Question

Namaste Company manufactures a unique yoga mat. The company began operations December 1, 2018. 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                   11,000
Cash, December 1                –0–
Depreciation on factory building        1,500
Depreciation on office equipment        800
Insurance on factory building        1,500
Miscellaneous expenses—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                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 mats 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.

Please complete in Excel spreadsheet showing calculations if possible!

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

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).

Answer 1

12.

Potential causes of a materials variance:

The price paid for plastics or any other raw materials included in helmet; employees; faulty equipment.

Potential causes of a direct labor variance:

Change in pay rates; inexperienced employees; faulty equipment

13.