Inventory Valuation

You are engaged in an audit of Roche Mfg. Company for the year ended December 31, Year 1. To reduce the workload at year-end, Roche took its annual physical inventory under your observation on November 30, Year 1. Roche's inventory account, which includes raw materials and work in process, is on a perpetual basis, and it uses the first-in, first-out method of pricing. It has no finished goods inventory. The company's physical inventory revealed that the book inventory of $60,770 was understated by $2,820. To avoid distorting the interim financial statements, Roche decided not to adjust the book inventory until year-end except for obsolete inventory items. Your audit revealed this information about the November 30 inventory:

• Pricing tests showed that the physical inventory was overpriced by $1,250.
• Addition and extension errors resulted in a $130 understatement of the physical inventory.
• Direct labor included in the physical inventory amounted to $11,360. Overhead was included at the rate of 200% of direct labor. You determined that the amount of direct labor was correct and the overhead rate was proper.
• The physical inventory included obsolete materials recorded at $340. During December, these materials were removed from the inventory account by a charge to cost of sales.

Your audit also disclosed the following information about the December 31, Year 1, inventory.

• Total debits to certain accounts during December are:

		December
Purchases		$26,960
Direct labor		12,370
Manufacturing overhead expense		27,320
Cost of sales		67,170

• The cost of sales of $67,170 included direct labor of $13,160.
• Normal scrap loss on established product lines is negligible. However, a special order started and completed during December had excessive scrap loss of $670 which was charged to Manufacturing Overhead Expense.

Required:

Question Content Area

1. Compute the correct amount of the physical inventory at November 30, Year 1.

Inventory per books			$fill in the blank 7a84b9fa4f8aff3_1
Addition and extension errorsObsolete inventoryPricing errorsPurchasesScrap loss on new productUnderstatement per client's computationsUnderstatement per client's computations			fill in the blank 7a84b9fa4f8aff3_3
Physical inventory, per client			$fill in the blank 7a84b9fa4f8aff3_4
Add: Addition and extension errorsAdd: PurchasesAdd: Understatement per client's computationsLess: Addition and extension errorsLess: LaborLess: Understatement per client's computationsAdd: Addition and extension errors			fill in the blank 7a84b9fa4f8aff3_6
Total			$fill in the blank 7a84b9fa4f8aff3_7
Add: Addition and extension errorsAdd: Pricing errorsAdd: Understatement per client's computationsLess: Addition and extension errorsLess: Pricing errorsLess: Understatement per client's computationsLess: Pricing errors	$fill in the blank 7a84b9fa4f8aff3_9
Add: Addition and extension errorsAdd: Obsolete inventoryAdd: Understatement per client's computationsLess: Addition and extension errorsLess: Obsolete inventoryLess: Understatement per client's computationsLess: Obsolete inventory	fill in the blank 7a84b9fa4f8aff3_11		fill in the blank 7a84b9fa4f8aff3_12
Corrected physical inventory at November 30, Year 1			$fill in the blank 7a84b9fa4f8aff3_13

Question Content Area

2. Without prejudice to your solution to Requirement 1, assume that the correct amount of the inventory at November 30, Year 1, was $57,130. Compute the amount of the inventory at December 31, Year 1.

Corrected physical inventory at November 30			$fill in the blank ae748dfef05506e_1
Add: Direct labor includedAdd: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: PurchasesAdd: Scrap loss on new productLess: Cost of salesLess: Direct labor includedLess: Materials inventory at December 31Less: Direct labor included		$Less: Direct labor included
Add: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: Overhead includedAdd: PurchasesLess: Cost of salesLess: Materials inventory at December 31Less: Obsolete items included in cost of salesLess: Overhead includedLess: Overhead included		Less: Overhead included	Less: Overhead included
Inventory of materials at November 30			$fill in the blank ae748dfef05506e_7
Add: Direct labor in inventoryAdd: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: PurchasesLess: Cost of salesLess: Materials inventory at December 31Less: Obsolete items included in cost of salesLess: PurchasesAdd: Purchases			Add: Purchases
Total material available			$fill in the blank ae748dfef05506e_10
Add: Direct labor in inventoryAdd: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: Scrap loss on new productDeduct: Cost of salesDeduct: Direct labor in inventoryDeduct: Materials inventory at December 31Deduct: Obsolete items included in cost of salesDeduct: Cost of sales		$Deduct: Cost of sales
Add: Direct labor in inventoryAdd: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: PurchasesLess: Direct labor in inventoryLess: LaborLess: Materials inventory at December 31Less: Obsolete items included in cost of salesLess: Labor	$Less: Labor
Add: Direct labor in inventoryAdd: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: OverheadLess: Direct labor in inventoryLess: Materials inventory at December 31Less: Obsolete items included in cost of salesLess: OverheadLess: Overhead	Less: Overhead	Less: Overhead
Total		$fill in the blank ae748dfef05506e_18
Accounts payableDirect labor in inventoryMaterials inventory at December 31Obsolete items included in cost of salesOverheadPurchasesSalesScrap loss on new productScrap loss on new product		Scrap loss on new product
Total		$fill in the blank ae748dfef05506e_21
Add: Materials inventory at December 31Add: Obsolete items included in cost of salesAdd: PurchasesLess: Direct labor in inventoryLess: Materials inventory at December 31Less: Obsolete items included in cost of salesLess: PurchasesLess: Scrap loss on new productLess: Obsolete items included in cost of sales		Less: Obsolete items included in cost of sales	Less: Obsolete items included in cost of sales
Materials inventory at December 31			$fill in the blank ae748dfef05506e_25
Add: Direct labor in inventoryAdd: Obsolete items included in cost of salesAdd: OverheadAdd: PurchasesLess: Cost of salesLess: Direct labor in inventoryLess: LaborLess: PurchasesAdd: Direct labor in inventory		$Add: Direct labor in inventory
Add: Obsolete items included in cost of salesAdd: OverheadAdd: PurchasesAdd: Scrap loss on new productLess: Cost of salesLess: Obsolete items included in cost of salesLess: OverheadLess: Scrap loss on new productAdd: Overhead		Add: Overhead	Add: Overhead
Inventory at December 31, Year 1			$fill in the blank ae748dfef05506e_31