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Problem 16.11A

Measuring Unit Cost

Early in the year, Bill Edmond founded Edmond Engineering Co. for the purpose of manufacturing a special plumbing device that he had designed.  Shortly after year-end, the company’s accountant was injured in an auto accident, and no year-end financial statements have been prepared.  However, the accountant had correctly determined the year-end inventories at the following amounts:


Work in process32,000

Finished goods (4,000 units)91,000

As this was the first year of operations, there were no beginnings of inventories.

While the accountant was in the hospital, Edmond improperly prepared the following income statement from the company’s accounting records:

Net sales$625,000

Cost of goods sold:

Purchases of direct materials$185,000

Direct labor costs assigned to production115,000

Manufacturing overhead applied to production160,000

Selling expenses75,000

Administrative expenses  135,000

Total costs   670,000

Net loss for year$(45,000)

Edmonds was very disappointed in these operating results.  He states, “Not only did we lose more than $40,000 this year, but look at our unit production costs.  We sold 10,000 units this year at a cost of $670,000; that amounts to a cost of $67 per unit.  I know some of our competitors are able to manufacture similar valves for about $30 per unit.  I don’t need an accountant to know that this business is a failure.”



Prepare a schedule of the cost of finished goods manufactured for the year.  (As there were no beginning inventories, your schedule will start with “Manufacturing costs assigned to production:.”  Show a supporting computation for the cost of direct materials used during the year.


Compute the average cost per unit manufactured.


Prepare a corrected income statement for the year, using the multiple-step format.  If the company has earned any operating income, assume an income tax rate of 20%.  (Omit earnings per share figures.)


Explain whether you agree or disagree with Edmond’s remarks that the business is unprofitable and that its unit cost of production ($67, according to Edmond) is much higher than that of competitors (around $30).  If you disagree with Edmond, explain any errors or shortcomings in his analysis.

Alternate Problems for use with Financial and Managerial Accounting, 12e16-11

© The McGraw-Hill Companies, 2002

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