Question

Problem 2-47 Inventory Estimates; Partial Data (LO 2-5, 2-6)

On May 10, after the close of business, Fresno Furniture Company had a devastating fire that destroyed the company’s work-in-process and finished-goods inventories. Fortunately, all raw materials escaped damage because materials owned by the firm were stored in another warehouse. The following information is available:

Sales revenue through May 10		$	330,000
Income before taxes through May 10			68,000
Direct labor through May 10			120,000
Cost of goods available for sale, May 10			275,000
Work-in-process inventory, January 1			21,000
Finished-goods inventory, January 1			35,000

Fresno Furniture Company’s accountants determined that the cost of direct materials used normally averages 25 percent of prime costs (i.e., direct material + direct labor). In addition, manufacturing overhead is 50 percent of the firm’s total production costs. The gross margin is 30 percent of sales.

Required:

The company is in the process of negotiating a settlement with its insurance company.

1.	Calculate the cost of finished-goods inventory that was destroyed by the fire.

2.	Calculate the cost of work-in-process inventory that was destroyed by the fire.

     

Answer 1

1)cost of goods sold= Sales revenue (/1-gross margin)

     = 330000 (1-.30)

     = 231000

cost of good sold = cost of goods available for sale -ending Finished goods

   231000 =275000- EFG

   Ending FG = 275000-231000

             = $ 44000

cost of finished-goods inventory that was destroyed by the fire. : 44000

2)Let direct material used be "X"

Direct material used = .25 * (Direct material+direct labor)

x =.25 (x+120000)

x = .25x +30000

x -.25x =30000

.75x =30000

   .x =30000/.75

= 40000

direct material : $ 45000

Let total production cost be "Y".

Production cost =direct material+direct labor+ overhead

y = 40000+120000+(y*.50)

y = 160000+.50y

y-.50y = 160000

.50y =160000

y =160000/.50

        = 320000

Total production cost =320000

***cost of goods manufactured =cost of goods available for sale-beginning FG

       =275000-35000

         = 240000

Ending Work in process destoryed by fire = Beginning WIP+Total production cost- Cost of goods manufactured

            =21000+320000-240000

           = $ 101000