Rainy Day Company

The Business Situation

Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. 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 $11,250

Advertising 15,250

Cash, April 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, April 1 0

Work in process, April 30 0

Raw materials inventory, April 1 0

Raw materials inventory, April 30 0

Raw material purchases 70,000

Finished goods inventory, April 1 0

Production and Sales Data

Number of umbrellas produced 10,000

Expected sales in units for April

($40 unit sales price) 8,000

Expected sales in units for May 10,000

Desired ending inventory 20% of next months 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 and Miscellaneous expenses factor are a variable cost.

Variable Fixed Total

Item Costs Costs Costs

3. Prepare a schedule of cost of goods manufactured for the month of April 2020.

4. Determine the cost of producing an umbrella.

5. Identify the type of cost accounting system that Rainy Day Company is probably using at this time. Explain.

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

7. Compute the unit variable cost for an umbrella.

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 April 2020.

(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 umbrella.

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).