The beginning balances of raw materials and finished goods inventory accounts of

ID: 2492869 • Letter: T

Question

The beginning balances of raw materials and finished goods inventory accounts of the ABC Corp. as of March, 1 are $2,000 (50 units) and $3,000 (30 units), respectively. The data on manufacturing and sales operations of the company for March are presented below: Some additional information on the month of March is provided: ABC Corp. intends to purchase materials for manufacturing process at a price of $45 per unit. The selling price of the finished product is $300 per unit. One unit of raw material is needed for each unit of finished product. The company uses the FIFO method for stock valuation. There is no beginning or ending work in process. Depreciation expense for the month is $1, 200. General and administrative expenses are $5,000. Ignore taxes. The company expects to pay dividends of $3,000. Calculate ending balances in raw materials and finished goods inventory accounts as of March, 31 prepare budgeted income statement for March.

Explanation / Answer

Calculation of ending balances in raw materials and finished goods inventory accounts:

Under FIFO, first bought inventory was first sold and the latest bought goods will be in inventory.

Ending Balance in raw material account:

Ending Inventory in units

= Opening inventory + Purchases – Issues

= 50 + 95 – 120

= 25 units

These 25 units were out of the latest bought goods of 95 units. Therefore cost per unit is $45.

Ending Inventory in raw material account

= 25 * 45

= $1125

Ending Balance in Finished Goods Inventory:

Ending Inventory in units

= Opening inventory + Purchases – Sales

= 30 + 120 – 100

= 50 units

Cost per Unit:

Total Cost incurred

= Variable Cost + Fixed Cost

= (75 * 120) + 1800

= $9000 + $1800

= $10800

Cost per unit = total cost / units = 10800 / 120 = $90

Ending Inventory = 50 * 90 = $4500

Ending Balances in Inventory:

Raw Material = $1125

Finished Goods = $4500

Cost of Goods Sold = Opening Inventory + Purchases – Closing Inventory

= (2000 + 3000) + (95 * 45) – (1125 + 4500)

= 5000 + 4275 – 5625

= $3650

Budgeted Income Statement for March:

Particulars

Amount ($)

Sales (100 * 300)

30000

Less: Cost of Goods Sold

3650

Gross Profit

26350

Less: Depreciation Expense

1200

Less: Variable Manufacturing Costs

9000

Less: Fixed Costs

1800

Less: General and Administrative Expense

5000

Less: Dividends

3000

Net Profit

6350