Problem 247 Inventory Estimates Partial Data LO 25 26 On May

Problem 2-47 Inventory Estimates; Partial Data (LO 2-5, 2-6)

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:

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 gross margin is 30 percent of sales.

The company is in the process of negotiating a settlement with its insurance company.

Solution

1)cost of goods sold= Sales revenue (/1-gross margin)

     = 330000 (1-.30)

     = 231000

cost of good sold = cost of goods available for sale -ending Finished goods

   231000 =275000- EFG

   Ending FG = 275000-231000

             = $ 44000

cost of finished-goods inventory that was destroyed by the fire. : 44000

2)Let direct material used be \"X\"

Direct material used = .25 * (Direct material+direct labor)

x =.25 (x+120000)

x = .25x +30000

x -.25x =30000

.75x =30000

   .x =30000/.75

= 40000

direct material : $ 45000

Let total production cost be \"Y\".

Production cost =direct material+direct labor+ overhead

y = 40000+120000+(y*.50)

y = 160000+.50y

y-.50y = 160000

.50y =160000

y =160000/.50

        = 320000

Total production cost =320000

***cost of goods manufactured =cost of goods available for sale-beginning FG

       =275000-35000

         = 240000

Ending Work in process destoryed by fire = Beginning WIP+Total production cost- Cost of goods manufactured

            =21000+320000-240000

           = $ 101000