JOB ORDER COSTING OBJECTIVE: Understand flow of product cost through inventory a
ID: 2333146 • Letter: J
Question
JOB ORDER COSTING
OBJECTIVE:
Understand flow of product cost through inventory accounts to income statement
INSTRUCTIONS:
Use the information below to fill in the boxes on the template provided at the end. With only a few exceptions, your answers should contain simple formulas. Even if you are only copying an amount from one cell to another, use a cell reference rather than typing in a number—that way if you change the original amount it will automatically update the amount in the cell to which it was copied. Do not modify the template.
Most of the information provided in the narrative below has been entered on the template.
On February 1, Jonathon Deming, Operations Manager of Kaufman Industries, and his 2 fellow managers walked from the parking lot to their 7 a.m. monthly team meeting. As the group neared the building, they watched in stunned silence as a small private airplane plummeted from the sky, crashing into the facility and immediately setting the plant and administrative offices ablaze.
Emily Keller, Sales Manager, used her cell phone to call 911, and the group waited until the fire department arrived and began battling the blaze.
“At least no one was in the building yet,” murmured Jonathon.
“Yeah,” agreed Sarah Collins, the company controller. “No one’s ever going to believe this—least of all the insurance company! How are we ever going to put together a claim when all of our records just went up in smoke? There’s no sense even calling our insurance agent unless we can figure out how to reconstruct our inventory balances.” The three stunned managers decided to meet briefly at the local coffee house to figure out what to do next.
“Things might not be as bad as they seem,” began Emily, as the last of the group sat down at the table. “I have this summary sheet I had prepared for our meeting that shows year-to-date sales of $1,350,000 and a gross profit ratio of 40%, which was roughly the same as our average rate last year, so gross profit must have been $540,000. In addition, cost of goods available for sale year-to-date was $960,000 at cost.”
“That’s good,” said Sarah. “And I have last year’s financials which show that the December 31 balance of raw materials was $30,000, of work in process was $50,000 and of finished goods was $90,000.”
“My notes for the meeting indicate that the sum of direct materials used and direct labor for the first month of the year was $510,000, and that total overhead cost for the period was $520,000, which represented an overhead rate of 400% of direct labor cost.”
“We’re almost there!” exclaimed Sarah, as she finished jotting down the information. “If we just knew the cost of our materials purchases for the year, I think we’d be able to put together a claim.”
“Let me call our purchasing agent,” said Jonathon, pulling his cell phone out. “We were just discussing that in our planning meeting yesterday.”
Jonathon stepped outside to make his call, and after a few moments returned to the group and triumphantly announced: “I’ve got it! Year-to-date purchases of direct materials were $420,000.”
“That’s it then,” said Sarah. “I should be able to put together a claim by the end of the day.”
REQUIRED: Complete the cells indicated on the template provided in order to determine the total inventory loss as of the date of the accident. Enter your answer in the space provided on the template. HINT: You will find it best to start with the partial income statement and work backwards.
NOTE: In Financial Accounting, you learned that Cost of Goods Sold was calculated as follows – Beginning Merchandise Inventory
+ Net Purchases
Cost of Goods Available for Sale
-Ending Merchandise Inventory
Cost of Goods Sold
For a manufacturer, we cannot refer to invoices to determine our net purchases for a period since we are making the inventory we are going to sell rather than buying it, so we adjust the calculation above as follows-
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
Cost of Goods Available for Sale
-Ending Finished Goods Inventory
Cost of Goods Sold
MATERIALS INVENTORY WORK IN PROCESS INVENTORY 1-Jan 30000 1-Jan 50000 Purchases 420000 <-- Direct Materials --> FINISHED GOODS INVENTORY 31-Jan Direct Labor 1-Jan 90000 Manufacturing Overhead 520000 <-- Cost of Goods Mfd. --> Cost of Goods Sold 31-Jan 31-Jan TOTAL INVENTORY LOSS: Income Statement Revenue 1350000 Beg. FG Inventory 90000 Cost of Goods Manufactured Cost of Goods Available for Sale 960000 End. FG Inventory Cost of Goods Sold Gross Margin 540000 (40%)Explanation / Answer
Calculation of COGM: Amount $ WIP - OB 50000 RM : OB 30000 add : Pur 420000 RM available 450000 less: CB -70000 RM consumed 380000 DL (520000/400%) 130000 Manuf Overhead 520000 Cost incurred during month 1030000 Cost incurred on manufactured 1080000 Less: WIP - CB -210000 COGM $870000 Income Statement: Amount $ Sales 1350000 Less: COGS: FG - OB 90000 add: COGM 870000 FG available for sale 960000 less:FG-CB 150000 COGS 810000 Gross Profit (40%) $540000
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