Accounting Exam 2

Chapter 5

Variable Costing v. Absorption Costing

Variable Costing – (also called direct costing or marginal costing) treats only those costs of production that vary with output as product costs. This approach dovetails with the contribution approach income statement and supports CVP analysis because of its emphasis on separating variable and fixed costs. The cost of a unit of product consists of DM, DL, and variable overhead. Fixed manufacturing overhead, and both variable and fixed selling and administrative expenses are treated as period costs and deducted from revenue as incurred

Absorption costing – (also called the full cost method) treats all costs of production as product costs, regardless of whether they are variable or fixed. Since no distinction is made btw variable and fixed costs, absorption costing is not well suited for CVP computations. Under absorption costing, the cost of a unit of product consists of DM, DL, and both variable and fixed overhead. Variable and fixed selling and administrative expenses are treated as period costs and are deducted from revenue as incurred

Unit Cost Computations

Variable and Absorption Costing Income Statements

Variable Costing Contribution format Income Statement – first we subtract all variable expenses from sales to get CM. Next we subtract fixed expenses to get the NOI. All $150,000 of fixed MO is expenses in the current period.

Absorption Costing. Harvey sold only 20,000 of the 25,000 units produced, leaving 5,000 units in ending inventory. At a unit cost of $16, COGS for the 20,000 units sold is $320,000. Subtracting COGS from sales, we find the gross margin of $280,000. Subtract selling and administrative expenses from the gross margin to get NOI. Fixed MO deferred in inventory, as a result of 5,000 unsold units at $6 of fixed Overhead per unit, is $30,000.

Comparing the 2 Methods

The difference in NOI btw the two methods ($30,000) can also be reconciled by multiplying the number of units in ending inventory (5,000 units) by the fixed manufacturing overhead per unit ($6) that is deferred in ending inventory under absorption costing.

Enabling CVP Analysis

Variable costing categorizes costs as fixed and variable so it is much easier to use this income statement format for CVP analysis

Because absorption costing assigns fixed manufacturing overhead costs to units produced, a portion of fixed manufacturing overhead resides in inventory when units remain unsold. The potential result is positive operating income when the number of units sold is less than the breakeven point.

Explaining Changes in Net Operating Income

Variable Costing income is only affected by changed in unit sales. It is not affected by the number of units produced. As a general rule, when sales go up, net operating income goes up, and vice versa.

Absorption Costing income is influenced by changes in unit sales and units of production. NOI can be increased simply by producing more units even if those units are not sold.

Supporting Decision Making

Variable costing correctly identifies the additional variable costs incurred to make one more unit. It also emphasizes the impact of total fixed costs on profits

Because absorption costing assigns fixed manufacturing overhead costs to units produced, it gives the impression that fixed manufacturing overhead is variable with respect to the number of units produced, but it is not. The result can be inappropriate pricing decisions and product discontinuation decisions

Variable Costing and the Theory of Constraints (TOC)

Companies involved in TOC use a form of variable costing. However, one difference of the TOC approach is that it treats direct labor as a fixed cost for three reasons:

1. Many companies have a commitment to guarantee workers a minimum number of paid hours – sometimes by law to guarantee a minimum number of paid hours

2. Direct labor is usually not the constraint, therefore, there is no reason to increase the number of direct laborers

3. TOC emphasizes the role direct laborers play in driving continuous improvement. Since layoffs often devastate morale, managers involved in TOC are extremely reluctant to lay off employees

Decentralization and Segment Reporting

Segment – any part or activity of an organization about which a manager seeks cost, revenue, or profit dataEx. Divisions of a company, sales territories, individual stores, service centers, manufacturing plants, marketing departments, individual customers, and product lines

There are two keys to building segmented income statements:

1. A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin

2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin

Identifying Traceable Fixed Costs

Traceable fixed costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappearedEx. The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo

Identifying Common Fixed Costs

Common fixed costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminatedEx. The salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors

