Question

Your best friend, Chris, is the owner of Salazar Company, a manufacturer of tablets. Recently, Salazar's controller had to step down as she contracted Covid-19 and is now hospitalized. Jenny, the receptionist who attends MJC and is majoring in Accounting, prepared the income statement. Chris is concerned about the accuracy of the statement as the reported numbers are not consistent with prior periods'. Chris asks you to make the necessary corrections. Chris provides you with the income statement, the inventory levels at the beginning and end of the month, and allocation rates for the utilities expense and the insurance expense. Salazar Company Income Statement For the Month Ended August 31, 202X $ 675,000 $ Sales Revenue Operating Expenses Raw materials purchases Direct labor costs Advertising expense Selling and administrative salaries Rent on factory facilities Depreciation on sales equipment Depreciation on factory equipment Indirect labor cost Utilities expense Insurance expense Total operating expenses Net Loss 220,000 160,000 75,000 70,000 60,000 50,000 35,000 20,000 10,000 5,000 705,000 (30,000) $ Raw materials Work in process Finished goods August 1 August 31 $ 19,500 $ 35,000 $ 25,000 $ 21,000 $ 40,000 $ 52,000 Utilities Expense Insurance Expense Factory 60% 70% Other 40.00% 30.00%

Answer 1

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Ans 1.
Salzar Company
Schedule of Cost of Goods Manufactured
for the period ending Aug 31,202x
Particulars	Amt $	Amt $
Raw Materials Consumed :
Opening Stock of Raw Materials	$               19,500
Add : Raw Materials purchased	$             220,000
Less : Ending stock Raw Materials	$              (35,000)
Raw Materials Consumed :		$          204,500
Direct Labor cost		$          160,000
Manufacturing Overheads
Rent on Factory facilities	$               60,000
Depreciation on Factory Equipments	$               35,000
Indirect labor cost	$               20,000
Utilities Expense-Factory Share 60%	$                  6,000
Insurance Expense -Factory share 70%	$                  3,500
Total Manufacturing Overhead		$          124,500
Total Cost of Manufacturing		$          489,000
Add : Opening Stock WIP		$            25,000
Less: Ending stock WIP		$          (21,000)
Cost of Goods Manufactured		$          493,000

Ans 2.

Salzar Company

Income Statement

for the period ending Aug 31,202x

Particulars	Amt $	Amt $
Sales Revenue		$          675,000
Cost of Goods Sold:
Cost of Goods Manufactured	$             493,000
Add: Opening stock Finished Goods	$               40,000
Less: Ending Stock Finished Goods	$              (52,000)
Cost of Goods Sold		$          481,000
Gross Profit		$          194,000
Operating Expenses
Selling & Admin salaries	$               70,000
Depreciation on Sales Equipment	$               50,000
Advertising Expense	$               75,000
Utilities Expense : Other share	$                  4,000
Insurance Expense : Other share	$                  1,500
Total Operating Expense		$          200,500
Net Operating Income /(Loss)		$             (6,500)

Ans 3.

The major area where the Managerial accounting principles is violated is the

non recognition of the effect of opening and closing stock of raw materials, WIP

and Finished goods while calculating the Cost of Goods Sold.

As the opening stock amounts have not been debited and Closing stock amounts

have not been credited, the COGS has been overstated by $23,500.

This has increased the operating loss by $23,500 as well.

Apart from that there is an error of treating the whole of Utilities and Insurance

expense as operating expense , where as part of those should be treated as Manufacturing overhead.

Also there is no clear segregation for cost of goods manufactured and cost of goods sold ,

all expenses have been clubbed under operating expense. The above two errors only

affect correct Gross profit reporting but did not affect at net operating loss level.