Question

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.

     

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