Traceable Fixed Costs Can Become Common Costs

The traceable fixed costs of one segment may be a common fixed cost of another segmentEx. The landing fee paid to land an airplane at an airport is traceable to the particular flight, but it is not traceable to first-class, business-class, and economy-class passengers

Segment Margin – computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the best gauge of the long-run profitability of a segment

Allocating common costs to segments reduced the value of the segment margin as a guide to long-run segment profitability. Common costs should not be allocated to segments

The costs assigned to a segment should include all the costs attributable to that segment from the company’s entire value chain. The value chain consists of all major business functions that add value to a company’s products and services.  Since only manufacturing costs are included in product costs under absorption costing, those companies that choose to use absorption costing for segment reporting purposes will omit from their profitability analysis all “upstream” and “downstream” costs. “Upstream” costs include research and development and product design costs. “Downstream” costs include marketing, distribution, and customer service costs. Although these “upstream” and “downstream” costs are not manufacturing costs, they are just as essential to determining product profitability as are manufacturing costs. Omitting them from profitability analysis will result in the undercosting of products.

Costs that can be traced directly to specific segments of a company should not be allocated to other segments. Rather, such costs should be charged directly to the responsible segment. For example, the rent for a branch office of an insurance company should be charged directly against the branch office rather than included in a companywide overhead pool and then spread throughout the company.

Some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments for internal decision making purposes only when the allocation base actually drives the cost being allocated. For example, sales is frequently used to allocate selling and administrative expenses to segments. This should only be done if sales drive these expenses.

Variable V. Absorption Costing

With all of these advantages, why is absorption costing still so prevalent? One reason (in addition to the external reporting issue) relates to the matching principle. Advocates of absorption costing argue that it better matches costs with revenues. They contend that fixed manufacturing costs are just as essential to manufacturing products as are the variable costs. However, advocates of variable costing view fixed manufacturing costs as capacity costs. They argue that fixed manufacturing costs would be incurred even if no units were produced.

Chapter Six

Activity-Based Costing (ABC) – designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, and therefore, affect “fixed” as well as variable costs

Differs from Traditional Cost Accounting in three ways:

1. ABC assigns both types of costs to products. Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis.

2. ABC does not assign all manufacturing costs to products. This is because ABC only assigns a cost to a product if decisions concerning that product will cause changes in the cost. ABC excludes two types of costs from product costs:

1. Organization-sustaining costs 2. The costs of unused or idle capacity

3. ABC uses more cost pools. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity. ABC cost pools are created to correspond to the activities performed in an organization that cause the consumption of overhead resources. Therefore the total number of ABC cost pools will definitely exceed one and it is likely to exceed the number of departments within a company, since more than one activity is often performed within each department

Each ABC cost pool has its own unique measure of activity. On the contrary, traditional cost systems usually rely on direct labor hours and/or machine hours to allocate all overhead costs to products

Direct labor and machine hours work correctly when changes in the quantity of the base are correlated with changes in the overhead costs being assigned using the base.

Relying exclusively on these bases to assign overhead costs to products has come under increased scrutiny since, on an economy-wide basis, direct labor and overhead costs have been moving in opposite directions and the variety of products produced by companies has increased

How Costs are Treated Under Activity-Based Costing

Activity – an event that causes the consumption of overhead resources

Activity Cost Pool – a “cost bucket” in which costs related to a single activity measure are accumulated

Activity Measure (Cost Driver) – an allocation base in an activity-based costing systemTwo common types of activity measures:

1. Transaction Driver- simple counts of the number of times an activity occurs such as the number of bills sent out to customers

2. Duration Drivers – measures of the amount of time needed to perform an activity such as the time spent preparing individual bills for customers

ABC defines five levels of activity that largely do not relate to the volume of units produced. Traditional cost systems usually rely on volume measures such as direct labor hours and/or machine hours to allocate all overhead costs to products

Manufacturing companies typically combine their activities into five classifications:

Unit-Level Activity – performed each time a unit is produced. For example, providing power to run processing equipment would be a unit-level activity

Batch-Level Activity – performed each time a batch is handled or processed, regardless of how many units are in the batch. Ex. Setting up equipment and shipping customer orders are batch-level activities

