Assignment:
The sustainable Chemical Corporation produced a specialty chemical called SC. At the beginning of each year, the company estimated what the cost of SC would be for the coming year as one factor in the development of its pricing and promotion strategies and as a benchmark against which to compare the actual costs of production. The estimated direct cost per drum (omitting any overhead allocation) of SC was as follows:
*Raw Material: 10 pounds at $2.00/pound = $20.00
*Direct Labor: 0.5 hours at $8.00/hour = 4.00
_____
$24.00
Sustainable chemical also prepared monthly budgets for nonmanufacturing expenses, production volume, sales volume, and the selling price per drum. For last month, the budgeted figures were:
*Nonmanufacturing expenses: $60,000
*Production volume: 11,000 drums
*Sales Volume: 11,000 drums
*Selling price per drum: $30.00
Actual results for last month differed somewhat from the budgeted amounts. Actual results were:
*Production volume: 11,000 drums
*Sales Volume: 10,000 drums, and sales revenue of 290,000
*Actual direct labor: 5,650 hours
*Actual direct labor cost: 46,330
* Raw Material Purchased: 150,000 lbs. at a cost of 291,000
*Raw Material used in production: 114,400 lbs.
*Nonmanufacturing expenses: 58,000
Sustainable Chemical's accounting policy was to use the actual raw material purchase cost per pound and the actual production cost per drum using the LIFO inventory method as the basis for inventory valuation and cost of goods sold determination. The actual cost per drum was generally compared to the estimated cost per drum to see if there was a significant difference.
The company's controller thoughts the financial statements might be prepared more scientifically if raw material inventory were kept at the estimated prices and finished goods inventory were kept at the estimated production cost per drum, with any differences between actual and estimated costs treated as adjustments to the month's income. Work in process was not a factor because it was negligible.
A variation of the controller's "scientific" approach would be to keep raw material inventory at actual costs, recognizing any difference between the actual and estimated cost per pound only for the material actually used. Using this approach, develop an income statement and note the ending inventory values.