Katy Perry Manufacturing Company specializes in producing fashion outfits. On July 31, 2012, a tornado touched down at its factory and general office. The inventories in the warehouse and the factory were completely destroyed as was the general office nearby. Next morning, through a careful search of the disaster site, however, Jim Craig, the company’s controller, and Teresa Perry, the cost accountant, were able to recover a small part of manufacturing cost data for the current month.
“What a horrible experience,” sighed Jim. “And the worst part is that we may not have enough records to use in filing an insurance claim.”
“It was terrible,” replied Teresa. “However, I managed to recover some of the manufacturing cost data that I was working on yesterday afternoon. The data indicate that our direct labor cost in July totaled $240,000 and that we had purchased $345,000 of raw materials. Also, I recall that the amount of raw materials used for July was $350,000. But I’m not sure this information will help. The rest of our records are blown away.”
“Well, not exactly,” said Jim. “I was working on the year-to-date income statement when the tornado warning was announced. My recollection is that our sales in July were $1,260,000 and our gross profit ratio has been 40% of sales. Also, I can remember that our cost of goods available for sale was $770,000 for July.”
“Maybe we can work something out from this information!” exclaimed Teresa. “My experience tells me that our manufacturing overhead is usually 60% of direct labor.”
“Hey, look what I just found,” cried Teresa. “It’s a copy of this June’s balance sheet, and it shows that our inventories as of June 30 are Finished Goods $38,000, Work in Process $25,000, and Raw Materials $19,000.”
“Super,” yelled Jim. “Let’s go work something out.” In order to file an insurance claim, Katy Perry Company must determine the amount of its inventories as of July 31, 2012, the date of the tornado touchdown.
Instructions
With the class divided into groups, determine the amount of cost in the Raw Materials, Work in Process, and Finished Goods inventory accounts as of the date of the tornado touchdown.