Question
Humpback Incorporated is a manufacturer of water bottles located in Auckland. The company was established by Aloysius Muthu in 2002, with a workforce of ten,
Humpback Incorporated is a manufacturer of water bottles located in Auckland. The company was established by Aloysius Muthu in 2002, with a workforce of ten, to meet the needs of the adventure-hiking community. Its product range then was limited, but the company had an excellent reputation for quality.
Nowadays, Humpback manufactures an extensive range of high-quality steel and plastic water bottles. The company is managed by Aloysius son, Kasper, and employs 20 people. It has annual sales averaging approximately $1 million. Although it has been consistently profitable, Humpback has experienced increasing pressure from competitors since the early 2010s. The company uses a cost-plus approach to pricing but is having to constantly reduce its mark-up to maintain market share.
Both Aloysius and Kasper are qualified as engineers and have practically no knowledge of accounting. The business is small and has never been able to employ an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses. Prices are based on rough estimates of cost of direct material and direct labour inputs plus a 50 percent markup.
With the decline in profit and constant pressure on prices, Kasper began to feel uneasy about the way costs and profits were calculated. The results for the year just ended were:
Sales - $980,000
Less Expenses:
Materials purchased - 300,000 Factory wages production line - 250,000
Production supervisors salary - 35,000
Rent for premises - 80,000 Council rates for premises - 5,000
Sales staff - 110,000 Advertising - 18,000 Equipment depreciation - 25,000
Electricity - 12,000 Owner/managers salary - 80,000 Truck lease - 10,000
Total expenses 925,000
Net profit $55,000
Additional Information:
- There was virtually no beginning inventory of raw materials, work in process and finished goods.
- At the end of the month, 10 percent of the materials purchased remained on hand, work in process amounted to 20 percent of the manufacturing costs incurred during the month, and finished goods inventories were negligible.
- The factory occupies 80 percent of the premises, the sales area 15 percent of the premises and the rest of the premises is occupied by the administrative functions.
- Equipment in the factory accounted for 95 percent of the total book value of equipment, with 5 percent of the equipment book value being used for sales and administrative functions.
- Almost all the electricity is consumed in the factory.
- The truck is used to deliver finished goods to customers.
- Kasper Muthu spends about one-half of his time on factory management, one third in the sales area and the rest on administration.
Requirement: estimate the cost of goods manufactured and prepare a revised statement of financial performance for the month.
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