Computing cash flows from operations (indirect)

Rawlings Company’s 2009 income statement and selected balance sheet data at December 31, 2008 and 2009, follow ($ thousands).

Selected Balance Sheet Accounts
At December 3120092008
Accounts receivable$280$290
Inventory 99 77
Accounts payable 220 230
Salaries payable 44 35
Utilities payable 11 8
Prepaid insurance 13 14
Prepaid rent 11 9

Income Statement
Sales revenue$48,600
Cost of goods sold 21,000
Depreciation expense 6,000
Salaries expense 9,000
Rent expense 4,500
Insurance expense 1,900
Interest expense 1,800
Utilities expense 1,400

Net income$ 3,000


Prepare the cash flows from operating activities section only of the company’s 2009 statement of cash flows using the indirect method.

Exercise 19-5
Cost flows in a job order cost system

The following information is available for SafeLife Company, which produces special-order security products and uses a job order cost accounting system.

April 30May 31
Raw materials$27,000$ 41,000
Goods in process 9,000 20,600
Finished goods 70,000 33,000
Activities and information for May
Raw materials purchases (paid with cash) 183,000
Factory payroll (paid with cash) 500,000
Factory overhead
Indirect materials 6,000
Indirect labor 74,000
Other overhead costs 95,500
Sales (received in cash) 1,500,000
Predetermined overhead rate based on direct labor cost 55%

Exercise 19-6
Journal entries for a job order cost accounting system

Use the information is 19-5 to prepare journal entries for the following events in May.

1.Raw materials purchase for cash
2.Direct materials usage.
3.Indirect materials usage.
4.Factory payroll cost in cash.
5.Direct labor usage.
6.Indirect labor usage.
7.Factory overhead excluding indirect materials and indirect labor (record credit to Other Accounts).
8.Application of overhead to goods in process.
9.Transfer of finished jobs to the finished goods inventory.
10.Sale and delivery of finished goods to customers for cash (record unadjusted cost of sales).
11.Allocating (closing) of overapplied or underapplied overhead to Cost of Goods Sold.

Preparation and analysis of merchandise purchases budgets

Herron Supply is a merchandise of three different products. The company’s February 28 inventories are footwear, 18,500 units; sports equipment, 80,000 units; and apparel, 50,000 units. Management believes that excessive inventories have accumulated for all three products. As a result, a new policy dictates that ending inventory in any month should equal 29% of the expected unit sales for the following month. Expected sales in units for March, April, May, and June follow.
Budgeted Sales in Units
Sports Equipment70,00089,00096,00089,500


1.Prepare a merchandise purchases budget (in units) for each product for each of the months of March, April, and May.


2.The purchases budgets in part 1 should reflect fewer purchases of all three products in March compared to those in April and May. What factor caused fewer purchases to be planned? Suggest Business conditions that would cause this factor to both occur and impact the company in this way.

Computation and Interpretation of labor variances

After evaluating Pima Company’s manufacturing process, management decides to establish standards of 1.4 hours of direct labor per unit of product and $15 per hour for the labor rate. During October, the company uses 3,720 hours of direct labor at a $40,920 total cost to produce 4,000 units of product. In November, the company uses 4,560 hours of direct labor at a $54,720 total cost to produce 3,500 units of product.

1.Compute the rate variance, the efficiency variance, and the total direct labor cost variance for each of these two months.
2.Interpret the October direct labor variances.

Computation and Interpretation of material variances

Listor company made 3,800 bookshelves using 23,200 board feet of wood costing $290,000. The company’s direct materials standards for one bookshelf are 8 board feet of wood at $12 per board foot.

1.Compute the direct materials variances incurred in manufacturing these bookshelves.
Interpret the direct materials variances