Question

Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2017.

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2017
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 2017, 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.

1. Inventory balances at the beginning and end of October were:

		October 1		October 31
Raw materials		$ 18,000		$ 29,000
Work in process		20,000		14,000
Finished goods		30,000		50,000

2. 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.

Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2017.

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2017
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 2017, 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.

1. Inventory balances at the beginning and end of October were:

		October 1		October 31
Raw materials		$ 18,000		$ 29,000
Work in process		20,000		14,000
Finished goods		30,000		50,000

2. 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.

Answer 1

COST OF GOODS MANUFACTURED SCHEDULE
Work in process inventory, October 1			20000
Direct Materials:
Raw materials inventory, October 1	18000
Raw materials purchase	264000
Total raw materials available	282000
Raw materials inventory, October 31	29000
Direct Materials used		253000
Direct labor		190000
Manufacturing Overhead:
Rent on factory facilities	60000
Depreciation on factory equipment	31000
Indirect labor cost	28000
Factory utilities (12000*75%)	9000
Factory insurance (8000*60%)	4800
Total manufacturing overhead		132800
Total manufacturing costs			575800
Total cost of work in process			595800
Work in process inventory, October 31			14000
Cost of goods manufactured			581800
INCOME STATEMENT
Sales		780000
Cost of goods sold:
Finished goods inventory, October 1	30000
Cost of goods manufactured	581800
Total cost of goods available for sale	611800
Finished goods inventory, October 31	50000
Cost of goods sold		561800
Gross profit		218200
Operating expenses:
Advertising expense	90000
Selling and administrative expense	75000
Depreciation expense-sales equipment	45000
Utilities expense (12000*25%)	3000
Insurance expense (8000*40%)	3200
Total operating expenses		216200
Net Income		2000