Product-Level Activity – relate to specific products and must be carried out regardless of how many batches are run or units produced or sold. Ex. Designing or advertising a product would be product-level activities

Customer-Level Activity – relate to specific customers and are not tied to any specific product. Ex. Sales calls and catalog mailings

Organization-Sustaining Activity – carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. Ex. Heating a factory and cleaning executive offices

Steps In Implementing Activity-Based Costing

1. Define activities, activity cost pools and activity measures. The activities are often identified and defined by interviewing the employees that work in the respective overhead departments. The lengthy list of activities that emerges from this process is usually reduced to a handful by combining similar activities. Ex.

Activity Cost Pool Activity MeasureCustomer orders Number of customer ordersDesign changes Number of design changesOrder size Machine-hoursCustomer relations Number of active customersOther Not applicable

The definition for each of the activity cost pools is:

Customer Orders – assigned all costs of resources that are consumed by taking and processing customer ordersDesign Changes – assigned all costs of resources consumed by customer requested design changesOrder Size – assigned all costs of resources consumed as a consequence of the number of units producedCustomer Relations – assigned all costs associated with maintaining relations with customersOther – assigned all organization-sustaining costs and unused capacity costs

2. Assign Overhead Costs to Activity Cost Pools – first-stage allocation

Once the percentage allocations have been determined, it is a simple matter to assign costs to activity cost pools

3. Calculate Activity Rates- divide the total cost for each activity by the total activity level

Use Activity-Based Costing to Compute Product and Customer Margins

Prepare Management Reports

Product Margin Calculations – the first step in computing product margin is to gather each product’s sales and direct cost data. The second step is to incorporate the previously computed activity-based cost assignments pertaining to each product. The third step is to deduct each product’s direct and indirect costs from sales

The product margin can be reconciled with the company’s net operating income as follows:

Product Margins Computed Using the Traditional Cost System

First step is to gather each product’s sales and direct cost data. The second step is to compute the plantwide overhead rate (total MOH/Total machine hours). The third step is to allocate MOH to each product. The fourth step is to actually compute product margins.

Differences Between ABC and Traditional Product CostsThere are three reasons why the reported product margins for the two costing systems differ from one another

1. Traditional Costing allocates all MOH to products. ABC costing only assigns MOH costs consumed by products to those products. The ABC system does not assign the MOH costs consumed by the customer relations activity to products because these costs are caused by customers, not specific products. The ABC system does not assign these MOH costs included in “other” activity to products because these organization-sustaining and unused capacity costs are not caused by products

2. Traditional Costing allocates all MOH costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases (machine-hours). The ABC system uses volume-related and non-volume related allocation bases to assign MOH to products

3. Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes MOH costs caused by products in the activity cost pools that are assigned to products

Targeting Process Improvement

Activity-based management is used in conjunction with ABC to identify areas that would benefit from process improvement. It involves focusing on activities to eliminate waste, decrease processing time, and reduce defects

While the theory of constraints approach discussed in Chapter 1 is a powerful tool for targeting improvement efforts, activity rates can also provide valuable clues on where to focus improvement efforts

Benchmarking can be used to compare activity cost information with world-class standards of performance achieved by other organizations

Activity-Based Costing and External Reporting

There are four reasons why most companies do not use ABC for external repoting purposes.

1. External reports are less detailed than internal reports. They only disclose cost of goods sold and ending inventory. Therefore, if some products are undercosted and others are overcosted, the errors tend to cancel each other out when the product costs are added together.

2. It may be difficult to make changes to the company’s accounting system3. ABC does not conform to GAAP4. Auditors may be suspect of the subjective allocation process based on

interviews employees

Chapter Seven

Relevant Cost – a cost that differs between alternatives

Relevant Benefit - a benefit that differs between alternatives

Avoidable Cost – a cost that can be eliminated in whole or in part by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.

