*THE BUSINESS CASE*

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 $15,500

Advertising for helmets 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 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

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 Labor / 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 classifi- cation. 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 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.

(f) Cash. (g) Budgeted income statement.