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B. Job Lot Costing; Factory Ledger; Income Statement. The manufacturing process of the Pepper Products Company consists of assembling its product from parts supplied by four prime contractors. These parts are accepted by the Pepper Products Company only when they prove acceptable for use in the finished product. The company pays its direct labor on a piecework basis, paymg only for completed units which prove to be acceptable upon inspection. Although the company does not employ a cost accounting system it normally schedules production in lots of 100 units each. Thus, at the end of a month some lots may still be in process. These lots may have all the necessary materials already issued,or only a portion of the materials may have been issued. Any direct labor costs incurred for these lots will be restricted to the labor for units already completed and accepted by inspection but not transferred to finished goods.
On September 30, 19—, the trial balance appeared as follows:
Assets (including a petty cash fund of $400 maintained at the plant) $133,700
Liabilities $ 20,000
Capital Stock 100,000
Retained Earnings 40,000
Materials 53,200
Direct Labor 18,900
Factory Overhead 12,400
Marketing Expenses 8,000
Administrative Expenses 4,000
Sales 70,200
Of the completed lots for September, one lot of 100 units is in the storeroom; and the remaining lots were sold to the National Mail Order Company under a contract which called for the purchaser to pay a price equal to cost (including a reasonable allowance for normal overhead) plus a markup equal to 30% of cost. This contract accounted for all of the company's sales in September. Since the Pepper Products Company has no cost accounting system, the National Mail Order Company cost accountant made an analysis of the Pepper Products Company's records and developed these figures pertinent to the contract:
Unit Cost Basis of Calculation
Direct materials cost $60 Cost to company of all components
Direct labor cost 30 Total piece rate per completed unit
Factory overhead 18 Percentage of prime cost
Direct materials cost $60 Cost to company of all components
Direct labor cost 30 Total piece rate per completed unit
Factory overhead 18 Percentage of prime cost
The Pepper Products Company now seeks to establish a cost accounting system for its plant. Since the home office and the plant are separated by a distance of 100 miles, the company also desires to maintain the cost accounts at the plant and the financial accounts on the books of the home office.
An inventory of materials on September 30 totals $12,100.
Required: Assuming the calculations of the cost accountant of the National Mail Order Company to be correct, prepare:
(a) Entries both on the books of the home office and on the books of the plant to change the company's accounts to reflect the use of a job-lot accounting system as desired by the management. (Assume that no inventories were on hand on September 1, 19—, and that the company closes its books on August 31, the end of its fiscal year.)
(b) An income statement for September. (Applied factory overhead is closed to the actual overhead account at the end of the fiscal year.)
