Case Study I Guide

The following cost items are needed before a schedule of Cost Of Goods Manufactured (COGM) can be prepared: Materials used in production: Prime Costs Less Direct Labor Cost Direct Materials Cost Manufacturing Overhead Cost: Direct Labor Cost/ Percentage of Conversion Cost: $220,000/35% 100%-65% = 35% Conversion Cost Less Direct Labor Cost Manufacturing Overhead Cost of Goods Manufactured (COGM): Cost of Goods Available for Sale Less: finished goods inventory, beginning Cost of Goods Manufactured $ 1,020,000 (Given) (35,000) 985,000 $ $ 628,571 (Total Coversion Cost From above) (220,000) 408,571 $ 628,571 Rounded to nearest Dollar ( this is Total Conversion Cost) $ $ 545,000 (220,000) 325,000

The easiest way to proceed from this point is to place all of the amounts that are known in a partially completed schedule of cost of goods manufactured and a partially completed income statement. Then fill in the missing amounts by analyzing the available data. Direct Materials: Raw Materials Inventory, beginning Add: Purchases of Raw Materials Raw Materials Available for use Deduct: Raw Materials inventory, ending Raw Materials Used in Production ( See above) Direct Labor Cost Manufacturing Overhead Cost (See Above) Total Manufacturing Costs Add: Work in Process inventory, beginning 41,000 (Known Information) 325,000 366,000

A
325,000 (Known Information) 220,000 (Known Information) 408,571 953,571 56,000 1,009,571

Deduct: Work in Process inventory, ending

Cost of Goods Manufactured (COGM) - From above Therefore, A is Raw Materials Available for Use Less: Raw Materials Used in Production Raw Materials Inventory, Ending $ $ 366,000 (41,000) (Known Information) 325,000

Therefore B is
Work in Process Ending Sales Cost of Goods Sold (COGS): Finished Goods Inventory, Beginning Cost of Goods Manufactured Cost of Goods Available for Sale Deduct: Finished Goods Inventory, Ending Gross Margin

$ $

1,009,571 985,000 24,571 1350000 35000 985000 1020000

945000 405000

Therefore C is as follows:
Cost of Goods Available for Sale Less: Cost of Goods Sold Finished Goods Inventory, Ending $ 1,020,000 (945,000) 75 000

Some students may wish to start at the bottom of the income statement ( with gross margin) and work upwards from that point. Also, the solution can be obtained by the use of T-accounts.

Information Provided for Top Switch Materials Purchased Direct Labor Sales Gross Margin Cost of Goods Available for Sale Prime Costs Manufacturer Overhead Direct Materials Beginning Inventory Raw Materials Works in Progress Finished Goods $41,000 $56,000 $35,000 $325,000 $220,000 $1,350,000 30% $1,020,000 $545,000 65% of Conversion Cost $325,000

(Known Information) SUM (Known Information) (Known Information) SUM SUM

( Raw Materials Inventory + Purchases of Raw Materials)

(Raw Materials Used in Production + Direct Labor Cost + Manufacturing Overhead Cost) (Total Manufacturing Costs + Work in Process inventory)

(Known Information)

(Raw Materials Available for Use - Raw Materials Used in Production)

SUM

(Finished Goods Inventory, Beginning + Cost of Goods Available for Sale)

SUM

(Cost of Goods Available for Sale = Cost of Goods Sold)