Items about which Sam Smith seemed to be correct

Variable Direct Costs

Direct materials cost per unit $0.75

Direct labor cost per unit 1.25

Total $2.00

Variable Overhead

Indirect labor cost per unit $0.20

Electricity cost per unit 0.10

Other overhead per unit produced 0.50

Total $0.80

Fixed Costs

Indirect labor per week $100

Indirect materials per week 300

Electricity per week 75

Factory insurance per week 125

Other overhead per week 110

Total $710

The office expenses are very close to $781 per week. Of this amount, the breakdown seems to be:

Salaries (including fringe benefits and payroll tax) $400

Rent on office 200

Depreciation on office equipment 81

Utilities 100

Total $781

Direct labor is paid on a piece-rate (or piecework) basis. Workers are paid $1.25 per unit produced.

Average rate of accounts receivable collection is as follows:

During the month in which sale is made 30%

1st month after sale 40%

2nd month after sale 20%

3rd month after sale 10%

100%

Several other notations made by George Hammond

a) Brad expected to draw $1,400 per month for personal use.

b) Consulting fees will be billed at about $225 per week or $900 per month.

c) A reasonable estimation of the value of factory and equipment is $70,000. Depreciation should be monthly on the basis of an average useful life of five years. This equipment will have a salvage value of $2,500.

d) The production process to produce JAG Tray is fairly simple. Raw materials consist of a single item, which is usually entered into the process in the morning. Various machining operations take place during the day. At the end of each day, all finished units are moved into the storeroom. Because started units are always finished before the workers go home, there is never a work-in-process inventory overnight.

e) The inventory of raw materials at the beginning of the coming year will be 800 units, and there will be 750 units of finished product. Several guidelines set by George Hammond

These guidelines should be followed through the year, at which time they are to be reviewed and revised.

a) The estimates of variable costs of production are almost certainly correct.

b) Fixed costs of production are almost certainly correct at $710 per week, except that there is no estimation or allowance for depreciation. Take fixed costs of production to equal $710 plus depreciation.

c) Charge fixed factory overhead on a monthly basis. Since the $710 per week amount seems reasonable, charge a monthly amount of $710 times 4.5. The over- or under-applied overhead existing at the end of the month will be charged as part of that months cost of goods sold.

d) Establish cost accounting records on the basis of full cost, assuming that normal output is 500 units per week, or 2,250 units per month. Thus, budgeted full cost is $4.72 per unit.

e) Selling commission should be 10% on all sales, and the price on regular sales should be set at $7.00 per unit for at least the first quarter of the year.

f) All depreciation should be on a straight-line basis

Following is an estimation of the balance sheet as it will appear on January 1, when Brad Jones takes complete control of the business:

Cash $ 10,000 Accounts Payable $ 1,275

Receivables 14,700 Notes Payable 30,000

Raw material inventory 600 Capital: Brad Jones 85,687

Finished goods inventory ($4.72/unit) 3,540 Total Liabilities & SE $116,962

Office equipment 13,122

Factory Equipment 70,000

Land 5,000

Total Assets $116,962

1. Production Budget - Required: Prepare a production schedule, schedule of raw material use, and a schedule of raw material purchases for January, February, and March

Janes first important step in budgeting was to develop a production budget and a raw materials schedule for the first quarter of the coming year. Actual sales for the prior October and November were available, and reasonable estimates of sales for December and the first four months of the coming year were made.

Actual sales (units) Expected sales (units)

October 1,500 December 1,800

November 2,300 January (of the coming year) 2,000

February (of the coming year) 2,200

March (of the coming year) 1,900

April (of the coming year) 2,100

Since there was no established policy on production scheduling, inventory planning, or raw materials inventory, it was necessary to establish one. George, Brad , and Jane agreed that a policy based on experience would have to wait until some data were collected over the next six to eight months. In an effort to get things going, they settled on a two-part operational statement of policy:

a) Production in any month should be scheduled so that an ending inventory of JAG Trays will equal one-half of the next months expected sales.

b) Purchase of raw material should be made so that on average there is enough raw material on hand to produce 700 JAG Trays. Thus, no end-of-month inventory should have fewer than 700 units of raw material.