How to calculate Cost of Goods Sold?

How to calculate Cost of Goods Sold?

Postby John_J » Fri Oct 08, 2010 9:27 am

Selected account balances for the year ended December 31 are provided below for Superior Company:
Selling and administrative salaries $ 110,000
Purchases of raw materials $ 290,000
Direct labor ?
Advertising expense $ 80,000
Manufacturing overhead $ 270,000
Sales commissions $ 50,000

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Inventory balances at the beginning and end of the year were as follows:

Beginning
of Year End of Year
Raw materials $ 40,000 $ 10,000
Work in process $ ? $ 35,000
Finished goods $ 50,000 $ ?

The total manufacturing costs for the year were $683,000; the goods available for sale totaled $740,000; and the cost of goods sold totaled $660,000.

I am trying to find the 'Work in process, beginning'. How do I calculate to get the correct answer?
John_J
 
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Re: How to calculate Cost of Goods Sold?

Postby Don_G » Fri Oct 08, 2010 11:30 am

You need to analyze the 3 Inventory accounts for the year.

Beg Bal plus Additions = Total Available less Transfers Out = End Bal.

Raw Material - Beg Bal 40,000 plus Purchases of 290,000 = 330,000 Available less Transfers to WiP = Ending Balance of 10,000. So Transfers to WiP were 320,000.

Next analyze Finished Goods, since we know more about it than WiP.

Finished Goods - Beg Bal 50,000 plus Transfers from WiP = Available for sale of 740,000 less Cost of Goods Sold of 660,000 = End Bal of 80,000. Since Goods Available for Sale were 740,000 and Beg Bal was 50,000 means Transfers from WiP were 690,000. Recap - BB 50,000 + 690,000 - 660,000 = 80,000

Work in Process - Beg Bal (unknown) plus Total Mfg Costs of 683,000 less Transfers to FG of 690,000 = End Bal of 35,000. End Bal 35,000 plus Transfers to FG 690,000 = 725,000 less Total Mfg Cost of 683,000 means a Beg Bal of 42,000. And Total Mfg Cost of 683,000 less Raw Matl of 320,000 less Mfg OH of 270,000 means Direct Labor = 93,000.

I know all these numbers seem like a very confusing solution. You need to T Account each Inventory account, post all known data, then back into the unknowns. Just follow the sequence of Beg Bal + Additions = Available less Deductions = End Bal. It works.
Don_G
 
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