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Determining the flow of costs through a manufacturer’s inventory accounts

True Fit Shoe Company makes loafers. During the most recent year, True Fit incurred total manufacturing costs of \(21,900,000. Of this amount, \)2,600,000 was direct materials used and \(14,800,000 was direct labor. Beginning balances for the year were Direct Materials, \)700,000; Work-in-Process Inventory, \(1,500,000; and Finished Goods Inventory, \)1,100,000. At the end of the year, balances were Direct Materials, \(800,000; Work-in-Process Inventory, \)2,000,000; and Finished Goods Inventory, $1,080,000.

Requirements Analyze the inventory accounts to determine:

1. Cost of direct materials purchased during the year.

2. Cost of goods manufactured for the year.

3. Cost of goods sold for the year.

Step by step solution

01

Calculation of cost of direct materials purchased

$\begin{array}{c}\mathrm{Purchaseofdirectmaterials}=\mathrm{Directmaterialsused}+\mathrm{Endingdirectmaterials}-\mathrm{BeginningDirectMaterials}\\ =\$2,600,000+\$800,000-\$700,000\\ =\$2,700,000\end{array}$

02

Calculation of cost of goods manufactured

$\begin{array}{c}\mathrm{Costofgoodmanufactured}=\mathrm{BeginningWIPInventory}+\mathrm{TotalManufacturingcostincurred}-\mathrm{EndingWIPinventory}\\ =\$1,500,000+\$21,900,000-\$2,000,000\\ =\$21,400,000\end{array}$

03

Calculation of cost of goods Sold

$\begin{array}{c}\mathrm{Costofgoodssold}=\mathrm{BeginningFinishedGoodsInventory}+\mathrm{COGM}-\mathrm{EndingFinishedGoodsInventory}\\ =\$1,100,000+\$21,400,000-\$1,080,000\\ =\$21,420,000\end{array}$

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