4. No, the insurance company probably does not owe Solar Technology
$226,000. The key question is how “cost” was defined in the insurance
contract. It is most likely that the insurance contract limits reimburse-
ment for losses to those costs that would normally be considered prod-
uct costs—in other words, direct materials, direct labor, and manufac-
turing overhead. The $226,000 figure is overstated since it includes ele-
ments of selling and administrative expenses as well as all of the prod-
uct costs. The $226,000 figure also does not recognize that some costs
incurred during the period are in the ending Raw Materials and Work in
Process inventory accounts, as explained in part (1) above. The insur-
ance company’s liability is probably just $156,000, which is the amount
of cost associated with the ending Finished Goods inventory as shown in
part (3) above.
Group Exercise 2-32
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