Question

Namaste Company

The Business Situation

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.

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 helmet.

Answer 1