Question

Watson’s revised pro forma cost of goods sold is closest to
A.	$16,565,000
B.	$16,942,000
C.	$17,377,000
D.	$17,760,000

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.

Answer 1

Cost of Goods Manufactured
Beginning Inventory	$1,200,000.00
Add: purchases (($2,200,000 + $3,200,000 + $6,720,000)	$12,120,000.00
Less: Ending Inventory	-$1,554,000.00
Material Consumed	$11,766,000.00
Direct Labour	$1,037,400.00
Overhead applied ({$1,176,000 indirect materials (10% of materials consumed) + $2,850,000 general factory overhead [$2,800,000 + (5,000 units × $10 per unit)]}	$4,026,600.00
Cost of Goods Manufactured	$16,830,000.00
Beginning pro forma finished goods inventory	$930,000.00
Ending pro-forma finished goods inventory (3300 units x ($16,830,000 CGM ÷ 145,000 revised unit output)	-$383,027.59
Cost of Goods sold	$17,376,972.41
Correct option C $17,377,000