Early in the year, Bill Edmond founded Edmond Engineering Co. for the purpose of manufacturing a special plumbing device that he had designed. Shortly after year-end, the company’s accountant was injured in an auto accident, and no year-end financial statements were prepared. However, the accountant had correctly determined the year-end inventories at the following amounts:
Materials | $52,000 |
Work in process | 32,000 |
Finished goods (4,000 units) | 91,000 |
As this was the first year of operations, there were no beginning inventories.
While the accountant was in the hospital Edmond improperly prepared the following income statement from the company’s accounting records:
Net sales |
| $625,000 |
Cost of goods sold: |
|
|
Purchases of direct materials | $185,000 |
|
Direct labor costs assigned to production | 115,000 |
|
Manufacturing overhead applied to production | 160,000 |
|
Selling expenses | 75,000 |
|
Administrative expenses | 135,000 |
|
Total costs |
| 670,000 |
Net loss for year |
| $ (45,000) |
Edmond was very disappointed in these operating results. He stilted. “Not only did we lose more than $40,000 this year, but look at our unit production costs. We sold 10,000 units this year at a cost of $670,000: that amounts to a cost of $67 per unit. I know some of our competitors are able to manufacture similar plumbing devices for about $30 per unit. I don’t need an accountant to know that this business is a failure.”
Instructions
a. Prepare a schedule of the cost of finished goods manufactured for the year. (As there were no beginning inventories, your schedule will start with “Manufacturing costs assigned to production:”.) Show a supporting computation for the cost of direct materials used during the year.
b. Compute the average cost per-unit manufactured. (Round your answer to two decimal places.)
c. Prepare a corrected income statement for the year, using the multiple-step format. If the company has earned any operating income, assume an income tax rate of 20 percent. (Omit earnings per share figures.)
d. Explain whether you agree or disagree with Edmond’s remarks that the business is unprofitable and that its unit cost of production ($67, according to Edmond) is much higher than that of competitors (around $30). If you disagree with Edmond, explain any errors or shortcomings in his analysis.
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