Question

Ehrlich Company had the following inventory balances at the beginning and end of the year:

January 1   December 31

Raw material $60,000 $50,000

Work in proces 140,000   180,000

Finished goods 280,000. 255,000

During the year, the company purchased $100,000 of raw material and incurred $340,000 of direct labor costs.

Other data: manufacturing overhead incurred, $440,000; manufacturing overhead applied, $450,000

Sales, $1,560,000;

Selling and administrative expenses, $90,000;

Income tax rate, 30%.

Required: 
A. Calculate cost of goods manufactured.

B. Calculate cost of goods sold.

C. Determine Ehrlich's net income. (prepare an income statement)

Answer 1

cost of goods manufactured can be calculated in the following way:

Cost of goods manufactured
Beginning raw material	$60,000
Add:Raw material purchase	$100,000
raw material available for use	$160,000
Less: Ending raw material	($50,000)
Raw material used		$110,000
Direct labor		$340,000
Manufacturing overhead applied		$450,000
Total manufacturing cost		$900,000 [110,000+340,000+450,000]
Beginning work in process		$140,000
Total Cost of work in process		$1,040,000
Less: Ending work in process		($180,000)
Cost of goods manufactured		$860,000

B.cost of goods sold

Beginning Finished goods	$280,000
Add: cost of goods manufactured	$860,000
Less: Overhead overapplied	$10,000 [440,000-450,000]
Less Ending finished goods	($255,000)
Cost of goods sold	$875,000

C.

Income statement

Sales Revenue		$1,560,000
Cost of goods sold		($875,000)
Gross Margin		$685,000
Selling, general and administrative expense		($90,000)
Income from operation		$595,000[$685,000-90,000]
Less: Income tax 30%		$178,500[$595,000*30%]
Profit After Tax		$416,500[$595,000-178,500]

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