explanations for each trans- action are as follows (each transaction includes a parenthetical reference to its row within the Microsoft Excel spreadsheet): a. (row 7) Purchasing raw materials on account for $80,000 will increase Raw Materi- als and Accounts Payable by $80.000. (row 8) When raw materials are used in production, it decreases Raw Materials by $78,000. The direct materials of $70,000 are added to Work in Process, whereas the b. = EXHIBIT 3A-2 Sapphire Company: Completed Transaction Analysis D G 1 Sapphire Company 2 Transaction Analysis 3 For the Month Ended January 31 Row Work in Finished Manufacturing Prepaid Account Retained 5 Transactions Cash Materials Process Goods Overhead Expenses PP&E (net) = Payable Earnings 6 Beginning balances 1/1 $ 15,000 S 8,000 $5,000 $ 13,000 $ $ 3,000 $240,000 = $4,000 $280,000 7 (a) Raw material purchases 80,000 80,000 8(b) Raw materials used in production 178,000) 70,000 8,000 9 (c) Salaries and wages (135,000) 68,000 45,000 122,000) 10 (d) Utility costs 15,000 15,000 11 (e) Depreciation 28,000 (40,000) (12,0001 12 (f) Advertising (18,000) (18,000 13 (8) Expiration of prepaid insurance 800 (1,000) (200) 14 (1) Manufacturing overhead applied 102,500 (102,500) 156) Cost of goods manufactured (235,000) 235,000 16 G) Sales 320,000 320,000 17 (k) Cost of goods sold (245,000) (245,000) 18 () Payments to creditors 192,000) 192,000 19 (m) Overapplied overhead 5,700 5,700 20 Ending balances 1/31 $ 90,000 $10,000 $ 10,500 $ 3,000 $ $ 2,000 $200,000 = $7,000 $308.500 21 e. increases Manufacturing Overhead. The $22,000 paid to employees working in sell- ing and administrative roles is a period cost that should be recorded on January's income statement. Because the income statement is embedded in Retained Earnings, we decrease Retained Earnings by $22,000. d. (row 10) The utility costs support production, so they are treated as a product cost rather than a period cost. Thus, Manufacturing Overhead increases by $15,000 and Accounts Payable increases by the same amount. (row 11) The depreciation reduces Property, Plant, and Equipment (net) by $40,000. This is equivalent to recording accumulated depreciation of $40,000. The deprecia- tion on manufacturing equipment of $28.000 (a product cost) increases Manufac- turing Overhead, whereas the depreciation on selling and administrative assets of $12,000 (a period cost) decreases Retained Earnings. f. (row 12) Advertising is a period cost so Cash and Retained Earnings decrease by $18,000. g. (row 13) The expired insurance coverage decreases Prepaid Expenses by $1,000. The insurance related to production (a product cost) increases Manufacturing Overhead by $800. The insurance related to selling and administration of $200 (a period cost) decreases Retained Earnings by $200. h. (row 14) The manufacturing overhead applied increases Work in Process and decreases Manufacturing Overhead by $102,500. Notice that manufacturing over- head is applied to Work in Process using the predetermined overhead rate. Actual manufacturing overhead costs are not recorded in Work in Process. In a later transac- tion, the actual overhead costs will be compared to the applied overhead to determine the amount of underapplied or overapplied overhead for the month. i. (row 15) The cost of goods manufactured refers to the cost of the goods that were trans- ferred from work in process to finished goods during the period. This transaction decreases Work in Process by $235,000 and increases Finished Goods by the same amount. j. (row 16) The sales will increase Cash by $320,000, and given that sales appear on the income statement, Retained Earnings will increase by the same amount. k. (row 17) The cost of goods sold must be removed from finished goods; therefore, Finished Goods decreases by $245,000. Because cost of goods sold appears on the income statement, Retained Earnings decreases by the same amount. 1. (row 18) The cash payments to creditors decrease Cash and Accounts Payable by $92,000. m. (row 19) The manufacturing overhead applied of $102,500 is $5,700 greater than the actual overhead costs incurred during the month of $96,800 (= $8,000+ $45,000 + $15,000 + $28,000 + $800). Therefore, manufacturing overhead is overapplied by $5,700. We record this transaction by increasing Manufacturing Overhead by $5,700 and increasing Retained Earnings by the same amount. The increase in Retained Earnings reflects the fact that we are decreasing Cost of Goods Sold (which increases net operating income). Once we have recorded all transactions, the company's balance sheet at January 31 can be derived by summing each column in the spreadsheet (see row 20 for the ending balances that would be reported on Sapphire Company's balance sheet at January 31). Sapphire Company-Schedules of Cost of Goods Manufactured and Cost of Goods Sold The transactions recorded in Exhibit 3A-2 can be used to create schedules of cost of goods manufactured and cost of goods sold. Exhibit 3A-3 shows Sapphire Company's schedule of cost of goods manufactured. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. 