Cost Flows Practice Problem
The managerial accountants at ABC Manufacturing Company were in the process of preparing the statement of cost of goods manufactured and sold for the year ended December 31, 1993, when an explosion on the right side of the accounting office (next to the windows) destroyed all of the information relating to the credits associated with the inventory accounts. Fortunately, the debit information was available and is listed below.
Purchases of direct materials$125,000
Total manufacturing costs600,000
Cost of goods manufactured650,000
Cost of goods sold700,000
While the debit information is useful, Jeri, one of the older and wiser managerial accountants, reminded everyone that this was insufficient to prepare a statement of cost of goods sold. Jim , a recently hired managerial accountant, finally realized that he was sitting on some important data, last year's annual report. He realized that the beginning inventory values would be on the balance. sheet. Jim opened the report and read the balance sheet information relating to inventories. The inventory values for January 1, 1993, are listed below:
Direct materials inventory$100,000
Work in process inventory150,000
Finished goods inventory200,000
Jeri, the old and wise managerial accountant, again reminded the staff that this was insufficient data to prepare a statement of cost of goods sold. Julie, a recently hired managerial accountant, had been working on the manufacturing overhead costs for 1993 and remembered that manufacturing overhead amounted to 50% of the total manufacturing costs and was 150% of the direct labor costs. Jeri finally smiled and said: "This might be sufficient information to prepare the statement of cost of goods sold." Jim said, "What about the ending inventory values?" Jeri responses, "You can calculate those!"
Calculate the ending inventory balances for direct materials, work in process and finished goods.
- From here it is easy to calculate ending finished goods as 200+650-700 = 150
- Total manufacturing costs were 600. Remember that this is the total of the debits to WIP, so you can plug in 600 as the total debit in WIP to get an ending balance in WIP of 100.
- Overhead is 50% of the manufacturing costs so overhead debited to WIP is 600*.5 = 300
- Overhead is 150% of direct labor costs so direct labor debited to WIP is 300*1.5 = 200
- Direct materials is the only debit to WIP left to find. If DM + DL + MOH = TMC, then
DM + 200 + 300 = 600, so DM = 100. Plugging this in as the debit to WIP and the credit to Raw Materials leaves an ending balance of 125 in Raw Materials.