Skyler Company was organized
on November 1 of the previous year.
After seven months of start-up losses, management had expected to earn a
profit during June, the most recent month.
Management was disappointed; however, when the income statement for June
also showed a loss, June’s income statement follows:
Skyler Company
Income Statement
For the month ended June 30, XXXX
Sales $593,000
Less operating expenses:
Selling and administrative salaries $35,000
Rent on facilities 40,000
Purchases of raw materials 190,000
Insurance 8,000
Depreciation, sales equipment 10,000
Utilities costs
50,000
Indirect labor 108,000
Direct labor 90,000
Depreciation, factory equipment 12,000
Maintenance, factory 7,000
Advertising
73,000 630,000
Net Operating Loss $(30,000)
After seeing the $30,000 loss
for June, Skyler’s president stated, “I was sure we’d be profitable within six
months, but after eight months we’re still spilling red ink. Maybe it is time for us to throw in the towel
and accept one of those offers we have had for the company. To make matters worse, I just heard that
Linda won’t be back from her surgery for at least six more weeks.”
Linda is the company’s
controller; in her absence, the statement above was prepared by a new assistant
who has had little experience in manufacturing operations. Additional information about the company
follows:
a. Only 80% of the rent on facilities
applies to factory operations; the remainder applies to selling and
administrative activities.
b. Inventory balances at the
beginning and end of the month were as follows:
June 1 June
30
Raw materials $17,000 $42,000
Work in process
70,000
85,000
Finished goods
20,000 60,000
c. Some 75% of the insurance
and 90% of the utilities cost apply to factory operations; the remaining
amounts apply to selling and administrative activities.
The president has asked you
to check over the above income statement and make a recommendation as to
whether the company should continue operations.
Required:
1. As one step in gathering data for a
recommendation to the president, prepare a schedule of cost of goods
manufactured for June.
2. As a second step, prepare a new income
statement for the month.
3. Based on your statements prepared in (1) and
(2) above, would you recommend that the company continue operations?
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Requirement 1:
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Skyler Company
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Cost of goods manufactured
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For the month ended June 30, 20XXXX
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Direct material used:
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Raw materials Inventory, June 1
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17,000
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Add: Purchases of raw materials
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190,000
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Total raw material available
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207,000
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Less: Raw materials Inventory,
June 30
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42,000
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Direct material used in the
production
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165,000
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Direct labor
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90,000
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Manufacturing overhead (refer
note 1)
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210,000
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Total Manufacturing cost
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465,000
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Add: Work in process, June 1
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70,000
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535,000
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Less: Work in process, June 30
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85,000
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Cost of goods manufactured
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450,000
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Note 1:
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Manufacturing overhead:
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Rent on facilities (80%)
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32,000
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Insurance (75%)
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6,000
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Utilities costs (90%)
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45,000
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Indirect labor
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108,000
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Depreciation, factory equipment
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12,000
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Maintenance, factory
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7,000
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Total manufacturing overhead
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210,000
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Requirement 2:
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Skyler Company
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Income Statement
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For the month ended June 30, 20XXXX
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Sales
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593,000
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Cost of goods sold:
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Finished goods inventory, June 1
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20,000
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Add: Cost of goods manufactured
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450,000
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Total available goods for sale
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470,000
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Less: Finished goods inventory,
June 30
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60,000
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Total cost of goods sold
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410,000
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Gross profit
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183,000
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Operating Expenses:
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Selling and administrative
salaries
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35,000
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Rent on facilities (20%)
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8,000
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Insurance (25%)
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2,000
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Utilities costs (10%)
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5,000
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Depreciation, sales equipment
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10,000
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Advertising
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73,000
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Total operating expenses
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133,000
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Net operating income
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50,000
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Requirement 3:
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Conclusion:
The above statement 1 & 2 indicates that the company had profitable month. It earned a net income of $50,000 for the June month. Since, the company is earning good profits it should continue the operations. |
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Great
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