Inventory Control for Cumberland Metals

Inventory Control for Cumberland Metals

SECTION I: BACKGROUND AND HISTORY OF THE PROBLEM

In the event of a fire, a company must be able to account for and document its last known level of material on hand, work in progress and the amount of finished goods on hand at the time of the fire in order to file an insurance claim. If not, the company would stand to lose large amounts of inventory and assets that are invested in these goods.

Due to a recent accidental fire, Cumberland Metals Company has lost not only its entire manufacturing plant but also its entire administrative office and records department. Fortunately for the company, when the fire broke out certain employees were able to take with them important financial documentation that could be used to recalculate the company’s last standing levels of inventory. When the fire broke out, these employees fled the building as fast as possible while at the same time carrying with them the last items that they were working on. The following list of information has been salvaged from the fire of Cumberland Metals Corporation:

• Direct labor costs for this year totals $180,000

• New raw material purchases total $290,000

• Sales to date total $1,200,000

• Gross margin rate for the company is 40% of sales

• Goods available for sale to customers totals $810,000 at cost

• Prime cost for the company is $410,000

• Manufacturing overhead is 70% of conversion cost

• Beginning raw materials for the year were $18,000

• Beginning work in progress for the year was $65,000

• Beginning finished goods for the year was $45,000

Based on this information the company needs to determine the amount of cost in its inventories on the date of the fire. The company will need to calculate the current cost of raw materials, the current cost of work in progress and the current cost of finished goods on the date of the fire. In doing this activity the company also considers all material used in production to be direct materials.

SECTION II: THEORIES TO ADDRESS THE PROBLEM

In order for the company to calculate the cost of raw materials, the cost of work in progress and the cost of finished goods on the date of the fire, it must first recreate its schedule of goods manufactured. By substituting in the known variables and then working backwards in the schedule, the company would be able to determine the missing variables. The following example shows what Cumberland Metals Corporation must recreate to determine the information that is needed for the insurance claim:

SECTION III: SOLUTION TO THE PROBLEM

The first thing that Cumberland Metals Corporation must do is input the information that it currently has into the cost of goods manufactured schedule. This information is listed in section I and also displayed below:

The