Castillo, Adrian Joseph R.

BSA-A2A
Use of Income Statement to Control Costs
Jalapeno Company provided the following information for last year:
               Sales in units                                                                      280,000
               Selling price                                                                      P    12
               Direct materials                                                               180,000
               Direct labor                                                                         505,000
               Manufacturing overhead                                            110,000
               Selling expense                                                                  437,000
               Administrative expense                                                854,000
Last year, beginning and ending inventories of work in process and finished goods equaled zero.
Required:
1. Prepare an income statement for Jalapeno for last year.  (5 pts.)

Jalapeno Company
Statement of Financial Performance
For the year ended 20xx

3,360,00
Sales (280,000 units * P12) 0

Less: Cost of Goods Sold 795,000*

2,565,00
Gross Profit 0

Less: Selling Expense 437,000

Administrative Expense 854,000
1,291,00
0
1,274,00
Net Income 0
*= Direct Material + Direct Labor + MOH

= 180,000 + 505,000 + 110,000

 = 795,000

Beginning and ending WIP and FG inventories equaled zero so it is assumed that the incurred product costs are all
part of COGS.

2.  Briefly explain how a manager could use the income statement created in Requirement 1
to better control costs.  (5 pts.)
In an income statement, all the costs that a company incurred in its business operations
are displayed according to their function or nature. A manager can determine a cost department
(e.g., COGS or selling expenses) that has the highest amount through an income statement.
Through this, a manager can formulate strategies to lower the costs in that specific cost
department.
Cost analysis using income statement can also be done using percentage of sales. A
company may set a specific standard for cost percentages to avoid incurring large amount of
costs. The percentage of each costs in relation to total sales can be generated to see if a specific
cost’s percentage is higher or lower than the standard.