Question

ABC Company applies overhead to products using a pre-determined rate of 125%
of direct labor cost. ABC Company's accounting records for 2019 indicated the
following costs had been incurred:

Direct materials purchased ................... $122,000
Depreciation, factory equipment ..............   33,000
Direct labor .................................     ?
Utilities.....................................     ?
Sales commissions.............................   52,000
Indirect materials............................   11,000
Depreciation, office equipment ...............     ?
Production supervisor's salary ...............   57,000
Advertising...................................   66,000

60% of the utilities relate to the factory while 40% of the utilities relate
to the general office building.

ABC Company's inventory accounts had the following balances during 2019:

                     January 1, 2019        December 31, 2019
Direct materials          50,000                  36,000
Work in process           22,000                  41,000
Finished goods            38,000                  35,000

For 2019, ABC Company reported sales revenue of $527,000; an unadjusted cost
of goods sold of $331,500; an adjusted cost of goods sold of $328,200; and
net income of $45,000

Calculate ABC Company's prime costs for 2019.

Answer 1

Step 1:Unadjusted Cost of Goods Sold = Cost of Goods Manufactured+ Opening Finished goods - Closing Finished Goods

331500= Cost of Goods Manufactured + 38000-35000

Cost of Goods Manufactured = 328500

Step 2:

Total Manufacturing Costs = Costs of Goods Manufactured + Closing Work in Progress - Opening Work in Progress

=328500+41000-22000

= 347500

Step 3 :

Direct Material used = Opening Balance of Raw Materials+Direct Material Purchased - Closing Balance of Raw Materials

= 50000+122000-36000

=136000

Step 4 : Total Manufacturing Cost = Direct Material Used + Direct Labor + Overheads applied

347500 = 136000+ Direct Labour + 125% * Direct Labor

211500= 2.25 Direct Labor

Direct Labor = 211500/2.25

= 94000

Step 5 :

Prime Cost = Direct Materials Used + Direct Labor

= 136000+ 94000

= 230000