Synoptic revision

nicolasimpson1988

Can some help with the following please?
At 31st Dec 2006 closing inventory was valued at £44500
Expected sales in 2007 £2560000, inventory expected to rise by 20% by year end. Gross margin 60% after deducting cost of sales. Production overheads are £280000. What is the amount spent and materials and labour.

rarah

Hi,

Best way to work this question out is first working out the cost of sales.

So if you know the gross margin is 60% of the sale then the cost of sales will be 40%.

You then work out the 20% rise on inventory, this amount is only on the closing inventory amount of 44500.

If you then add that 20% with the cost of sales it will be your estimated spend on materials and labour.

I hope this helps you a little bit.

Ellada

Good question.
My workings:
100% Sales £2560000
40% Cost of Sales £10240000 (2560000x40%), which includes direct mat-s and labour
60% Margin (Gross profit) £1536000 (2560000x60%)

From my point of view:
Cost of Sales = Opening inv-ry + Direct mat/labour + prod.overheds - Clos.inv.
£1024000 = £44500 + X + £280000 - £53400, where 53400 is clos inv., 44500*20%

X = £1024000 - £44500 - £280000 + £53400, so X (direct mat/labour) = £752900

Hopefully, I resolved it correctly.

Guys, please, can someone tell me if there are any mistakes?

Ellada

nicolasimpson1988 said:

Can some help with the following please?
At 31st Dec 2006 closing inventory was valued at £44500
Expected sales in 2007 £2560000, inventory expected to rise by 20% by year end. Gross margin 60% after deducting cost of sales. Production overheads are £280000. What is the amount spent and materials and labour.

Do you have correct answer?

nicolasimpson1988

Perfect, that's seems to be right. So easy now you've explained.

Thanks