Q2. Melat recently took over as the controller of Johnson brothers manufacturing. Last month, the previous controller left the company with little notice and left the accounting records in disarray. Melat needs the ending inventory balances to report first quarter numbers. For the previous month (March 2011) Melat was able to piece together the followinginformation:

Question

Direct materials purchased
$ 240,000

Work-in-process inventory, 3/1/2011
70,000

Direct materials inventory, 3/1/2011
25,000

Finished goods inventory, 3/1/2011
320,000

Conversion Costs
660,000

Total manufacturing costs added during the period
840,000

Cost of goods manufactured 4 times direct materials used
Gross margin as a percentage of revenues 20% Revenues 1,037,500
Calculate the cost of:
Finished goods inventory,3/31/2011
Work-in-process inventory,3/31/2011
Direct materials inventory, 3/31/2011

Answer 1

To calculate the ending inventory balances for Finished Goods, Work-in-Process, and Direct Materials for Johnson Brothers Manufacturing as of March 31, 2011, we will follow these steps:

1. Calculate Direct Materials Used

We know that:

• Direct Materials Purchased = $240,000
• Direct Materials Inventory at the beginning (3/1/2011) = $25,000

To calculate Direct Materials Used:

\[ \text{Direct Materials Used} = \text{Direct Materials Purchased} + \text{Direct Materials Inventory (beginning)} - \text{Direct Materials Inventory (ending)} \]

First, we need to determine the Direct Materials Used:

1. Cost of Goods Manufactured is 4 times Direct Materials Used.

Let \( X \) be the Direct Materials Used:

\[ \text{Cost of Goods Manufactured} = 4X \]

2. Total Manufacturing Costs = Direct Materials Used + Conversion Costs.

We can express this as:

\[ 840,000 = X + 660,000 \]

This implies:

\[ X = 840,000 - 660,000 = 180,000 \]

2. Calculate the Cost of Goods Manufactured:

Now that we have Direct Materials Used, we can find the Cost of Goods Manufactured:

\[ \text{Cost of Goods Manufactured} = 4 \times 180,000 = 720,000 \]

3. Calculate the Ending Finished Goods Inventory

We can now calculate how much was sold and how much is left in Finished Goods:

1. Beginning Finished Goods Inventory = $320,000
2. Cost of Goods Sold (COGS) is derived from the revenues. With a Gross Margin of 20%:

\[ \text{Gross Margin} = \text{Revenues} - \text{COGS} \]

Therefore,

\[ COGS = \text{Revenues} \times (1 - \text{Gross Margin %}) = 1,037,500 \times (1 - 0.20) = 1,037,500 \times 0.80 = 830,000 \]

3. Then, calculate the Ending Finished Goods Inventory:

\[ \text{Ending Finished Goods Inventory} = \text{Beginning Finished Goods} + \text{Cost of Goods Manufactured} - \text{COGS} \]

Substituting values:

\[ \text{Ending Finished Goods Inventory} = 320,000 + 720,000 - 830,000 = 210,000 \]

4. Calculate Ending Work-in-Process Inventory

Work-in-Process Inventory at the end can be calculated as follows:

\[ \text{Ending Work-in-Process Inventory} = \text{Beginning Work-in-Process} + \text{Total Manufacturing Costs} - \text{Cost of Goods Manufactured} \]

Substituting the values:

\[ \text{Ending Work-in-Process Inventory} = 70,000 + 840,000 - 720,000 = 190,000 \]

5. Calculate Ending Direct Materials Inventory

Finally, we can calculate the Ending Direct Materials Inventory using the formula from above:

\[ \text{Direct Materials Used} = \text{Direct Materials Purchased} + \text{Beginning Direct Materials} - \text{Ending Direct Materials Inventory} \]

Substituting values:

\[ 180,000 = 240,000 + 25,000 - \text{Ending Direct Materials Inventory} \]

Rearranging gives:

\[ \text{Ending Direct Materials Inventory} = 240,000 + 25,000 - 180,000 = 85,000 \]

Conclusion of Inventory Balances

To summarize:

• Ending Finished Goods Inventory (3/31/2011): $210,000
• Ending Work-in-Process Inventory (3/31/2011): $190,000
• Ending Direct Materials Inventory (3/31/2011): $85,000