148 Chapter 3 EXHIBIT 3A-3 Sapphire Company: Schedule of Cost of Goods Manufactured N 1 Sapphire Company 2 Schedule of Cost of Goods Manufactured 3 For the Month Ended January 31 5 Direct materials: 6 Beginning raw materials inventory (16) 7 Add: Purchases of raw materials (07) 8 Total raw materials available 9 Deduct: Ending raw materials inventory (20) 10 Raw materials used production 11 Deduct: Indirect materials included in manufacturing overhead (GS) 12 Direct labor (E9) 13 Manufacturing overhead applied to work in process (E14) 14 Total manufacturing costs 15 Add: Beginning work in process inventory (E6) 16 17 Deduct: Ending work in process inventory (E20) 18 Cost of goods manufactured $ 8,000 80,000 88,000 10,000 78,000 8,000 $ 70,000 68,000 102,500 240,500 5,000 245,500 10,500 $ 235,000 19 Notice that the cost of goods manufactured of $235,000 as shown in Exhibit 3A-3 equals the cost of goods manufactured mentioned in transaction and recorded in row 15 of Exhibit 3A-2. Exhibit 3A-4 shows Sapphire Company's schedule of cost of goods sold. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. B EXHIBIT 3A-4 Sapphire Company: Schedule of Cost of Goods Sold A 1 Sapphire Company 2 Schedule of Cost of Goods Sold 3 For the Month Ended January 31 5 Beginning finished goods inventory (F6) 6 Add: Cost of goods manufactured (F15) 7 Cost of goods available for sale 8 Deduct: Ending finished goods inventory (F20) 9 Unadjusted cost of goods sold 10 Deduct: Overapplied overhead (19) 11 Adjusted cost of goods sold 12 $ 13,000 235,000 248,000 3,000 245,000 5,700 $ 239,300 Job-Order Costing: Cost Flows and External Reporting 149 EXHIBIT 3A-5 Sapphire Company: Income Statement 1 2 3 $ 320,000 239,300 80,700 Sapphire Company Income Statement For the Month Ended January 31 5 Sales (L16) 6 Cost of goods sold 7 Gross margin 8 Selling and administrative expenses: 9 Salaries expense (L9) $ 22,000 10 Depreciation expense (L11) 12,000 11 Advertising expense (L12) 18,000 12 Insurance expense (L13) 13 Net operating income ht. Mit het the 200 52,200 28,500 $ 14 In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700 from unadjusted cost of good sold because overapplied overhead means that too much overhead was added to production during the period, and hence, the cost of goods sold was overstated. In Exhibit 3A-2, we add overapplied overhead to retained earnings (see row 19) because lowering cost of goods sold increases net operating income, which in turn increases retained earnings. Sapphire Company-Income Statement Exhibit 3A-5 shows Sapphire Company's income statement for the month of January The sales and selling and administrative expenses come from the transaction analysis in Exhibit 3A-2 and they each contain a corresponding parenthetical cell reference. The cost of goods sold ($239,300) is carried over from the schedule of cost of goods sold in Exhibit 3A-4. Sapphire Company Balance Sheet January 1 $ 15,000 Assets Cash.. Raw materials Work in process. Finished goods Prepald expenses Property, plant, and equipment (net) Total assets. $8,000 5,000 13,000 26,000 3,000 240.000 $284,000 Llabilitles and Stockholders' Equity Accounts payable Retained earnings. Total liabilities and stockholders' equity $ 4,000 280,000 $284,000 Exhibit 3A-1 contains a Microsoft Excel sprcadshect that includes the beginning balances shown in the balance shect above. Notice that column "I" of the sproudsbcet. contains "="signs (scc cells Jl und J2). This means that after we record cuch of the forth- coming transactions, the amounts on the left-hand side of column"]" will always need to equal the amounts on the right-hand side of column Also, notice that the spreadsheet contuins all of the accounts shown in the Junuary ! balance sheet plus un account culled Manufacturing Overhead. As discussed curlier in the chapter, Manufacturing Overhead is a clcuring account that always has a beginning und ending balance of zero. This account is used to record two things--all actual overhead costs and the amount of manufacturing overhead applied to production using the prede- termined overhead rate. The difference between the actual overhead cost and the amount of overhead applied to production is the underapplied or overupplied overhead. Finally, to conserve space, the Excel spreadsheet abbreviates Property. Plunt, and Equipment (net) as PP&E (net). The term ner implies that the acquisition cost of property plant, and equipment is being reported ner of accumulated depreciation. Sapphire Company-Transaction Analysis The remainder of the appendix proceeds in three steps. First, it lists Sapphire Company's transactions for the month of January. Second, it explains how each of these transac- tions is recorded in the Microsoft Excel spreadsheet. Finally, it explains how to use the EXHIBIT 3A-1 Sapphire Company: Transaction Analysis A D Sapphire Company Transaction Analysis For the Month Ended January 31 Row Work in Finished Morforturing Prepold Accounts Retoined Trortsactions cash Moterlo Process Goods Overheod Expenses PP&E (net) - Payable Eornings Beginning balances 1/1 S115.000.000 $ 5,000 315.000 $3,000 $240,000 - 54,000 $280,000 Levent Chapter 3 information depicted in the spreadsheet to prepare a schedule of cost of goods manufac- tured, a schedule of cost of goods sold, and an income statement for the month of January. To begin our