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Wilmont Chemical Corporation

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The Wilmont Chemical Corporation produced a variety of industrial products, including a
specialty chemical called SC. SC was packaged and sold by the company in 25-liter plastic
containers. At the beginning of each year, the company’s controller estimated the unit cost of SC
for the coming year as one factor in the development of the product’s pricing and promotion
strategies. In addition, the estimated cost of SC was used as a benchmark against which to
compare the actual cost of production. The estimated direct cost per unit (omitting any
manufacturing-overhead allocation) of SC for the current year was as follows:
Raw material (10 pounds at $3.00/pound)
Direct labor (0.5 hour at $12.00/hour)
Total direct cost per unit


Wilmont Chemical also prepared monthly budgets for production volume, sales volume, and
nonmanufacturing expenses. In general, management strove to achieve actual results similar to
the budgeted amounts, and tried to minimize the company’s working-capital investment by
maintaining just-in-time inventory levels. Unfortunately, the market demand and sales price for
SC were difficult to predict. In addition, the company’s actual direct-labor costs were somewhat
erratic, primarily owing to equipment problems and high employee turnover. Also, the cost of
the raw material used to produce SC was significantly affected by unstable crude-oil prices and
variability in the quality of the available material. Owing to the general instability of the
environment in which the company produced and sold SC, it was not unusual for actual results to
deviate from budgeted amounts.

This case was prepared by E. Richard Brownlee, II, Professor of Business Administration. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright
 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order
copies, send an e-mail to No part of this publication may be reproduced, stored in a
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photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊



For example, the actual operating results for the most recent month differed from the
budgeted amounts as follows:
Production volume (units)
Sales volume (units)
Sales price per unit
Direct-labor hours
Direct-labor cost
Raw materials purchased (lbs.)
Raw materials purchased (cost)
Raw materials used in production (lbs.)
Nonmanufacturing expenses



Wilmont Chemical’s accounting policy was to use the actual raw-material cost and the actual
direct-labor cost in applying the LIFO inventory method as the basis for valuation of ending
inventory and determination of cost of goods sold. Work-in-process inventory was not a factor
because it was negligible. Each month, the actual unit cost of SC was compared with the
estimated unit cost to see if there was a difference. Significant differences were investigated by
management as part of Wilmont Chemical’s continuous-improvement program.
Based on what he had learned at a recent professional-development conference, the
company’s controller thought the financial statements might be more managerially relevant if
raw-material inventory were kept at estimated costs and finished-goods inventory were kept at
estimated production costs. Cost of goods sold would be determined using estimated costs, and
differences between actual and estimated costs would be treated as adjustments to the current
month’s income. The controller thought this new approach would facilitate the identification of
any variances from plan, which could be broken down into the price and quantity impacts for
both materials and labor. In his opinion, this new approach would enhance management’s ability
to take appropriate corrective actions.
1. Prepare an income statement for the most recent month using the company’s actual
costing system. Assume that raw-material and finished-goods inventory were both zero at
the beginning of the month. Calculate the ending-inventory costs for raw materials and
finished goods.
2. Prepare an income statement for the most recent month using the controller’s
“managerially relevant” approach. Calculate the ending-inventory costs. Explain the
differences in the two income statements and in the ending-inventory balances.
3. A variation of the controller’s “managerially relevant” approach would be to keep rawmaterial inventory at actual cost, recognizing any differences between the actual and



estimated cost only for the material used in production. Using this modified approach,
prepare an income statement for the most recent month and calculate the endinginventory costs. Explain how this income statement and ending-inventory balances differ
from the other two approaches.
4. As a manager, which of these three financial-statement approaches would you prefer?