Question

QUESTION 7 UVM, Inc. employs a process costing system and uses normal costing. Its records showed the following inventory balances in 2019: Jan 1, 2019 Dec 31,2019 Materials .................................. $31,000 ?? Work in process ................................. 71,000 50,000 Finished goods ................................... 66,000 81,000 The following transactions were recorded for the year: Materials were purchased, $450,000. Materials were used in production, $465,000 ($431,000 direct and $34,000 indirect). Employee costs were: direct labor, $296,000; indirect labor, $63,000; and administrative salaries, $157,000. Selling costs, $134,000. Factory utility costs, $14,000. Depreciation related to factory operations was $85,000 and $5,000 was related to selling and administrative activities. Manufacturing overhead was applied. The company uses a predetermined overhead rate of $4 per machine hour. At the beginning of the year, the company estimated that it would work 44,000 machine-hours. The actual level of activity for the year was 48,000 machine-hours. Sales for the year totaled $1,287,000 Required: What was UVM’s ending Materials balance? How much overhead was applied to Work in Process in 2019? What was UVM’s actual overhead? What was UVM’s cost of goods manufactured? What was UVM’s cost of goods sold (ignoring over- or under-applied overhead)? What was UVM’s gross profit margin? (Remember to adjust cost of goods sold as necessary.) What were UVM’s total selling, general and administrative expenses? What was UVM’s net income for 2019?

Answer 1

1) Calculation of UVM's ending Material Balance:

Calculation of Closing Inventory
	$
Opening Material Balance	31,000
Purchases	4,50,000
Total material Available	4,81,000
(-) Material Used in Production	4,65,000
Closing Material Balance	16,000

The formula to calculate Closing Inventory is as follows:

Closing Material Balance = Opening Material Balance + Purchases – Material Used for Production.

By applying the above formula the closing Material Balance is $16,000.

2) UVM's Actual Overhead Calcualtion:

calcualtion of UVM's Actual Overhead
Indirect Material	34000
Indirect Labour	63,000
Factory Utility Costs	14,000
Depreciation Factory Operations	85000
Total Actual Manufacturing Overhead	196000

Direct material and Labour does not come under Overhead cost. Only Indirect Costs are Overhead Cost. The Cost that are related to Manufacturing of the goods are used for calculation of overhead and other administrative and selling expenses are ignored.

3)

Calculation of UVM's Cost of Goods Manufactured
Material Used in Production	4,65,000
Direct Labour	2,96,000
Manufacturing Overhead	1,96,000
Total Manufacturing Cost	9,57,000
(+) Opening WIP	71,000
(-) Closing WIP	50,000
Cost Of Goods Manufactured	9,78,000

Cost of Goods Manufacturesd is the cost incured in production of completed goods. here administration and selling expenses are ignored because those are not the expenses incured in production of goods. Opening work in progress is added because those goods will be completed during the period and sent to finished goods and similarly closing work in progress is deducted because those are not completed and will be shown separtely and used in calculating for the next accounting period. refer to above calcualtion for Manufacturing Overhead.

4)

Calculation of Cost of goods sold
Cost Of goods Manufactured	978000
Administrative Salaries	157000
selling Costs	134000
Depreciation relating to selling and administrative activities	5000
	1274000
(+)Opening Finished Goods	66,000
(-)Closing Finished Goods	81,000
Cost of goods sold	12,59,000

Refer to previous calcualtion for cost of goods manufactured. Cost of goods sold is the total costs incurred in manufacturing and selling of the products that are sold. as we are calculating cost of goods that are sold we are adding opening finished goods and reducing closing finished goods. This cost includes all the expenses that are incurred starting from purchasing materials till selling goods.