Problem 6 The bookkeeper for Allison Inc does not understand the difference betw

Question

Problem 6 The bookkeeper for Allison Inc does not understand the difference between product costs and period costs and prepared the inocme statement shown using the following information There were no beginning inventories and no WIP inventory at the end of the year It takes 2 pounds of material at $5 per pound to make a unit. It takes 1 hour at $15 per hour of labor to make one unit Overhead is allocated at 90% of direct labor $ Units made Units soltd Materials bought Direct labor Factory Overhead Selling Expenses G & A Expenses Selling Price Income statement as prepared Sales10,000 x $60 Less: Expenses Materials purchased 26,000 x $5 Direct labor used 12,000x $15 Factory OH Selling Expense G & A Expense 12,000 10,000 600,000 26,000 lbs at $5 12,000 hrs at $15 -130,000 -180,000 162,000 80,000 80,000 100,000 60 180,000 x .9 -100,000 -652,000 -52,000 Net Loss Prepare a correct statement

Explanation / Answer

Cost statement of Allison Inc Particulars $ $ Sales (10000 units @ $60) 600000 Less: Cost of sales Opening Inventory 0 Cost of production: Material cost (26000 @ $5) 130000 Less: Closing material -10000 120000 Direct Labor (12000 @ $15) 180000 Factory Overheads (90% of labor) 162000 Less: Closing inventory -77000 Total direct cost 385000 Direct Income (Sales - Direct cost) 215000 Less: Selling expenses 80000 Less: General & Admin expenses 100000 Total period costs 180000 Net Income (Direct income - Indirect costs) 35000 Closing material: Material for production of 12000 units = 12000*2*5 = 120000 Remaining material = 130000-120000 = 10000 Closing inventory: Total units purchased - Units sold = 12000 - 10000 = 2000 Value = 2000 *((5*2)+15+ (15*90%)) Value = 2000 *38.5 = 77000

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