Question

Chaos Manufacturing had the following financial information for the year ended December 31 2018:

Inventory Balances:                Beginning                    Ending

Work in Progress                    $ 90,000                      $ 80,000

Finished Goods                        $ 77,000                      $ 67,000

Raw Materials                         $ 10,000                      $ 10,000

During the year, the budgeted and actual costs were as follows:

	Note	Budget	Actual
Raw Materials	1	300,000	290,000
Labour	2	540,000	518,000
Depreciation Factory Equipment		72,000	72,000
Depreciation Office Equipment		24,000	24,000
Building Rent	3	100,000	100,000
Maintenance – Factory Equipment		64,000	40,000
Utilities – Electrical	4	200,000	180,000
Utilities - Gas	5	100,000	90,000
Utilities - Telecom	6	20,000	22,000
Sales Commissions		40,000	30,000
Advertising		30,000	20,000
Shipping	7	20,000	16,000
Total		1,506,000	1,402,000

Sales for the year were $1,500,000

Note 1 – Raw material

For both budget and actual materials: 90% of raw materials are traced directly to specific jobs, and the remaining 10% of raw materials are used throughout the production process and not traced. $290,000 in materials was purchased in the year.

Note 2 – Labour

Budget: Direct Labour $300,000 + Factory Salaries $80,000 + Head Office Salaries $160,000 = $540,000

Actual: Direct Labour $270,000 + Factory Salaries $85,000 + Head Office Salaries $163,000 = $518,000

Note 3 – Building Rent

The building is shared between the factory and the administrative office. 68% of the building is related to the factory, and the remaining 32% is related to the administrative office.

Note 4 – Utilities Electrical

For both budget and actual, 90% of these costs are related to the factory, and 10% of these costs are related to the administrative office.

Note 5 – Utilities - Gas

All of the Gas is used to heat production equipment.

Note 6 – Utilities - Telecom

All of the Telecom costs are for sales people.

Note 7 – Shipping

All of the shipping costs are to ship finished goods to customers

Note 8 – Overhead

The manufacturer uses Normal Costing. Overhead is allocated based on Direct Labour costs. Any under/over applied overhead is allocated to Cost of Goods Sold.

Required:

By using Normal Costing, prepare an income statement. You may include a schedule of Cost of Goods Manufactured and Cost of Goods Sold as separate schedules or as part of the Income Statement.

Answer 1

	MANUFACTURING OVERHEAD COST
			Budget	Actual
	Depreciation Factory Equipment		72000	72000
	Building Rent		68000	68000	(68%*100000)
	Maintenance – Factory Equipment		64000	40000
	Utilities – Electrical		180000	162000	(90% of costs)
	Utilities - Gas		100000	90000
	Total		484,000	432,000
	Budgeted Manufacturing Overhead			484,000
	Add : Indirect materials			30,000	(10% of 300000)
	Add : Indirect Labor			80,000	(Factory salaries)
	Total Budgeted Manufacturing Overhead			594,000
	Total Budgeted Direct Labor cost			300,000
	Overhead Application Rate			1.9800	(594000/300000)
	SCHEDULE OF COST OF GOODS MANUFACTURED
	Beginning Raw Materials inventory	$10,000
	Purchase	$290,000
	Total Raw Materials available	$300,000
	Ending Raw Materials inventory	$10,000
	Raw materials used	$290,000	(300000-10000)
	Direct material cost (90%*290000)	$261,000
	Direct Labor	$270,000
	Applied Overhead	$534,600	(270000*1.9800)
	Total Production Costs Incurred	$1,065,600	(261000+270000+435600)
	Beginning Workin process Inventory	$90,000
	Ending Work in Process inventory	$80,000
	Cost of Goods Manufactured	$1,075,600	(1065600+90000-80000)
	SCHEDULE OF COST OF GOODS SOLD
	Beginning Finished goods Inventory	$77,000
	Cost of Goods Manufactured	$1,075,600
	Cost of Goods Available	$1,152,600
	Ending Finished goods Inventory	$67,000
	Cost of goods sold	$1,085,600	(1152600-67000)
	Actual Manufacturing Overhead Cost	432,000
	Add: Indirect materials	$29,000	(290000*10%)
	Add: Indirect labor	$85,000	(Factory salaries)
	Total Actual Manufacturing Overhead	$546,000
	Applied Overhead	$534,600
	Under applied Manufacturing Overhead	$11,400
	COST OF GOODS SOLD:
	Cost of goods sold	$1,085,600
	Under applied Manufacturing Overhead	$11,400
	Adjusted Cost of goods sold	$1,097,000
	ACTUAL ADMINISTRATIVE EXPENSES
	Depreciation Office Equipment	$24,000
	Building Rent	$32,000	(32% of 100000)
	Utilities electrical	$18,000	(10% *180000)
	Head Office Salaries	$163,000
	Total Administrative Expenses	$237,000
	ACTUAL SELLING EXPENSES
	utilities Telecom	$22,000
	Sales Commissions	$30,000
	Advertising	$20,000
	Shipping	$16,000
	Total Selling Expenses	$88,000
	INCOME STATEMENT
	Sales revenue		$1,500,000
	Cost of Goods Sold		$1,097,000
	Gross Profit		$403,000
	Other Expenses:
	Administrative Expenses	$237,000
	Selling expenses	$88,000
	Total Selling & Administrative Expenses		$325,000
	Net Income for the year		$78,000