Two broad categories of costs that are never relevant in any decision:1. Sunk Costs2. A future cost that does not differ between alternatives

Decision Making: A Two Step Process

Step One – Eliminate costs and benefits that do not differ between alternatives. These irrelevant costs consist of sunk costs and future costs that do not differ between alternatives

Step Two – Use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs

Costs that are relevant in one decision may not be relevant in another context. Thus, in each situation, the manager must examine the data at hand and isolate the relevant costs

Total and Differential Cost Approaches

The total approach requires constructing two contribution format income statements – one for each alternative. The difference between the two income statements equals the differential benefits

The most efficient means of analyzing the decision is to use the differential approach to isolate the relevant costs and benefits

Using the differential approach is desirable for two reasons:

1. Only rarely will enough information be available to prepare detailed income statements for both alternatives

2. Mingling irrelevant costs with relevant costs may cause confusion and distract attention away from the information that is really critical

Adding/Dropping Segments

One of the most important decisions make is whether to add or drop a business segment

A Contribution Margin ApproachDecision Rule – only drop the segment if its profit would increase due to dropping

Compare the contribution margin that would be lost to the costs that would be avoided if the line was to be dropped

Comparative Income ApproachPrepare comparative income statements showing results with and without the segment

The Make or Buy Decision

When a company is involved in more than one activity in the entire value chain, it is vertically integrated. A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called a “make or buy” decision

Opportunity Cost – the benefit that is foregone as a result of pursuing some course of action. Not actual cash outlays and are not recorded in the formal accounts of an organization

Special Order – a one-time order that is not considered part of the company’s normal ongoing business

When analyzing a special order, only the incremental costs and benefits are relevant. Since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant

When a limited resource of some type restricts the company’s ability to satisfy demand, the company is said to have a constraint

The machine or process that is limiting overall output is called the bottleneck – it is the constraint

Utilization of a Constrained ResourceFixed costs are usually unaffected in these situations, so the product mix that maximizes the company’s total contribution margin should ordinarily be selected

A company should not necessarily promote those products that have the highest unit contribution margin

Rather, total contribution margin will be maximized by promoting those products or accepting those orders that provide the highest contribution margin in relation to the constraining resource

Utilization of a Constrained Resource: An Example

Machine A1 is the constrained resource and is being used at 100% of its capacityThere is excess capacity on all other machinesMachine A1 has a capacity of 2400 minutes per week

The company should emphasize Product 2 because it generates a CM of $30 per minute of the constrained resource relative to $24 per minute for product 1. The company can maximize its CM by first producing product 2 to meet customer demand and then using any remaining capacity to produce product 1.

Managing Constraints

Joint Costs

In some industries, a number of end products are produced from a single raw material input.Two or more products produced from a common input are called joint productsThe point in the manufacturing process where each joint product can be recognized as a separate product is called the split-off point

The Pitfalls of Allocation

Joint costs are traditionally allocated among different products at the split-off point. A typical approach is to allocate joint costs according to the relative sales value of the end products.

Although allocation is needed for some purposes such as balance sheet inventory valuation, allocations of this kind are very dangerous for decision making

Sell or Process Further

Joint costs are irrelevant in decisions regarding what to do with a product from the split-off point forward. Therefore these costs should not be allocated to end products for decision-making purposes

With respect to sell or process further decisions, it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from such processing exceeds the incremental processing costs incurred after the split-off point

Chapter Nine

Profit Planning – The Basic Framework of Budgeting

Budget – a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period

Budgeting – the act of preparing a budget

Budgetary Control – the use of budgets to control an organization’s activities

Planning – involves developing objectives and preparing various budgets to achieve those objectives

Control – involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal

To be effective, a good budgeting system must provide for both planning and control

Advantages of Budgeting

Budgets communicate management’s plans throughout the organization. Budgets force mangers to think about and plan for the future. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budget process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance

Responsibility Accounting Managers should be held responsible for those items – and only those items – that they can actually control to a significant extent.

Responsibility accounting systems enable organizations to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets

Choosing the Budget Period

Operating budgets ordinarily cover a one-year period corresponding to a company’s fiscal year. Many companies divide their annual budget into four quarters.

