Question

Phillips Company is a manufacturer of computers. Its controller resigned in October 2018. An inexperienced assistant accountant has prepared the following income statement for the month of October 2018.
Phillips Company
Income Statement
For the Month Ended October 31, 2018
Sales revenue $780,000
Less: Operating expenses
Raw materials purchases $264,000
Direct labor cost 190,000
Advertising expense 90,000
Selling and administrative salaries 75,000
Rent on factory facilities 60,000
Depreciation on sales equipment 45,000
Depreciation on factory equipment 31,000
Indirect labor cost 28,000
Utilities expense 12,000
Insurance expense 8,000 803,000
Net loss $ (23,000)

Prior to October 2018, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.
Inventory balances at the beginning and end of October were:
October 1 October 30
Raw materials $18,000 $29,000
Work in process 16,000 14,000
Finished goods 30,000 45,000

Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

Instructions
a. Prepare a schedule of cost of goods manufactured for October 2018.
b. Prepare a correct income statement for October 2018.

Answer 1

$16,000 PHILLIPS COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2018 Work in Process Inventory, October 1 Direct materials Raw materials inventory, October 1 $18,000 Raw materials purchases $264,000 Total raw materials available for use $282,000 Less: Raw materials inventory, October 31 $29,000 Direct Materials Used $253,000 Direct Labour $190,000 Manufacturing Overhead Rent on factory facilities $60,000 Depreciation on factory equipment $31,000 Indirect labor cost $28,000 Factory utilities ($12,000 x 75% $9,000 Factory insurance ($8,000 X 60%) $4,800 Total manufacturing overhead $132.800 Total manufacturing costs Total Cost of work in process Less: Work in Process Inventory, October 31 Cost of goods manufactured $575,800 $591,800 $14,000 $577,800 $780,000 PHILLIPS COMPANY Income Statement For the Month Ended October 31, 2018 Sales (net) Cost of goods sold Finished goods inventory, October 1 $30,000 Cost of goods manufactured $577,800 Cost of goods available for sale $607,800 Less: Finished goods inventory, October 31 $45,000 Cost of goods sold Gross profit Operating expenses Advertising expense $90,000 Selling and administrative salaries $75,000 Depreciation expenses $45,000 Utilities expenses $3,000 Insurance expenses $3,200 Total operating expenses Net Income $562.800 $217,200 $216,200 $1,000