Question

On June 30, 2016, a flash flood damaged the warehouse and factory of Padway Corporation, completely destroying the work-in-process inventory. There was no damage to either the raw materials or finished goods inventories. A physical inventory is taken after the flood revealed the following valuations:

Raw materials $62,000
Work in process $0
Finished goods $119,000
The inventory on January 1, 2016, consisted of the following:

Raw materials $30,000
Work in process $100,000
Finished goods $140,000
Total $270,000
A review of the books and records disclosed that the gross profit margin historically approximated 25% of sales. The sales for the first six months of 2016 were $340,000. Raw material purchases were $115,000. Direct Labor costs for this period were $80,000, and manufacturing overhead was historically applied at 50% of direct labor.

Required:

Compute the value of the work-in-process inventory lost on June 30, 2016.

Answer 1

To calculate the value of the Work-in-Process inventory lost for Padway Corporation, we use sales data, production costs, and inventory records to first determine the cost of goods sold (COGS) and then subtract the sum of beginning WIP and total manufacturing costs from the sum of COGS and ending Finished Goods Inventory. The lost WIP inventory on June 30, 2016, is valued at $71,000.

Step-by-step explanation:

To compute the value of the work-in-process (WIP) inventory lost on June 30, 2016, for Padway Corporation, we need to apply a cost reconstruction method since the physical WIP inventory was destroyed. We start by calculating the gross profit, which would be 25% of sales. The sales for the first six months of 2016 were $340,000, so the cost of goods sold (COGS) is calculated by subtracting the estimated gross profit from sales.

First, we find the gross profit:
Gross Profit = Sales * Gross Profit Margin
Gross Profit = $340,000 * 25% = $85,000

Then, we calculate COGS:
COGS = Sales - Gross Profit
COGS = $340,000 - $85,000 = $255,000

Next, we need to determine the total manufacturing costs for the period by adding the raw materials used, direct labor, and manufacturing overhead:

• Raw Materials Used: Raw Materials Beginning Inventory + Purchases - Raw Materials Ending Inventory
• Direct Labor: $80,000
• Manufacturing Overhead: 50% of Direct Labor Costs

Raw Materials Used = $30,000 + $115,000 - $62,000 = $83,000

Manufacturing Overhead = $80,000 * 50% = $40,000

Total Manufacturing Costs = Raw Materials Used + Direct Labor + Manufacturing Overhead = $83,000 + $80,000 + $40,000 = $203,000

The value of the work-in-process inventory lost is found by subtracting the sum of beginning WIP and total manufacturing costs from the sum of COGS and ending finished goods inventory.

Value of WIP Lost = (COGS + Finished Goods Ending Inventory) - (WIP Beginning Inventory + Total Manufacturing Costs)

Value of WIP Lost = ($255,000 + $119,000) - ($100,000 + $203,000) = $71,000

The calculated value of work-in-process inventory lost due to the flood at Padway Corporation on June 30, 2016, is $71,000.