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W. W. Phillips Company produced 4,000 leather recliners during the year. These recliners sell for $400 each. Phillips had 500 recliners in finished goods inventory at the beginning of the year. At the end of the year, there were 700 recliners in finished goods inventory. Phillips' accounting records provide the following information:

Purchases of raw materials ………………………………….$320,000
Beginning materials inventory ………………………………...46,800
Ending materials inventory ……………………………………66,800
Direct labor …………………………………………………..200,000
Indirect labor ………………………………………………….40,000
Rent, factory building …………………………………………42,000
Depreciation, factory equipment ………………………………60,000
Utilities, factory ……………………………………………….11,900
Salary, sales supervisor ………………………………………..90,000
Commissions, salespersons …………………………………..180,000
General administration ……………………………………….300,000
Beginning work-in-process inventory …………………………13,040
Ending work-in-process inventory …………………………….14,940
Beginning finished goods inventory …………………………..80,000
Ending finished goods inventory …………………………….114,100

Required:
a. Prepare a statement of cost of goods manufactured.
b. Compute the average cost of producing one unit of product in the year.
c. Prepare an income statement for external users.

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Answer:

a. Statement of cost of goods manufactured.

                                                                        $                           $

Beginning work-in-process inventory                                   13,040

Raw Materials :

Beginning materials inventory                    46,800

Add Purchases of raw materials               320,000

Available for Production                            366,800

Ending materials inventory                         (66,800)         300,000

Direct labor                                                                         200,000

Indirect labor                                                                         40,000

Rent, factory building                                                           42,000

Depreciation, factory equipment                                        60,000

Utilities, factory                                                                       11,900

Ending work-in-process inventory                                      (14,940)

Cost of goods manufactured                                            652,000

b. Average cost of producing one unit of product in the year.

Average cost = Total Cost ÷ Total units produced

                      = $652,000 ÷ 4,000

                      = $163.00

c. Prepare an income statement for external users.

                                                                                             $

Sales (3,800 ×  $400)                                                  1,520,000

Less Cost of Goods Sold ($163.00 × 3,800)                (619,400)

Gross Profit                                                                    900,600

Less Expenses :

Salary, sales supervisor                                                 (90,000 )

Commissions, salespersons                                         (180,000 )

General administration                                                 (300,000)

Net Income / (Loss)                                                        330,600

Explanation:

Determination of  leather recliners sold during the year.

Units Sold = Opening Finished Inventory  + Units Produced - Ending Finished Inventory

                 = 500 + 4,000 - 700

                 = 3,800

Other Notes :

Include only manufacturing costs in the statement of goods manufactured.

External users would want to see an income statement prepared using an absorption costing system in line with financial reporting standards.

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