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HELME T COMPA NY O STR NG Case 7 AR M 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 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 Advertising for helmets Cash, December 1 Depreciation on factory building Depreciation on office equipment Insurance on factory building Miscellaneous expensesfactory Office supplies expense Professional fees Property taxes on factory building Raw materials used Rent on production equipment Research and development Sales commissions Utility costsfactory Wagesfactory Work in process, December 1 Work in process, December 31 Raw materials inventory, December 1 Raw materials inventory, December 31 Raw material purchases Finished goods inventory, December 1 $15,500 11,000 -0- 1,500 800 1,500 1,000 300 500 400 70,000 6,000 10,000 40,000 900 70,000 -0- -0- -0- -0- 70,000 -0- CA-27 CA-28 ARMSTRONG HELMET COMPANY case 7 Cases for Management Decision-Making Production and Sales Data Number of helmets produced Expected sales in units for December ($40 unit sales price) Expected sales in units for January Desired ending inventory Direct materials per finished unit Direct materials cost Direct labor hours per unit Direct labor hourly rate 10,000 8,000 10,000 20% of next month's sales 1 kilogram $7 per kilogram .35 $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. Instructions Using the data presented above (including data on page CA-27), 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. Product Costs 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 costsfactory 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 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. (f) Cash. (g) Budgeted income statement. case 7 Cases for Management Decision-Making 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 direct 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). ARMSTRONG HELMET COMPANY CA-29 CASE 7 ARMSTRONG HELMET COMPANY 1. Product Costs Direct Manufacturing Labor Overhead 800 1,500 1,000 300 500 400 $70,000 6,000 10,000 40,000 900 $70,000 $70,000 $70,000 $11,300 $78,100 Th Totals Period Costs $15,500 11,000 $ 1,500 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Item Administrative salaries Advertising for helmets Depreciation on factory building Depreciation on office equipment Insurance on factory building Miscellaneous expenses factory Office supplies expense Professional fees Property taxes on factory building Raw materials used Rent on production equipment Research and development Sales commissions Utility costsfactory Wagesfactory Direct Materials 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-1 CASE 7 (Continued) 2. $ Fixed Costs $15,500 11,000 1,500 800 1,500 1,000 300 500 400 70,000 Total Costs $15,500 11,000 1,500 800 1,500 1,000 300 500 400 70,000 6,000 10,000 40,000 900 70,000 $229,400 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Item Administrative salaries ............................ Advertising for helmets ........................... Depreciation on factory building ......... Depreciation on office equipment ....... Insurance on factory building ............... Miscellaneous expensesfactory ...... Office supplies expense .......................... Professional fees........................................ Property taxes on factory building ..... Raw materials used ................................... Rent on production equipment............. Research and development ................... Sales commissions.................................... Utility costsfactory ................................ Wagesfactory........................................... Totals............................................................... Variable Costs 6,000 10,000 40,000 900 $48,400 Th 70,000 $181,000 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-2 CASE 7 (Continued) 3. ARMSTRONG HELMET COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2008 Total manufacturing costs..................... Total cost of work in process ............... Less: Work in process (Dec. 31).......... Cost of goods manufactured ................ 4. -0- $70,000 70,000 11,300 $151,300 151,300 -0$151,300 Production cost per helmet = $151,300 [from 3.] 10,000 = $15.13. The Armstrong Helmet Company likely uses a process cost system. Process costing is used when large volumes of a homogenous product are produced on a continuous basis. Armstrong Helmet Company would find it useful, using a process costing system, to identify the cost of each production batch of bicycle helmets. Th 5. $ sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Work in process, December 1 .............. Direct materials Raw materials inventory ................. $ 0 (Dec. 1) Raw materials purchased ............... 70,000 Less: Raw materials inventory (Dec. 31) .................................... 0 Direct materials used............................... Direct labor ................................................. Manufacturing overhead Rent on production equipment........ $ 6,000 Insurance on factory building ....... 1,500 Depreciation on factory building............................................ 1,500 Utility costsfactory........................ 900 Property taxes on factory building............................................ 400 Miscellaneous expenses factory .............................................. 1,000 6. If Armstrong Helmet Company decides to produce additional helmets (e.g., baseball, hockey, football, etc., or different models of bicycle helmets), it may find it useful to move to a job order costing system. 