During its first year of operations, JKL Company paid $11,065 for direct materials and $11,200 for production workers' wages. Lease payments and utilities on the production facilities amounted to $10,200 while general, selling, and administrative expenses totaled $3,300. The company produced 7,550 units and sold 4,700 units at a price of $6.80 a unit. What is JKL's cost of goods sold for the year?

a. $32,465

b. $15,915

c. $20,210

d. $25,565

c. $20210

Explanation:

The formula for COGS is as follows;

COGS = cost of opening inventory + purchases - cost of closing inventory.

Lets first calculate total production cost of 7550 units.

Total production cost = material cost + labor cost + production overheads.

(Important: selling and administrative expenses are not part of cost of goods sold).

TPC = $11065 + $11200 + $10200

TPC = $32465

Now we calculate production cost per unit in order to find the cost of closing inventory.

Production cost/unit = $32465:7550

Production cost/unit = $4.3

The company produced 7550 units but sold only 4700 of them therefore the difference represents the closing inventory.

Cost of closing inventory = $4.3*2850

cost of closing inventory = $12255

If we subtract cost of closing inventory from total production cost we will get Cost of goods sold (COGS).

COGS = $32465 - $12255

COGS = $20210