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Swift Company was organized on March 1 of the current year. After five months of startup...

Swift Company was organized on March 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August’s income statement follows:

SWIFT COMPANY
Income Statement
For the Month Ended August 31
  Sales $ 470,000    
  Less: Operating expenses:
      Indirect labour cost $ 13,200    
      Utilities 15,000    
      Direct labour cost 66,000    
      Depreciation, factory equipment 25,000    
      Raw materials purchased 177,000    
      Depreciation, sales equipment 18,000    
      Insurance 2,600    
      Rent on facilities 43,000    
      Selling and administrative salaries 36,000    
      Advertising 80,700     476,500   
  Net loss $ (6,500)


    The company’s controller resigned a month ago. Sam, a new assistant in the controller’s office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $6,500 loss for August, Swift’s president stated, “I was sure we’d be profitable within six months, but our six months are up and this loss for August is even worse than July’s. I think it’s time to start looking for someone to buy out the company’s assets—if we don’t, within a few months there won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just limp along with Sam for the time being.”

     Additional information about the company follows:
a.

Some 60% of the utilities cost and 70% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.

  
b. Inventory balances at the beginning and end of August were as follows:
August 1 August 31
  Raw materials $ 20,000     $ 17,000    
  Work in process 8,000     18,000    
  Finished goods 43,000     48,000    

  

c.

Only 75% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

        The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets.

Required:
1.

As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in good form for August.

      

2. As a second step, prepare a new income statement for August.

     

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Answer #1
Q1
Direct materials
Raw materials inventory Aug 1 20000
Add:purchases of raw materials 177000
Raw materials available for use 197000
Less:Raw Materials inventory Aug 31 17000
Raw materials used in production 180000
Direct Labor 66000
Manufacturing overhead
Indirect labor cost 13200
Utilities 9000
15000*0.6
Depreciation factory equipment 25000
Insurance 1820
2600*0.7
Rent on facilities 32250
43000*0.75
Total overhead costs 81270
Total manuacturing costs 327270
Add:Work in process August 1 8000
335270
Less:WIP Aug 31 18000
Cost of goods manufactured 317270
Q2
Sales 470000
Cost of goods sold
Finished goods Aug 1 43000
Add:cost of goods manufactured 317270
Goods available for sale 360270
Less:Finished goods aug 31 48000 312270
Gross Margin 157730
Selling and administrative expenses
Utilities 6000
Depreciation factory equipment 18000
Insurance 780
Rent on facilities 10750
Selling and administrative salaries 36000
Advertising 80700 152230
Net operating income 5500
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