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-3 CASE 7 (Continued) 7. Unit variable cost 8. = $181,000 10,000 helmets = $18.10 per helmet Contribution margin per unit = Unit selling price - Unit variable costs = $40.00 - $18.10 = $21.90 Contribution margin ratio = Contribution margin per unit Unit selling price = $21.90 $40.00 = 54.75% sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 9. Break-even point in dollars: Sales dollars at the break-even point = Fixed costs Contribution margin ratio X = $48,400 54.75% X = $88,402 Break-even point in units = Fixed costs Contribution margin per unit X = $48,400 $21.90 X = 2,210 helmets 10. (a) ARMSTRONG HELMET COMPANY Sales Budget For the Month Ended December 31, 2008 Expected unit sales...................................................................... Unit selling price........................................................................... Total sales....................................................................................... Th (b) ARMSTRONG HELMET COMPANY Production Budget For the Month Ended December 31, 2008 Expected unit sales...................................................................... Add: Desired ending finished goods units (10,000 X 20%)........................................................................... Total required units...................................................................... Less: Beginning finished goods units .................................. Required production units ........................................................ 2008 8,000 X $40 $320,000 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ 8,000 2,000 10,000 0 10,000 Case 7-4 CASE 7 (Continued) (c) ARMSTRONG HELMET COMPANY Direct Materials Budget For the Month Ended December 31, 2008 (d) sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Units to be produced .................................................................. Direct materials per unit ............................................................ Total kilograms needed for production ................................ Add: Desired ending direct materials (kilograms) ............ Total materials required............................................................. Less: Beginning direct materials (kilograms) .................... Direct materials purchases....................................................... Cost per kilogram......................................................................... Total cost of direct materials purchases.............................. 10,000 1kg 10,000 0 10,000 0 10,000 X $7 $70,000 X ARMSTRONG HELMET COMPANY Direct Labor Budget For the Month Ended December 31, 2008 Units to be produced .................................................................. Direct labor time (hours) per unit ........................................... Total required direct labor hours............................................ Direct labor cost per hour ......................................................... Total direct labor cost ................................................................ (e) 10,000 X 0.35 3,500 X $20 $70,000 ARMSTRONG HELMET COMPANY Selling and Administrative Expenses Budget For the Month Ended December 31, 2008 Th Variable expenses Sales commissions................................................................. Total variable ................................................................................. Fixed expenses Administrative salaries.......................................................... Advertising for helmets......................................................... Depreciation on office equipment...................................... Office supplies expense........................................................ Research and development ................................................. Professional fees..................................................................... Total fixed ....................................................................................... Total selling and administrative expenses.......................... 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ $40,000 $40,000 $15,500 11,000 800 300 10,000 500 38,100 $78,100 Case 7-5 CASE 7 (Continued) (f) ARMSTRONG HELMET COMPANY Cash Budget For the Month Ended December 31, 2008 (g) $ -0240,000 240,000 240,000 52,500 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Beginning cash balance............................................................. Add: Receipts Collections from customers (75% of sales, $320,000) .......................................... Total receipts ......................................................... Total available cash ..................................................................... Less: Disbursements Direct materials........................................................ (75% of direct materials purchases, $70,000) Direct labor................................................................ Manufacturing overhead ($11,300 from part (1) - $1,500 depreciation).................................................... Selling and administrative expenses ($78,100 from part (e) - $800 depreciation).................................................... Total disbursements.................................... Excess (deficiency) of available cash over disbursements .................................................................... Financing: Borrowing............................................................... Ending cash balance ................................................................ 70,000 9,800 77,300 209,600 30,400 -0$ 30,400 ARMSTRONG HELMET COMPANY Budgeted Income Statement For the Month Ended December 31, 2008 Th Sales (8,000 X $40) ....................................................................... Cost of goods sold [8,000 X $15.13 (from part (4.)]........... Gross profit .................................................................................... Selling and administrative expenses..................................... Income from operations ............................................................. Income tax expense (45%)......................................................... Net income................................................................................. 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ $320,000 121,040 198,960 78,100 120,860 54,387 $ 66,473 Case 7-6 CASE 7 (Continued) 11. ARMSTRONG HELMET COMPANY Monthly Flexible Manufacturing Costs Budget For the Month Ended December 31, 2008 9,000 10,000 $ 63,000 63,000 900 126,900 $ 70,000 70,000 1,000 141,000 10,300 $137,200 10,300 $151,300 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Activity level Production in units ................... 8,000 Variable costs Raw materials ($7)..................... $ 56,000 Wages ($7) ................................... 56,000 Miscellaneous ($0.10) .............. 800 Total variable costs........ 