As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for June. 2. As a second step, prepare a new income statement for the month. 3. Based on your statements prepared in (1) and (2) above, would you recommend that the company continue operations?
PROBLEM 2-25 Schedule of Cost of Goods Manufactured; Income Statement [LO1, LO2, LO3, LO4]
Skyler Company was organized on November 1 of the previous year. After seven months of start-up
losses, management had expected to earn a profi t during June, the most recent month. Management
was disappointed, however, when the income statement for June also showed a loss. June’s income
statement follows:
Variable or Fixed
Direct or Direct or with Respect
Indirect Cost of Indirect Cost of to the Number
the Immunization Particular of Immunizations
Center Patients Administered
Item Description Direct Indirect Direct Indirect Variable Fixed
Example: The cost of polio
immunization
tablets . . . . . . . . . . . . . . . . X X X
Skyler Company
Income Statement
For the Month Ended June 30
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600,000
Less operating expenses:
Selling and administrative salaries . . . . . . . $ 35,000
Rent on facilities . . . . . . . . . . . . . . . . . . . . . . 40,000
Purchases of raw materials . . . . . . . . . . . . . 190,000
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Depreciation, sales equipment. . . . . . . . . . . 10,000
Utilities costs. . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . 108,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Depreciation, factory equipment . . . . . . . . . 12,000
Maintenance, factory. . . . . . . . . . . . . . . . . . . 7,000
Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 630,000
Net operating loss. . . . . . . . . . . . . . . . . . . . . . . $(30,000)
After seeing the $30,000 loss for June, Skyler’s president stated, “I was sure we’d be
profi table within six months, but after eight months we’re still spilling red ink. Maybe it’s time
for us to throw in the towel and accept one of those offers we’ve had for the company. To make
matters worse, I just heard that Linda won’t be back from her surgery for at least six more
weeks.”
Linda is the company’s controller; in her absence, the statement above was prepared by a new
assistant who has had little experience in manufacturing operations. Additional information about the
company follows:
a. Only 80% of the rent on facilities applies to factory operations; the remainder applies to selling
and administrative activities.
b. Inventory balances at the beginning and end of the month were as follows:
June 1 June 30
Raw materials. . . . . . . . . . . $17,000 $42,000
Work in process. . . . . . . . . $70,000 $85,000
Finished goods. . . . . . . . . . $20,000 $60,000
c. Some 75% of the insurance and 90% of the utilities cost apply to factory operations; the remaining amounts apply to selling and administrative activities.
The president has asked you to check over the above income statement and make a recommendation as to whether the company should continue operations.
Required:
1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost
of goods manufactured for June.
2. As a second step, prepare a new income statement for the month.
3. Based on your statements prepared in (1) and (2) above, would you recommend that the company
continue operations?
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