illustration, let's assume that Sapphire Company has a predetermined overhead rate of $25 per direct labor-hour that was based on a cost formula that estimated $100,000 in manufacturing overhead cost for an estimated allocation base of 4,000 direct labor-hours. During January, the company completed the following transactions: a. Purchased raw materials on account, $80,000. b. Raw materials used in production, $78,000 ($70,000 was direct materials and $8,000 was indirect materials). c. Paid $135,000 of salaries and wages in cash ($68,000 was direct labor, $45,000 was indirect labor, and $22,000 was related to employees responsible for selling and administration). d. Utility costs incurred (on account) to support production, $15,000. c. Depreciation recorded on property, plant, and equipment, $40,000 (70% related to man- ufacturing equipment and 30% related to assets that support selling and administration). f. Advertising expenses paid in cash, $18,000. g. Prepaid insurance expired during the month, $1,000 (80% related to production, and 20% related to selling and administration), h. Manufacturing overhead applied to production, $102,500. This amount was com- puted by multiplying 4,100 direct labor-hours worked in January by the predeter- mined overhead rate of $25 per direct labor-hour. i. Cost of goods manufactured, $235,000. j. Cash sales, $320,000. k. Cost of goods sold. $245,000. 1. Cash payments to creditors, $92,000. m. Close overapplied overhead of $5,700 to cost of goods sold, Exhibit 3A-2 summarizes how each of the transactions just described would be recorded in the Microsoft Excel spreadshect. The underlying explanations for cach trans- action are as follows (each transaction includes a parenthetical reference to its row within the Microsoft Excel spreadsheet): a. (row 7) Purchasing raw materials on account for $80,000 will increase Raw Materi- als and Accounts Payable by $80,000. b. (row 8) When ruw materials are used in production, it decreases Raw Materials by $78,000. The direct materials of $70,000 are added to Work in Process, whereas the EXHIBIT 3A-2 Sapphire Company: Completed Transaction Analysis B c G H K 1 Sapphire Company 2 Transaction Analysis For the Month Ended January 31 Row Work In Finished Manufacturing Prepold Accounts Retained 5 Transactions Cash Materials Process Goods Overhead Expenses PP&E (net) - Payable Eomings 6 Beginning balances @ 1/1 $ 15,000 $ 8,000 $ 5,000 $13,000 $ $ 3,000 $240,000 = $ 4,000 $280,000 7 (a) Raw material purchases 80,000 80,000 8 (b) Raw materials used in production (78,000) 70.000 8,000 9 (c) Salaries and wages (135,000) 68,000 45,000 (22,000) 10 (d) Utility costs 15,000 15,000 11 (e) Depreciation 28,000 (40,000) = (12,000] 12 (1) Advertising (18,000) (18,000) 13 (g) Expiration of prepaid insurance 800 (1,000) (200) 14 th) Manufacturing overhead applied 102,500 (102,500) 15 (Cost of goods manufactured [235,000) 235,000 10 Sales 320,000 320,000 17 (k) Cost of goods sold (245,000) (245,000) 18 W Payments to creditors (92,000) 192,000) 19 (m) Overapplied overhead 5,700 5,700 20 $ 2,000 $200,000 - S 7.000 $308,500 $ 90,000 $10,000 $ 10,500 $ Ending balances @ 1/31 3,000 $ 21 LLL LEERLEXNIBAL indirect materials of $8,000 are added to Manufacturing Overhead. Notice that actual manufacturing overhead costs, such as the $8,000 of indirect materials, are not added to Work in Process. As you will see in a later transaction, manufacturing overhead is applied to Work in Process using the predetermined overhead rate. c. (row 9) The salaries and wages decrease Cash by $135,000. The direct labor cost of $68,000 increases Work in Process, whereas the indirect labor cost of $45,000 increases Manufacturing Overhead. The $22,000 paid to employees working in sell- ing and administrative roles is a period cost that should be recorded on January's income statement. Because the income statement is embedded in Retained Earnings, we decrease Retained Earnings by $22,000. d. (row 10) The utility costs support production, so they are treated as a product cost rather than a period cost. Thus, Manufacturing Overhead increases by $15,000 and Accounts Payable increases by the same amount. e. (row 11) The depreciation reduces Property, Plant, and Equipment (net) by $40,000. This is equivalent to recording accumulated depreciation of $40,000. The deprecia- tion on manufacturing equipment of $28,000 (a product cost) increases Manufac- turing Overhead, whereas the depreciation on selling and administrative assets of $12,000 (a period cost) decreases Retained Earnings. f. (row 12) Advertising is a period cost so Cash and Rctained Earnings decrcasc by $18,000.. g. (row 13) The expired insurance coverage decreases Prepaid Expenses by $1,000. The insurance related to production (a product cost) increases Manufacturing Overhead by $800. The insurance related to selling and administration of $200 (a period cost) decrcuses Retained Earnings by $200. h. (row 14) The manufacturing overhcad upplicd increases Work in Process and decreases Manufacturing Overhead by $102,500. Notice that manufacturing over- head is applied to Work in Process using the predetermined overhead rate. Actual manufacturing overhead costs are not recorded in Work in