Answer to Question #288805 in Accounting for Joseph

Question

On June 30, 2021, a flash flood damaged the warehouse and factory of a particular

manufacturing company, completely destroying the work in process inventory. There was

no damage to either the direct materials or finished goods inventories. A physical inventory

taken after the flood revealed the following costs

Direct material $62,000

Work in process -0-

Finished goods 119,000

The inventory on June 1, 2021, consisted of the following

Direct material $30,000

Work in process 100,000

Finished goods 140,000

A review of the records disclosed that the gross margin historically approximated 25% of sales.

The sales for the first six months of 2021 were $340,000. Direct material purchases were

$1150,000. Direct labor costs for this period were $80,000, and manufacturing overhead has

historically been 50% of direct labor hour.

Required: Compute the cost of work in process destroyed on June 30, 2021

Answer 1

i) Calculating cost of goods manufactured

• The opening finished goods inventory is $\$140,000$
• The closing finished goods inventory is $\$119,000$
• Sales were $\$340,000$
• The gross profit is $25\%$ of sales or cost of goods sold is $75\%$ of sales
• Cost of goods sold =$\$340,000 \times75\%=\$255,000$

Cost of goods manufactured = Cost of goods sold + Closing finished goods inventory - Opening finished goods inventory

$=\$255,000 + \$119,000 - \$140,000\\ =\$234,000$

ii) Calculating ending work-in-process inventory lost on June 30, 2016

• The opening work-in-process inventory is $\$100,000$
• Raw material consumption during the period = Opening raw material inventory + purchases - Closing raw material inventory

$=\$30,000 + \$115,000 - \$62,000$

$=\$83,000$

• The direct labor cost is $\$80,000$
• The manufacturing overhead = Direct labor cost$\times50\%$

$=\$80,000 \times 50\%\\ =\$40,000$

The cost of goods manufactured is;

$\$83,000+\$40,000+\$100,000=\$243,000$

Ending work-in-process inventory = (Opening work-in-process inventory + Raw material consumption + direct labor cost + manufacturing overhead) - Cost of goods manufactured

$=(\$100,000 + \$83,000 + \$80,000 + \$40,000) - \$234,000\\ = \$69,000$

The value of the work-in-process inventory lost on June 30, 2016, is $\$69,000$