Question

Telecom Switches designs and manufactures switches used in telecommunications. Serious flooding in Houston affected Telecom Switches facilities. Inventory was completely ruined and the company’s computer system, including its accounting records, were destroyed. [What internal control procedure did they ignore?]

Before the disaster recovery specialists from CleanPro Cleaning and Restoration (a real company owned by a Loyola accounting alum, Parrish Orth) start work, Telecom Switches’ controller, Vero Sanchez, is desperate to salvage whatever records she can to support an insurance claim for the destroyed inventory. She is standing in what is left of the accounting department with Brendan Pedrayes, the new cost accountant.

“Ugh, I did not know mud could smell so bad,” says Brendan. “What should I be looking for?” “Don’t worry about beginning inventory numbers,” responds Ms. Sanchez, “We’ll get them from last year’s annual report. We need the first quarter cost data.” “I was working on the first quarter’s result just before the storm hit,” Brendan says. “Look, my report is still in my desk drawer! But all I can make out is that for the first quarter, materials purchases were $476,000, and that direct labor, manufacturing overhead (other than indirect materials), and total manufacturing costs to account for totaled $505,000, $245,000, and $1,425,000, respectively. Oh, and it looks like cost of goods available for sale was $1,340,000!” “Great,” says Ms. Sanchez, “I remember that sales for the quarter were about $1.7 million. Since our gross profit historically is 30%, that’s all you should need.” Brendan is not so sure, but he remembers learning something helpful in cost class…

The annual report states that beginning inventory numbers were:

Raw materials $113,000

Work-in-process $229,000

Finished goods $154,000

So, you (as Brendan) must determine ending inventories of raw materials, work-in-process, and finished goods (These would be what was destroyed by flood). • Provide labelled work in a nice table that your boss could give to the insurance company to support your claim for losses. • Be sure you show your boss (Ms. Sanchez –and me by extension) supporting labelled calculations.  

Answer 1

Ending Inventory Raw material Work in process Finished goods $143,000 WN 3 $239,000 WN 2 $150,000 WN 1 Working notes: Sales Gross profit Cost of goods sold $1,700,000 $510,000 $1,190,000 WN 1 Ending Finished goods Inventory Cost of goods available for sale Cost of goods sold Ending Finished goods Inventory $1,340,000 $1,190,000 $150,000 Cost of goods available for sae Beginning Finished goods inventory Cost of goods manufactured $1,340,000 $154,000 $1,186,000 WN 2 Ending Work in process Inventory Total manufacturing cost to account for Cost of goods manufactured Ending Work in process Inventory $1,425,000 $1,186,000 $239,000 $1,425,000 $229,000 $1,196,000 Total manufacturing cost to account for Less: Opening Work in process Inventory Current Manufacturing cost Less: Direct Labor Manufacturing overhead Cost of Raw material consumed $505,000 $245,000 $446,000 WN 3 Ending Raw material inventory Opening Raw material inventory Add: Purchases Cost of raw material available for use Cost of Raw material consumed Ending Raw material inventory $113,000 $476,000 $589,000 $446,000 $143,000