Question

A tornado struck the only manufacturing plant of Toledo Farm Implements (TFI) on June 1. All work-in-process inventory was destroyed, but a few records were salvaged from the wreckage and from the company's headquarters. If acceptable documentation is provided, the loss will be covered by insurance. The insurable value of work-in-process inventory consists of direct materials, direct labor, and applied overhead. The following information about the plant appears on the April financial statements at the company's downtown headquarters: Materials inventory, April 30 $ 98,000 Work-in-process inventory, April 30 172,400 Finished goods inventory, April 30 64,000 Cost of goods sold through April 30 697,200 Accounts payable (materials suppliers), April 30 43,200 Manufacturing overhead through April 30 369,800 Payroll payable, April 30 0 Withholding and other payroll liabilities, April 30 19,400 Overhead applied through April 30 359,200 A count of the inventories on hand May 31 shows the following: Materials inventory $ 86,000 Work-in-process inventory
Required:
Determine the cost of the work-in-process inventory lost in the disaster.

Answer 1

Answer:

The cost of the work in process inventory lost in the disaster is $155,000

Explanation:

The insurable value of work in process inventory consists of:

1. Direct materials which is equal to the difference between materials inventory as at April 30th and materials inventory as at May 31st.

This difference is the amount or cost of materials that were directly used in the manufacturing process.

$98,000 - $86,000 = $12,000

2. Direct Labour. This is the combination of Accounts Payable and Other Payroll Liabilities. That is $43,200 + $19,400 = $62,600

3. Applied overhead cost is $359,200

The total of these 3 figures gives the insurable value of WIPI

359,200 + 62,600 + 12,000 = $433,800

The question though says:

Determine the cost of the WIPI lost in the tornado.

WIPI does not include:

- Finished goods

- Unused raw materials

The ending (month end in this case) WIPI is the cost of partly completed or uncompleted work as at the end of the accounting period.

WIPI = Beginning WIPI amount + All manufacturing costs - Cost of finished goods

WIPI = 12,000 + 172,400 - 64,000 - 697,200 +43,200 + 0 + 19,400 + 359,200

WIPI = -$155,000