8-17.07 Critical thinking about cost flows Fairbain Corporation was newly formed

Question

8-17.07 Critical thinking about cost flows Fairbain Corporation was newly formed early in 20X1. The following information relates to the full year: Raw materials purchased (net) Direct labor costs Factory overhead Selling, general & administrative $3,000,000 2,000,000 ,500,000 700,000 80% of the available raw material was transferred into production. 75% of the work in process was completed. 90% of the finished goods were sold. 10% of factory overhead related to depreciation. 20% of SG&A; related to depreciation. (a) How much is in ending inventory for (1) raw materials, (2) work in process, and (3) finished goods? (b) How much is in (1) cost of goods sold and (2) SG&A; expense for the period against income during the period?

Explanation / Answer

A.

1) Ending inventory:

Raw materials: (1-0.8)*3000000 = 600000

2) Work in process: (1-0.75)*0.8*3000000 = 600000

3) Finished goods = 0.8*0.75*(1-0.9)*3000000 = 180000

B) Cost of goods sold = 0.8*0.75*0.9*(3000000+2000000+0.9*1500000) = 3429000

SGA = 0.8*0.75*0.9*0.8*700000 = 302400

C) Depreciation = (0.1*1500000+0.2*700000)*0.8*0.75*0.9

= 156600

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