Question

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 Income before taxes through May Direct labor through May 10 68,000 120,000 265,000 January 21,000 35,000 103 Cost of goods available for sale, Work-in-process inventory, Finished-goods inventory, January1 May 10 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 Required: The company is in the process of negotiating a settlement with its insurance company.

Answer 1

1. Cost of finished goods inventory: $27000

Gross margin = 30% of sales = 30% x $340000 = $102000

Cost of goods sold = Sales - Gross margin = $340000 - $102000 = $238000

Cost of finished goods inventory = Cost of goods available for sale - Cost of goods sold = $265000 - $238000 = $27000

2. Cost of work-in-process inventory: $111000

Prime cost = Direct material + Direct labor

Assuming the prime cost is 'x'

x = 0.25x + $120000

x - 0.25x = $120000

0.75x = $120000

x = $160000

Total production cost = Prime cost + Manufacturing overhead

Assuming the total production cost is 'y'

y = $160000 + 0.50y

y - 0.50y = $160000

0.50y = $160000

y = $320000

Cost of goods manufactured = Cost of goods available for sale - Finished goods inventory, January 1 = $265000 - $35000 = $230000

Cost of goods manufactured = Total production cost + Work-in-process inventory, Janaury 1 - Work-in-process inventory, May 10

$230000 = $320000 + $21000 - Work-in-process inventory, May 10

Work-in-process inventory, May 10 = $320000 + $21000 - $230000 = $111000