23. Cost flow model.

Franklin, LLP, an auditing firm, is reconstructing the records of a client

called MultiChips, which is concerned that some of its inventory is missing. The accounting
records provide the following information about MultiChips’ inventories:

You physically counted the ending inventory and found it to be as follows: computer chips,
$600,000; potato chips, $240,000; and poker chips, $50,000. Compute the ending inventory
according to the accounting records and compare it to the physical count. What discrepancy do
you find between the physical count and the accounting records, if any?

Answer:

Cost Flow Equation: BB + TI = TO + EB

Computer Chips : $600,000 + $1,600,000 = $1,800,000 + EB

EB = $600,000 + $1,600,000 - $1,800,000

EB = $400,000

The firm physical count is $200,000 it is more than in the records. It means there is a problem in
the physical count or in the records.

Potato Chips : $160,000 + $600,000 = $500,000 + EB

EB = $160,000 + $600,000 - $500,000

EB = $260,000

$20,000 is the discrepancy between the record and physical count in potato chips.
Poker Chips: $60,000 + $200,000 = $180,000 + EB

EB = $60,000 + $200,000 – $180,000

EB = $80,000

$30,000 is the discrepancy between the record and physical count in poker chips.

24. Just-in-time methods. McNeal Products uses a just-in-time system. To produce 2,000 units
for an order, it purchased and used materials costing $50,000, and incurred other manufacturing
costs of $30,000, of which $10,000 was labor. All costs were on account.

After McNeal Products completed production of the 2,000 units and shipped 1,600 units,
management needed the Finished Goods Inventory balance for the 400 units remaining in
inventory for financial statement preparation. The firm incurred costs evenly across all products.
Show the flow of costs using journal entries and T-accounts using backflush costing.

Answer:

Journal Entries

Cost of Goods Sold........................................................ 80,000

Accounts Payable - Materials........................................................................... 50,000

Accounts Payable - Manufacturing Costs ........................................................20,000

Wages Payable ................................................................................................... 10,000

Finished Goods Inventory........................................... 16,000

Cost of Goods Sold.............................................................................................. 16,000

T-accounts:

Accounts and Wages Payable Cost of Good Sold

50,000 80,000
20,000
10,000 16,000

64,000

Finished Goods Inventory

16,000

25. Just-in-time methods. Memory Bank uses just-in-time production methods. To produce 1,200
units for an order, the company purchased and used materials costing $26,000 and incurred other
manufacturing costs of $22,000, of which $8,000 was labor. All costs were on account.

After Memory Bank completed production on the 1,200 units and shipped 1,100 units,
management recorded the Finished Goods Inventory balance for the 100 units remaining in
inventory for financial statement preparation. Prepare journal entries and T-accounts for these
transactions using backflush costing.

Journal Entries:

Cost of Goods Sold........................................................ 48,000

Accounts Payable - Materials....................................................................... 26,000

Accounts Payable - Manufacturing Costs .................................................... 14,000

Wages Payable .............................................................................................. 8,000

.
Finished Goods Inventory........................................... 4,000

Cost of Goods Sold.......................................................................................... 4,000

T-accounts:

Accounts and Wages Payable Cost of Good Sold

26,000 48,000
14,000
8,000 4,000

44,000

Finished Goods Inventory

4,000
26. Job costs in a service organization. Loomis and Associates, a CPA firm, uses job costing.
During January, the firm provided audit services for two clients and billed those clients for the
services performed. Springsteen Productions was billed for 4,000 hours at $100 per hour, and
RCI Records was billed for 2,000 hours at $100 per hour. Direct labor costs were $60 per hour.
Of the 6,400 hours worked in January, 400 hours were not billable. The firm assigns overhead to
jobs at the rate of $20 per billable hour. During January, the firm incurred actual overhead of
$140,000. The firm incurred marketing and administrative costs of $20,000. All transactions
were on account. a. Show how Loomis and Associates’ accounting system would record these
revenues and costs using journal entries. b. Prepare an income statement for January like the one
in Exhibit 2.5

Work in Process—Springsteen Productions......................................................240,000

Work in Process—RCI Records....................................................................... 120,000
Direct Labor—Unbillable................................................................................. 24,000
Wages Payable.......................................................... 384,000

Work in Process—Springsteen Productions.....................................................80,000

Work in Process—RCI Records...................................................................... 40,000
Overhead ………………........................................... 120,000

Marketing and Administrative Costs............................................................... 20,000

Wages and Accounts Payable ..................................... 20,00

Overhead.......................................................................................................... 140,000
Wages and Accounts Payable....................................... 140,000

Accounts Receivable ....................................................................................... 600,000

Revenue......................................................................... 600,000

Cost of Services Billed.......................................................................................... 480,000

Work in Process—Springsteen Productions.................320,000
Work in Process—RCI Records.................................. 160,000
 LOOMIS AND ASSOCIATES
Income Statement
For the Month Ending January 31
Revenue from Services .......................................................................... $ 600,000
Less Cost of Services Billed ..................................................................... 480,000
Gross Margin........................................................................................... $ 120,000
Less:
Direct Labor—Unbillable........................................................................... (24,000)
Overhead—Underapplied........................................................................... (20,000)
Marketing and Administrative.................................................................... (20,000)
Operating Profit........................................................................................... $ 56,000
27. Job costs in a service organization. Internet Designs, a Web site design and maintenance
firm, uses job costing. During November, the firm provided Web site services for two clients and
billed those clients for the services performed. Internet Designs billed Mountain View Company
for $200,000 and Palatine Productions for $100,000. Direct labor costs were $80 per hour.
Internet Designs worked 1,500 hours on the Mountain View account and 900 hours on the
Palatine account. The firm worked an additional 100 hours that it did not charge to either
account. The firm assigns overhead to jobs at the rate of $60 per billable hour. During
November, the firm incurred actual overhead of $140,000. The firm incurred marketing and
administrative costs of $60,000. All transactions were on account. a. Show how Internet
Designs’ accounting system would record these revenues and costs using journal entries. b.
Prepare an income statement for November like the one in Exhibit 2.5. c. Were the two jobs
profitable for Internet Design?

Journal Entries:
Work in Process—Mountain View Company.............................. 120,000
Work in Process—Palatine Productions ..................................... 72,000
Direct Labor—Unbillable............................................................ 8,000
Wages Payable ............................................................................... 200,000

Work in Process—Mountain View Company……………….... 90,000

Work in Process—Palatine Productions ................................... 54,000
Overhead (Applied).......................................................................... 144,000

Overhead ................................................................... 140,000

Wages and Accounts Payable ......................................... 140,000

Marketing and Administrative Costs......................................... 60,000

Wages and Accounts Payable ............................................................ 60,000
Accounts Receivable ................................................................ 300,000
Revenue ………………………………............................................. 300,000
Cost of Services Billed........................................ 336,000
Work in Process—Mountain View C……………………............. 210,000
Work in Process—Palatine Productions..........................................126,000

INTERNET DESIGNS
Income Statement
For the Month Ending November 30
Revenue from Services .............................................................. $ 300,000
Less Cost of Services Billed ....................................................... 336,000
Gross Margin........................................................................... $ (36,000)
Less:
Direct Labor—Unbillable.............................................................(8,000)
Overhead—Over applied................................................................ 4,000
Less Marketing and Administrative Expense................................. (60,000)
Operating Profit (Loss)................................................................ $ (100,000)