Question

Veekay Company was organized on November 1 of the previous year. After seven months of start-up losses, management had expected to earn a profit 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:

VEEKAY COMPANY
Income Statement
For the Month Ended June 30
Sales				$	795,000
Less operating expenses:
Selling and administrative salaries	$	46,200
Rent on facilities		58,000
Purchases of raw materials		263,000
Insurance		11,800
Depreciation, sales equipment		13,700
Utilities costs		69,400
Indirect labour		133,400
Direct labour		111,600
Depreciation, factory equipment		16,600
Maintenance, factory		9,800
Advertising		98,800			832,300
Operating loss				$	(37,300	)

After seeing the $37,300 loss for June, Veekay’s president stated, “I was sure we’d be profitable within six months, but after eight months we’re still spilling red ink. Maybe it’s time for us to throw in the towel. To make matters worse, I just heard that Debbie won’t be back from her surgery for at least six more weeks.”

Debbie 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 85% 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 June were as follows:

	June 1	June 30
Raw materials	$20,800	$54,100
Work in process	$79,700	$100,300
Finished goods	$24,160	$76,260

c.	Some 90% of the insurance and 80% 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 recommend whether the company should continue operations. 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.

Answer 1

Answer 1				Answer 2
VEEKAY COMPANY				VEEKAY COMPANY
Schedule of Cost of Goods Manufactured for June				Income Statement for the June
Direct Materials				Sales		$795,000
Raw Materials ,June 1	$20,800			Cost of goods sold
Add : Raw Materials Purchases	$263,000			Finished Goods , June 1	$24,160
Raw Materials available for use	$283,800			Add : Cost of goods manufactured	$595,940
Less : Raw Materials ,June 30	$54,100			Less : Finished Goods ,June 30	$76,260	$543,840
Direct Materials Used		$229,700		Gross Margin		$251,160
Direct Labour		$111,600		Less : Operating Expenses
Factory Overheads				Insurance	$1,180
Depreciation Expense-Factory Equipment	$16,600			Utilities	$13,880
Factory insurance	$10,620			Rent Expense	$8,700
Factory Utilities	$55,520			Selling and administrative salaries	$46,200
Indirect Labour	$133,400			Depreciation, sales equipment	$13,700
Rent Expense - Factory facilities	$49,300			Advertising	$98,800
Maintenance expense - Factory equipment	$9,800			Total Operating Expenses		$182,460
Total Factory Overhead costs		$275,240		Operating Income		$68,700
Total Manufacturing Costs		$616,540
Add : Work in process , June 1		$79,700
Total Cost of work in process		$696,240
Less : Work in process , June 30		$100,300
Cost of goods Manufactured		$595,940
Considering the answer in step 2 , it is recommended that the company should continue operations.