Service Company: In August, purchases of materials equaled $9,750, the beginning

Question

Service Company:

In August, purchases of materials equaled $9,750, the beginning inventory of materials was $850, and the ending inventory of materials was $950. Payments for direct labor during the month totaled $18,570. Overhead incurred was $15,000. Spent $5,000 on advertising during the month. Admin. costs (primarily accounting & legal services) amounted to $3,000 for the month. Revenues for August were $60,400.

1. What was the cost of materials used during August?
2. What was the prime cost for Aug.?
3. What was the conversion cost for Aug.?
4. What was the total cost of services for Aug.?
5. Prepare an income statement for Aug.

Explanation / Answer

1.The cost of materials used during August was
Opening Inventory + purchases - closing Inventory
$850 + $9,750 -$950 = $9,650

2. Prime cost = Direct material + Direct labour + Direct overhead
Prime Cost = $9,750 + $18,750 + $15,000 = $43,500

3. Conversion Cost = Direct Labor Cost + Manufacturing Overhead Cost
Conversion Cost = $18,750 + $15,000 = $33,750

4. Total cost of services = Advertising + Admin.costs = $15,000 + $3,000 =$18000

5. Income Statement

Sales + Closing Inventory - (Opening Stock + purchases + overhead) = Gross Profit
$60,400 + $950 - ($850 + $9,750 + $15,000) =
$61,350 - $25,600 = $35,750

Operating profit = Gross profit - Advertising - admin. = $35,750 - $15,000 -$3,000 = $17,750

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