Case $7$ ME G RMS INH Armstrong Helmet Company Developed by Dick Wasson, Southwestern College The Business Situation 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 com$-$ pany 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 recommenda$-$ tions based on that information. The information provided to each candidate is as follows. Cost Items and Account Balances Administrative salaries $$15,500$ Advertising for helmets $11,000$ Cash, December $1$ Depreciation on factory building $1,500$ Depreciation on office equipment $800$ Insurance on factory building $1,500$ Miscellaneous expenses$-$factory $1,000$ Office supplies expense $300$ Professional fees $500$ Property taxes on factory building $400$ Raw materials used $70,000$ Rent on production equipment $6,000$ Research and development $10,000$ Sales commissions $40,000$ Utility costs factory $900$ Wages$-$factory $70,000$ Work in process, December $1$ Work in process, December $31$ Raw materials inventory, December $1$ Raw materials inventory, December $31$ Raw material purchases $70,000$ Finished goods inventory, December $1$ CA$-27$ COMPANY Production and Sales Data Number of helmets produced $10,000$ Expected sales in units for December $($S$40$ unit sales price$)8\mathrm{.}000$ Expected sales in units for January $10,000$ Desired ending inventory $20\%$ of next month's sales Direct materials per finished unit $1$ kilogram Direct materials cost $$7$ per kilogram Direct labor hours per unit Direct labor hourly rate $$20$ Cash Flow Data Cash collections from customers $75\%$ in month of sale and $25\%$ the following month. Cash payments to suppliers: $75\%$ in month of purchase and $2596$ the following month. Income tax rate: $45$ Cost of proposed production equipment: $$720,000.$ Manufacturing over head and selling and administrative costs are paid as incurred. Desired ending cash balance: $$30,000.35$ Instructions Using the data presented above $($including data on page CA$-27),$ do the following $1.$ Classify the costs as cither 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 Product Costs Direct Direct Manufacturing Item Materials Labor Overhead Period Costs $2.$ Classify the costs as either variable or fixed costs. Assume there are no mixed costs. Enter the dollar amount of cach cost in the appropriate column and total each classif cation. Use the format shown below. Assume that Utility costs$-$factory are a fixed cost Variable Fixed Total Item Costs Costs Costs $3.$ Prepare a schedule of cost of goods manufactured for the month of December $20134.$ Determine the cost of producing a helmet. $5.$ Identify the type of cost accounting system that Armstrong Helmet Company is prob ably 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 $2013($a$)$ Sales. $($b$)$ Production $($c$)$ Direct materials. $($d$)$ Direct labor $($e$)$ Selling and administrative expenses. $($ Cash $()$ Budgeted income statement.

Case $7$

ME

G

RMS

INH

Armstrong Helmet Company

Developed by Dick Wasson, Southwestern College

The Business Situation

ArmstrongCOMPANY

Production and Sales Data

Number of helmets produced

$10,000$

Expected sales in units for December

$($S$40$ unit sales pricCase $7$ ME G RMS INH Armstrong Helmet Company Developed by Dick Wasson, Southwestern College The Business Situation 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 com$-$ pany 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 recommenda$-$ tions based on that information. The information provided to each candidate is as follows. Cost Items and Account Balances Administrative salaries $$15,500$ Advertising for helmets $11,000$ Cash, December $1$ Depreciation on factory building $1,500$ Depreciation on office equipment $800$ Insurance on factory building $1,500$ Miscellaneous expenses$-$factory $1,000$ Office supplies expense $300$ Professional fees $500$ Property taxes on factory building $400$ Raw materials used $70,000$ Rent on production equipment $6,000$ Research and development $10,000$ Sales commissions $40,000$ Utility costs factory $900$ Wages$-$factory $70,000$ Work in process, December $1$ Work in process, December $31$ Raw materials inventory, December $1$ Raw materials inventory, December $31$ Raw material purchases $70,000$ Finished goods inventory, December $1$ CA$-27$ COMPANY Production and Sales Data Number of helmets produced $10,000$ Expected sales in units for December $($S$40$ unit sales price$)8\mathrm{.}000$ Expected sales in units for January $10,000$ Desired ending inventory $20\%$ of next month's sales Direct materials per finished unit $1$ kilogram Direct materials cost $$7$ per kilogram Direct labor hours per unit Direct labor hourly rate $$20$ Cash Flow Data Cash collections from customers $75\%$ in month of sale and $25\%$ the following month. Cash payments to suppliers: $75\%$ in month of purchase and $2596$ the following month. Income tax rate: $45$ Cost of proposed production equipment: $$720,000.$ Manufacturing over head and selling and administrative costs are paid as incurred. Desired ending cash balance: $$30,000.35$ Instructions Using the data presented above $($including data on page CA$-27),$ do the following $1.$ Classify the costs as cither 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 Product Costs Direct Direct Manufacturing Item Materials Labor Overhead Period Costs $2.$ Classify the costs as either variable or fixed costs. Assume there are no mixed costs. Enter the dollar amount of cach cost in the appropriate column and total each classif cation. Use the format shown below. Assume that Utility costs$-$factory are a fixed cost Variable Fixed Total Item Costs Costs Costs $3.$ Prepare a schedule of cost of goods manufactured for the month of December $20134.$ Determine the cost of producing a helmet. $5.$ Identify the type of cost accounting system that Armstrong Helmet Company is prob ably 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 $2013($a$)$ Sales. $($b$)$ Production $($c$)$ Direct materials. $($d$)$ Direct labor $($e$)$ Selling and administrative expenses. $($ Cash $()$ Budgeted income statement.