Question

1. Steve’s Job Inc. works a lot of jobs and makes a lot of money. At the end of the previous month Steve had one job, job 10020, in process. For Job 10020 Steve had incurred $20,000 in labor, $50,000 in material and applied $10,000 in overhead. Steve tacks on a 50% profit margin to determine the amount charged to his customers. During the month Steve incurred another $40,000 in labor and another $30,000 in material plus the overhead. This job still hadn’t been completed by month end. Steve wondered what was taking so long. During the month Steve did a lot of things. One of the things he did was start and complete job # 1002 For job #10021 Steve spent $60,000 in labor, $40,000 in material and applied another $30,000 for overhead. Unfortunately, by month end the client had still not signed off on the work. Finally, Steve started and completed job # 10022. A very pretty job of which the client was more than satisfied. Steve spent $22,000 in labor, $44,000 in material and applied $11,000 in overhead. Actual overhead for the month was $53,000.

At month end what was the

1. WIP inventory balance
2. FG inventory balance
3. Unadjusted cost of goods sold
4. Adjusted cost of goods sold
5. Gross Margin, adjusted

Answer 1

1. WIP Inventory Balance

The WIP Inventory Balance during a month is calculated using the formula:

WIP = Opening WIP + Cost of Goods Manufactured - Closing WIP

= (20,000 + 50,000 + 10,000) +(40,000 + 30,000 + Overhead for Job 10020) + (60,000 + 40,000 + 30,000) + (22,000 + 44,000 +11,000) - (20,000 + 50,000 + 10,000) - (40,000 + 30,000 + Overhead for Job 10020) - (60,000 + 40,000 + 30,000)$

Now Overhead cost for Job 10020 = Actual Overhead - (30,000 + 11,000) = 53,000 - 41,000 = 12,000 $

So, WIP Inventory Balance = 80,000 + 70,000 + 12,000 + 130,000 +77,000 - 80,000 - 82,000 - 130,000 = 77,000$

2. FG Inventory Balance = Opening Balance of finished goods + Cost of goods manufactured - Cost of Finished Goods

Here, we assume that Job 10022 has been sold to the customer.

So, FG Inventory Balance = 0 + (40,000 + 30,000 + 12,000) + (60,000 + 40,000 + 30,000) + (22,000 + 44,000 +11,000) - (22,000 + 44,000 +11,000) = 212,000$

=> FG Inventory Balance = 212,000$

3. Cost of Goods Sold (Unadjusted) =  22,000 + 44,000 +11,000 = 77,000$

4. Cost of Goods Sold (Adjusted) = Cost of Opening Inventory + Cost of Manufacturing Goods - Cost of Closing Inventory = (20,000 + 50,000 + 10,000) + (40,000 + 30,000 + 12,000) + (60,000 + 40,000 + 30,000) + (22,000 + 44,000 +11,000) - (20,000 + 50,000 + 10,000) - (40,000 + 30,000 + 12,000) - (60,000 + 40,000 + 30,000) = 77,000$

COGS (Adjusted) = 77,000$

5. Adjusted Gross Margin = Revenue - Adjusted COGS = (22,000 + 44,000 +11,000) + 50% x (22,000 + 44,000 +11,000) - 77,000 = 38,500$