Question

ncome Statement

Pietro Frozen Foods, Inc., produces frozen pizzas. For next year, Pietro predicts that 50,400 units will be produced, with the following total costs:

Direct materials	?
Direct labor	66,000
Variable overhead	18,000
Fixed overhead	240,000

Next year, Pietro expects to purchase $128,500 of direct materials. Projected beginning and ending inventories for direct materials and work in process are as follows:

	Direct materials Inventory	Work-in-Process Inventory
Beginning	$4,000	$14,800
Ending	$3,900	$16,800

Next year, Pietro expects to produce 50,400 units and sell 49,700 units at a price of $16.00 each. Beginning inventory of finished goods is $43,500, and ending inventory of finished goods is expected to be $35,000. Total selling expense is projected at $26,500, and total administrative expense is projected at $120,500.

Required:

1. Prepare an income statement in good form. Round the percent to four decimal places before converting to a percentage. For example, .88349 would be rounded to .8835 and entered as 88.35.

Pietro Frozen Foods, Inc.
Income Statement
For the Coming Year
			Percent
		$	%
			%
		$	%
Less operating expenses:
	$
			%
		$	%

2. What if the cost of goods sold percentage for the past few years was 55.73 percent? Management's reaction might be:

Answer 1

1.

	Budgeted Cost of Goods Sold
	For the Coming Year
a	Work in Process Beginning Inventory			$     14,800.00
b	Direct Materials :
c	Direct Materials Beginning Inventory	$               4,000.00
d	Direct Material Purchases	$           128,500.00
e	Cost of Direct Material Available for sale (c+d))	$           132,500.00
f	Less Direct Materials Ending Inventory	$               3,900.00
g	Cost of Direct Material Used in production (e-f)		$ 128,600.00
h	Direct Labor		$   66,000.00
i	Factory Overhead		$ 258,000.00
j	Cost of Goods added to production (g+h+i)			$   452,600.00
k	Cost of Goods available (a+j)			$   467,400.00
l	Work in Process Ending Inventory			$     16,800.00
m	Cost of Goods manufactured (k-l)			$   450,600.00
n	Plus Finished Goods Beginning Inventory			$     43,500.00
o	Less Finished Goods Ending Inventory			$     35,000.00
p	Cost of Goods Sold (m+n-o)			$   459,100.00
	Budgeted Income Statement
	For the Coming Year
a	Sales Revenue	$           795,200.00	100.00%
b	Cost of Goods Sold	$           459,100.00	57.73%
c	Gross Profit (a-b)	$           336,100.00	42.27%
	Less : Operating Expenses
d	Selling Expenses	$             26,500.00	3.33%
e	Administrative Expenses	$           120,500.00	15.15%
f	Income from Operations (c-d-e)	$           189,100.00	23.78%

Sales Revenue = $16 x 49700 = $795200
Percentage has been calculated by taking sales as base

2.
Cost of Goods Sold has increased from 55.73% to 57.73% i.e. 2% increase which will ultimately lead to lower income.
Management has to assess the reasons for increase in Cost of Goods Sold and has to find ways to control the same.