Question

During the month of June, Reardon Company incurs $17,000 of direct labour and $8,500 of manufacturing overhead, and purchases $15,000 of raw materials. Between the beginning and the end of the month, the raw-materials inventory increases by $2,000, the finished goods inventory increases by $1,500, and the work-in-process inventory decreases by $3,000. What is the cost of goods manufactured?

Answer 1

Solution

Reardon Company

Determination of cost of goods manufactured:

Direct materials purchased                              $15,000

Less: increase in raw material inventory         $2,000

Cost of materials used                                                $13,000

Direct labor                                                                 $8,500

Manufacturing overhead                                             $17,000

Add: Decrease in work in process inventory              $3,000

Cost of goods manufactured                                      $41,500

Notes:

1. The information about inventory change (inventory increase or inventory decrease) in current period is reflected as follows in the cost of goods manufactured statement,

Purchases - inventory increase + inventory decrease. For the given question, the inventory increases by $2,000, hence cost of goods sold is arrived at as follows,

Purchases – inventory increase = $15,000 - $2,000 = $13,000.

1. A decrease in work in process indicates that the company used more inventory in the production and hence the cost of manufacturing increases by that amount. Hence, a decrease in WIP is added to arrive at cost of goods manufactured.
2. The changes in finished goods inventory levels is not reflected in cost of goods manufactured, but is reflected in cost of goods sold. Hence, the finished goods inventory increases of $1,500 is not relevant to arrive at the cost of goods manufactured.