Question

Mapleton Corporation builds sailboats. On January 1, 2019, the company had the following account balances: $48,000 for both cash and common stock. Boat 25 was started on February 10 and finished on May 31. To build the boat, Mapleton had incurred cash costs of $8,640 for labor and $7,500 for Page 567materials. During the same period, Mapleton paid $11,160 cash for actual manufacturing overhead costs. The company expects to incur $210,600 of indirect overhead cost during 2019. The overhead is allocated to jobs based on direct labor cost. The expected total labor cost for the year is $162,000. Mapleton uses a just-in-time inventory management system. Consequently, it does not have raw materials inventory. Raw materials purchases are recorded directly in the Work in Process Inventory account. Required Use the horizontal financial statements model, as illustrated here, to record Mapleton’s business events. The first row shows beginning balances. If Mapleton desires to earn a profit equal to 20 percent of cost, for what price should it sell the boat? If the boat is not sold by year-end, what amount would appear in the Work in Process Inventory and Finished Goods Inventory on the balance sheet for Boat 25? Is the amount of inventory you calculated in Requirement c the actual or the estimated cost of the boat? When is it appropriate to use estimated inventory cost on a year-end balance sheet?

Answer 1

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Mapleton Corporation
Calculation of predetermined overhead rate:		Note
Expected indirect overhead	210,600.00	A
Expected labor cost	162,000.00	B
Predetermined overhead rate	130.00%	C=A/B
Cost of Boat 25
Materials	7,500.00
Direct labor	8,640.00	D
Allocated indirect overhead	11,232.00	E=D*C
Cost of Boat 25	27,372.00	F
Profit margin on cost	20%	G
Profit margin on cost	5,474.40	H=F*G
Desired sale price	32,846.40	I=F+H

So it should sell the boat for $ 32,846.40 to have profit of 20% on cost.

If the boat is not sold by year-end then there will be Finished Goods Inventory of $ 27,372. As boat is already completed so there will be no Work in Process Inventory.

The amount of inventory calculated in Requirement is the estimated cost of the boat because we have not assigned actual cost but allocated indirect overhead cost to the boat.

When is it appropriate to use estimated inventory cost on a year-end balance sheet?

It is appropriate when there are no abnormal loses and business has sun normally through out the year.