Armstrong Helmet Company Essay

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 – Factory Building 1,500 Depreciation – Office Equipment 800 Insurance – Factory Building 1,500 Miscellaneous expenses – Factory 1,000 Office supplies expense 300 Professional Fees 500 Property Taxes – Factory Building 400 Raw material used 70,000 Rent on production equipment 6,000 Research & development 10,000 Sales commission 40,000 Utility Costs – Factory 900 Wages – Factory 70,000 Work in process – Dec 1 0 Work in process – Dec 31 0 Raw materials inventory, Dec 1 0 Raw materials inventory, Dec 31 0 Raw materials purchases 70,000 Finished goods inventory, Dec 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 labour hours per unit .35 Direct labor hourly rate $20Cash 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 Required: Using the data presented, do the following in your respective groups. 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 Labour 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. 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, 2013. 4) Determine the cost of producing a helmet. 5) Identify the type of cost accounting system that Armstrong Helmet Company is probably using 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 labour e. Selling and administrative expenses f. Cashg. 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.QUESTION 2 INCREMENTAL ANALYSIS (20 MARKS) Navula Company is considering the purchase of new equipment to replace the existing equipment it currently has. Details of the new equipment are tabulated below: Invoice Price $140,000 Freight Charges $ 4,000 Installation Costs $6,000 Expected useful life 5 years Salvage value 0 The new equipment is faster than the old equipment, and it is more efficient in its usage of materials. Existing equipment could be retained and used for an additional 5 years if the new equipment is not purchased and by that time the salvage value of the equipment would be zero. However, if the new equipment is purchased now, the existing machine would have to be scrapped. The current book value of the existing machine is $36,000 and the company uses the straight-line depreciation method. Navula Company’s accountant has accumulated the following data below regarding annual sales and expenses with and without the new equipment. DETAILS OLD EQUIPMENT NEW EQUIPMENT Production & Sale Output 12 000 units Increase by 10% Selling Price $100 $100 Gross Profit Rate 25% of sales 30% of sales Annual Selling Expenses $180,000 Increase by 10% Annual Administrative Expenses $100,00