Process. In a later transac- tion, the actual overhead costs will be compared to the applied overhead to determine the amount of underapplicd or overapplicd overhoud for the month. i. (row 15) The cost of goods manufactured refers to the cost of the goods that were trans- ferred from work in process to finished goods during the period. This transaction decreases Work in Process by $235,000 and increases Finished Goods by the same amount. j. (row 16) The sales will increase Cash by $320,000, and given that sales appear on the income statement, Relaincu Earnings will increase by the same amount k (row 17) The cost of goods sold must be removed from finished goods: therefore, Finished Goods decreases by $245,000. Because cost of goods sold appeurs on the income statement, Retained Earnings decreases by the same amount. 1. (mw 18) The cash payments to creditors decrease Cash and Accounts Payable hy $92.000. m. (row 19) The manufacturing overhead applied or $102,500 is $5.700 greater than the actual overhead costs incurred during the month ol $96.800 ( $8.000 + $ 15.000 + $15.000 + $28.000 + $800). Therefore, manufacturing overhead is overapplied by $5,700. We record this transaction by increasing Manufacturing Overhead by $5,700 and increasing Retained Earnings by the same amount: The increase in Retained Earnings rellects the fact that we are decreasing Cost of Goods Sold (which increases net operating income), Once we have recorded all transuctions, the company s balance sheet al January 31 can be derived by summing each column in the spreadsheet (sce row 20 for the ending balances that would be reported on Sapphire Company's balance sheet at January 31). Sapphire Company-Schedules of Cost of Goods Manufactured and Cost of Goods Sold The transactions recorded in Exhibit 3A-2 can be used to create schedules of cost of goods manufactured and cost of goods sold. Exhibit 3A-3 shows Sapphire Company's schedule of cost of goods manufactured. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. 148 Chapter 3 B EXHIBIT 3A-3 Sapphire Company: Schedule of Cost of Goods Manufactured A 1 Sapphire Company 2 Schedule of Cost of Goods Manufactured 3 For the Month Ended January 31 5 Direct materials: 6 Beginning raw materials inventory (16) 7 Add: Purchases of raw materials (D7) 8 Total raw materials available 9 Deduct: Ending raw materials inventory (120) 10 Raw materials used production 11 Deduct: Indirect materials included in manufacturing overhead (G8) 12 Direct labor (E9) 13 Manufacturing overhead applied to work in process (E14) 14 Total manufacturing costs 15 Add: Beginning work in process inventory (E6) 16 17 Deduct: Ending work in process inventory (E20) 18 Cost of goods manufactured 19 h A BE htt. $ 8,000 80,000 88,000 10,000 78,000 8,000 $ 70,000 68,000 102,500 240,500 5,000 245,500 10,500 $ 235,000 Notice that the cost of goods manufactured of $235,000 as shown in Exhibit 3A-3 equals the cost of goods manufactured mentioned in transaction "" and recorded in row 15 of Exhibit 3A-2. Exhibit 3A-4 shows Sapphire Company's schedule of cost of goods sold. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. B EXHIBIT 3A-4 Sapphire Company: Schedule of Cost of Goods Sold A 1 Sapphire Company 2 Schedule of Cost of Goods Sold 3 For the Month Ended January 31 5 Beginning finished goods inventory (F6) 6 Add: Cost of goods manufactured (F15) 7 Cost of goods available for sale 8 Deduct: Ending finished goods inventory (F20) 9 Unadjusted cost of goods sold 10 Deduct: Overapplied overhead (G19) 11 Adjusted cost of goods sold 12 13,000 235,000 248,000 3,000 245,000 5,700 $ 239,300 HELLE Job Order Costing: Cost Fows and External Reporting 149 1 c EXHIBIT 3A-5 Sapphire Company. Income Statement $ B Sapphire Company 2 Income Statamant For the Month Ended January 31 5 Sales (L16) 6 Cost of goods sold 7 Gross margin & Selling and administrative expenses: 9 Salaries expense (19) $ 22,000 10 Depreciation expense (L11) 12,000 11 Advertising expense (112) 18,000 12 Insurance expense (113) 13 Net operating income 14 BALERA ExhaEhk 320,000 239,300 80,700 200 52,200 28,500 $ In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700 from unadjusted cost of good sold because overapplied overhead means that too much overhead was added to production during the period, and hence, the cost of goods sold was overstated. In Exhibit 3A-2, we add overapplied overhead to retained earnings (see row 19) because lowering cost of goods sold increases net operating income, which in turn increases retained earnings. Sapphire Company-Income Statement Exhibit 3A-5 shows Sapphire Company's income statement for the month of January. The sales and selling and administrative expenses come from the transaction analysis in Exhibit 3A-2 and they each contain a corresponding parenthetical cell reference. The cost of goods sold ($239.300) is carried over from the schedule of cost of goods sold in Exhibit 3A 4. The final project is a written paper assignment that should be a minimum of 7 pages, plus supporting material, and preferably no more than 10 pages. Steps for Project are as follows: First of all, Differentiate the basic costing terms, and costing methods including job order costing, variable costing, absorption