A continuous budget is a 12-month budget that rolls forward one month (or quarter_ as the current month (or quarter) is completed. This approach keeps managers focused on the future at least one year ahead

Human Factors in Budgeting1. Top management must be enthusiastic and committed to the budget process2. Top management must not use the budget to pressure employees or blame

them when something goes wrong3. Highly achievable budget targets are usually preferred when managers are

rewarded when mangers are rewarded based on meeting budget targets

The Master Budget

The Sales Budget

To calculate the total sales in dollars for any period, we multiply the budgeted sales in units times the unit selling price.

Expected Cash Collections

1. Insert the march 31st beginning accounts receivable, $30,000, into the April column of the cash collections schedule. This balance will be collected in full in April

2. Calculate the April credit sales that will be collected during each month of the quarter. We will collect another $140,000 ($200,000 x 70 percent) in April. In addition, 25% of April projected sales will be collected in May, so $50,000 of April sales will be collected in May. Finally 5% of April’s sales will prove to be uncollectable. This amounts to $10,000 (200,000 x 5%)

3. Calculate the May credit sales that will be collected during each month of the quarter. We will collect $350,000 (500,000 x 70%) in the month of May and an additional 25% of the $500,000 will be collected in June. Finally 5% of May’s sales will prove to be uncollectable. The uncollectible amount will be $25,000 (500,000 x 5%)

4. Calculate the June credit sales that will be collected during the month of Jue5. Calculate the total for each column in the schedule and the total for the

quarter ($905,000)

The Production BudgetAfter we have budgeted our sales and expected cash collection, we must make sure the production budget is adequate to meet the forecasted sales and to provide for the desired ending inventory. We need inventory on hand at the end of the period to minimize the likelihood of an inventory stock-out

1. Insert the budgeted sales in units from the sales budget2. Calculate the required production in units for April (26,000 units). Notice,

the desired ending inventory in units for April (10,000 units) and the beginning inventory in units for April (4,000 units)

3. Calculate the required production for May (46,000 units). Notice, April’s desired ending inventory (10,000 units) becomes May’s beginning inventory

4. Calculate the required production for June (29,000 units). Notice we are assuming a desired ending inventory of 5,000 units. This implies that projected sales in July are 25,000 units because 20% of 25,000 units is 5,000 units

5. Complete the quarter columns. Notice, April’s beginning inventory and June’s ending inventory are carried over to the column

The Direct Materials Budget

1. Insert the required production in units from the production budget2. Calculate the monthly and quarterly production needs, which in this case are

stated in terms of pounds of direct material3. Calculate the materials to be purchased for April (140,000 pounds). April’s

desired ending inventory is equal to 10% of May’s production needs, or 23,000 pounds. The total number of pounds needed in April is 153,000 pounds

4. Subtract our materials on hand to determine the number of pounds of material that must be purchased (140,000 pounds of direct materials)

5. Calculate the materials to be purchased for May (221,500 pounds). Notice that April’s desired ending inventory becomes May’s beginning inventory. May’s desired ending inventory is 10% of June’s production needs of 145,000 pounds

6. Calculate the materials to be purchased for June (142,000 pounds). The desired ending inventory for May becomes the beginning inventory for June. We are assuming the desired ending inventory for June of 11,500 pounds. April’s beginning inventory and June’s ending inventory carry over to the quarter columns.

Expected Cash Disbursement for Materials

1. Calculate the April credit purchases that will be paid during each month of the quarter. In April $28,000 ($56,000 x 50%) will be paid in April and $28,000 will be paid in May. The $56,000 is derived by multiplying 140,000 pounds by the $0.40 per pound purchase price.

