Exercise 3-44

Concern for gas emissions and depletion of nonrenewable resources has caused
environmentalists and others to push for higher fuel-efficiency standards for new cars.
The current corporate automotive fuel efficiency (CAFE) standards require automakers to
produce an overall fuel efficiency of 26.2 miles per gallon for all autos produced.
Currently the U.S. government supports the development of hybrid autos that combine
gas and electric power as the solution to the problem. Others propose simply raising the
CAFE standards for auto manufacturers. To study the issue, the American Council for an
Energy-Efficient Economy (ACEEE) conducted research to determine the cost for raising
fuel efficiency for the different proposals. Their findings are as follows:

Cost for each

Option to reduce emissions and provide gallon of gas
better fuel economy Fuel Efficiency (mpg) saved
Current mileage standards 26.2 $0.00
Moderate increase inCAFE 40.8 $0.57
Significant increase in CAFÉ 45.8 $0.60
Partial hybrid (15% of power from electricity) 52.6 $1.38
Full hybrid (40% of power form electricity) 59.3 $1.80

The increase in fuel economy required by higher CAFE standards would require
automakers to use conventional technology to improve engines and transmissions. The
hybrid vehicles require newer technology and electric motors.

Required
Give a brief critical review of the ACEEE’s research results. What questions would you
have for the researchers who presented these results?
Exercise 3-53
The following data pertain to Winstead Company for the year ended
December 31, 2010:
December 31, December 31,
2009 2010
Purchases of direct materials $120,000
Direct labor $85,000
Indirect labor $25,000
Factory insurance $12,000
Depreciation-Factory $65,000
Repairs and maintenance-Factory $15,000
Marketing expenses $110,000
General and administrative expenses $55,000
Direct materials inventory $25,000 $35,000
Work-in-process inventory $33,000 $42,000
Finished goods inventory $18,000 $20,000

Required
Prepare a schedule of cost of goods manufactured and an income statement
for Winstead Company similar to those in Exhibit 3.15a.
Exercise 3-54
Consider the following information for Household Furnishing, Inc. for the
year ended December 31, 2010:

Depreciation expense-Administrative office $33,000

Depreciation expense-Plant and equipment $88,000
Direct labor--Wages $487,000
Direct materials inventory, Dec. 31, 2010 $25,000
Direct materials inventory, Jan. 1, 2010 $18,000
Direct materials purchases $155,000
Finished goods inventory, Dec. 31, 2010 $38,000
Finished goods inventory, Jan. 1, 2010 $15,000
Heat, light, & power--Plant $44,000
Indirect labor $25,000
Property taxes--Plant $34,000
Sales representatives' salaries $145,000
Sales revenue $1,500,000
Factory Supervisor's salary $66,000
Supplies--Administrative office $16,000
Supplies--Plant $29,000
Work-in-Process inventory, Dec. 31, 2010 $9,000
Work-in-Process inventory, Jan. 1, 2010 $23,000

Required
Prepare a statement of cost of goods manufactured and an income statement
for Household Furnishings for the year ended December 31, 2010, similar to
the one in Exhibit 3.15a.
Exercise 3-56
The following information was taken from the accounting records of Tomek
Manufacturing Company. Unfortunately, some of the data were destroyed
by a computer malfunction.

Case A Case B
Sales $150,000 ?
Finished goods inventory, Jan. 1, 2010 $35,000 $28,000
Finished goods inventory, Dec. 31, 2010 $40,000 ?
Cost of goods sold ? $61,000
Gross margin $25,000 $23,000
Selling and administrative expenses ? $1,000
Operating Income $10,000 $22,000
Work-in-Process inventory, Jan. 1, 2010 ? $14,000
Direct material used $18,000 $8,000
Direct labor $15,000 $9,000
Factory overhead $50,000 ?
Total manufacturing costs ? $35,000
Work-in-Process inventory, Dec. 31, 2010 $22,000 ?
Cost of goods manufactured ? $45,000

Required
Calculate the unknowns indicated by question marks.
3-44 Interpreting Average Cost

This question is based on a report by Paul Raeburn, “Hybrid Cars: Less

Fuel but More Costs,” Business Week, April 15, 2002, p 107. See also
information on the history of gas prices from January 2000 to the present at
the U.S. Department of Energy website:
http://tonto.eia.doe.gov/oog/info/gdu/gaspump.html

The rapid increase of gasoline prices in 2004-2008 should enhance the

interest in the issue discussed. The costs shown for each gallon of
gasoline saved look much better in 2008 than in 2002 when the article was
written; in 2002 the price of gas averaged $1.30, about 30% of the 2008
price. The cost justification for higher fuel efficiency of the full hybrid
would not pass in 2002 (cost of $1.80 per gallon when the price of gas was
$1.30), but would surely pass the test in summer 2008, with the price of
gas at approximately $4.00 per gallon.