costing and activity based-costing. Start a new business for a manufacturing concem. Identify Direct Material, Indirect material, Direct Labor, indirect Labor cost for your business. Prepare inventory costing sheet. Calculate Breakeven in units and dollars. And also calculate units required for a certain target profit. Calculate cost of goods manufactured, cost of goods sold, and Income Statement under variable and absorption costing Calculate per unit cost under variable and absorption costing Further assume that you are manufacturing the products with distinct features and as per the customer requirements. So calculate the cost of goods manufactured by using job order costing. . Sapphire Company-Setting the Stage Sapphire Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows: $ 15,000 Sapphire Company Balance Sheet January 1 Assets Cash... Raw materials Work in process Finished goods Prepaid expenses. Property, plant, and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Retained earnings Total liabilities and stockholders' equity $8,000 5,000 13.000 26,000 3,000 240.000 $284.000 $ 4.000 280,000 $284.000 Exhibit 3A-1 contains a Microsoft Excel spreadsheet that includes the beginning balances shown in the balance sheet above. Notice that column "J" of the spreadsheet contains "="signs (see cells JI and J2). This means that after we record each of the forth- coming transactions, the amounts on the left-hand side of column "J" will always need to equal the amounts on the right-hand side of column "J." Also, notice that the spreadsheet contains all of the accounts shown in the January 1 balance sheet plus an account called Manufacturing Overhead. As discussed earlier in the chapter, Manufacturing Overhead is a clearing account that always has a beginning and ending balance of zero. This account is used to record two things--all actual overhead costs and the amount of manufacturing overhead applied to production using the prede- termined overhead rate. The difference between the actual overhead cost and the amount of overhead applied to production is the underapplied or overapplied overhead. Finally, to conserve space, the Excel spreadsheet abbreviates Property, Plant, and Equipment (net) as PP&E (net). The term net implies that the acquisition cost of property, plant, and equipment is being reported net of accumulated depreciation. Sapphire Company-Transaction Analysis The remainder of the appendix proceeds in three steps. First, it lists Sapphire Company's transactions for the month of January. Second, it explains how each of these transac- tions is recorded in the Microsoft Excel spreadsheet. Finally, it explains how to use the EXHIBIT 3A-1 Sapphire Company: Transaction Analysis 0 Sapphire Company 2 Transaction Analysis 3 For the Month Ended January 31 Row Work in Finished Manufacturing Prepaid Accounts Retained 5 Transactions Cash Materials Process Goods Overhead Expenses PP&E (net) - Payable Earnings 0 Beginning balances @1/1 $ 15,000 $8,000 $ 5,000 $ 13,000 $ $ 3,000 $240,000 $4,000 $280,000 7 D... BAS information depicted in the spreadsheet to prepare a schedule of cost of goods manufac- tured, a schedule of cost of goods sold, and an income statement for the month of January To begin our illustration, let's assume that Sapphire Company has a predetermined overhead rate of $25 per direct labor hour that was based on a cost formula that estimated $100,000 in manufacturing overhead cost for an estimated allocation base of 4,000 direct labor-hours. During January, the company completed the following transactions: a. Purchased raw materials on account, $80,000 b. Raw materials used in production, $78,000 ($70,000 was direct materials and $8,000 was indirect materials). c. Paid $135,000 of salaries and wages in cash ($68.000 was direct labor, S45,000 was indirect labor, and $22,000 was related to employees responsible for selling and administration). d. Utility costs incurred on account) to support production, $15,000. e. Depreciation recorded on property, plant, and equipment, $40,000 (70% related to man ufacturing equipment and 30% related to assets that support selling and administration), f. Advertising expenses paid in cash, $18,000, 3. Prepaid insurance expired during the month, $1,000 (80% related to production, and 20% related to selling and administration), h. Manufacturing overhead applied to production, S102,500. This amount was com puted by multiplying 4.100 direct labor-hours worked in January by the predeter- mined overhead rate of $25 per direct labor-hour i. Cost of goods manufactured, S235,000. 