Question

COLORADO CORPORATION

On October 27, 2011, a freak snowstorm destroyed the work-in-process of the company, who promptly filed a claim with their insurance company for the lost work-in-process inventory, and raw materials inventory which were in the factory. Luckily, the finished goods are kept at a separate warehouse location, which was not damaged by the storm. As is normal, they put in a claim for lost profits as a result of the damage.

You have been sent to the scene on behalf of the insurance company to audit the claim being made by company. The company claims that the cost of work-in-process inventory destroyed by the storm was $50,000, and the cost of raw materials was $175,000.

From your conversations with factory personnel, you discover that the company was in process of manufacturing two custom jobs, Alpha and Gamma, both of which were started during 2011. Further discussion with the warehouse supervisor revealed that there was one job, Beta, complete and in the warehouse awaiting shipment at the time of the storm.

While the company’s onsite accounting records were destroyed, you were able to get the following information from off-site backup records, and through interviewing company personnel:

1. The company applies overhead at the rate of 85% of direct labor cost.
2. Cost of goods sold averages 75% of the company’s selling price.
3. Sales to date as of the date of the storm totaled $1,598,000.
4. The company pays its factory workers a rate of $12.90 per hour. A total of 25,760 direct labor hours were used during the year.
5. Raw materials purchased year to date totaled $843,276.
6. Total costs of job Beta amounted to $165,600.

Job cost records for Alpha and Gamma showed the following:

		Alpha	Gamma
Direct materials		$ 21,980	$ 14,700
Direct labor		128 hrs	240 hrs

The December 31, 2010 financial statements showed the following inventory amounts:

Raw materials	$ 19,500
Finished goods	$ 68,900
Work in process	$ 14,600

Required:

1. Calculate the cost of goods sold for the year.
2. Calculate the cost of goods manufactured for the year.
3. Compute the amount of applied overhead for each job in the WIP inventory (round to the nearest dollar).
4. Evaluate the claim for damages submitted as follows:

1. Determine the cost of work in process destroyed by the snowstorm.
2. Determine the cost of raw materials destroyed by the snowstorm.

Answer 1

1.Cost of goods sold for the year is:-

Particular	Amount
Sales	1598000
COGS%	75%
COGS Value	1198500

2.Cost of goods manufactured for the year is:-

Particular	Amount
Closing finished goods	165600
Cost of goods sold	1198500
Less: Opening finished goods	68900
Cost of goods Manufactured	1295200

3.Amount of applied overhead for each job in the WIP inventory:-

Particular	Hrs	Rate	Overhead rate	Overhead applied
Alpha	128	12.9	85%	$          1,403.52
Gamma	240	12.9	85%	$          2,631.60

4.Cost of work in process destroyed by the snowstorm is:-

Particular	Alpha	Gamma
Direct Material	$   21,980.00	$   14,700.00
Direct Labour	$      1,651.20	$     3,096.00
	(128*12.9)	(240*12.9)
Overheads	$      1,403.52	$     2,631.60
Total cost/ Destroyed value	$   25,034.72	$   20,427.60

5.Cost of raw materials destroyed by the snowstorm is:-

Particular	Amount
Opening Raw material	$         19,500.00
Add: Purchases	$       843,276.00
Less: Raw material used(Note1&2)	$       711,299.92
Destroyed Raw material	$       151,476.08

Note 1:-

Particular	Amount
Cost of goods manufactured	1295200
Closing WIP	45462.32
Less: Opening WIP	14600
Total manufacturing cost	1326062.32

Note 2:-

Particular	Amount
Total manufacturing cost	1326062.32
Less: DL	332304
Less: Overheads	282458.4
Ram material used	711299.92