Case 6 - M. Gerry Naufal. R. G. YP A 69

M. Gerry Naufal. R. G.
29123123 – YP69A
FRC CASE 6
Fire Destroyed
Hector P. Wastrel, a careless employee, left some combustible materials near an open flame
in Salter Company’s plant. The resulting explosion and fire destroyed the entire plant and
administrative offices. Justin Quick, the company’s controller, and Constance Trueheart, the
operations manager, were able to save only a few bits of information as they escaped from
the roaring blaze.
“What a disaster,” cried Justin. “And the worst part is that we have no records to use
in filingan insurance claim.”
“I know,” replied Constance. “I was in the plant when the explosion occurred, and I
managed to grab only this brief summary sheet that contains information on one or two of
our costs. It says that our direct labor cost this year totaled $180,000 and that we
purchased $290,000 in raw materials. But I’m afraid that doesn’t help much; the rest of our
records are just ashes.”
“Well, not completely,” said Justin. “I was working on the year-to-date income
statement when the explosion knocked me out of my chair. I instinctively held onto the page
I was working on, and from what I can make out, our sales to date this year totaled
$1,200,000 and our gross margin was 40% of sales. Also, I can see that our goods
sold to customers totaled $810,000 at cost.”
“Maybe we’re not so bad off after all,” exclaimed Constance. “My sheet says that
prime cost totaled $410,000 this year and that manufacturing overhead is 70% of
conversion cost. Now if we just had some information on our beginning inventories.”
“Hey, look at this,” cried Justin. “It’s a copy of last year’s annual report, showing our
inventories when this year started. Let’s see, raw materials were $18,000, work in
process was $65,000, and finished goods were $45,000.
“Super,” yelled Constance. “Let’s go to work.” To file an insurance claim, the
company must determine the amount of cost in its inventories as of the date of the fire. You
may assume that all materials used during the year were direct materials.
Required:
Determine the amount of cost in the Raw Materials, Work in Process, and Finished
Goods inventory accounts as of the date of the fire. (Hint: One way to proceed would be
to reconstruct the various schedules and statements that would have been affected by the
company’s inventory accounts during the period). To file an insurance claim, the company
must determine the amount of cost in its inventories as of the date of the fire.
Answer
Components Cost
Direct Labor Cost $180.000
Raw Materials (Purchased) $290.000
Sales $1.200.000
Gross Margin of Sales (40%) $480.000
Goods Available for Sale $810.000
Prime Cost $410.000
Beginning raw materials $18.000
Beginning work in the process $65.000
Beginning finished goods $45.000
Manufacturing Overhead (70%) $287.000
Prime Cost = Direct Material + Direct Labor

$410.000 = Direct Material + $180.000
Direct Material = $230.000
Conversion Cost = Direct Labor (30%) + Manufacturing Overhead (70%)

Manufacturing Overhead = 70/30 *180.000
Manufacturing Overhead = $420.000
Total Material Available = Material purchased + Beginning Material

Total Material Available = $290.000 + $18.000
Total Material Available = $308.000
Ending Raw Material = Total Material Available - Raw Material used (Direct Material)
Ending Raw Material = 308.000 - 230.000 = 78.000
Total manufacturing cost = Direct Material + Direct Labor + Manufacturing Overhead

Total manufacturing cost = 230.000 + 180.000 + 420.000 = 830.000
Cost of goods manufactured = Cost Goods Available for Sale - Beginning finished goods
inventory
Cost of good manufactured = 810.000 - 45.000 = 765.000
Cost Ending Work in Progress = Total manufacturing cost + Beginning work in process - cost
of goods manufactured
Cost Ending Work in Progress = 830.000 + 65.000 - 765.000 = 130.000
Cost of Goods Sold = Sales - Gross Profit

Cost of Good Sold = 1.200.000 - 480.000 = 720.000
Ending Finished Goods Inventory = Goods available for sale - Cost of goods sold
Ending Finished Goods Inventory = 810.000 - 720.000 = 90.000
COST OF GOODS MANUFACTURED Amounts($) Amounts($)
Direct materials :
beginning raw material inventory 18.000
add: purchase of raw materials 290.000
total material available 308.000
Deduct: Ending raw materials inventory 78.000
Raw materials used in production 230.000
Direct Labor 180.000
Manufacturing Overhead Applied 420.000
Total Manufacturing Costs 830.000
Add: Beginning work in process inventory 65.000
895.000
Deduct: Ending work in process inventory (130.000)
Cost of Goods Manufactured 765.000
COST OF GOODS SOLD
Beginning finished goods inventory 45.000
Add: Cost of goods manufactured 765.000
Cost of goods available for sale 810.000
Deduct: ending finished goods inventory (90.000)
Unadjusted cost of goods sold 720.000
Add: Underapplied overhead 0
Adjusted cost of goods sold 720.000
To file an insurance claim, the company must determine the amount of cost in its inventories
as of the date of the fire. All materials used during the year were direct materials.
● The closing Raw Material is $78,000.
● Closing Work-In-Process is $130,000.
● Closing Finished Goods is $90,000.
Closing inventory is the inventory that remains unsold or unused at the end of the reporting
period. It can be raw materials, work-in-process materials, or finished goods.
Manufacturing overhead includes all indirect costs incurred during the manufacturing
process. This overhead is applied to the units produced during a reporting period. Because
direct materials and direct labor are usually thought to be the only costs that directly apply to
a production unit, manufacturing overhead is (by default) all of a factory's indirect costs.

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M. Gerry Naufal. R. G.

Direct Labor Cost $180.000

Raw Materials (Purchased) $290.000

Gross Margin of Sales (40%) $480.000

Goods Available for Sale $810.000

Prime Cost $410.000

Beginning raw materials $18.000

Beginning work in the process $65.000

Beginning finished goods $45.000

Manufacturing Overhead (70%) $287.000

Prime Cost = Direct Material + Direct Labor

Conversion Cost = Direct Labor (30%) + Manufacturing Overhead (70%)

Total Material Available = Material purchased + Beginning Material

Total manufacturing cost = Direct Material + Direct Labor + Manufacturing Overhead

Cost of Goods Sold = Sales - Gross Profit

beginning raw material inventory 18.000

add: purchase of raw materials 290.000

total material available 308.000

Deduct: Ending raw materials inventory 78.000

Raw materials used in production 230.000

Direct Labor 180.000

Manufacturing Overhead Applied 420.000

Total Manufacturing Costs 830.000

Add: Beginning work in process inventory 65.000

Deduct: Ending work in process inventory (130.000)

Cost of Goods Manufactured 765.000

COST OF GOODS SOLD

Beginning finished goods inventory 45.000

Add: Cost of goods manufactured 765.000

Cost of goods available for sale 810.000

Deduct: ending finished goods inventory (90.000)

Unadjusted cost of goods sold 720.000

Add: Underapplied overhead 0

Adjusted cost of goods sold 720.000

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