PROBLEM 12-27

On December 31, 2021, Mappang Company has a fire which completely destroyed the goods in process
inventory. After the fire, a physical inventory was taken.

The raw materials were valued at P1,200,000, the finished goods at P2,000,000 and supplies at P200,000
on December 31, 2021. The inventories on January 1, 2021 consisted the following:

Finished goods 2,800,000

Goods in process 2,000,000

Raw materials 600,000

Supplies 800,000

Data for 2021 were:

Sales 6,000,000

Purchases 2,000,000

Freight in 200,000

Direct labor 1,600,000

Manufacturing overhead – 50% of direct labor ?

Case No. 1: assume the following data and trend continues in 2021:

2018 2019 2020

Sales P 2,000,000 P 3,500,000 P 4,000,000

Less: cost of sales 1,700,000 2,800,000 3,000,000

Gross profit P 300,000 P 700,000 P 1,000,000

This T-account of Raw Materials will be the same under the three different cases:

Raw Materials

Beginning balance 600,000 1,200,000 Balance end

Net Purchases 2,200,000 1,600,000 Direct materials used

Total (RMAFU) 2,800,000 2,800,000

CASE NO. 1

Question No.1 What is the cost of goods sold for the year ended December 31, 2021?

GP Rate: 2018 2019 2020 2021

Gross Profit 300,000 700,000 1,000,000

Divide by: Sales 2,000,000 3,500,000 4,000,000

Gross Profit Rate 0.15 0.20 0.25 0.30

Sales 6,000,000

Multiply by: Cost Ratio 0.70

Cost of goods sold 4,200,000 (B)

Question No. 2 What is the estimated cost of goods in process on December 31, 2021 that was
completely destroyed by fire?

Finished Goods

Beginning balance 2,800,000 2,000,000 Balance end

Cost of goods manufactured 3,400,000 4,200,000 Cost of goods sold

Total (COGAFS) 6,200,000 6,200,000

Work in Process

Beginning balance 2,000,000 2,600,000 Balance end(A)

Direct materials used 1,600,000 Cost of goods

Direct labor 1,600,000 3,400,000 manufactured

Factory overhead 800,000

Total (COGIP) 6,000,000 6,000,000

Computation of factory overhead:

Direct labor cost 1,600,000

Multiply by: Predetermined rate 50%

Factory overhead 800,000

CASE NO. 2

Assume the following data and average gross profit to be used in 2021:

2018 2019 2020

Sales 2,000,000 3,500,000 4,000,000

Less: Cost of Sales 1,660,000 2,870,000 3,000,000

Gross Profit 340,000 630,000 1,000,000

Question No. 3 What is the cost of goods sold for the year ended December 31, 2021?

GP Rate: 2018 2019 2020 2021

Divide by: Sales 2,000,000 3,500,000 4,000,000

Gross Profit Rate 0.17 0.18 0.25 0.20

The GP rate in 2021 is computed as follows:

17 %+18 % +25 %
Gross profit rate =
3
= 20%

The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goods sold is computed as
follows:

Sales 6,000,000

Multiply by: Cost Ratio 0.80

Cost of goods sold 4,800,000 (B)

Question No. 4 What is the estimated cost of goods sold in process on December 31, 2021 that was
completely destroyed by fire?

Finished Goods

Beginning balance 2,800,000 2,000,000 Balance end

Cost of goods manufactured 4,000,000 4,800,000 Cost of goods sold

Total (COGAFS) 6,800,000 6,800,000

Work in Process

Beginning balance 2,000,000 2,000,000 Balance end (A)

Direct materials used 1,600,000 Cost of goods

Direct labor 1,600,000 4,000,000 manufactured

Factory overhead 800,000

Total (COGIP) 6,000,000 6,000,000

CASE NO. 3

Assume the following data and the insurance company agreed that the fire loss claim should be based
on the assumption that the overall gross profit ratio for the past two years was in effect during the
current year.

2019 2020

Sales 3,500,000 4,000,000

Less: Cost of Sales 2,700,000 3,000,000

Gross Profit 800,000 1,000,000

The gross profit for 2021 is computed based on the overall gross profit for 2019 and 2020:

800,000+1,000,000
Gross profit rate =
3,500,000+ 4,000,000
1,800,000
=
7,500,000
= 24%

The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goods sold is computed as
follows:

Sales 6,000,000

Multiply by: Cost Ratio 0.76

Cost of goods sold 4,560,000 (A)

Question No. 6 What is the estimated cost of goods in process on December 31, 2021 that was
completely destroyed by fire?

Finished Goods

Beginning balance 2,800,000 2,000,000 Balance end

Cost of goods manufactured 3,760,000 4,560,000 Cost of goods sold

Total (COGAFS) 6,560,000 6,560,000

Work in Process

Beginning balance 2,000,000 2,240,000 Balance end (A)

Direct materials used 1,600,000 Cost of goods

Direct labor 1,600,000 3,760,000 manufactured

Factory overhead 800,000

Total (COGIP) 6,000,000 6,000,000

SUMMARY OF ANSWERS:

1. B 2. A 3. B 4. A 5. A 6. A