Question

Delta Mountain Supplies has been in business for three months. The company was formed by two outdoor enthusiasts to produce high quality sleeping bags, which can used in all kinds of weather conditions. The owners of the company were well skilled in production and had developed an excellent relationship with a boutique store that specializes in selling outdoor equipment. The administration work and the accounting have been managed by the brother of one of the owner’s. The brother had a business degree but no special training in accounting.

The owners had just received the income statement for the latest quarter and were somewhat dismayed by the results. The company had almost reached its productive capacity for producing sleeping bags and most of them had been sold. Still, the income statement, presented in exhibit one, showed an operating loss for the quarter.

Believing something was not correct, the owners have hired you to review the accounting information and to report back to them.

Exhibit One

Delta Mountain Supplies

Income Statement

For the Quarter ended, September 30th Sales (5,000 sleeping bags)	$720,000
Operating expenses:
Selling and administrative salaries	$63,000
Travel for sales purposes	45,000
Advertising	98,000
Indirect labour costs	100,000
Raw materials purchased	220,000
Plant supplies	5,000
Direct labour cost	75,000
Plant maintenance	38,000
Depreciation, office equipment	13,000
Rent (90% for the plant, 10% for sales space)	50,000
Insurance (Plant only)	6,000
Depreciation, Plant equipment	65,000
Utilities (80% plant, 20% for sales operations)	32,000
Total operating expenses	810,000
Operating loss	$(90,000)

During the quarter, the company completed 7,000 sleeping bags. The owners completed a physical inventory count and valuation on September 30th. The opening and closing inventory values are as follows:	July 1st
Raw materials inventory	$0	$30,000
Work-in-process inventory	$0	$24,000
Finished goods inventory	$0	?

  

1. Describe two conceptual errors that the “accountant” made in preparing the income statement shown in exhibit one

2. Prepare a schedule of the cost of goods manufactured for the quarter ending September 30th.

3. Prepare a corrected income statement for the quarter.

Answer 1

First error that an accountant has made is that,He has taken the entire production cost to income statement which is a part of or should be shown in statement of cost of goods manufactured Therefore the production cost of 7000 units should not be shown as operating expense under income statement rather should be part of product cost. STATEMENT OF COST OF GOODS MANUFACTURED Particulars Amount Amount Beginning raw material inventory IS Raw material purchase $ 2,20,000.00 Raw material available for use $ 2,20,000.00 less:Ending raw material inventory $ -30,000.00 Raw material to be used $ 1,90,000.00 Direct labor cost $ 75,000.00 overhead Indirect labor $ 1,00,000.00 Plant supplies $ 5,000.00 Plant maintenance $ 38,000.00 Plant rent (50000*90%) $ 45,000.00 Insurance $ 6,000.00 Depreciation-plant $ 65,000.00 Utilities (32000*80%) $ 25,600.00 Total overhead $ 2,84,600.00 Total manufacturing cost $ 5,49,600.00 Beginning work in process $ Less:Ending work in process $ -24,000.00 Cost of goods manufactured $ 5,25,600.00 Second error is that only the cost of units sold (5000 units) out of 7000 units produced should be shown as cost of goods sold under income statement. Cost of Inventory which are not sold should be shown under Balance sheet. Amount Amount $ 7,20,000.00 $-3,75,429.00 $ 3,44,571.00 Particulars sales less:cost of goods sold (525600*5000/7000) Gross profit less operating expense selling and adm salaries Travel for sales purpose Advertising Depreciation-office Rent utilities Total operating expense Net income $ 63,000.00 $ 45,000.00 $ 98,000.00 $ 13,000.00 $ 5,000.00 $ 6,400.00 $-2,30,400.00 $ 1,14,171.00