19. LO. 4 (Cost Accumulation) On September 25, 2010, a hurricane destroyed the w

Question

19. LO. 4 (Cost Accumulation) On September 25, 2010, a hurricane destroyed the work in process inventory of Biloxi Corporation. At that time, the company was in the process of manufacturing two custom jobs (B325 and Q428). Although all of Biloxi’s on-site accounting records were destroyed, the following information is available from some backup off-site records:
• Biloxi Corp. applies overhead at the rate of 85 percent of direct labor cost.
• The cost of goods sold for the company averages 75 percent of selling price. Sales from January 1 to the date of the hurricane totaled $1,598,000.
• The company’s wages rate for production employees is $12.90 per hour. A total of 25,760 direct labor hours were recorded from January 1 through September 25.
• As of September 25, $21,980 of direct material and 128 hours of direct labor had been recorded for Job B235. Also at that time, $14,700 of direct material and 240 hours of direct labor had been recorded for job Q428.
• January 1, 2010, inventories were as follows: $19,500 of Raw Material and $68,900 of Finished Goods. Raw materials purchased during 2010 totaled $843,276.
• The amount of Work in Process Inventory at January 1, 2010, was $14,600. Jobs B235 and Q428 were not in process on January 1.
• One job, R91, was completed and in the warehouse awaiting shipment on September 25. The total cost of this job was $165,600.
Determine the following amounts:
a. Cost of goods sold for the year
b. Cost of goods manufactured during the year
c. Amount of applied overhead for each job in WIP inventory
d. Cost of WIP Inventory destroyed by the hurricane
e. Cost of RM Inventory destroyed by the hurricane

Explanation / Answer

a. Cost of goods sold for the year.
Sales from January 1 to the date of the hurricane totaled $1,598,000.
COGS = $1,598,000 x 75% = $1,198,500

b. Cost of goods manufactured during the year.

Beginning Finshed Goods + Cost of Goods Manufactured – Ending Finished goods = Cost of Goods Sold
$68,900 + Cost of Goods Manufactured - $165,600(Job R91) = $1,198,500

Cost of Goods Manufactured = $1,198,500 - $68,900 + $165,600 = $1,295,200

c. Amount of applied overhead for each job in WIP inventory.
Overhead is applied @ 85% of direct labor cost   i.e.
Job B235    128 hours x $12.90 x 85%   = $1,403.52
Job Q428   240 hours x $12.90 x 85%   = $2,631.60

d. Cost of WIP Inventory destroyed by the hurricane.
    Job                                    B235           Q428               Total
Direct Materials             $21,980.00     $14,700.00       $36,680.00
Direct labor           
128 hours x $12.90        $1,651.20                              $1,651.20
240 hours x 12.90                                $3,096.00          $3,096.00
Overhead Applied            $1,403.52      $2,631.60          $4,035.12
                            _________________________________________
Cost of WIP destroyed   $25,034.72     $20,427.60        $45,462.32
                           ==========================================

e. Cost of RM Inventory destroyed by the hurricane.

Cost of RM destroyed = Beg. RM inventory + RM purchases - RM used in production = Ending RM inventory
= $19,500 + $843,276 - $711,299.921 = $151,476.08

1Total Manufacturing cost = COGM + Ending WIP - Beginning WIP
= $1,295,200 + $45,462.32 - $14,600 = $1,326,062.32
Raw materials used = Total manufacturing cost - DL - Overhead
= $1,326,062.32 - (25,760 hours x $12.90) - (25,760 hours x $12.90 x 0.85)
= $1,326,062.32 - $332,304 - $282,458.40 = $711,299.92

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