Inventory data for the year Cost incurred: Raw material purchased 125,000 Direct

Question

Inventory data for the year Cost incurred: Raw material purchased 125,000 Direct labor 75,000 Indirect labor 40,000 Equipment maintenace 10,000 Insurance on factory 30,000 Rent on factory 12,000 Equipment depreciation 20,000 Factory supplies 11,000 Advertising expenses 15,000 Selling and administrative expenses 21,000 A) Calculate the cost of goods manufactured B) Calculate the cost of goods sold C) List the cost not included in the calculations of cost of goods manufactured and cost of goods sold, and discuss why you exclude them from those calculations. D) If raw materials and work in progress inventories had decreased during the year, would the finacial statements be different? How?

Explanation / Answer

A & B)

C)

The costs which are not included in the cost of goods manufactured are:

1) cost of ending inventory of raw materials

2) cost of ending WIP

3) Operating expenses like advertisement costs and administrative and selling and distribution cost

The above costs are excluded from the coat of goods manufactured, because Operating expenses like advertisement costs and administrative and selling and distribution cost are not incurred for manufacturing the goods and are not regarded as the conversion costs like the factory overheads. The ending WIP and Ending raw materials are not included; because the cost of ending WIP is carried forward to the nest accounting period and the cost of ending inventory of raw materials remain unused at the end of the production process of the accounting period in question.

Following costs are not included in the cost of goods sold:

Cost of the ending inventory of finished goods. this is because ,the ending inventory of finished goods are not sold during the accounting period and are carried forward to the next period as opening inventory.

D)

Yes. if raw material and WIP inventories decrease during the financial statements will be different because they will change the cost of goods manufactured and thereby the cost of goods sold, which in turn will change the gross profit. If the closing WIP and closing raw material inventory is decreased, the cost of goods manufactured and thereby cost of goods sold will increase thereby increasing the gross profit.

Raw material purchased and used $ 1,25,000.00 Direct labour $     75,000.00 Factory overhead: indirect labour $ 40,000.00 equipment maintenace $ 10,000.00 insurance on factory $ 30,000.00 Rent on factory $ 12,000.00 equipment depreciation $ 20,000.00 Factory supplies $ 11,000.00 $ 1,23,000.00 Cost of goods manufactured $ 3,23,000.00 Add: Advertisement expense $ 15,000.00 Administrative and selling expense $ 21,000.00 $     36,000.00 Cost of goods sold $ 3,59,000.00

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