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				$	727,500
Less operating expenses:
Selling and administrative salaries	$	42,600
Rent on facilities		49,000
Purchases of raw materials		236,000
Insurance		10,900
Depreciation, sales equipment		12,350
Utilities costs		62,200
Indirect labour		126,200
Direct labour		105,300
Depreciation, factory equipment		14,800
Maintenance, factory		8,900
Advertising		93,400			761,650
Operating loss				$	(34,150	)
After seeing the $34,150 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: Only 85% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities. Inventory balances at the beginning and end of June were as follows: June 1 June 30   Raw materials $19,900 $50,050   Work in process $78,350 $97,150   Finished goods $23,080 $71,130   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. 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.

Answer 1

1)
Veekay Company
Schedule of Cost of Goods Manufactured
For the Month Ended June 30
Direct Materials:
Raw materials inventory, June 1	$19,900.00
Add: Purchases of raw materials	$236,000.00
Raw materials available for use	$255,900.00
Deduct: Raw materials inventory, June 30	-$50,050.00
Raw materials used in production		$205,850.00
Direct labour		$105,300.00
Manufacturing overhead:
Rent on facilities (85% ×$49,000)	$41,650.00
Insurance (90% ×$10,900)	$9,810.00
Utilities (80% ×$62,200)	$49,760.00
Indirect labour	$126,200.00
Maintenance, factory	$8,900.00
Depreciation, factory equipment	$14,800.00
Total overhead costs		$251,120.00
Total manufacturing costs		$562,270.00
Add: Work in process inventory, June 1		$78,350.00
		$640,620.00
Deduct: Work in process inventory, June 30		-$97,150.00
Cost of goods manufactured		$543,470.00
Veekay Company
Income Statement
For the Month Ended June 30
Sales		$727,500.00
Cost of goods sold
Finished goods inventory, June 1	$23,080.00
Add: Cost of goods manufactured	$543,470.00
Goods available for sale	$566,550.00
Deduct: Finished goods inventory, June 30	-$71,130.00	$495,420.00
Gross margin		$232,080.00
Selling and administrative expenses:
Selling and administrative salaries	$42,600.00
Rent on facilities (15% ×$49,000)	$7,350.00
Depreciation, sales equipment	$12,350.00
Insurance (10% ×$10,900)	$1,090.00
Utilities (20% ×$62,200)	$12,440.00
Advertising	$93,400.00	$169,230.00
Operating income		$62,850.00