Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.

Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.

“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”

“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.”

“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were \(476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were \)505,000, \(245,000, and \)1,425,000, respectively. Wait! Cost of goods available for sale was \(1,340,000.”

“Great,” says Stephen. “I remember that sales for the period were approximately \)1,700,000. Given our gross profit of 30%, that’s all you should need.”

Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were:

• Direct Materials, \(113,000

• Work-in-Process, \)229,000

• Finished Goods, $154,000

Requirements

1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods.

2. Itemize a list of the cost of inventory lost.

Step by step solution

01

Step-by-Step SolutionStep 1 Preparation of flow of costs schedule

Powerswitch Inc.
Flow of costs Schedule
For the 1st quarter
Raw material Inventory	Work-in-process Inventory	Finished Goods Inventory
Beginning DM $113,000	Beginning WIP $229,000	Beginning FG $154,000
+ Purchase of DM 476,000	+DM used 446,000	+COGM 1,186,000
DM available for use 589,000	+DL 505,000	Cost of goods available for sales 1,134,000
-Ending DM 143,000	+MOH 245,000	-Ending FG 150,000
DM Used $446,000	Total manufacturing cost to account for 1,425,000	COGS $1,190,000
	-Ending WIP 239,000
	COGM 1,186,000

Working notes: Calculations

$\begin{array}{c}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{COGS}\mathbf{=}\mathbf{Sales}\mathbf{\times }(\mathbf{1}\mathbf{-}\mathbf{GrossProfit}\mathbf{\%})\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{700}\mathbf{,}\mathbf{000}\mathbf{\times }(\mathbf{1}\mathbf{-}\mathbf{30}\mathbf{\%})\\ =\$1,190,000\end{array}$

$\begin{array}{c}\mathrm{EndingFGInventory}=\mathrm{Costofgoodsavailableforsales}-\mathrm{COGS}\\ =\$1,340,000-\$1,190,000\\ =\$150,000\end{array}$

role="math" localid="1653033001331" $$\begin{gathered} \mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{manufactured}\mathbf{=}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{available}\mathbf{}\mathbf{for}\mathbf{}\mathbf{sale}\mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{FGInventory} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{340}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{154}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{186}\mathbf{,}\mathbf{000} \end{gathered}$$

role="math" localid="1653033138659" $$\begin{gathered} \mathbf{Ending}\mathbf{}\mathbf{WIPInventory}\mathbf{=}\mathbf{Total}\mathbf{}\mathbf{Manufacturing}\mathbf{}\mathbf{costs}\mathbf{}\mathbf{to}\mathbf{}\mathbf{account}\mathbf{}\mathbf{for}\mathbf{-}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{manufactured} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{425}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{186}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{239}\mathbf{,}\mathbf{000} \end{gathered}$$

role="math" localid="1653033316923" $$\begin{gathered} \mathbf{Direct}\mathbf{}\mathbf{Material}\mathbf{}\mathbf{Used}\mathbf{=}\mathbf{TotalManufacturing}\mathbf{}\mathbf{costs}\mathbf{}\mathbf{to}\mathbf{}\mathbf{accountfor}\mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{WIP}\mathbf{-}\mathbf{Direct}\mathbf{}\mathbf{Labor}\mathbf{-}\mathbf{MOH} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{425}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{229}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{505}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{245}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{446}\mathbf{,}\mathbf{000} \\ \mathbf{Ending}\mathbf{}\mathbf{DM}\mathbf{=}\mathbf{DM}\mathbf{}\mathbf{available}\mathbf{}\mathbf{for}\mathbf{}\mathbf{use}\mathbf{-}\mathbf{Direct}\mathbf{}\mathbf{Materials}\mathbf{}\mathbf{used} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{589}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{446}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{143}\mathbf{,}\mathbf{000} \end{gathered}$$

02

Inventory lost in flood

Direct Materials	$143,000
WIP inventory	239,000
Finished goods inventory	150,000
Total inventory	$532,000

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