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Lambeth Custom Cabinets A Case Solution
Lambeth Custom Cabinets was a shop owned and operated by Jack Lambert. The shop sold custom made cabinets for its customers. Lambeth was concerned about the manufacturing overhead variable when he reviewed the financial data for September. For September, the journal entries are done for each transaction. The journal entries are used to construct the income statement and balance sheet for the month ending on September 30th. Lambeth also lost business from Mrs. Carter to the competitor by quoting a higher price. Therefore, Lambeth also became concerned about the higher cost of making the cabinet as this might lead to future loss of revenue.
Following questions are answered in this case study solution
Prepare journal entries for the transaction for September.
Record the beginning balances in the general Ledger. post the September transaction from #1 into the general Ledger.
Prepare a balance sheet and income statement for September 30th.
Prepare a variable closing income statement for September 30th.
Based on what you know about the cost structure of Lambeth custom cabinets, could Lambeth make a profit and / or a positive contribution margin on Mrs. Carter's order at a selling price of $1,500.
Case Analysis for Lambeth Custom Cabinets A
1. Prepare journal entries for the transaction for September.
Exhibit 2 shows the journal entries for all the transactions in September. Journal entries are done for raw material, supplies, direct and indirect labor, manufacturing overheads, work in progress, finished goods and assets, excluding inventory.
For the calculations of the cost of finished goods, the cost for A-3, A-4, and A-6 has been calculated by summing up material, labor and the overhead cost incurred before and during September. It is assumed that the manufacturing overheads are absorbed in 50% of direct labor. The costs of finished goods, A-3, A-4 and A-6, are $3,805, $4,175 and $1,110, respectively. The calculation is shown in Exhibit 1.
2. Record the beginning balances in General Ledger. Post the September transaction from #1 into General Ledger.
Exhibit 3 shows the general ledgers made, using the journal entries, of the transactions done in September. The direct material purchased and used during the month is recorded in the raw material ledger. The direct and indirect labor is recorded in the labor ledger. The supplies and indirect labor are treated as manufacturing overheads. Labor, material, and overheads are also recorded in the work-in-progress ledger. The cost of finished goods is transferred to the finished goods ledger and, later, recorded in the income and expense summary ledger. The selling and administrative expense and revenue earned are also recorded in the income and expense summary ledger.
It is assumed that, during September, all the expenses, supplies, direct and indirect labor, and material payables were paid for in cash. Similarly, the customers for A-3, A-4 and A-5 paid the accounts receivable in cash. These assumptions cause a change in other assets ledger as shown in Exhibit 3.
3. Prepare a balance sheet and income statement for September 30th.
The general ledgers in Exhibit 3 are used to make income statement and balance sheet for September 30th. Exhibit 4 shows the income statement for Lambeth in September. The revenue earned from the three cabinets finished is $16,745. The total cost of A-3, A-4, and A-6 using all the manufacturing cost under absorption costing is $9,090. The gross margin for the month was $7,385, which is around 45% of the revenue. The selling and administrative cost of $3,420 is charged to the gross profit. The net profit is $3,965. Due to high administrative expenses, the net income falls to 24% of the revenue.
Exhibit 5 shows the balance sheet made from the available information. Lambert has four types of inventory; raw material inventory, supplies inventory, work in progress inventory and finished goods inventory. All these inventories are reported in the balance sheet at the closing balance of their ledgers. The closing balance of the other assets is $22,230. Hence, the value of total assets at September 30th is $31,275. The net income is added to equity and capital. The capital of $27,310 is calculated after subtracting the net income from the total assets.
4. Prepare a variable closing income statement for September 30th.
Exhibit 6 shows the variable costing income statement for September 30th. In the variable costing income statement, first, all the variable cost is subtracted from revenue to get the contribution after which all the fixed cost is subtracted to get net income. It is assumed that all the selling and administrative expenses are fixed. Hence, Exhibit 1 shows that the total variable cost for A-3, A-4, and A-5 is $6,945. The contribution for September is $9,530.
In variable costing, the absorption rate i.e. 50% of direct labor would not apply for fixed manufacturing overheads. The fixed cost will be treated as a periodic cost. Therefore, the total fixed cost incurred in September will be charged to the income statement and subtracted from contribution. Hence, the net income under variable costing is $3,620.
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