Question

Watson’s revised pro forma cost of goods sold statement will report direct materials purchased of A....

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.

Watson Corporation

Pro Forma Statement of Cost of Goods Sold

For the Year Ending August 31, Year 2

($000 omitted)

Direct materials:

Materials inventory, 9/1/Yr 1

$ 1,200

Materials purchased

11,400

Materials available for use

12,600

Materials inventory, 8/31/Yr 2

1,480

Direct materials consumed

$11,120

Direct labor

980

Factory overhead:

Indirect materials

1,112

General factory overhead

2,800

3,912

Cost of goods manufactured

16,012

Add: finished goods inventory

9/1/Yr 1

930

Cost of goods available for sale

16,942

Less: finished goods inventory,

8/31/Yr 2

(377)

Cost of goods sold

$16,565

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.

Homework Answers

Answer #1

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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