CSLB Law & Business ExamBusiness FinancesHard
A contractor is preparing the annual budget and needs to project the cost of materials. The company typically has a beginning inventory of $15,000, expects to purchase $80,000 worth of materials during the year, and aims for an ending inventory of $20,000. What is the estimated Cost of Materials Used for the year?
- A$85,000
- B$80,000
- C$115,000
- D$75,000
Show answer & explanationAnswer & explanation
Correct answer: D. $75,000
The Cost of Materials Used is calculated as: Beginning Inventory + Purchases - Ending Inventory. So, $15,000 (Beginning Inventory) + $80,000 (Purchases) - $20,000 (Ending Inventory) = $75,000.
Why the other options are wrong
- A. This would be the result if ending inventory was $15,000 instead of $20,000.
- B. This is only the purchases, not the materials used.
- C. This is the sum of beginning inventory, purchases, and ending inventory, which is incorrect.
Cost of Materials Used
The total cost of raw materials that were consumed in the production process during a specific accounting period.
- Calculated as Beginning Inventory + Purchases - Ending Inventory.
- A key component in determining the Cost of Goods Manufactured and Cost of Goods Sold.
- Different from 'materials purchased' as it accounts for inventory changes.
Memory trick: Start with what you Had, Add what you Got, Subtract what's Left, to find what you Used.