91Ó°ÊÓ

The following events took place for Mercury Shoe Company during May 2006, the first month of operations as a producer of athletic shoes: \- Purchased \(\$ 155,300\) of materials. \- Used \(\$ 145,800\) of direct materials in production. \- Incurred \(\$ 94,500\) of direct labor wages. \- Applied factory overhead at a rate of \(75 \%\) of direct labor cost. \- Transferred \(\$ 304,300\) of work in process to finished goods. \- Sold goods with a cost of \(\$ 300,100\). \- Sold goods for \(\$ 510,000\). \- Incurred \$116,000 of selling expenses. \- Incurred \(\$ 48,400\) of administrative expenses. a. Prepare the May income statement for Mercury Shoe Company. Assume that Mercury Shoe uses the perpetual inventory method. b. Determine the inventory balances at the end of the first month of operations.

Step by step solution

01

Calculate Cost of Goods Manufactured (COGM)

To find the Cost of Goods Manufactured, we consider direct materials, direct labor, and applied overhead. Given: Direct materials used = \( \\(145,800 \) Direct labor = \( \\)94,500 \) Factory overhead = \( 0.75 \times 94,500 = \\(70,875 \)Thus, COGM is:\[COGM = \text{Direct Materials Used} + \text{Direct Labor} + \text{Factory Overhead} = 145,800 + 94,500 + 70,875 = \\)311,175\]

02

Calculating Cost of Goods Sold (COGS)

Next, we determine the Cost of Goods Sold, which is the cost of the goods actually sold during the period.Given:Cost of finished goods transferred to COGS = \( \\(300,100 \)Thus, COGS is:\[COGS = \\)300,100\]

03

Calculate Gross Profit

Gross profit is the difference between sales revenue and the cost of goods sold.Given:Sales revenue = \( \\(510,000 \)COGS (from Step 2) = \( \\)300,100 \)Thus:\[\text{Gross Profit} = \text{Sales Revenue} - \text{COGS} = 510,000 - 300,100 = \$209,900\]

04

Calculate Operating Expenses

Operating expenses include selling and administrative expenses.Given:Selling expenses = \( \\(116,000 \)Administrative expenses = \( \\)48,400 \)Thus, Total Operating Expenses is:\[\text{Total Operating Expenses} = 116,000 + 48,400 = \$164,400\]

05

Calculate Net Income

Net income is calculated by subtracting operating expenses from gross profit.From Step 3, Gross Profit = \( \\(209,900 \)From Step 4, Total Operating Expenses = \( \\)164,400 \)Thus:\[\text{Net Income} = \text{Gross Profit} - \text{Total Operating Expenses} = 209,900 - 164,400 = \$45,500\]

06

Balance Finished Goods Inventory

To find the finished goods inventory at the end of the month, we start with goods manufactured and subtract sold goods.From Step 1, COGM = \( \\(311,175 \)From Step 2, COGS = \( \\)300,100 \)Ending Finished Goods Inventory:\[\text{Ending Finished Goods Inventory} = COGM - COGS = 311,175 - 300,100 = \$11,075\]

07

Balance Raw Materials Inventory

Calculate the ending balance of raw materials inventory by considering all materials purchased and used.Given:Materials purchased = \( \\(155,300 \)Direct materials used = \( \\)145,800 \)End Raw Materials Inventory:\[\text{Ending Raw Materials Inventory} = 155,300 - 145,800 = \$9,500\]

08

Prepare May Income Statement

Composing the income statement:**Mercury Shoe Company Income Statement for May 2006**- **Sales Revenue:** \( \\(510,000 \)- **Cost of Goods Sold:** \( \\)300,100 \)- **Gross Profit:** \( \\(209,900 \)- **Operating Expenses:** - Selling Expenses: \( \\)116,000 \) - Administrative Expenses: \( \\(48,400 \) - **Total Operating Expenses:** \( \\)164,400 \)- **Net Income:** \( \$45,500 \)This income statement includes the calculated values from the previous steps.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost of Goods Manufactured

The Cost of Goods Manufactured (COGM) represents the total cost incurred by a company to produce products during a specific period. It includes direct materials, direct labor, and manufacturing overhead used in production. Calculating COGM allows businesses to determine how much they have spent in getting their inventory ready for sale.
To calculate COGM, you essentially add up the costs related to the inventory production: the cost of direct materials consumed, the labor costs directly attributed to the production, and any overhead costs that apply.
For Mercury Shoe Company, these costs included:

• Direct Materials Used: \(145,800 \)
• Direct Labor: \(94,500 \)
• Factory Overhead: Calculated at 75% of direct labor, which is \(0.75 \times 94,500 = 70,875 \)

Summing these gives us a total COGM of \(311,175 \). Understanding your COGM is essential to managing production costs and setting product pricing effectively.

Cost of Goods Sold

The Cost of Goods Sold (COGS) is the cost associated with the goods that were actually sold during the period. It's a critical measurement as it directly impacts the gross profit of a company.
To determine COGS, the inventory costs that are directly tied to the production of goods that were sold are considered. This includes the finished goods transferred to be sold. For Mercury Shoe Company, the COGS is calculated from the cost of the goods that have been sold, which was given as \(300,100 \).
By subtracting COGS from your sales revenue, you can determine the profitability of the inventory you sold, making this number crucial for financial planning and analysis.

Gross Profit Calculation

Gross profit is a company's profit before deducting operating expenses, taxes, and interest payments. It's calculated by subtracting the cost of goods sold (COGS) from total sales revenue.
This figure is an indicator of a company's efficiency in managing its production costs relative to sales. For Mercury Shoe Company, with sales revenue at \(510,000 \) and COGS at \(300,100 \), the gross profit comes out to be:\[\text{Gross Profit} = \text{Sales Revenue} - \text{COGS} = 510,000 - 300,100 = 209,900\]A high gross profit margin indicates a potential for significant profit, provided operating expenses are controlled. Monitoring this figure helps businesses adjust pricing strategies or cost structures.

Operating Expenses Analysis

Operating expenses are the costs required to run the business that aren't related to direct production costs. These include selling and general administrative expenses, and they play a crucial role in determining a company's net income.
For Mercury Shoe Company, the operating expenses include:

• Selling Expenses: \(116,000 \)
• Administrative Expenses: \(48,400 \)

This results in total operating expenses of \(164,400 \).
By analyzing these figures, businesses can identify areas where expenses might be reduced without affecting production capacity. When operating expenses are subtracted from the gross profit, you're left with the net income. This step is important because it highlights the costs that directly reduce the net income beyond production costs.