Miller Safe Way Company

The Business Situation

Miller Safe Way Company manufactures a unique model of bicycle Headgear.

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 Headgears 11,000

Cash, December 1 -0-

Depreciation on factory building 1,500

Depreciation on office equipment 800

Insurance on factory building 1,500

Miscellaneous expensesfactory 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 costsfactory 900

Wagesfactory 70,000

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 Headgears 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.

Instructions

Using all 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.

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 each cost in the appropriate column and total each classification. Use the format shown below. Assume that Utility costsfactory are a fixed cost.

VariableFixed Total

Item CostsCostsCosts

3. Prepare a schedule of cost of goods manufactured for the month of December 2013.

4. Determine the cost of producing a Headgear.

5. Identify the type of cost accounting system that Miller Safe Way Company is probably

using at this time. Explain.

6. Under what circumstances might Miller use a different cost accounting system?

7. Compute the unit variable cost for a Headgear.

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.

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 Headgear.

13. Determine the cash payback period on the proposed production equipment purchase,

assuming a monthly cash fl ow as indicated in the cash budget (requirement 10f).