Question

Swift Company was organized on March 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August’s income statement follows:

SWIFT COMPANY Income Statement For the Month Ended August 31
Sales			$	540,000
Less: Operating expenses:
Indirect labour cost	$	17,400
Utilities		16,500
Direct labour cost		80,000
Depreciation, factory equipment		21,000
Raw materials purchased		219,000
Depreciation, sales equipment		18,000
Insurance		5,400
Rent on facilities		48,000
Selling and administrative salaries		50,000
Advertising		73,700		549,000
Net loss			$	(9,000)

    The company’s controller resigned a month ago. Sam, a new assistant in the controller’s office, prepared the income statement above. Sam has had little experience in manufacturing operations. After seeing the $9,000 loss for August, Swift’s president stated, “I was sure we’d be profitable within six months, but our six months are up and this loss for August is even worse than July’s. I think it’s time to start looking for someone to buy out the company’s assets—if we don’t, within a few months there won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just limp along with Sam for the time being.”

     Additional information about the company follows:

a.	Some 80% of the utilities cost and 75% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.
b.	Inventory balances at the beginning and end of August were as follows:

	August 1		August 31
Raw materials	$	24,000	$	20,000
Work in process		8,000		19,000
Finished goods		57,000		62,000

  

c.	Only 75% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

        The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets.

Required:

1.	As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in good form for August.

      

Answer 1

Beginning WIP			8000
Beginning Balance of Raw Materials	24000
Add: Purchases	219000
Less: Ending Balance of Raw Materials	-20000	223000
Direct Labour Cost		80000
Indirect Labour		17400
Utilitites		13200
Depreciation of Factory Equipment		21000
Insurance		4050
Rent on Facilitites		36000
Total Cost of Good			394650
Less: Ending WIP			-19000
Cost of Goods Manufactured			383650
Sales		540000
Beginning Balance of FG	57000
Add: Cost of Goods Manufactured	383650
Less: Ending Balance of FG	-62000	378650
Gross Profit		161350
Less: Utilitites	3300
Depreciation of Sales Equipment	18000
Insurance	1350
Rent	12000
Selling Adm Salaries	50000
Advertising	73700	158350
Net Income		3000