1. Cash sales, $320,000 k Cost of goods sold, S245,000. I Cash payments to creditors, $92,000 m Close overapplied overhead of $5,700 to cost of goods sold. Exhibit 3A-2 summarizes how each of the transactions just described would be recorded in the Microsoft Excel spreadsheet. The underlying explanations for each trans- action are as follows (each transaction includes a parenthetical reference to its row within the Microsoft Excel spreadsheet): a (row 7) Purchasing raw materials on account for $80,000 will increase Raw Materi- als and Accounts Payable by $80,000. b. (row 8) When raw materials are used in production, it decreases Raw Materials by $78,000. The direct materials of $70,000 are added to Work in Process, whereas the EXHIBIT 3A-2 Sapphire Company: Completed Transaction Analysis D Sapphire Company Transaction Analysis For the Month Ended January 31 Row Work in Finished Monufacturing Prepaid Accounts Retained 5 Transactions Cosh Materials Process Goods Overhead Expenses Peet) - Puyable Fornings Beginning balances @ 1/1 $ 15,000 $2,000 $ 5,000 $ 13,000 $ $ 2,000 $240,000 $4,000 $280,000 7 (a) Raw material purchases 30,000 80,000 (b) Raw materials used in production (78,000) 70,000 9 (6) Salaries and wages (185,000) 68,000 45,000 (22,0001 10 (d) Ut costs 15,000 15,000 11 (0) Depreciation 28.000 140,000) (12,0001 12 Advertising (18,000) (18,0001 13 (6) Expiration of prepaid insurance 800 (1,000) (2001 14 th) Manufacturing overhead applied 102,500 1102,5001 15 ) Cost of goods manufactured (235,000) 235,000 100) Sales 320,000 320,000 17 ) Cost of goods sold (245,000) (245,000) 18 () Payments to creditors 192,000) 192,000) 10 (m) Overapplied overhead 5,700 5,700 20 Ending balances 01/31 90,000 $ 10,000 10,500,000 $2,000 $200,000 $7,000 $20,500 21 ht 2 3 8,000 Job-Order Costing: Cost Flows and External Reporting 14 indirect materials of $8.000 are added to Manufacturing Overhead Notice that actual manufacturing overhead costs, such as the $8,000 of indirect materials, are not added to Work in Process. As you will see in a later transaction, manufacturing overhead is applied to Work in Process using the predetermined overhead rate. c. (row 9) The salaries and wages decrease Cash by $135.000. The direct labor cost of $68,000 increases Work in Process, whereas the indirect labor cost of $45,000 increases Manufacturing Overhead. The $22,000 paid to employees working in sell- ing and administrative roles is a period cost that should be recorded on January's income statement. Because the income statement is embedded in Retained Earnings. we decrease Retained Earnings by $22,000. d. (row 10) The utility costs support production, so they are treated as a product cost rather than a period cost. Thus, Manufacturing Overhead increases by $15.000 and Accounts Payable increases by the same amount. e (row 11) The depreciation reduces Property, Plant, and Equipment (net) by $40,000. This is equivalent to recording accumulated depreciation of $40,000. The deprecia- tion on manufacturing equipment of $28,000 (a product cost) increases Manufac- turing Overhead, whereas the depreciation on selling and administrative assets of $12,000 (a period cost) decreases Retained Earnings. f (row 12) Advertising is a period cost so Cash and Retained Earnings decrease by $18,000. g. (row 13) The expired insurance coverage decreases Prepaid Expenses by $1,000. The insurance related to production (a product cost) increases Manufacturing Overhead by $800. The insurance related to selling and administration of $200 (a period cost) decreases Retained Earnings by $200. h. (row 14) The manufacturing overhead applied increases Work in Process and decreases Manufacturing Overhead by $102,500. Notice that manufacturing over- head is applied to Work in Process using the predetermined overhead rate. Actual manufacturing overhead costs are not recorded in Work in Process. In a later transac- tion, the actual overhead costs will be compared to the applied overhead to determine the amount of underapplied or overapplied overhead for the month. i. (row 15) The cost of goods manufactured refers to the cost of the goods that were trans- ferred from work in process to finished goods during the period. This transaction decreases Work in Process by $235,000 and increases Finished Goods by the same amount. ji (row 16) The sales will increase Cash by $320,000, and given that sales appear on the income statement, Retained Earnings will increase by the same amount k (row 17) The cost of goods sold must be removed from finished goods: therefore, Finished Goods decreases by $245,000. Because cost of goods sold appears on the income statement, Retained Earnings decreases by the same amount. L. (row 18) The cash payments to creditors decrease Cash and Accounts Payable by $92,000. m. (row 19) The manufacturing overhead applied of $102,500 is $5.700 greater than the actual overhead costs incurred during the month of $96,800 (= $8,000 + $45,000 + $15,000 + $28,000 + $800). Therefore, manufacturing overhead is overapplied by $5,700. We record this transaction by increasing Manufacturing Overhead by $5,700 and increasing Retained Earnings by the same amount. The increase in Retained Earnings reflects the fact that we are decreasing Cost of Goods Sold (which increases net operating income). Once we have recorded all transactions, the company's balance sheet at January 31 can be derived by summing each column in the spreadsheet (see row 20 for the ending balances that would be reported on Sapphire Company's balance sheet at January 31). Sapphire Company-Schedules of Cost of Goods Manufactured and Cost of Goods Sold The transactions recorded in Exhibit 3A-2 can be used to create schedules of cost of goods manufactured and cost of goods sold. Exhibit 3A-3 shows Sapphire Company's schedule of cost of goods manufactured. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. 