Lambeth Custom Cabinets (Lambeth Custom Cabinets (C) Jack Lambeth, a master cabi

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Lambeth Custom Cabinets (Lambeth Custom Cabinets (C) Jack Lambeth, a master cabinet maker, owns and operates a shop where he sells custom-made cabinets. At the beginning of September his business had no outstanding debt and the following amounts were on his books: 1. Raw materials inventory, $2,850. 2. Supplies inventory, $875. 3. Work-in-process inventory, $8,750. Job Materials Labor Overhead (50% of Labor) A-3 $ 1,050 $ 1,300 $ 650 A-4 2,125 950 475 A-5 700 1,000 500 Total $ 3,875 $ 3,250 $ 1,625 $ 8,750 4. Cash as of September 1 were $12,225. During the month, Lambeth’s woodworking crew finished jobs A-3, A-4, and A-6 but did not finish A-5. Job A-7 and A-8 was started but not finished during September. Overhead costs (pertaining primarily to equipment and shop depreciation, cleaning supplies, and insurance) are applied to every job at the end of the month unless the job is finished during the month, in which case overhead is applied when the job is finished. During September, the following direct materials and direct labor costs were incurred: Job Direct Materials Labor A-3 $350 $950 A-4 650 1,250 A-5 225 650 A-6 425 590 A-7 600 470 A-8 1,050 970 Total $3,300 $4,880 Other financial factors of importance pertaining to September were: A. $4,200 of raw materials were purchased during the month. B. Supplies of $950 were purchased while $850 were used and thus transferred to the manufacturing overhead account. C. Total increases to the labor general ledger account were $7,400. (Apparently there was $2,520 indirect labor charged.) D. General and administrative expenses for the month were $3,650. E. Collections received from customers on jobs A-3, A-4, and A-6 amounted to $7,625, $10,800, and $3,250, respectively, for a total of $21,675. F. At the end of the month, Lambeth Custom Cabinets had no outstanding debts. While Jack was reviewing the September data he became very concerned about the manufacturing overhead variance (MOV). Since Jack never wanted to lay off an employee, the MOV was always large in months when business was slow. (Jack assigned unoccupied workers to general clean-up and repair work and charged their wages to indirect labor.) Of course, Lambeth realized why the MOV was so large. What he worried about, however, was Mrs. Carter. Mrs. Carter, a neighbor, had stopped in the shop one day in early September to get a price on some cabinets she wanted built. Jack’s son, Jack Jr., spoke with her. Jack Jr. was working in the shop while on summer vacation between his first and second year of graduate business school. Jack Jr. studied the plans that Mrs. Carter had and estimated the cost to build her cabinets at $2,050. His job estimation sheet showed: Lumber $990 Finishing materials 100 Direct labor cost 640 Overhead 320 $2,050 When Jack Jr. quoted a price of $2,560 ($2,050 cost $510 profit) to Mrs. Carter, she said that she could get the same thing built by Walworth Custom Kitchens for $1,950. Furthermore, she informed Jack Jr. that, “I would throw the dumb economics books away before I would pay a penny more than $1,950 for book cabinets to store them.” Jack Jr. simply told her that his best price would be $2,560. He explained all about labor, materials, profit, overhead, and competitive capitalism. In addition, he told Mrs. Carter that Walworth couldn’t make money on a $1,950 price and if Walworth was really willing to build the shelves for $1,950 she would be stealing from Mr. Walworth! Mrs. Carter was very angry when she left. Jack Jr. later told his father the whole story and laughed as he said, “Heck, we can’t build stuff that costs $2,050 and sell it at a price of $1,950, let alone $2,000 can we?” At that time Lambeth didn’t think much about the incident but he began to wonder whether Jack Jr. had learned anything at graduate business school. Lambeth became especially concerned when he saw Bob Walworth, who said, “Mrs. Carter saved me last month.” It seems that Walworth had just delivered Mrs. Carter’s new cabinets for which she paid $1,950. Jack Lambeth wondered who was right – Jack Jr. or Walworth? 1. Prepare journal entries for the transaction for September. 2. Record the beginning balances in the General Ledger. Post the September transaction from #1 into the General Ledger. 3. Prepare a Balance Sheet and Income Statement for September 30th. 4. Prepare a Variable Costing Income Statement for September 30th. C)

Explanation / Answer

1 Recording the journal entries S.no. Description Debit($) Credit($) A Rawmaterial inventory           4,200 Creditor           4,200 (To record the purchase of raw material) B Manufacturing overhead              850 Stores and spares              850 (To record the consumed stores) C Labour charges           7,400 Cash           7,400 (To record the labour charges) D Adminstrative expense           3,650 Cash           3,650 (To record the admin expense) E Bank        21,675 Accounts receivable        21,675 (To record the cash received) F Creditors           4,200 Bank           4,200 (To record the payment of creditors)

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