Watson’s revised pro forma cost of goods sold statement will report direct materials purchased of | |
A. | $11,400,000 |
B. | $11,600,000 |
C. | $11,800,000 |
D. | $12,120,000 |
The following information was
adapted from a question on Part 4 of the December 1990 CMA
examination that concerned preparation of a pro forma statement of
cost of goods sold. The following is Watson Corporation’s pro forma
statement of cost of goods sold for the year ended August 31, Year
2.
|
The results for the first quarter
required the following changes in the budget assumptions:
The estimated production in units for the fiscal year should be revised from 140,000 to 145,000 units with the balance of production being scheduled in equal segments over the last 9 months of the year. The actual first quarter’s production was 25,000 units. The planned inventory for finished goods of 3,300 units at the end of the fiscal year remains unchanged and will be valued at the average manufacturing cost for the year. The finished goods inventory of 9,300 units on September 1, Year 1, had dropped to 9,000 units by November 30, Year 1. Due to a new labor agreement, the labor rate will increase 8% effective June 1, Year 2, the beginning of the fourth quarter, instead of the previously anticipated effective date of September 1, Year 2, the beginning of the next fiscal year. The assumptions remain unchanged for direct materials inventory at 16,000 units for the beginning inventory and 18,500 units for the ending inventory. Direct materials inventory is valued on a FIFO basis. During the first quarter, direct materials for 27,500 units of output were purchased for $2,200,000. Although direct materials will be purchased evenly for the last 9 months, the cost of the direct materials will increase by 5% on March 1, Year 2, the beginning of the third quarter. One unit of raw material is used in each unit of product. Indirect materials costs will continue to be projected at 10% of the cost of direct materials consumed. One-half of general factory overhead is considered fixed. |
Opening Inventory of Materials = 16,000
Desired Ending Inventory of Materials = 18,500
Production revised to = 145,000
Direct Materials Used for Production = 145,000 x 1unit = 145,000
Direct Material Purchases during the year = Direct Material Usage + Desired Ending Material - Beginning Direct Material
= 145,000 + 18,500 - 16,000
= 147,500 units
27,500 Direct Materials purchased for $2,200,000
Each unit of Direct Material cost = $2,200,000 27,500 = $ 80 per unit.
Direct Material Purchase cost for the year = 147,500 x $80
= $11,800,000
Option C is correct answer.
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