148 Chapter 3 B c EXHIBIT 3A-3 Sapphire Company: Schedule of Cost of Goods Manufactured 1 Sapphire Company 2 Schedule of Cost of Goods Manufactured 3 For the Month Ended January 31 5 Direct materials: 6 Beginning raw materials inventory (06) 7 Add: Purchases of raw materials (07) 8 Total raw materials available 9 Deduct: Ending raw materials inventory (D20) 10 Raw materials used production 11 Deduct: Indirect materials included in manufacturing overhead (GS) 12 Direct labor (59) 13 Manufacturing overhead applied to work in process (E14) 14 Total manufacturing costs 15 Add: Beginning work in process inventory (E6) $ 8,000 80,000 88,000 10,000 78,000 8,000 $ 70,000 68,000 102,500 240,500 5,000 245,500 10,500 $ 235,000 16 17 Deduct: Ending work in process inventory (E20) 18 Cost of goods manufactured 19 BALAR Exhibit Notice that the cost of goods manufactured of $235,000 as shown in Exhibit 3A-3 equals the cost of goods manufactured mentioned in transaction and recorded in row 15 of Exhibit 3A-2. Exhibit 3A-4 shows Sapphire Company's schedule of cost of goods sold. Each row heading in this exhibit contains a cell reference that indicates where the number appears in Exhibit 3A-2. B EXHIBIT 3A-4 Sapphire Company: Schedule of Cost of Goods Sold 2 1 Sapphire Company 2 Schedule of Cost of Goods Sold 3 For the Month Ended January 31 5 Beginning finished goods inventory (F6) 6 Add: Cost of goods manufactured (F15) 7 Cost of goods available for sale 8 Deduct: Ending finished goods inventory (F20) 9 Unadjusted cost of goods sold 10 Deduct: Overapplied overhead (G19) 11 Adjusted cost of goods sold 12 $ 13,000 235,000 248,000 3,000 245,000 5,700 $ 239,300 Job-Order Costing: Cost Flows and External Reporting 149 EXHIBIT 3A-5 Sapphire Company: Income Statement $ 320,000 239,300 80,700 1 Sapphire Company 2 Income Statement 3 For the Month Ended January 31 5 Sales (L.16) 6 Cost of goods sold 7 Gross margin 8 Selling and administrative expenses: 9 Salaries expense (19) $ 22,000 10 Depreciation expense (L11) 12,000 11 Advertising expense (112) 18,000 12 Insurance expense (L13) 200 13 Net operating income 23.A.M. 52,200 $ 28,500 14 In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700 from unadjusted cost of good sold because overapplied overhead means that too much overhead was added to production during the period, and hence, the cost of goods sold was overstated. In Exhibit 3A-2, we add overapplied overhead to retained earnings (see row 19) because lowering cost of goods sold increases net operating income, which in turn increases retained earnings, Sapphire Company-Income Statement Exhibit 3A-5 shows Sapphire Company's income statement for the month of January The sales and selling and administrative expenses come from the transaction analysis in Exhibit 3A-2 and they each contain a corresponding parenthetical cell reference. The cost of goods sold ($239,300) is carried over from the schedule of cost of goods sold in Exhibit 3A 4 Job-Order Costing: Cost Flows and External Reporting 145 Sapphire Company-Setting the Stage Sapphire Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows: Sapphire Company Balance Sheet January 1 Assets Cash $ 15,000 Raw materials Work in process Finished goods Prepaid expenses Property, plant, and equipment (net) Total assets $8.000 5.000 13.000 26,000 3,000 240,000 $284,000 Liabilities and Stockholders' Equity Accounts payable Retained earnings.......... Total liabilities and stockholders' equity $ 4,000 280,000 $284,000 Exhibit 3A-1 contains a Microsoft Excel spreadsheet that includes the beginning balances shown in the balance sheet above. Notice that column "J" of the spreadsheet contains "=" signs (see cells J1 and 12). This means that after we record each of the forth- coming transactions, the amounts on the left-hand side of column "J" will always need to equal the amounts on the right-hand side of column". Also, notice that the spreadsheet contains all of the accounts shown in the January 1 balance sheet plus an account called Manufacturing Overhead. As discussed earlier in the chapter, Manufacturing Overhead is a clearing account that always has a beginning and costs and the amount of manufacturing overhead applied to production using the prede- overhead rate. The difference between the actual overhead cost and the amount of overhead applied to production is the underapplied or overapplied overhead. Finally, to conserve space, the Excel spreadsheet abbreviates Property, Plant, and Equipment (net) as PP&E (net). The term net implies that the acquisition cost of property, plant, and equipment is being reported net of accumulated depreciation. termined Sapphire Company-Transaction Analysis The remainder of the appendix proceeds in three steps. First, it lists Sapphire Company's transactions for the month of January. Second, it explains how each of these transac- tions is recorded in the Microsoft Excel spreadsheet. Finally, it explains how to use the EXHIBIT 3A-1 Sapphire Company: Transaction Analysis 1 2 3 Sapphire Company Transaction Analysis For the Month Ended January 31 Row Work in Finished Manufacturing Prepaid Accounts Retoined Cash Materials Process Goods Overhead Expenses PP&E (net) - Payable Earnings $ 