EA SEE2 C. 2 Business EXP- Cost of Goods Sold

Lisa Arsenault operates a small basket weaving business as a sole proprietor. She incurred the following expenses in 2014: Beginning inventory raw material $5,000 Beginning inventory finished goods10,000 Ending inventory raw material 6,250 Ending inventory finished goods 4,700 Purchases 17,500 Fabric used in finished goods 2,350 Building rent 12,000 Freight in on fabric 300 Freight out on sale of finished goods 475 What was her cost of goods sold? A. $24,200 B. $24,375 C. $21,850 D. $24,675

Answer (A) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Freight out on sale of finished goods are selling expenses, not costs of inventory. Beginning inventory (raw materials and finished goods) $ 15,000 Materials and labor: Fabric used $ 2,350 Freight-in 300 Purchases 17,500 Goods available for sale 20,150 $ 35,150 Less ending inventory (raw materials and finished goods) (10,950) Cost of goods sold $ 24,200 Authors' note: This is a former EA exam question. The answer choices indicate that building rent is a Selling, General, and Administrative (SG&A) expense (i.e., not included in overhead and therefore not included in COGS).

Question: 4 The FX Partnership manufactures garden hoses for sale. In the month of January, its sales were $80,000. During that month, the partnership had: Beginning inventory, January 1 $ 0 Raw materials purchased January1 35,000 Raw materials shipping costs 1,585 Direct labor (production) 27,000 Factory overhead 6,000 Ending inventory, January 31 10,000 What is the cost of goods sold for the FX Partnership for the month of January? A. $53,585 B. $59,585 C. $58,000 D. $69,585

Answer (B) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Beginning inventory $ 0 Raw materials and labor: Direct labor $27,000 Raw materials 36,585 Production overhead 6,000 $ 69,585 Goods available for sale $ 69,585 Less ending inventory (10,000) Cost of goods sold $ 59,585

Ms. Zickert, a slot machine manufacturer, paid and incurred the following expenses during the current year: Raw materials $75,000 Materials and supplies 8,000 Freight-in on raw materials 5,000 Freight on shipment of finished slot machines 6,000 Direct labor 40,000 Indirect labor 22,000 Allocable overhead expenses for production 28,000 Beginning inventory 40,000 Ending inventory 29,000 What was the amount of Ms. Zickert's cost of goods sold for the current year? A. $195,000 B. $189,000 C. $224,000 D. $218,000

Answer (B) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Beginning inventory $ 40,000 Raw materials and labor: Labor $62,000 Raw materials 80,000 Materials and supplies 8,000 Production overhead 28,000 178,000 Goods available for sale $218,000 Less ending inventory (29,000) Cost of goods sold $189,000

XYZ Corporation, a clothing retailer, showed the following expenses in 2014: Clothing purchased for resale $72,000 Freight-in 3,550 Freight out to customers 1,750 Beginning inventory 55,650 Ending inventory 42,500 What is XYZ's cost of goods sold? A. $86,900 B. $175,450 C. $88,700 D. $90,450

Answer (C) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Therefore, the cost of goods sold is $88,700. Beginning inventory $ 55,650 Clothing purchased for resale 72,000 $127,650 Less ending inventory 42,500 $ 85,150 Freight-in 3,550 $ 88,700

Mr. March, a medical equipment manufacturer, paid and incurred the following expenses during 2014: Raw materials $60,000 Direct labor 50,000 Materials and supplies 50,000 Freight-in on raw materials 1,000 Freight on shipments of finished goods 1,000 Allocable overhead expenses for production 10,000 Cost of inventory donated to charity 1,000 Fair market value of inventory donated 3,000 Beginning inventory 20,000 Ending inventory 30,000 The inventory donated to charity was included in the beginning inventory and is not eligible for special treatment under Sec. 170(e)(3). What was the amount of Mr. March's cost of goods sold for 2014? A. $158,000 B. $161,000 C. $159,000 D. $160,000

Answer (D) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Goods included in beginning inventory that are donated to charity reduce the goods available for sale in the amount of their adjusted basis [Reg. 1.170A-1(c)(4)]. Beginning inventory $ 20,000 Raw materials and labor: Direct labor $50,000 Raw materials 61,000 Materials and supplies 50,000 Production overhead 10,000 171,000 Goods available for sale $191,000 Less inventory donated to charity (1,000) Less ending inventory (30,000) Cost of goods sold $160,000

Sluggo, a slot machine manufacturer, paid and incurred the following expenses during the year: Raw materials $50,000 Materials and supplies 10,000 Freight-in on raw materials 3,500 Freight on shipments of finished slot machines 5,000 Direct labor 35,000 Indirect labor 15,000 Allocable overhead expenses for production 20,000 The beginning inventory of finished goods was $35,000, and the ending inventory was $20,000. What is the amount of Sluggo's cost of goods sold for the year? A. $133,500 B. $150,000 C. $168,500 D. $148,500

Answer (D) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Beginning inventory $ 35,000 Raw materials and labor: Direct labor $35,000 Indirect labor 15,000 Raw materials 53,500 Materials and supplies 10,000 Production overhead 20,000 $ 133,500 Goods available for sale $168,500 Less ending inventory (20,000) Cost of goods sold $148,500

Mr. K, a widget manufacturer, incurred and paid the following expenses during the year: Raw materials $ 50,500 Direct labor 145,250 General and administrative costs (direct costs) 30,750 Freight-in on raw materials 1,500 Freight on shipments of finished goods 12,000 Overhead expenses for production 18,000 Mr. K had $12,000 in beginning inventory and $20,000 in ending inventory. What is Mr. K's cost of goods sold? A. $238,000 B. $217,750 C. $205,750 D. $207,250

Answer (D) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Beginning inventory $12,000 Raw materials and labor: Direct labor $145,250 Raw materials 52,000 Production overhead 18,000 215,250 Goods available for sale $227,250 Less ending inventory (20,000) Cost of goods sold $207,250

Jack Roston operates a small manufacturing business as a sole proprietorship. His business, Roston Rubber, manufactures industrial rubber seals and also makes rubber bands used in packaging. He uses the accrual method of accounting. He incurred the following expenses during 2014. What was his cost of goods sold? (Disregard uniform capitalization rules for this computation.) Beginning inventory, raw materials $ 14,000 Beginning inventory, work in process 20,000 Beginning inventory, finished goods 100,000 Ending inventory, raw materials 15,000 Ending inventory, work in process 12,000 Ending inventory, finished goods 110,000 Purchases 2,000,000 Salaries, factory 200,000 Salaries, sales 50,000 Chemicals used in manufacturing process 10,000 Office supplies 5,000 Freight-in on raw material purchases 3,000 A. $2,265,000 B. $2,268,000 C. $2,207,000 D. $2,210,00

Answer (D) is correct. Cost of goods sold is computed by starting with the beginning inventory, adding the cost of materials purchased during the year and the cost of production, and subtracting the ending inventory. Under Sec. 263A, manufacturers are required to use the full absorption method of costing, which means that both direct and indirect production costs must be included. Freight charges are always added to the cost of the goods purchased. Costs to ship to the purchaser are selling expenses, not costs of inventory. Beginning inventory (raw materials, WIP, and finished goods) $ 134,000 Materials and labor: Labor $ 200,000 Chemicals 10,000 Freight-in on raw materials 3,000 Purchases 2,000,000 $2,213,000 Goods available for sale $2,347,000 Less ending inventory (raw materials, WIP, and finished goods) (137,000) Cost of goods sold $2,210,000