112,800 Fixed costs............................................. Total fixed costs ......................... 10,300* Total costs.............................................. $123,100 *$11,300 [from (1)] - $1,000 miscellaneous (variable cost). 12. Potential causes of a materials variance: price paid for plastics or any other raw materials included in helmet; employees; faulty equipment Potential causes of a direct labor variance: change in pay rates; inexperienced employees; faulty equipment Potential causes of a manufacturing overhead variance: change in use of supplies; increase in indirect costs such as fuel, heat, etc. 13. Cash payback period: Cost of capital investment Net cash flow Th $720,000 [$30,400 (from part (10f)] = 23.68 months or approximately 2 years. 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-7 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Th https://www.coursehero.com/file/5680990/case7/ Powered by TCPDF (www.tcpdf.org) CASE 7 ARMSTRONG HELMET COMPANY 1. Product Costs Direct Manufacturing Labor Overhead 800 1,500 1,000 300 500 400 $70,000 6,000 10,000 40,000 900 $70,000 $70,000 $70,000 $11,300 $78,100 Th Totals Period Costs $15,500 11,000 $ 1,500 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Item Administrative salaries Advertising for helmets Depreciation on factory building Depreciation on office equipment Insurance on factory building Miscellaneous expenses factory Office supplies expense Professional fees Property taxes on factory building Raw materials used Rent on production equipment Research and development Sales commissions Utility costsfactory Wagesfactory Direct Materials 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-1 CASE 7 (Continued) 2. $ Fixed Costs $15,500 11,000 1,500 800 1,500 1,000 300 500 400 70,000 Total Costs $15,500 11,000 1,500 800 1,500 1,000 300 500 400 70,000 6,000 10,000 40,000 900 70,000 $229,400 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Item Administrative salaries ............................ Advertising for helmets ........................... Depreciation on factory building ......... Depreciation on office equipment ....... Insurance on factory building ............... Miscellaneous expensesfactory ...... Office supplies expense .......................... Professional fees........................................ Property taxes on factory building ..... Raw materials used ................................... Rent on production equipment............. Research and development ................... Sales commissions.................................... Utility costsfactory ................................ Wagesfactory........................................... Totals............................................................... Variable Costs 6,000 10,000 40,000 900 $48,400 Th 70,000 $181,000 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-2 CASE 7 (Continued) 3. ARMSTRONG HELMET COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2008 Total manufacturing costs..................... Total cost of work in process ............... Less: Work in process (Dec. 31).......... Cost of goods manufactured ................ 4. -0- $70,000 70,000 11,300 $151,300 151,300 -0$151,300 Production cost per helmet = $151,300 [from 3.] 10,000 = $15.13. The Armstrong Helmet Company likely uses a process cost system. Process costing is used when large volumes of a homogenous product are produced on a continuous basis. Armstrong Helmet Company would find it useful, using a process costing system, to identify the cost of each production batch of bicycle helmets. Th 5. $ sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Work in process, December 1 .............. Direct materials Raw materials inventory ................. $ 0 (Dec. 1) Raw materials purchased ............... 70,000 Less: Raw materials inventory (Dec. 31) .................................... 0 Direct materials used............................... Direct labor ................................................. Manufacturing overhead Rent on production equipment........ $ 6,000 Insurance on factory building ....... 1,500 Depreciation on factory building............................................ 1,500 Utility costsfactory........................ 900 Property taxes on factory building............................................ 400 Miscellaneous expenses factory .............................................. 1,000 6. If Armstrong Helmet Company decides to produce additional helmets (e.g., baseball, hockey, football, etc., or different models of bicycle helmets), it may find it useful to move to a job order costing system. 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-3 CASE 7 (Continued) 7. Unit variable cost 8. = $181,000 10,000 helmets = $18.10 per helmet Contribution margin per unit = Unit selling price - Unit variable costs = $40.00 - $18.10 = $21.90 Contribution margin ratio = Contribution margin per unit Unit selling price = $21.90 $40.00 = 54.75% sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 9. Break-even point in dollars: Sales dollars at the break-even point = Fixed costs Contribution margin ratio X = $48,400 54.75% X = $88,402 Break-even point in units = Fixed costs Contribution margin per unit X = $48,400 $21.90 X = 2,210 helmets 10. (a) ARMSTRONG HELMET COMPANY Sales Budget For the Month Ended December 31, 2008 Expected unit sales...................................................................... Unit selling price........................................................................... Total sales....................................................................................... Th (b) ARMSTRONG HELMET COMPANY Production Budget For the Month Ended December 31, 2008 Expected unit sales...................................................................... Add: Desired ending finished goods units (10,000 X 20%)........................................................................... Total required units...................................................................... Less: Beginning finished goods units .................................. Required production units ........................................................ 