Question

Veekay 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:

VEEKAY COMPANY
Income Statement
For the Month Ended June 30
Sales				$	675,000
Less operating expenses:
Selling and administrative salaries	$	39,800
Rent on facilities		42,000
Purchases of raw materials		215,000
Insurance		10,200
Depreciation, sales equipment		11,300
Utilities costs		56,600
Indirect labour		120,600
Direct labour		100,400
Depreciation, factory equipment		13,400
Maintenance, factory		8,200
Advertising		89,200			706,700
Operating loss				$	(31,700	)

     After seeing the $31,700 loss for June, Veekay’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. Only 85% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.
2. Inventory balances at the beginning and end of June were as follows:

	June 1	June 30
Raw materials	$19,200	$46,900
Work in process	$77,300	$94,700
Finished goods	$22,240	$67,140

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. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for June. $ 187,300 100.400 VEEKAY COMPANY Schedule of Cost of Goods Manufactured For the Month Ended June 30 Direct materials: Raw materials inventory, June 1 $ 19,200 Add: Purchases of raw materials 215,000 Raw materials available for use 224200 Deduct: Raw materials inventory, June 30 46,900) Raw materials used in production Direct labour [ Manufacturing overhead: Indirect labour 120,600 Rent on facilities 42,000 Utilities 56,600 Maintenance, factory 8,200 Depreciation, factory equipment 13,400 Insurance 10,200 Total overhead costs Total manufacturing costs Add: Work in process inventory, June 1 251,000 538 700 77.300 616,000 94.700 521.300 Deduct Work in process inventory, June 30 Cost of goods manufactured S

Answer 1

Part 1

Veekay Company Schedule of Cost of Goods Manufactured For the Month Ended June 30
Direct materials:
Raw materials inventory, June 1	19200
Add: Purchases of raw materials	215000
Raw materials available for use	234200
Deduct: Raw materials inventory, June 30	46900
Raw materials used in production		187300
Direct labour		100400
Manufacturing overhead:
Rent on facilities (85% × $42,000)	35700
Insurance (90% × $10,200)	9180
Utilities (80% × $56600)	45280
Indirect labour	120600
Maintenance, factory	8200
Depreciation, factory equipment	13400
Total overhead costs		232360
Total manufacturing costs		520060
Add: Work in process inventory, June 1		77300
		597360
Deduct: Work in process inventory, June 30		94700
Cost of Goods Manufactured		$502660

Part 2

Veekay Company Income Statement For the Month Ended June 30
Sales		675000
Cost of goods sold:
Finished goods inventory, June 1	22240
Add: Cost of goods manufactured	502660
Goods available for sale	524900
Deduct: Finished goods inventory, June 30	67140	457760
Gross margin		217240
Selling and administrative expenses:
Selling and administrative salaries	39800
Rent on facilities (15% × $42,000)	6300
Depreciation, sales equipment	11300
Insurance (10% × $10,200)	1020
Utilities (20% × $56600)	11320
Advertising	89200	158940
Operating income		$58300