Chapter 1, Problem 1.5AP

Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2017.

EMPIRE COMPANY

Income Statement

For the Month Ended October 31, 2017

Sales revenue		$780,000
Less: Operating expenses
Raw materials purchases	$264,000
Direct labor cost	190,000
Advertising expense	90,000
Selling and administrative salaries	75,000
Rent on factory facilities	60,000
Depreciation on sales equipment	45,000
Depreciation on factory equipment	31,000
Indirect labor cost	28,000
Utilities expense	12,000
Insurance expense	8,000	803,000
Net loss		$ (23,000)

Prior to October 2017, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her 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.

1. Inventory balances at the beginning and end of October were:

	October 1	October 31
Raw materials	$18,000	$29,000
Work in process	20,000	14,000
Finished goods	30,000	50,000

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

Instructions

(a) Prepare a schedule of cost of goods manufactured for October 2017.

(b) Prepare a correct income statement for October 2017.