2008 8,000 X $40 $320,000 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ 8,000 2,000 10,000 0 10,000 Case 7-4 CASE 7 (Continued) (c) ARMSTRONG HELMET COMPANY Direct Materials Budget For the Month Ended December 31, 2008 (d) sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Units to be produced .................................................................. Direct materials per unit ............................................................ Total kilograms needed for production ................................ Add: Desired ending direct materials (kilograms) ............ Total materials required............................................................. Less: Beginning direct materials (kilograms) .................... Direct materials purchases....................................................... Cost per kilogram......................................................................... Total cost of direct materials purchases.............................. 10,000 1kg 10,000 0 10,000 0 10,000 X $7 $70,000 X ARMSTRONG HELMET COMPANY Direct Labor Budget For the Month Ended December 31, 2008 Units to be produced .................................................................. Direct labor time (hours) per unit ........................................... Total required direct labor hours............................................ Direct labor cost per hour ......................................................... Total direct labor cost ................................................................ (e) 10,000 X 0.35 3,500 X $20 $70,000 ARMSTRONG HELMET COMPANY Selling and Administrative Expenses Budget For the Month Ended December 31, 2008 Th Variable expenses Sales commissions................................................................. Total variable ................................................................................. Fixed expenses Administrative salaries.......................................................... Advertising for helmets......................................................... Depreciation on office equipment...................................... Office supplies expense........................................................ Research and development ................................................. Professional fees..................................................................... Total fixed ....................................................................................... Total selling and administrative expenses.......................... 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ $40,000 $40,000 $15,500 11,000 800 300 10,000 500 38,100 $78,100 Case 7-5 CASE 7 (Continued) (f) ARMSTRONG HELMET COMPANY Cash Budget For the Month Ended December 31, 2008 (g) $ -0240,000 240,000 240,000 52,500 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Beginning cash balance............................................................. Add: Receipts Collections from customers (75% of sales, $320,000) .......................................... Total receipts ......................................................... Total available cash ..................................................................... Less: Disbursements Direct materials........................................................ (75% of direct materials purchases, $70,000) Direct labor................................................................ Manufacturing overhead ($11,300 from part (1) - $1,500 depreciation).................................................... Selling and administrative expenses ($78,100 from part (e) - $800 depreciation).................................................... Total disbursements.................................... Excess (deficiency) of available cash over disbursements .................................................................... Financing: Borrowing............................................................... Ending cash balance ................................................................ 70,000 9,800 77,300 209,600 30,400 -0$ 30,400 ARMSTRONG HELMET COMPANY Budgeted Income Statement For the Month Ended December 31, 2008 Th Sales (8,000 X $40) ....................................................................... Cost of goods sold [8,000 X $15.13 (from part (4.)]........... Gross profit .................................................................................... Selling and administrative expenses..................................... Income from operations ............................................................. Income tax expense (45%)......................................................... Net income................................................................................. 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ $320,000 121,040 198,960 78,100 120,860 54,387 $ 66,473 Case 7-6 CASE 7 (Continued) 11. ARMSTRONG HELMET COMPANY Monthly Flexible Manufacturing Costs Budget For the Month Ended December 31, 2008 9,000 10,000 $ 63,000 63,000 900 126,900 $ 70,000 70,000 1,000 141,000 10,300 $137,200 10,300 $151,300 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Activity level Production in units ................... 8,000 Variable costs Raw materials ($7)..................... $ 56,000 Wages ($7) ................................... 56,000 Miscellaneous ($0.10) .............. 800 Total variable costs........ 112,800 Fixed costs............................................. Total fixed costs ......................... 10,300* Total costs.............................................. $123,100 *$11,300 [from (1)] - $1,000 miscellaneous (variable cost). 12. Potential causes of a materials variance: price paid for plastics or any other raw materials included in helmet; employees; faulty equipment Potential causes of a direct labor variance: change in pay rates; inexperienced employees; faulty equipment Potential causes of a manufacturing overhead variance: change in use of supplies; increase in indirect costs such as fuel, heat, etc. 13. Cash payback period: Cost of capital investment Net cash flow Th $720,000 [$30,400 (from part (10f)] = 23.68 months or approximately 2 years. 2008 For Instructor Use Only https://www.coursehero.com/file/5680990/case7/ Case 7-7 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Th https://www.coursehero.com/file/5680990/case7/ Powered by TCPDF (www.tcpdf.org)