ABC Company was organized on March 1 of the current year. After five months of start-up losses, management had expected to earn a profit during August. Management was disappointed, however, when the income statement for August also showed a loss. August’s income statement follows: ABC Company Income Statement For the Month Ended August 31 Sales 450,000 Less operating expenses: Indirect labor cost 12,000 Utilities 15,000 Direct labor cost 60,000 Depreciation, factory equipment 21,000 Raw materials purchased 165,000 Depreciation, sales equipment 18,000 Insurance 4,000 Rent on facilities 70,000 Selling and administrative expenses 32,000 Advertising 75,000 472,000 Net operating loss (22,000) After seeing the Tk. 22,000 loss for August, ABC’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.” 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. Additional information about the company as follows: a. Some 50% of the utilities cost and 75% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities. b. Only 70% of the rent on facilities applies to factory operations. The remaining amounts apply to selling and administrative activities. c. Inventory balances at the beginning and end of August were: August 1 August 31 Raw materials 8,500 12,000 Work in process 15,000 22,000 Finished goods 42,000 50,000 The president has asked you to check over the income statement and make a recommendation as to 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 for August. 2. As a second step, prepare a new income statement for August.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
ABC Company was organized on March 1 of the current year. After five months of start-up losses,
management had expected to earn a profit during August. Management was disappointed, however, when
the income statement for August also showed a loss. August’s income statement follows:
ABC Company
Income Statement
For the Month Ended August 31
Sales 450,000
Less operating expenses:
Indirect labor cost 12,000
Utilities 15,000
Direct labor cost 60,000
Raw materials purchased 165,000
Depreciation, sales equipment 18,000
Insurance 4,000
Rent on facilities 70,000
Selling and administrative expenses 32,000
Advertising 75,000 472,000
Net operating loss (22,000)
After seeing the Tk. 22,000 loss for August, ABC’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.”
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. Additional
information about the company as follows:
a. Some 50% of the utilities cost and 75% of the insurance apply to factory operations. The
remaining amounts apply to selling and administrative activities.
b. Only 70% of the rent on facilities applies to factory operations. The remaining amounts apply to
selling and administrative activities.
c. Inventory balances at the beginning and end of August were:
August 1 August 31
Raw materials 8,500 12,000
Work in process 15,000 22,000
Finished goods 42,000 50,000
The president has asked you to check over the income statement and make a recommendation as to 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 for August.
2. As a second step, prepare a new income statement for August.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 4 images
