Armstrong Helmet Company manufactures a unique model of bicycle helmet. The company began operations December 1, 2008. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.
Cost Items and Account Balances
Administrative salaries $15,500
Advertising for helmets 11,000
Cash, December 1 –0–
Depreciation on factory building 1,500
Depreciation on office equipment 800
Insurance on factory building 1,500
Miscellaneous expenses—factory 1,000
Office supplies expense 300
Professional fees 500
Property taxes on factory building 400
Raw materials used 70,000
Rent on production equipment 6,000
Research and development 10,000
Sales commissions 40,000
Utility costs—factory 900
Work in process, December 1 –0–
Work in process, December 31 –0–
Raw materials inventory, December 1 –0–
Raw materials inventory, December 31 –0–
Raw material purchases 70,000
Finished goods inventory, December 1 –0–
Production and Sales Data
Number of helmets produced 10,000
Expected sales in units for December ($40 unit sales price) 8,000
Expected sales in units for January 10,000
Desired ending inventory 20% of next month's sales
Direct materials per finished unit 1 kilogram
Direct materials cost $7 per kilogram
Direct labor hours per unit .35
Direct labor hourly rate $20
Cash Flow Data
Cash collections from customers: 75% in month of sale and 25% the following month.
Cash payments to suppliers: 75% in month of purchase and 25% the following month.
Income tax rate: 45%.
Cost of proposed production equipment: $720,000.
Manufacturing overhead and selling and administrative costs are paid as incurred.
Desired ending cash balance: $30,000.
Using the data presented above, do the following.
1 Classify the costs as either product costs or period costs using a five-column table as shown below. Enter the dollar amount of each cost in the appropriate column and total each classification.
Item Direct Materials Direct Labor Manufacturing Overhead Period Costs
2 Classify the costs as either variable or fixed costs. Assume there are no mixed costs. Enter the dollar amount of each cost in the appropriate column and total each classification. Use the format shown below. Assume that Utility costs—Factory are a fixed cost.
Item Variable Costs Fixed Costs Total Cost
3 Prepare a schedule of cost of goods manufactured for the month of December 2008.
4 Determine the cost of producing a helmet.
5 Identify the type of cost accounting system that Armstrong Helmet Company is probably using at this time. Explain.
6 Under what circumstances might Armstrong use a different cost accounting system?
7 Compute the unit variable cost for a helmet.
8 Compute the unit contribution margin and the contribution margin ratio.
9 Calculate the break-even point in units and in sales dollars.
10 Prepare the following budgets for the month of December 2008.
(c) Direct materials.
(d) Direct labor.
(e) Selling and administrative expenses.
(g) Budgeted income statement.
11 Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and 10,000 units, in 1,000 unit increments.
12 Identify one potential cause of materials, direct labor, and manufacturing overhead variances in the production of the helmet.
13 Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow as indicated in the cash budget (requirement 10f).