Douglas, Inc., employs a normal costing system.The following information pertains to the year just ended. Total manufacturing costs were $2,500,000. Cost of goods manufactured was $2,425,000. Applied manufacturing overhead was 30 percent of total manufacturing costs. Manufacturing overhead was applied to production at a rate of 80 percent of direct-labor cost. Work-in-process inventory on January 1 was 75 percent of work-in-process inventory on December 31. Based on this information, what is the value of the company's work-in-process inventory on December 31.
A)$750,000.
B)$300,000
C)$727,500.
D)$333,333.
E)$1,875,000.

Question

Quizplus · Accepted Answer

The work-in-process inventory on December 31 can be calculated by first determining the direct labor cost and then using the given relationships. The applied manufacturing overhead is 30% of total manufacturing costs, which is $750,000 (30% of $2,500,000). Since overhead is 80% of direct labor, direct labor is $937,500 ($750,000 / 0.80). The cost of goods manufactured is $2,425,000, so the beginning WIP plus total manufacturing costs minus cost of goods manufactured gives the ending WIP. Let X be the ending WIP, then 0.75X is the beginning WIP. Solving the equation 0.75X + $2,500,000 - $2,425,000 = X gives X = $300,000.