AICPA Adapted Inventory Valuation
Response to the following problem:
You are engaged in an audit of the Roche Mfg. Company for the year ended December 31, 2010. To reduce the workload at year-end, the company took its annual physical inventory under your observation on November 30, 2010. The company'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 $60,570 was understated by $3,000. To avoid distorting the interim financial statements, the company 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:
a. Pricing tests showed that the physical inventory was overpriced by $2,200.
b. Footing and extension errors resulted in a $150 understatement of the physical inventory.
c. Direct labor included in the physical inventory amounted to $10,000. 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.
d. The physical inventory included obsolete materials recorded at $250. 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, 2010 inventory
e. Total debits to certain accounts during December are:
December
Purchases $24,700
Direct labor 12,100
Manufacturing overhead expense 25,200
Cost of sales 68,600
f. The cost of sales of $68,600 included direct labor of $13,800.
g. Normal scrap loss on established product lines is negligible. However, a special order started and completed during December had excessive scrap loss of $800, which was charged to Manufacturing Overhead Expense.
Required
1. Compute the correct amount of the physical inventory at November 30, 2010.
2. Without prejudice to your solution to Requirement 1, assume that the correct amount of the inventory at November 30, 2010 was $57,700. Compute the amount of the inventory at December 31, 2010.