Decision Case 1 PowerSwitch, Inc., designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected PowerSwitch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.

Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.

“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”

“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.”

“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report’s still in my desk drawer. All I can make out is that for the first quarter, material purchases were $476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were $505,000, $245,000, and $1,425,000, respectively. Wait, and cost of goods available for sale was $1,340,000.”

“Great,” says Stephen. “I remember that sales for the period were approximately $1.7 million. Given our gross profit of 30%, that’s all you should need.”

Paul is not sure about that, but decides to see what he can do with this information. The beginning inventory numbers are
• Direct materials, $113,000
• Work in process, $229,000
• Finished goods, $154,000
He remembers a schedule he learned in college that may help him get started.

Requirements
1. Exhibit 18-11 (p. 914) resembles the schedule Paul has in mind. Use it to determine the ending inventories of direct materials, work in process, and finished goods.
2. Draft an insurance claim letter for the controller, seeking reimbursement for the flood damage to inventory. PowerSwitch’s insurance representative is Gary Ogleby, at Industrial Insurance Co., 1122 Main Street, Hartford, CT 06268. The policy number is #3454340-23. PowerSwitch’s address is 5 Research Triangle Way, Raleigh, NC 27698.