Case study

XYZ Company started its operations on May 1, 2017. The company was organized and owned by three former employees of a large computer manufacturer. The firm produces a component used in several brands of personal computers. One of the major stockholders has just finished her first accounting course at a nearby university and has agreed to perform accounting services for the firm. At the end of May , she prepared the following income statement:

CASE # 1 29/03/2020

Case Material

XYZ Company started its operations on May 1, 2017. The company was organized and owned by three former employees of a large computer manufacturer. The firm produces a component used in several brands of personal computers. One of the major stockholders has just finished her first accounting course at a nearby university and has agreed to perform accounting services for the firm. At the end of May , she prepared the following income statement:

XYZ Company
Income Statement
For the Month Ended May 31, 2017
						US $		US $
Sales								600,000
Operating expenses:
Selling and administrative						156,000
Raw materials purchased						192,000
Direct labor						161,000
Indirect labor						70,000
Building rent						60,000
Utilities						20,000
Royalty on production patent						60,000
Plant maintenance						18,000
Plant equipment rental						20,000
Total operating expenses								757,000
Net income (loss)								(157,000)

The accountant was very confused when she completed the income statement. Throughout the month, the three owners observed that the sales and production performance for the firm had been in line with their expectations. In addition, the selling price per component had been $20, which was the expected selling price. Yet, the income statement shows a significant net loss of $157,000 for the first month of operations. The company presidents reaction to the financial results was even more negative after he had a chance to review the calculations. This simply cannot reflect what happened, was his initial comment. We were expecting a unit production cost for each component in the $12 to $13 range when we set our selling price of $20, which is compatible with the price charged by our main competitors. Now you are telling me that our unit cost must be significantly higher than that when we produced 40,000 units during May . What in the world is wrong? We cannot survive at this rate and we sure cannot raise our selling price. Lets look at these numbers again.

The accountant reconsidered the situation and discovered the following:

1. Inventories at the end of May:

Raw materials $22,000

Work in process $80,000

Finished goods ?

2. The production operation uses 70% of the building and the selling and administrative functions occupy the other 30%. Utilities are used in the same ratio.

3. A production patent used by the firm has a royalty of $2 per component produced.

4. Rent on the plant equipment is $5,000 per month plus $0.5 per component produced.

Required:

A. How many components were sold during May?

B. How many components were in the ending finished goods inventory on May 31, 2017?

C. Prepare a corrected income statement for July and a supporting cost of goods manufactured statement. Determine the unit production cost for each of the 40,000 components produced to compute the cost of the ending finished goods inventory.