Reference no: EM13355906

Identify the type of cost accounting system.

Armstrong Helmet Company manufactures a unique model of bicycle helmet.  The company began operations December 1, 2006.  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:

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 expense - factory	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 costs - factory	900
Wages - factory	0
Work in progress, December 1	0
Work in progress, December 31	0
Raw materials inventory, December 31	0
Raw materials purchases	70,000
Finished goods inventory, December 1	0

 

Production and sales data
Number of helmets 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	0.35
Direct labor hourly rate	$20

Cash flow data

Cash collections from customers: 75% in month of sale & 25% the following month.

Cash payments to suppliers: 75% in month of purchase & 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling & admin costs are paid as incurred.

Desired ending cash balance: $30,000.

Using the data presented above, do the following:

1. Classify the costs as either product costs or period costs using a five-column table as show below. Enter the dollar amount of each cost in the appropriate column & 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 costs - factory 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 2006.

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 a flexible budget for manufacturing costs for activity levels between 8,000 and 10,000 units, in 1,000 unit increments.

11. Identify one potential cause of materials, direct labor, and manufacturing overhead variances in the production of the helmet.

Calculate the per unit cost amounts before you prepare the 3 flexible budgets.  This is asking for a flexible budget for a very specific item.

Check figures:
a. Total Period Costs = $78,100
b. Total Manufacturing Overhead = $11,300
c. Total Variable Costs = $181,000
d. Total Costs = $229,400
e. Miscellaneous expenses - factory are considered to be variable.