Your team (group) at a public accountants practice has been assigned a client job to review the costs incurred in the manufacturing division of New Age Caravans, a manufacturer of a rugged, but luxury range of caravans. The caravans produced by New Age come in two range styles: Off-Road and Semi- Off Road.
The two ranges are different in design, but both are high quality. They have exclusive features and fittings and are priced accordingly. The owner of the company, Frank Burgess, has always believed in pricing a quality product based on how much their larger competitors are pricing theirs. His argument has been that "our product is as good, if not better, than the mass producers of caravans, so we should be charging at least as much, if not more, than what they charge".
When your team arrives to meet the client for the first time, you learn that although the company has been in existence for the last ten years, they have never had an accountant. The accounts were typically prepared by one of the administration staff, Tracy Hill, and each month a contract bookkeeper, Mike Powers has prepared the accounts.
Mike has informed Frank that he is not continuing in business as a bookkeeper and he intends to retire. He has suggested the need for an accountant on a full time basis. Your team has been brought in to review the current procedures with the purpose of setting out a job description for the future potential accountant.
Frank is still not convinced of the need for a full-time accountant. "Look, why do I need a full-time accountant? At the end of the day, all I need to do is total-up my revenues, total up my expenses and the difference is my profit. Do I really need to understand my product costs? What is the purpose of that? It's not like I can lower my prices if my product costs are lower. I just follow the big guys like Jayco or Windsor and price my product according to their prices. Why do I need to know what my product costs are?" asked Frank.
Tracy, who has been the administration person preparing the basic accounts since the day the company started has prepared some information for you. Trying to be helpful, she has put all the accounts in alphabetical order. "I do not know much about accounting," said Tracy. "But Mike has said that we need a Schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold, whatever that means. I have last year's accounts for you, so could you please prepare those schedules or whatever and get it to Frank?" The list of accounts (in alphabetical order) can be found in Appendix A.
Four days into your work, there is a fire over the weekend in the main office that stored the accounts. The manufacturing facility was not affected and work could go on, however, most of the information that was for the current year's accounts was damaged and only partial fragments were readable. These are shown in Appendix B. Luckily your work on last year's accounts was not affected as you had saved the records on which you had been working onto the ‘Cloud'.
"You need to get me back all the information that's now lost! My creditors want to see that information and I need you to work on it ASAP! If you can't do it, I'll get someone else who can!" said Frank when he saw you and he was obviously getting very distressed about the fire and the potential harm to the business that a loss of records could cause.
Sifting through ashes and interviewing selected employees, you have worked up some additional information:
a) Tracy remembers clearly that the predetermined overhead rate was based on 60,000 direct- labour hours to be worked for the year and $1,800,000 in overhead costs. ("Mike mentioned this before he left," Tracy said. "No idea why it is important, but if it can help you, good luck".)
b) The production supervisor's cost sheets showed only one job in process on 30 April. Materials of $180,000 had been added to the job.
c) The accounts payable are for raw material purchases only, according to Tracy. She clearly remembers that the balance in the account on 1 April was $12,000. Checking with Frank for his payment receipts (from the electronic bank payments), payments of $180,000 were made to suppliers during April. (All materials used were direct materials.)
d) A charred piece of the payroll ledger shows that 5,200 direct labour hours were recorded for the month. Tracy has confirmed that there were no variations in pay rate (i.e. all employees were paid $35 per hour.)
e) Records in the warehouse indicate that the finished goods inventory totalled $11,000 on 1 April.
f) From another charred piece of paper, you discerned that the cost of goods manufactured for April was $489,000.
You are now ready to reconstruct the T-accounts and give Frank the information he needs before he gives up on the team and hires another accountant! When you went in to tell Frank that you can now start working on the information, Frank tells you that he has spoken to Mike (their previous part-time accountant) and that the following information is required: "Mike says we need the following information:
Work in process at the end of April, raw materials purchased in April, Overhead applied, Cost of goods sold in April, and Raw materials used in April. He also suggested that we should be looking at whether the overhead was over- or under-applied, whatever that means."
As you were about to leave, Frank stopped you. "Listen, I have heard talk of this new costing system that some of our competitors are using and I want to know more about it. I need you to tell me what it's all about and whether it would suit us. They are calling it ABC or something like that. It is said to be a better costing system but I am not sure. Tell me more about it. I need to know how it works, its benefits and its limitations. If it works for us, I would like to implement it as well. I do not want to be left behind!"
REQUIRED:
Complete the T-accounts and determine the following:
i. Work in Process at the end of April;
ii. Raw materials purchased in April;
iii. Overhead applied in April;
iv. Cost of Goods sold in April;
v. Raw materials used in April; and,
vi. Over- or under-applied overhead in April.
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Accounts
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$
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Administrative salaries
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24000
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Advertising expense
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12000
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Depreciation - Factory building
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8000
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Depreciation - Factory equipment
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16000
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Depreciation - Office equipment
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1800
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|
Direct labour costs
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182000
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|
Raw materials - Opening balance
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12000
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Raw materials - Closing balance
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12000
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Finished goods inventory, Opening balance
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11000
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Finished goods inventory, Closing balance
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16000
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General liability insurance
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2400
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|
Indirect labour cost
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118000
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Insurance - Factory
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14000
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Purchases - Raw Materials
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180000
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Repairs and maintenance - Factory
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8000
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Sales salaries
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90000
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Land tax - Factory
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4500
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Travel and entertainment (sales) expense
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14100
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Work in process, Opening balance
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4500
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Work in process, Closing balance
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33500
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