Question

Chapter 2:  

Wicked Candles, located in Nederland, Texas has been manufacturing organic and eco-friendly 100% soy candles since 2015, selling through retail stores and also directly through their own Web site.

Unfortunately, Wicked Candles manufacturing facilities experienced record rain falls (60.5 inches) and historic flooding during Hurricane Harvey on August 25, 2017. Wicked Candles inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.

Evanora Kalinya, the company’s owner, is anxious to salvage whatever records she can to support an insurance claim for the destroyed inventory before the disaster recovery specialists arrive and clean the building. She is standing in what is left of the Accounting Department with Theodora Locasta, the operations manager.

         “I didn’t know mud and water could smell so bad,” Theodora says. “What should I be looking for?”

         “Don’t worry about beginning inventory numbers,” responds Evanora. “We’ll get them from last year’s annual report. We need cost data for this year.”

         “I was working on this year’s annual to date results a couple of days ago before the storm hit,” Theodora says. “According to all the forecasts, the storm was expected to make landfall in southern Texas within a day or two; however, as the storm spun off shore and then back again it continued to dump massive amounts of rain onto Texas and Louisiana. I think I am still in shock at the damage it caused. Look! The report I was working on is still in my desk drawer.”

         “Be careful! It looks like it got pretty wet.” exclaimed Evanora.

         “All I can make out is that this year’s raw material purchases were $705,000 and that direct labor, manufacturing overhead (other than indirect materials) and total manufacturing costs were $505,000; $245,000; and $1,425,000 respectively. Wait, and cost of goods available for sale was $1,340,000.” replied Theodora.

         “Great,” says Evanora. “I remember that sales for the year so far were approximately $1.7 million. Given our gross profit of 30% of sales, that’s all you should need.”

         Theodora is not sure about that, but decides to see what she can do with this information. The beginning inventory numbers are as follows: Raw Materials, $113,000; Work in Process, $229,000; and Finished Goods, $154,000. She thinks she remembers several schedules she learned in college that may help her get started.

Required:

Determine the amount of cost in the Raw Materials, Work-in-Process, and Finished Goods inventory accounts as of the date of the flood. (Hint: One way to proceed would be to reconstruct the various schedules and statements that would have been affected by the company’s inventory accounts during the period.) You can use T-Accts also to reconstruct the missing amounts. Show ALL computations and formulas used to arrive at any missing amounts.

Answer 1

Calculation of Direct Material Used
For Current Year
Raw Material Inventory - Beginning	113,000.00
Add: Purchases	705,000.00
Raw Material Available for Use	818,000.00
Less: Raw Material Inventory , Ending (6)	(372,000.00)
Direct Material Used (5)	446,000.00
Calculation of Cost of Goods Manufactured
For Current Year
WIP - Beginning Inventory	229,000.00
Direct Material Used	446,000.00
Direct Labor	505,000.00
Manufacturing Overhead	245,000.00
Total Manufacturing Costs	1,425,000.00
Less: WIP - Ending Inventory (4)	239,000.00
Cost of Goods Manufactured (3)	1,186,000.00
Calculation of Cost of Goods Sold
For Current Year
Finished Goods Inventory - Beginning	154,000.00
Add: Cost of Goods Manufactured	1,186,000.00
Cost of Goods Available for Sale	1,340,000.00
Less: Finished Goods Inventory - ending (2)	150,000.00
Cost of Goods Sold (1)	1,190,000.00
(1)
Sales	1,700,000.00
Less: Gross Margin - 30% of $1,700,000	510,000.00
Cost of Goods Sold	1,190,000.00
(2)
Cost of Goods Available for Sale	1,340,000.00
Less: .Cost of Goods Sold	1,190,000.00
Ending Finished Goods Inventory	150,000.00
(3)
Cost of Goods Available for Sale	1,340,000.00
Less: Beginning Finished Goods Inventory	154,000.00
Cost of Goods Manufactured	1,186,000.00
(4)
Total Manufacturing Costs	1,425,000.00
Less: Cost of Goods Manufactured	1,186,000.00
Ending WIP Inventory	239,000.00
(5)
Total Manufacturing Costs		1,425,000.00
Less: Beginning WIP	229,000.00
Less: Direct Labor	505,000.00
Less: Manufacturing Overhead	245,000.00	979,000.00
Direct Material Used		446,000.00
(6)
Calculation of Raw Material Inventory
Beginning Raw Material inventory	113,000.00
Add: Purchases	705,000.00
Material Available for Use		818,000.00
Less: Direct Material Used		446,000.00
Ending Raw Material Inventory		372,000.00
Total Inventory Lost in Flood
Raw Material Inventory	372,000.00
WIP Inventory	239,000.00
Finished Goods Inventory	150,000.00
Total Inventory	761,000.00