Service versus manufacturing companies
Mazzel Company began operations on January 1, 2008, by issuing common stock for $33,000 cash. During 2008, Mazzel received $39,000 cash from revenue and incurred costs that required $66,000 of cash payments.
Prepare an income statement, balance sheet, and statement of cash flows for Mazzel Company for 2008, under each of the following independent scenarios.
a. Mazzel is a promoter of rock concerts. The $66,000 was paid to provide a rock concert that produced the revenue.
b. Mazzel is in the car rental business. The $66,000 was paid to purchase automobiles. The automobiles were purchased on January 1, 2008, had four year useful lives and no expected salvage value. Mazzel uses straight line depreciation. The revenue was generated by leasing the automobiles.
c. Mazzel is a manufacturing company. The $66,000 was paid to purchase the following items.
(1) Paid $5,900 cash to purchase materials that were used to make products during the year.
(2) Paid $25,000 cash for wages of factory workers who made products during the year.
(3) Paid $2,100 cash for salaries of sales and administrative employees.
(4) Paid $33,000 cash to purchase manufacturing equipment. The equipment was used solely to make products. It had a three year life and a $7,200 salvage value. The company uses straight line depreciation.
(5) During 2008, Mazzel started and completed 2,000 units of product. The revenue was earned when Mazzel sold 1,300 units of product to its customers.
d. Refer to Requirement c. Could Mazzel determine the actual cost of making the 500th unit of product? How likely is it that the actual cost of the 500th unit of product was exactly the same as the cost of producing the 501st unit of product? Explain why management may be more interested in average cost than in actual cost.