Umair Company is a manufacturing of computers. Its controller resigned in October 2019. An inexperienced assistant accountant has prepared the following income statement for the month of October 2019. UMAIR COMPANY Income statement For the Month Ended October 31,2019 Sales (net) $390,00 Less: Operating expenses Raw materials purchases $ 132,000 Direct labor cost 95,000 Advertising expense 45,000 Selling and administrative salaries 37,500 Rent on factory facilities 30,000 Depreciation on sales equipment 22,500 Depreciation on factory equipment 15,500 Indirect labor cost 14,000 Utilities expense 6,000 insurance expense 4,000 401,500 Net loss -$11,500 Prior to October 2019 the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As his friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows. October 1 October 31 Raw materials $ 9,000 $17,000 Work in process 8,000 7,000 finished goods 15,000 24,000 Inventory balance at the beginning and end of October were: Only 30% of the utilities and 70% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities. Instructions: Prepare a schedule of the cost of goods manufactured for the October 2019.
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.
Umair Company is a manufacturing of computers. Its controller resigned in October 2019. An inexperienced assistant accountant has prepared the following income statement for the month of October 2019.
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UMAIR COMPANY |
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Income statement |
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For the Month Ended October 31,2019 |
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Sales (net) |
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$390,00 |
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Less: Operating expenses |
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Raw materials purchases |
$ 132,000 |
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Direct labor cost |
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95,000 |
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Advertising expense |
45,000 |
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Selling and administrative salaries |
37,500 |
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Rent on factory facilities |
30,000 |
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22,500 |
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Depreciation on factory equipment |
15,500 |
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Indirect labor cost |
14,000 |
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Utilities expense |
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6,000 |
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insurance expense |
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4,000 |
401,500 |
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Net loss |
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-$11,500 |
Prior to October 2019 the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As his friend, you have been asked to review the income statement and make necessary corrections. After examining other
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October 1 |
October 31 |
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Raw materials |
$ 9,000 |
$17,000 |
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Work in process |
8,000 |
7,000 |
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finished goods |
15,000 |
24,000 |
- Inventory balance at the beginning and end of October were:
- Only 30% of the utilities and 70% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.
Instructions:
Prepare a schedule of the cost of goods manufactured for the October 2019.
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