The main point of this exercise is to have the students understand that the
determination of an average cost, as in this report, requires a specification
of the level of activity, or output, that drives costs. This is the reason the
concept of average cost is often misunderstood and misused in practice.
For example, since in this case total cost per gallon of gas depends
on both variable costs (gasoline) and fixed costs (vehicle cost), the
determination of an average cost requires an assumption of activity level.
While variable costs (the price of gasoline) are constant per unit, for the
number of gallons purchased, the average per-gallon fixed cost of
purchasing the vehicle will depend on the number of miles traveled. Car
owners who travel relatively few miles will have large average fixed costs in
contrast to “road warriors” with many miles traveled.
The Business Week report does a good job in this regard by reporting
that the assumed activity was 12,000 miles per year for 12 years. This
gives the reader a way to interpret the findings; those who drive more than
this amount can expect lower “cost for each gallon of gas saved” from
improvements in the vehicle, while those who drive fewer miles can expect
higher costs than those reported.

Instructors can start this exercise by asking the class how average
cost is determined in this case. The key idea to bring out is that average
fixed cost is determined by some pre-determined activity level.
3-53 Cost of Goods Manufactured and Sold

Winstead Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2010
Direct Materials Used
Direct Materials Inventory, Beginning $25,000
Direct Materials Purchases + 120,000
Total Direct Materials Available 145,000
Direct Materials Inventory, Ending - 35,000
Direct Materials Used $110,000
Direct Labor--Wages 85,000
Factory Overhead
Repair and Maintenance $15,000
Factory insurance 12,000
Depreciation Expense--Plant 65,000
Indirect Labor--Wages 25,000
Total Factory Overhead + 117,000
Total Manufacturing Costs Incurred during year 312,000
Work-in-Process Inventory, Beginning + 33,000
Total Manufacturing Costs to Account for 345,000
Work-in-Process Inventory, Ending - 42,000
Cost of Goods Manufactured $303,000
Winstead Company
Income Statement
For the Year Ended December 31, 2010
Sales Revenue $650,000
Cost of Goods Sold
Finished Goods Inventory, Beginning $18,000
Cost of Goods Manufactured 303,000
Total Goods Available for Sale 321,000
Finished Goods Inventory, Ending 20,000

Cost of Goods Sold 301,000

Gross Margin $349,000
Marketing Expenses $110,000
General and Administrative 55,000
Total Selling & Administrative Expenses 165,000
Operating Income $184,000
3-54 Cost of Goods Manufactured and Sold
Household Furnishings, Inc
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2010
Direct Materials Used
Direct Materials Inventory, Beginning $18,000
Direct Materials Purchases 155,000
Total Direct Materials Available 173,000
Direct Materials Inventory, Ending 25,000
Direct Materials Used $148,000
Direct Labor--Wages 487,000
Factory Overhead
Heat, Light, & Power--Plant $44,000
Supplies--Plant 29,000
Property Taxes--Plant 34,000
Depreciation Expense--Plant and Equip. 88,000
Indirect Labor--Wages 25,000
Supervisor's Salary Plant 66,000
Total Factory Overhead 286,000
Total Manufacturing Costs Incurred during year 921,000
Work-in-Process Inventory, Beginning 23,000
Total Manufacturing Costs to Account for 944,000
Work-in-Process Inventory, Ending 9,000
Cost of Goods Manufactured $935,000
Household Furnishings, Inc
Income S tatement
For the Year Ended December 31, 2010
Sales Revenue $1,500,000
Cost of Goods Sold
Finished Goods Inventory, Beginning $15,000
Cost of Goods Manufactured 935,000
Total Goods Available for Sale 950,000
Finished Goods Inventory, Ending 38,000

Cost of Goods Sold 912,000

Gross Margin $588,000

Sales Representatives' Salaries $145,000

Supplies--Administrative Office 16,000
Depreciation Expense--A dmin. Office 33,000
Total Selling & Administrative Expenses 194,000
Net Income $394,000
3-56 Cost of Goods Manufactured, Calculating Unknowns

Case A
1. Direct materials used $18,000
+ Direct labor 35,000
+ Manufacturing overhead 50,000
Total manufacturing costs $103,000

2. Sales $150,000
- Cost of goods sold - ? = $125,000
Gross margin $25,000

3. Beginning finished goods $ 35,000

+ Cost of goods manufactured + ? = $130,000
- Ending finished goods -40,000
Cost of goods sold 125,000

4. Beginning work in process ? = $49,000

+ Total manufacturing costs +103,000
- Ending work in process -22,000
Cost of goods manufactured $130,000

5. Gross margin $25,000

- Selling and administrative expenses -? = $15,000
Operating income $10,000

Case B
1. Sales ? = $84,000
- Cost of Goods sold - 61,000
Gross margin $23,000

2. Beg. Finished goods inventory $ 28,000

+ Cost of goods manufactured +45,000
- End. Finished goods inventory - ? = $12,000
Cost of goods sold $61,000
3-56 (continued -1)

3. Direct materials used $ 8,000

+ Direct labor + 9,000
+ Manufacturing overhead + ? = $ 18,000
Total manufacturing costs $35,000

4. Total manufacturing costs $35,000

+ Work in process inv., Jan. 14,000
- Work in process inv., Dec. - ? = $4,000
Cost of goods manufactured $45,000