Running head: COST OF GOODS MANUFACTURED AND MIXED COSTS IN A

Cost of Goods Manufactured and Mixed Costs in a Pricing Decision David A. Sanchez Grand Canyon University

Cost of Goods Manufactured and Mixed Costs in a Pricing Decision PROBLEM 221 Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior [LO2, LO3, LO4, LO5, LO6] Selected account balances for the year ended December 31 are provided below for Superior Company: Selling and administrative salaries . . . . . . . . . . . . $110,000 Purchases of raw materials . . . . . . . . . . . . . . . . . . $290,000 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? Advertising expense . . . . . . . . . . . . . . . . . . . . . . . $80,000 Manufacturing overhead . . . . . . . . . . . . . . . . . . . . $270,000 Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . $50,000

Inventory balances at the beginning and end of the year were as follows:

Beginning of the Year Raw materials . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . $40,000 ? $50,000

End of the Year $10,000 $35,000 ?

The total manufacturing costs for the year were $683,000; the goods available for sale totaled $740,000; and the cost of goods sold totaled $660,000. Required: 1. Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the companys income statement for the year.

Superior Company Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning (given).................... $40,000 Add: Purchases of raw materials (given)......................... 290,000 Raw materials available for use....................................... 330,000 Deduct: Raw materials inventory, ending (given)........... 10,000 Raw materials used in production.................................... Direct labor.......................................................................... Manufacturing overhead (given)......................................... Total manufacturing costs (given)....................................... Add: Work in process inventory, beginning........................ Deduct: Work in process inventory, ending (given)............ Cost of goods manufactured................................................

$320,000 93,000 270,000 683,000 42,000 725,000 35,000 $690,000

2. Assume that the dollar amounts given above are for the equivalent of 40,000 units produced during the year. Compute the average cost per unit for direct materials used and the average cost per unit for manufacturing overhead.

Direct materials: $320,000 40,000 units = $8.00 per unit. Manufacturing overhead: $270,000 40,000 units = $6.75 per unit.

3. Assume that in the following year the company expects to produce 50,000 units and manufacturing overhead is fixed. What average cost per unit and total cost would you expect to be incurred for direct materials? For manufacturing overhead? (Assume that direct materials is a variable cost.)

Direct materials: $8.00 per unit. Manufacturing overhead: $270,000 50,000 units = $5.40 per unit.

4. As the manager in charge of production costs, explain to the president the reason for any difference in average cost per unit between (2) and (3) above.

The average cost per unit for manufacturing overhead dropped from $6.75 to $5.40 because of the increase in production between the two years. Because fixed costs do not change in total as the activity level changes, the average cost per unit will decrease as the activity level rises.

CASE 518 Analysis of Mixed Costs in a Pricing Decision [LO1 , LO2 or LO3 or LO5 ] Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavezs business is seasonal, with a heavy schedule during the summer months and holidays and a lighter schedule at other times. One of the major events Chavezs customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest as follows: Food and beverages. . . . . . . . . . . . . . . . $15.00 Labor (0.5 hrs. @ $10.00/hr.) . . . . . . . . . 5.00 Overhead (0.5 hrs. @ $13.98/hr.) . . . . . . 6.99 Total cost per guest . . . . . . . . . . . . . . . . $26.99 The standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work. When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 per guest. She is confident about her estimates of the costs of food and beverages and labor but is not as comfortable with the estimate of overhead cost. The $13.98 overhead cost per labor-hour was determined by dividing total overhead expenses for the last 12 months by total labor-hours for the same period. Monthly data concerning overhead costs and labor-hours follow: LaborMonth January . . . . . . . . . . February . . . . . . . . . March. . . . . . . . . . . . Hours 2,500 2,800 3,000 Overhead Expenses $ 55,000 59,000 60,000

April . . . . . . . . . . . . . May . . . . . . . . . . . . . June. . . . . . . . . . . . . July . . . . . . . . . . . . . August . . . . . . . . . . . September. . . . . . . . October . . . . . . . . . . November . . . . . . . . December . . . . . . . .

4,200 4,500 5,500 6,500 7,500 7,000 4,500 3,100 6,500

64,000 67,000 71,000 74,000 77,000 75,000 68,000 62,000 73,000

Total . . . . . . . . . . . . .

57,600

$805,000

Chavez has received a request to bid on a 180-guest fund-raising cocktail party to be given next month by an important local charity. (The party would last the usual three hours.) She would like to win this contract because the guest list for this charity event includes many prominent individuals that she would like to land as future clients. Maria is confident that these potential customers would be favorably impressed by her companys services at the charity event. Required: 1. Estimate the contribution to profit of a standard 180-guest cocktail party if Chavez charges her usual price of $31 per guest. (In other words, by how much would her overall profit increase?) The overall profit will increase by $1,623.60. 2. How low could Chavez bid for the charity event in terms of a price per guest and still not lose money on the event itself? The lowest she can go is $22.00 so she does not lose money.

3. The individual who is organizing the charitys fund-raising event has indicated that he has already received a bid under $30 from another catering company. Do you think Chavez should bid below her normal $31 per guest price for the charity event? Why or why not? (CMA, adapted) She should bit under the $31.00 but not less than $22.00 if she wants to show her work to the guests at the event and still making profit. It is not recommendable that she go to low because in future contracts that can be use against her. The only excuse that she can use is that this event it was a charity event, but at the same time what if all the contracts that she gets were charity events? In this case scenario is better make less now and gets more contracts later rather than not doing it and most likely those guests will not see her work. Eventually she will be in disadvantage with the company who win the bit.