Problem

Measuring Unit CostEarly in the year, Jane Jackson founded Jackson Engineering Co. for the...

Measuring Unit Cost

Early in the year, Jane Jackson founded Jackson Engineering Co. for the purpose of manufacturing a special plumbing device that she had designed. Shortly after year-end, the company’s accountant was injured in an auto accident, and no year-end financial statement were prepared. However, the accountant had correctly determined the year-end inventories at the following amounts:

Materials

$51,000

Work in process

32,000

Finished goods (4,000 units)

108,000

As this was the first year of operations, there were no beginning inventories.

While the accountant was in the hospital, Jackson improperly prepared the following income statement from the company’s accounting records:

Net sales

 

$625,000

Cost of goods sold:

 

 

   Purchases of direct materials

$188,000

 

   Direct labor costs assigned to production

  113,000

 

   Manufacturing overhead applied to production

  160,000

 

  Selling expenses

    75,000

 

  Administrative expenses

  135,000

 

     Total costs

 

671,000

Net loss for year

 

$(46,000)

Jackson was very disappointed in these operating results. She stated, “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 $671,000; that amounts to a cost of $67.10 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 Jackson’s remarks that the business is unprofitable and that its unit cost of production ($67.10, according to Jackson) is much higher than that of competitors (around $30). If you disagree with Jackson, explain any errors or shortcomings in her analysis.

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