15,000 $8,000S 5,000 $13,000 S $ 3,000 $240,000 = $ 4,000 $280,000 5 Transactions Beginning balances @ 1/1 7 146 20. $(% , Chapter 3 information depicted in the spreadsheet to prepare a schedule of cost of goods manufac- tured, a schedule of cost of goods sold, and an income statement for the month of January To begin our illustration, let's assume that Sapphire Company has a predetermined overhead rate of $25 per direct labor-hour that was based on a cost formula that estimated $100,000 in manufacturing overhead cost for an estimated allocation base of 4.000 direct labor-hours. During January, the company completed the following transactions: a. Purchased raw materials on account, $80,000. b. Raw materials used in production, $78,000 ($70,000 was direct materials and $8,000 was indirect materials). c. Paid $135,000 of salaries and wages in cash ($68,000 was direct labor, 545,000 was indirect labor, and $22,000 was related to employees responsible for selling and administration). d. Utility costs incurred (on account) to support production, $15,000. e. Depreciation recorded on property, plant, and equipment, S40,000 (70% related to man- ufacturing equipment and 30% related to assets that support selling and administration). f. Advertising expenses paid in cash, $18,000. h. Manufacturing overhead applied to production, $102,500. This amount was com- puted by multiplying 4,100 direct labor-hours worked in January by the predeter- mined overhead rate of $25 per direct labor-hour. i. Cost of goods manufactured, $235,000. j. Cash sales, $320,000. k. Cost of goods sold, $245,000. 1. Cash payments to creditors, $92,000. m. Close overapplied overhead of $5,700 to cost of goods sold. Exhibit 3A-2 summarizes how each of the transactions just described would be recorded in the Microsoft Excel spreadsheet. The underlying explanations for each trans- action are as follows (each transaction includes a parenthetical reference to its row within the Microsoft Excel spreadsheet): a. (row 7) Purchasing raw materials on account for $80,000 will increase Raw Materi- als and Accounts Payable by $80.000. (row 8) When raw materials are used in production, it decreases Raw Materials by $78,000. The direct materials of $70,000 are added to Work in Process, whereas the b. = EXHIBIT 3A-2 Sapphire Company: Completed Transaction Analysis D G 1 Sapphire Company 2 Transaction Analysis 3 For the Month Ended January 31 Row Work in Finished Manufacturing Prepaid Account Retained 5 Transactions Cash Materials Process Goods Overhead Expenses PP&E (net) = Payable Earnings 6 Beginning balances 1/1 $ 15,000 S 8,000 $5,000 $ 13,000 $ $ 3,000 $240,000 = $4,000 $280,000 7 (a) Raw material purchases 80,000 80,000 8(b) Raw materials used in production 178,000) 70,000 8,000 9 (c) Salaries and wages (135,000) 68,000 45,000 122,000) 10 (d) Utility costs 15,000 15,000 11 (e) Depreciation 28,000 (40,000) (12,0001 12 (f) Advertising (18,000) (18,000 13 (8) Expiration of prepaid insurance 800 (1,000) (200) 14 (1) Manufacturing overhead applied 102,500 (102,500) 156) Cost of goods manufactured (235,000) 235,000 16 G) Sales 320,000 320,000 17 (k) Cost of goods sold (245,000) (245,000) 18 () Payments to creditors 192,000) 192,000 19 (m) Overapplied overhead 5,700 5,700 20 Ending balances 1/31 $ 90,000 $10,000 $ 10,500 $ 3,000 $ $ 2,000 $200,000 = $7,000 $308.500 21 e. increases Manufacturing Overhead. The $22,000 paid to employees working in sell- ing and administrative roles is a period cost that should be recorded on January's income statement. Because the income statement is embedded in Retained Earnings, we decrease Retained Earnings by $22,000. d. (row 10) The utility costs support production, so they are treated as a product cost rather than a period cost. Thus, Manufacturing Overhead increases by $15,000 and Accounts Payable increases by the same amount. (row 11) The depreciation reduces Property, Plant, and Equipment (net) by $40,000. This is equivalent to recording accumulated depreciation of $40,000. The deprecia- tion on manufacturing equipment of $28.000 (a product cost) increases Manufac- turing Overhead, whereas the depreciation on selling and administrative assets of $12,000 (a period cost) decreases Retained Earnings. f. (row 12) Advertising is a period cost so Cash and Retained Earnings decrease by $18,000. g. (row 13) The expired insurance coverage decreases Prepaid Expenses by $1,000. The insurance related to production (a product cost) increases Manufacturing Overhead by $800. The insurance related to selling and administration of $200 (a period cost) decreases Retained Earnings by $200. h. (row 14) The manufacturing overhead applied increases Work in Process and decreases Manufacturing Overhead by $102,500. Notice that manufacturing over- head is applied to Work in Process using the predetermined overhead rate. Actual manufacturing overhead costs are not recorded in Work in Process. In a later transac- tion, the actual overhead costs will be compared to the applied overhead to determine the amount of underapplied or overapplied overhead for the month. i. (row 15) The cost of goods manufactured refers to the cost of the goods that were trans- ferred from work in process to finished goods