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Lam Tien Tran
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27 views4 pages

Supplemental Problems

Uploaded by

Lam Tien Tran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CORPORATE MANAGEMENT

Questions – Cost Terms and Cost Systems


Soma 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:

Sales revenue $795,000


Operating expenses:
Selling and administrative expenses $46,200
Rent of manufacturing facilities 58,000
Purchases of raw materials 263,000
Insurance 11,800
Depreciation, sales equipment 13,700
Utilities 69,400
Indirect labour 133,400
Direct labour 111,600
Depreciation, manufacturing equipment 16,600
Maintenance, manufacturing 9,800
Advertising 98,800
Total operating expenses 832,300
Operating income (loss) $(37,300)

After seeing the $37,300 loss for June, Soma’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’s time for us to
throw in the towel. To make matters worse, I just heard that Debbie won’t be back from her
surgery for at least six more weeks.”
Debbie 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:

1
a. Only 85% 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 June were as follows:

June 1 June 30
Raw materials $20,800 $54,100
Work-in-process 79,700 100,300
Finished goods 24,160 76,260

c. Some 90% of the insurance and 80% 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 recommend
whether the company should continue operations.
Required:

1. Describe the conceptual error that the “accountant” made in preparing the income
statement shown on the first page.
2. Prepare a schedule of cost of goods manufactured for June.
3. Prepare a new income statement for June.

2
Question 2

The following selected account balances for the year ended December 31 st, 2018 are provided
for Tangerine Industries:

Advertising expense $430,000


Insurance, manufacturing equipment 16,000
Depreciation, sales equipment 80,000
Rent, manufacturing facility 180,000
Utilities. Manufacturing 104,000
Sales commissions 70.000
Cleaning supplies, manufacturing 12,000
Depreciation, manufacturing equipment 220,000
Selling and administrative expenses 170,000
Maintenance, manufacturing 148,000
Other operating expenses 65,000
Direct labour ?
Purchases of raw material 520,000

Inventory balances at the beginning and end of year were as follows:

Beginning of
year End of year
Raw materials $100,000 $80,000
Work-in-process ? 66,000
Finished goods $60,000 ?

The total manufacturing costs for the year were $1,350,000. The goods available for sale
totalled $1,440,000 and the cost of goods sold totalled $1,270,000. Sales revenue for the year
was $2,200,000.

Required:
1. Prepare a schedule of cost of goods manufactured and a schedule of the cost of goods
sold for the year ending December 31st, 2018.
2. Prepare the statement of income for the year ended December 31st, 2018.

3
Question 3

On December 31st, 2018, the manufacturing facility of Peach Industries was severely damaged
by an accidental fire. As a result, the company’s raw materials inventory, work-in-process
inventory and finished goods inventory were destroyed. The company did have access to
certain incomplete accounting records, which revealed the following:

1. Inventory balances at January 1st, 2018 were as follows:

Raw materials $96,000


Work-in-process 204,000
Finished goods 90,000

2. Key ratios for the year to date:


 Gross profit = 20% of sales revenue
 Prime costs = 70% of manufacturing costs
 Manufacturing overhead was 40% of conversion costs
 Ending work-in-process inventory is always 10% of the monthly manufacturing
costs
3. All costs are incurred evenly in the manufacturing process
4. Actual operations data for the 2018 year:

Sales revenue $2,700,000


Direct labour incurred 1,080,000
Raw material purchases 960,000

Required:
1. From the above information, prepare an estimated cost of goods manufactured
schedule.
2. Calculate the cost of the inventory lost and identify by category what the ending
inventory balances were prior to the fire.

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