Scenario: Yum Yum Cookies Manufactures Cookies Material

Scenarioyum Yum Cookies Company Manufactures Cookies Materials

Scenario: YUM YUM COOKIES Company manufactures cookies. Materials are added in the Baking Department. After processing, the cookies are moved to the Packing Department where more materials are added. The completed packages are then moved to Finished Goods. Task: Using the data below the month of July, determine the July Gross Profit using FIFO inventory methods.

Paper For Above instruction

The task involves calculating the gross profit for Yum Yum Cookies Company for the month of July, based on the provided operational and financial data, utilizing the FIFO (First-In, First-Out) inventory costing method. This requires analyzing inventory levels, purchases, materials requisitioned, costs incurred, sales, and work-in-progress (WIP) at the end of the month to determine the cost of goods sold (COGS) and, consequently, the gross profit.

To accurately compute the gross profit, the following steps are necessary:

  1. Determine Beginning Inventory and Purchases: Begin with the June 30 balances for Raw Materials, WIP, and Finished Goods. Incorporate July's material purchases of $520,000.
  2. Calculate total manufacturing costs incurred during July: Sum direct materials, direct labor, manufacturing overhead, and other expenses for both departments.
  3. Estimate the cost of goods manufactured (COGM): Using the FIFO method, assign costs of inventory on hand and purchases to units completed and transferred to Finished Goods.
  4. Calculate Ending Inventory: Taking into account the WIP inventory at month-end, valued using FIFO, considering the degree of completion.
  5. Determine Cost of Goods Sold (COGS): Subtract ending inventory from the sum of beginning inventory and COGM.
  6. Compute Gross Profit: Subtract COGS from sales revenue.

Followed by detailed calculations of each step, considering the cost flows, inventory layers, and applying FIFO assumptions, will enable the accurate determination of July’s gross profit.

Paper For Above instruction

Yum Yum Cookies Company’s financial performance for July hinges critically on accurate inventory cost calculations, particularly when applying the FIFO method. The company's operational activities include raw materials procurement, processing through baking and packing departments, and final sale of cookie cases. This comprehensive analysis elucidates the steps necessary to determine gross profit, integrating inventory valuation, cost accumulation, and sales revenue.

Introduction

In manufacturing environments like Yum Yum Cookies, inventory valuation plays a pivotal role in financial reporting. FIFO (First-In, First-Out) is one of the most common inventory costing methods, assuming that the oldest inventory is sold first. This method impacts gross profit calculations, especially when costs fluctuate over the period. Accurate application of FIFO necessitates understanding beginning inventory balances, purchases, work-in-progress, and ending inventories, all of which influence the cost of goods sold (COGS) and, subsequently, gross profit.

Beginning Inventory and Purchases

At the close of June, Yum Yum Cookies carried raw materials valued at $235,000. For July, raw material purchases totaled $520,000, signifying an influx of newer inventory at potentially different cost levels. The calculation of COGS under FIFO involves first considering the existing inventory and then incorporating purchases in chronological order, beginning with the oldest. This approach ensures that the earliest costs are assigned to units sold first, aligning with FIFO principles.

Manufacturing Costs during July

Manufacturing costs encompass several elements:

  • Materials requisitioned: Direct materials (DM) and indirect materials (IM)
  • Labor costs: Direct labor (DL) and indirect labor (IL)
  • Manufacturing overhead (FOH): Applied to both departments
  • Other expenses: Miscellaneous, depreciation, prepaid expenses

For the Baking Department, total manufacturing costs are calculated by summing direct materials ($225,000), direct labor ($106,000), indirect materials ($25,000), indirect labor ($12,000), manufacturing overhead ($86,700), and other expenses ($18,000, $4,500, $46,000). A similar process applies to the Packing Department. Summing these provides total manufacturing costs incurred during July, which are essential for determining COGM.

Calculating Cost of Goods Manufactured (COGM)

COGM under FIFO involves tracking inventory layers from the beginning to the end of the period. The beginning WIP inventories and their associated costs are first used up, then the costs of purchases and additional manufacturing costs are applied proportionally. Given the data, the total costs added to the production process during July, including direct materials, labor, and overhead, are allocated to units processed, with adjustments for the degree of completion of WIP at month-end.

Specifically, the WIP in the Baking Department at 40% completion and in the Packing Department at 10% completion must be valued considering both costs incurred during July and prior costs in beginning inventory, following FIFO logic.

Ending Inventory Valuation

The ending WIP inventory comprises units not yet completed. For the Baking Department, 5,000 cases remain at 40% completion; in Packing, 5,000 cases are at 10% completion. Using FIFO, the costs assigned to these units are based on the most recent manufacturing costs, adjusted for the degree of completion, ensuring that older inventory layers are recognized in COGS, while current costs reflect in ending inventory.

Cost of Goods Sold (COGS)

Calculating COGS involves summing beginning inventory and COGM, then subtracting ending inventory. FIFO ensures that the oldest costs are assigned to COGS, which impacts gross profit, especially in periods of fluctuating costs. Once the COGS is known, it can be deducted from total sales revenue to determine gross profit.

Sales Revenue and Gross Profit Calculation

Yum Yum Cookies sold 47,000 cases at $42 per case, totaling $1,974,000 in revenue. Subtracting COGS from this figure yields the gross profit. The accuracy of this measure depends on the precise valuation of inventories and the proper application of FIFO principles.

Conclusion

Applying FIFO inventory method to Yum Yum Cookies’ data requires meticulous calculations of inventory layers, costs, and work-in-progress at month-end. The process involves combining beginning inventories, current period costs, and ending inventories, adjusted for percentage completeness, to compute COGS accurately. The resultant gross profit provides critical insights into the company’s profitability for July, guiding managerial decisions and financial reporting.

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