Question

Mermaid Motors is a company that manufactures boats. On January 1, the Work In Process Inventory account had a balance of $2,000. At the end of the year, the Work-In-Process Inventory account had a balance of $1,500. In 2019, Mermaid Motors had the following information regarding their production costs. What is the company's cost of goods manufactured? Prime Cost 34,000 Direct Material 12,000 MOH Allocated 29,000 MOH Actual 27,500 63,500 62,000 41,500 103,000

Answer 1

Prime costs are the costs directly incurred to create a product or service. These costs include direct material, direct labour and actual manufacturing overheads. To this we add opening wip and deduct closing wip. Opening wip goes into production at the beginning and closing wip remains in process at the end . Hence this adjustment.

In the question, Direct material, which is given separately should not be considered since direct materials forms part of prime cost.

The right option is (B). - refer computation below

Computation of Cost of Goods Manufactured (COGM)
	Particulars	$
	Prime Cost	34000
	MOH _ Actual	27500
	Total (A)	61500
Add	Opening WIP (B)	2000
Less	Closing WIP ( C )	1500
	Cost of goods Manufactured (A+B)-C	62000