2. The remaining steps include calculating the May and June credit purchases that are paid during each month of the quarter. We also calculate the totals for all columns in the schedule and the total for the quarter ($185,000)

The Direct Labor Budget

1. Compute the direct labor hours required to meet the production needs. Remember each unit of output requires 0.05 direct labor hour. We will require 1,300 direct labor hours in April, 2,300 direct labor hours in May, and 1,450 direct labor hours in June

2. Compute the total direct labor cost. Based on the $10 per hour rate, Royal will pay $15,000 for direct labor in April, $23,000 in May, and $15,000 in June, for a total of $53,000 for the quarter

Manufacturing Overhead Budget

1. Calculate the variable manufacturing overhead costs for each month and in total. We begin by multiplying our variable manufacturing overhead rate of $20 times the number of direct labor hours used in the month. For April, we expect to apply $26,000 of variable overhead

2. Add the fixed manufacturing overhead costs ($50,000 per month) to the variable overhead costs to arrive at total manufacturing overhead costs for each month and in total. We estimate total overhead of $76,000 in April and for the quarter, we expect a total of $251,000. If we divide the manufacturing overhead of $251,000 by the total labor hours required during the quarter, we get a predetermined overhead rate of $49.70 (rounded). Once the level of fixed costs has been determined in the budget, the costs really are fixed; hence, the time to adjust fixed costs is during the budgeting process

3. calculate the cash disbursements for manufacturing overhead by subtracting noncash expenses from the total manufacturing overhead costs. When we subtract the noncash overhead costs from the total manufacturing overhead costs, we get the cash paid for overhead costs. We will use this cash overhead amount in our cash budget. In our example, $20,000 of depreciation is

deducted from each month’s total overhead costs to arrive at the cash disbursements for manufacturing overhead

Ending Finished Goods Inventory Budget

1. Compute the direct materials cost per unit. We know that each unit requires 5 pounds of direct material at $0.40 per pound, for a total of $2.00 per unit. The information needed can be derived by referring back to the direct materials budget

2. Compute the direct labor cost per unit. It takes 0.05 hours to produce one unit and the pay rate is $10 per hour. We have a direct labor cost per unit of $0.50. The information needed can be derived by referring back to the direct labor budget

3. Compute the manufacturing overhead cost per unit. Royal uses absorption costing for valuing inventory. We apply overhead on the basis of direct labor hours, so we multiply 0.05 times the predetermined rate of $49.70, which yields an overhead cost per unit of $2.49. Our total unit cost is $4.99. The predetermined overhead rate was calculated when we prepared the manufacturing overhead budget

4. Calculate the value of the ending finished goods inventory. We estimate there will be 5,000 units in ending inventory and at a per unit cost of $4.99, we have a total cost of $24,950. The finished goods inventory will appear on our budgeted balance sheet. The ending inventory in units is derived from the production budget

Selling and Administrative Expense Budget

Format of the Cash Budget

1. Calculate the total cash available. We began April with $40,000 in cash. To this amount, we add our expected cash collections from sales of $170,000 for the month of April. We complete the first section by calculating the total cash available of $210,000

2. Calculate the total cash disbursements. During April, we expect to pay $40,000 for raw materials, $15,000 for direct labor, $56,000 for cash manufacturing overhead, and $70,000 for selling and administrative expense. This is not the total manufacturing overhead because we have excluded noncash depreciation costs

3. Calculate the excess (deficiency) of cash available over disbursements. In the month of April, we expect to have a cash deficiency of $20,000, given that Royal has a policy that the company will always maintain an ending cash balance of $30,000

4. Determine the financing requirements and the ending cash balance. After Royal borrows $50,000 on its line-of-credit, it will have an ending cash balance of $30,000. The ending cash balance for April becomes the beginning cash balance for May

The Budgeted Income Statement

The Budgeted Balance Sheet

You can see our cash balance of $43,000 comes directly from the cash budget. Accounts receivable ($75,000) is 25% of June’s sales ($300,000). Raw materials inventory ($4,600) is calculated by multiplying the ending inventory of raw material in pounds (11,500) by the cost per pound. The finished goods inventory ($24,950) is taken from the ending finished goods inventory budget. The land and equipment amounts are given. Accounts payable ($28,400) is 50% of June’s purchases ($56,800). The balance in the common stock account is given

The balance of retained earnings at June 30 is $336,150, which is based on: beginning balance + net income - dividends paid ($146,150 + $239,000 - $49,000)