Watson Corporation Pro Forma Statement of Cost of Goods Sold

Watson Corporation

Pro Forma Statement of Cost of Goods Sold

For the Year Ending August 31, Year 2

($000 omitted)

Direct materials:

Materials inventory, 9/1/Yr 1

$ 1,200

Materials purchased

11,400

Materials available for use

12,600

Materials inventory, 8/31/Yr 2

1,480

Direct materials consumed

$11,120

Direct labor

980

Factory overhead:

Indirect materials

1,112

General factory overhead

2,800

3,912

Cost of goods manufactured

16,012

Add: finished goods inventory

9/1/Yr 1

930

Cost of goods available for sale

16,942

Less: finished goods inventory,

8/31/Yr 2

(377)

Cost of goods sold

$16,565

The estimated production in units for the fiscal year should be revised from 140,000 to 145,000 units with the balance of production being scheduled in equal segments over the last 9 months of the year. The actual first quarter’s production was 25,000 units.

The planned inventory for finished goods of 3,300 units at the end of the fiscal year remains unchanged and will be valued at the average manufacturing cost for the year. The finished goods inventory of 9,300 units on September 1, Year 1, had dropped to 9,000 units by November 30, Year 1.

Due to a new labor agreement, the labor rate will increase 8% effective June 1, Year 2, the beginning of the fourth quarter, instead of the previously anticipated effective date of September 1, Year 2, the beginning of the next fiscal year.

The assumptions remain unchanged for direct materials inventory at 16,000 units for the beginning inventory and 18,500 units for the ending inventory. Direct materials inventory is valued on a FIFO basis. During the first quarter, direct materials for 27,500 units of output were purchased for $2,200,000. Although direct materials will be purchased evenly for the last 9 months, the cost of the direct materials will increase by 5% on March 1, Year 2, the beginning of the third quarter. One unit of raw material is used in each unit of product.

Indirect materials costs will continue to be projected at 10% of the cost of direct materials consumed.

One-half of general factory overhead is considered fixed.

Watson’s revised pro forma ending direct materials inventory is
A.	$1,280,000
B.	$1,480,000
C.	$1,520,136
D.	$1,554,000

Solution

Answer is D

Working:

Direct material units purchased in Quarter 1 = 27,500

Cost of the purchases in Quarter 1 = $2,200,000

Cost per unit in Quarter 1 = $80.00 ($2,200,000 / 27,500)

Cost increase in the third quarter = 5%

Cost per unit of direct material from third quarter = $84.00 ($80.00 + 5% of $80.00)

Ending direct material quantity = 18,500

Cost of the ending direct material inventory = 18,500 x $84.00

= $1,554,000