On 1 January 2023, Bob Teo set up Safe Pte Ltd to manufacture and sell face masks.

Fantastic news! We've Found the answer you've been seeking!

Question:

On 1 January 2023, Bob Teo set up Safe Pte Ltd to manufacture and sell face masks. He manages the company single-handedly and at the end of the year, he prepared the following income statement for the year. $ $ Sales 540,000 Less Operating expenses: Purchases of raw materials 240,000 Purchase of factory supplies 12,000 Wages for factory workers involved directly in manufacturing the face masks 90,000 Wages for other factory workers 12,000 Manager's salary 48,000 Office staff salaries 12,000 Sales staff salaries 26,400 Advertising 6,000 Administrative expenses 9,600 Cleaning costs 6,000 Rent 30,000 Electricity & utilities 5,400 Purchases of factory equipment 168,000 Purchases of office equipment 12,000 Purchases of sales vehicles 18,000 Total operating expenses 695,400 Net loss (155,400) Although Bob Teo is disappointed with the result, he is certain that the statement is not correctly prepared. However, he is unable to identify the error. Hence, he approached you for help to review the statement.

To help you in your review, Bob Teo has also provided the following additional information:

(i) The factory occupies 80% of the rented building, the sales area 15% and the administration area 5%.

(ii) All the company's non-current assets are estimated to have a useful life of 5 years and no salvage value at the end of their useful life.

(iii) Bob Teo spends 50% of his time as factory manager and the remaining time equally on sales and general administration.

(iv) Electricity & utilities costs are consumed almost entirely by the factory. (v) Cleaning costs are to be allocated to factory, sales and general administration based on the areas occupied.

At 31 December 2023, the following inventories existed: Raw material $24,000 Work in process $48,000 Finished goods $1,800 Required: (a) Based on the information provided, determine the following: (i) Direct material used. (ii) Total manufacturing cost. (iii) Cost of goods manufactured. (iv) Cost of goods sold. (v) Gross profit. (vi) Sales and administrative expenses. (vii) Net profit. Show all workings.

(26 marks) (b) Identify the mistake made by Bob Teo with regards to his understanding of costs when computing Safe Pte Ltd's net profit for the year ending 31 December 2023. Explain why this is a mistake.

(c) Assuming Safe Pte Ltd uses normal costing and applies manufacturing overhead based on direct labour cost and if the pre-determined manufacturing overhead rate is 135%, determine the cost of goods manufactured. Compute the MOH variance and pass the journal entry to close off the Manufacturing Overhead Control account assuming that the MOH variance is immaterial.