Reference no: EM132529979

Medical Technology Ltd. Income for Quarter ended June 30th

Sales (16,000 monitors) $975,000

Less operating expenses:

Selling and administrative salaries $90,000

Advertising 200,000

Cleaning supplies, factory 6,000

Indirect labour costs 135,000

Depreciation, office equipment 18,000

Direct labour costs 80,000

Raw materials purchased 310,000

Maintenance, factory 47,000

Rental cost facilities 65,000

Insurance, factory 9,000

Utilities 40,000

Depreciation, production equipment 75,000

Travel, salespersons 60,000 1,135,000

Net operating cost $(160,000)

Point 1: Medical Technology was organised on April 1 of the current year to produce and market a revolutionary new heart monitor. The company's accounting system was set up by Jacob's brother-in-law who had taken an accounting course about 10 years ago.

Point 2: "We may not last a year if the insurance company doesn't pay the $227,000 it owes us for the 4,000 monitors lost in the lorry accident last week," said Staci. "The agent says our claim is inflated, but that's a lot of rubbish."

Point 3: Just after the end of the quarter, a lorry carrying 4,000 monitors wrecked and burned, destroying the entire load. The monitors were part of the 20,000 units completed during the quarter ended June 30. They were in a warehouse awaiting sale at quarter-end and were sold and shipped on July 3 (this sale is not included on the income statement above). The trucking company's insurer is liable for the cost of the goods lost. Jacobs's brother-in-law has determined this cost as follows

Total costs for the quarter = $1,135,000 / 20,000 units = $56.75 per unit

Monitors produced during the quarter

4,000 units x $56.75 per unit = $227,000

The following additional information is available on the company's activities during the quarter ended June 30:

a. Inventories at the beginning and end of the quarter were as follows:

Inventory Beg. of the Quarter End of the Quarter

Raw materials $0 $40,000

Work in process $0 $30,000

Finished goods $0 ?

b. Eighty percent of the rental cost for facilities and 90% of the utilities cost relate to manufacturing operations. The remaining amounts relate to selling and administrative activities.

Question 1. What conceptual errors, if any, were made in preparing the income statement above?

Question 2. Prepare a schedule of cost of goods manufactured for the quarter.

Question 3. Prepare a corrected income statement for the quarter. Your statement should show in detail how the cost of goods sold is computed.

Question 4. Do you agree that the insurance company owes Medical Technology Ltd. $227,000? Explain your answer.

Question 5. Can you give any suggestions to Jacob in improving his accounting information system? This is an open question, and any ideas are welcome, as long as appropriate.