Armstrong Helmet Company manufactures a unique model of bicycle helmet. The company began operations December 1, 2013. 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 – Factory Building 1,500
Depreciation – Office Equipment 800
Insurance – Factory Building 1,500
Miscellaneous expenses – Factory 1,000
Office supplies expense 300
Professional Fees 500
Property Taxes – Factory Building 400
Raw material used 70,000
Rent on production equipment 6,000
Research & development 10,000
Sales commission 40,000
Utility Costs – Factory 900
Wages – Factory 70,000
Work in process – Dec 1 0
Work in process – Dec 31 0
Raw materials inventory, Dec 1 0
Raw materials inventory, Dec 31 0
Raw materials purchases 70,000
Finished goods inventory, Dec 1 0
Production and Sales Data
Number of helmets produced 10,000
Expected sales in units for December
($40 unit sales price)
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 labour hours per unit .35
Direct labor hourly rate $20Cash 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, do the following in your respective groups. 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.
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. Use the format shown below. Assume that ‘Utility Costs – Factory’ are a fixed cost.
Item Variable Costs Fixed Costs Total Costs
3) Prepare a schedule of cost of goods manufactured for the month of
December, 2013. 4) Determine the cost of producing a helmet.
5) Identify the type of cost accounting system that Armstrong Helmet Company is probably using 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, 2013. a. Sales
c. Direct materials
d. Direct labour
e. Selling and administrative expenses
f. Cashg. 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.QUESTION 2 INCREMENTAL ANALYSIS (20 MARKS) Navula Company is considering the purchase of new equipment to replace the existing equipment it currently has. Details of the new equipment are tabulated below: Invoice Price $140,000
Freight Charges $ 4,000
Installation Costs $6,000
Expected useful life 5 years
Salvage value 0
The new equipment is faster than the old equipment, and it is more efficient in its usage of materials.
Existing equipment could be retained and used for an additional 5 years if the new equipment is not purchased and by that time the salvage value of the equipment would be zero. However, if the new equipment is purchased now, the existing machine would have to be scrapped. The current book value of the existing machine is $36,000 and the company uses the straight-line depreciation method.
Navula Company’s accountant has accumulated the following data below regarding annual sales and expenses with and without the new equipment.
DETAILS OLD EQUIPMENT NEW EQUIPMENT
Production & Sale Output 12 000 units Increase by 10%
Selling Price $100 $100
Gross Profit Rate 25% of sales 30% of sales
Annual Selling Expenses $180,000 Increase by 10%
Annual Administrative Expenses $100,00