Problem 2-31 Cost Identification and Analysis, Cost Assignment, income Statement

Question

Problem 2-31 Cost Identification and Analysis, Cost Assignment, income Statement
Peter Kanakarian has decided to open a printing shop. He has secured two contracts: (1) a fiveyear
contract to print a popular regional magazine (5,000 copies each month), and (2) a threeyear
agreement to print tourist brochures for the province (10,000 brochures per month).
Peter has rented a building for $1,400 per month. His printing equipment was purchased for
$40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is
assigned to a period based on the hours of usage. Peter has scheduled the delivery of the products
so that two production runs are needed. In the first run, the equipment is prepared for the
magazine printing. In the second run, the equipment is reconfigured for brochure printing. It
takes twice as long to configure the equipment for the magazine setup as it does for the brochure
setup. The total setup costs per month are $600.
Insurance costs for the building and equipment are $140 per month. Power to operate the
printing equipment is strongly related to machine usage. The printing equipment causes virtually
all the power costs. Power costs will run $350 per month. Printing materials will cost $0.40 per
copy for the magazine and $0.08 per copy for the brochure. Peter will hire workers to run the
presses as needed (part-time workers are easy to hire). He must pay $10 per hour. Each worker
can produce 20 copies of the magazine per printing hour or 100 copies of the brochure. Distribution
costs are $500 per month. Peter will receive a salary of $1 ,500 per month. He is responsible
for personnel, accounting, sales, and production- in effect, he is responsible for administering
all aspects of the business.
Required:
1. What are the total monthly manufacturing costs?
2. What are the total monthly prime costs? Total monthly prime costs for the regional magazine?
For the brochure?
3. What are the total monthly conversion costs? Suppose Peter wants to determine monthly
conversion costs for each product. Assign monthly conversion costs to each product using
direct tracing and relationship tracing whenever possible. For those costs that cannot be
assigned using a tracing approach, you may assign them using direct labour hours.
4. Peter receives $1.80 per copy of the magazine and $0.45 per brochure. Prepare an income
statement for the first month of operations.

Explanation / Answer

Working Answer 1 Regional Magazine Tourist Broucher Total monthly manufacturing cost 5000 10000 each month copies in nos. Particulars in$ 5 3 Years of contract Rent 1400 Machine set up cost 600 Expenses Insurance cost per month 140 Monthly rent of building $1400 Power cost per month 350 Depreciation Cost Printing cost 2800 Cost of printing equipment $40000 Labour cost 3500 Life expectancy of machine 20000 hours Distribution cost 500 Depreciation Cost per hour 2 Peter salary 1500 Depreciation 700 Total machine set up cost per month $600 Total cost 11490 No.of machine setup for Magazine 1 No.of machine setup for Broucher 2 Answer 2 Setup Cost for Magazine $200 Calculation of prime cost Setup Cost for Broucher $400 Particulars Regional Magazine Tourist Broucher Printing material 2000 800 Insurance cost per month $140 Labour cost 2500 1000 Power cost per month $350 Total in $ 4500 1800 Printing material for magazine $0.40 per copy Answer 3 No.of copies per month 5000 Calculation of conversion cost Total printing cost 2000 Particulars Regional Magazine Tourist Broucher Printing material 2000 800 Printing material for broucher $0.08 per copy Labour cost 2500 1000 No.of copies per month 10000 Machine set up cost 200 400 Total printing cost 800 Depreciation cost 500 200 Power cost 250 100 Labour cost per hour $10 Rent 1000 400 No.of labour hours for magazine Per month 250 Total 6450 2900 Labour cost for magazine per month 2500 Answer 4 No.of labour hours for Broucher Per month 100 Income statement for the first month Labour cost for broucher per month 1000 Particulars In $ Sales Total Labour cost per month in $ 3500 - Magazine 9000 - Broucher 4500 Distribution cost per month $500 Total revenue (a) 13500 Peter salary per month $1500 Expenses Total printing hours per month 350 Rent 1400 Depreciation Cost per hour 2 Machine set up cost 600 Depreciation Cost per month 700 Insurance cost per month 140 Power cost per month 350 Total monthly labour hours 350 Printing cost 2800 Power cost per month 350 Labour cost 3500 Rate per labour hour 1 Distribution cost 500 Peter salary 1500 Monthly rent of building 1400 Depreciation 700 Rate per labour hour 4 Total Expenses (b) 11490 Net Income ( a -b) 2010

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