Problem 17 - Accounting

Question

The following information is available for the first month of operations of Zahorik Company, a manufacturer of mechanical pencils: \(\begin{array}{lr}\text { Sales } & \$ 360,000 \\ \text { Gross profit } & 210,000 \\ \text { Cost of goods manufactured } & 180,000 \\ \text { Indirect labor } & 78,000 \\ \text { Factory depreciation } & 12,000 \\\ \text { Materials purchased } & 111,000 \\ \text { Total manufacturing costs for the period } & 207,000 \\ \text { Materials inventory } & 15,000\end{array}\) Using the above information, determine the following missing amounts: a. Cost of goods sold b. Finished goods inventory c. Direct materials cost d. Direct labor cost e. Work in process inventory

Step-by-Step Solution

Answer

a. COGS is $150,000. b. Finished Goods Inventory is $30,000. c. Direct Materials Cost is $96,000. d. Direct Labor Cost is $21,000. e. Work in Process Inventory is $27,000.

Step 1: Calculate Cost of Goods Sold

To find the Cost of Goods Sold (COGS), use the formula: \( \text{COGS} = \text{Sales} - \text{Gross Profit} \). Here, \( \text{Sales} = \\(360,000 \) and \( \text{Gross Profit} = \\)210,000 \), so \( \text{COGS} = \\(360,000 - \\)210,000 = \$150,000 \).

Step 2: Determine Finished Goods Inventory

Finished Goods Inventory can be found by using \( \text{Finished Goods Inventory} = \text{Cost of Goods Manufactured} - \text{COGS} \). Here, \( \text{Cost of Goods Manufactured} = \\(180,000 \), so \( \text{Finished Goods Inventory} = \\)180,000 - \\(150,000 = \\)30,000 \).

Step 3: Calculate Direct Materials Cost

Direct Materials Cost can be calculated using the formula: \( \text{Direct Materials Cost} = \text{Materials Purchased} - \text{Materials Inventory} \). \( \text{Materials Purchased} = \\(111,000 \) and \( \text{Materials Inventory} = \\)15,000 \), leading to \( \text{Direct Materials Cost} = \\(111,000 - \\)15,000 = \$96,000 \).

Step 4: Find Direct Labor Cost

To find the Direct Labor Cost, use \( \text{Total Manufacturing Costs} = \text{Direct Materials Cost} + \text{Direct Labor Cost} + \text{Indirect Labor} + \text{Factory Depreciation} \). Solving for Direct Labor Cost: \( \text{Direct Labor Cost} = \text{Total Manufacturing Costs} - \text{Direct Materials Cost} - \text{Indirect Labor} - \text{Factory Depreciation} \). Substituting the values: \( \\(207,000 = \\)96,000 + \text{Direct Labor Cost} + \\(78,000 + \\)12,000 \). This results in \( \text{Direct Labor Cost} = \$21,000 \).

Step 5: Calculate Work in Process Inventory

Work in Process Inventory can be calculated using the formula: \( \text{Work in Process Inventory} = \text{Total Manufacturing Costs} - \text{Cost of Goods Manufactured} \). Given, \( \text{Total Manufacturing Costs} = \\(207,000 \) and \( \text{Cost of Goods Manufactured} = \\)180,000 \), we have \( \text{Work in Process Inventory} = \\(207,000 - \\)180,000 = \$27,000 \).

Key Concepts

Finished Goods Inventory

Finished Goods Inventory refers to the final products that a company has completed but has not yet sold. These are the items sitting in the warehouse ready to be shipped to customers. Knowing the amount of finished goods inventory helps businesses understand how much product is available for sale at any given time.

In manufacturing, a company may start with raw materials and work them through various processes to create a finished product. The value of the finished goods can be calculated using:

• The Cost of Goods Manufactured (the total cost incurred in making the products).
• Subtracting the Cost of Goods Sold (COGS), which represents the products that have been sold.

This calculation helps in determining the unsold products at the end of a period, hence, keeping a check on stock levels.

Direct Materials Cost

Direct Materials Cost refers to the expense associated with the raw materials that are used to manufacture a product. It is a crucial component of a company's production expenses and varies directly with the level of production.

To calculate Direct Materials Cost,

• Subtract the ending materials inventory from the total materials purchased during the period.

This gives you the materials that have been put into production.

Accurately calculating direct materials costs is vital because it affects both the pricing strategy and the profitability of a company, ensuring that a business understands its production costs well.

Direct Labor Cost

Direct Labor Cost is a term used to describe the wages paid to workers who are directly involved in the manufacturing of products. These are the costs that directly contribute to the creation of goods.

To find the direct labor cost, consider:

• The total manufacturing costs involved in production.
• Subtract the costs of direct materials, indirect labor (supervisory and maintenance staff), and other overheads like factory depreciation.

Determining this cost is essential for manufacturers as it allows them to measure how much is spent on labor in producing an item, thereby influencing costing and pricing strategies.

Work in Process Inventory

Work in Process (WIP) Inventory refers to the materials and components that have begun their transformation into finished goods but are not yet complete. This is an important measure as it represents the resources tied up in the production process.

To calculate WIP Inventory,

• Use the total manufacturing costs (expenses incurred during production).
• Subtract the cost of goods manufactured at that stage.

Keeping track of WIP Inventory helps companies manage production efficiency and resource utilization, ensuring that processes stay on track and budgets are maintained.