Question

The following events took place for Fed Inc. during October 2012, the first month of operations as a producer of road bikes:

Purchased $427,000 of materials.

Used $367,500 of direct materials in production.

Incurred $315,000 of direct labor wages.

Applied factory overhead at a rate of 80% of direct labor cost.

Transferred $892,500 of work in process to finished goods.

Sold goods with a cost of $848,750.

Sold goods for $1,500,000.

Incurred $367,500 of selling expenses.

Incurred $131,950 of administrative expenses.

a. Prepare the October income statement for Fed. Assume that Fed uses the perpetual inventory method.

b. Determine the inventory balances at the end of the first month of operations.

Answer 1

Solution

Cost of goods manufactured:

Direct materials $367,500

Direct labor $315,000

Factory overhead $252,000

Total manufacturing costs $934,500

Add Work in process inventory, October 1: $0

Less Work in process inventory, October 31: $42,000

Cost of goods manufactured $892,500

a) Income statement

Sales $1,500,000

less

Cost of goods sold

Beg. finished goods $0

Cost of goods manufactured $892,500

less Ending finished goods $43,750

Cost of goods sold $848,750

Gross profit $621,250

less Operating expenses

selling expenses $367,500

administrative expenses $131,950

Earnings before taxes $151,800

b. Determine the inventory balances at the end of the first month of operations.

Direct materials inventory $59,500

Work in process inventory $42,000

Finished goods inventory $43,750

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