Problem 11 - Accounting

Question

Monterey Manufacturing Company reported the following materials data for the month ending October 31, 2010: \(\begin{array}{lr}\text { Materials purchased } & \$ 160,000 \\ \text { Materials inventory, October } 1 & 50,000 \\ \text { Materials inventory, October } 31 & 42,000\end{array}\) Determine the cost of direct materials used in production by Monterey during the month ended October 31, \(2010 .\)

Step-by-Step Solution

Answer

The cost of direct materials used is \( \$168,000 \).

Step 1: Understand the Formula

To determine the cost of direct materials used, we use the formula: \[ \text{Materials Used} = \text{Beginning Inventory} + \text{Materials Purchased} - \text{Ending Inventory} \] This formula helps in finding out how much material was actually consumed during the production process.

Step 2: Identify the Values from the Problem

From the problem, identify the following: - Beginning Inventory (October 1): \( \\(50,000 \) - Materials Purchased during October: \( \\)160,000 \) - Ending Inventory (October 31): \( \$42,000 \)

Step 3: Substitute the Values into the Formula

Now, plug these values into the formula: \[ \text{Materials Used} = 50,000 + 160,000 - 42,000 \]

Step 4: Perform the Calculation

Calculate the equation step by step: - First, add the Beginning Inventory and Materials Purchased: \( 50,000 + 160,000 = 210,000 \)- Next, subtract the Ending Inventory from the sum: \( 210,000 - 42,000 = 168,000 \)

Step 5: State the Result

The cost of direct materials used in production by Monterey during the month ended October 31, 2010, is \( \$168,000 \).

Key Concepts

Materials Inventory Calculation

Calculating materials inventory is crucial for understanding how much material is used in production over a specific time period. It involves reconciling beginning inventory, purchases, and ending inventory to determine the cost of materials consumed. Understanding this calculation helps manufacturers control costs and plan future purchases.
To calculate this, use the formula: \[ \text{Materials Used} = \text{Beginning Inventory} + \text{Materials Purchased} - \text{Ending Inventory} \]
This formula serves as a simple way to find out the materials that have directly contributed to the manufacturing of goods during a specific period.

Beginning Inventory

Beginning inventory is the initial stock of materials available at the start of a period. In financial terms, it's the value of all materials on hand at the beginning of a month, quarter, or year.
For Monterey, the beginning inventory on October 1 was \( \$50,000 \).
Having accurate beginning inventory figures ensures that you can calculate how much material has been consumed or how much is left at the end of the period. This starting point helps businesses track their material consumption effectively.

Ending Inventory

Ending inventory is the stock of materials still available at the end of a period. It represents what hasn't been used for production.
For Monterey, the ending inventory on October 31 was \( \$42,000 \).
The accuracy of ending inventory is vital for financial statements and helps businesses in making decisions about future material purchases. The ending inventory figure is subtracted when calculating the cost of materials used, which reflects the actual consumption during the period.

Materials Purchased

Materials purchased refers to the cost of materials that a company acquires during the accounting period. These are added to the beginning inventory to assess the total available material for production.
For Monterey, materials purchased amounted to \( \$160,000 \).
Understanding this component ensures that businesses have enough resources to meet production demands. Furthermore, keeping track of purchases allows companies to evaluate supplier reliability and their purchasing strategies to optimize costs.