Question

COMPREHENSIVE PROBLEM

You would like to start a business manufacturing a unique model of bicycle helmet. In preparation for an interview with the bank to discuss your financing needs, you develop answers to the following questions. A number of assumptions are required; clearly note all assumptions that you make.

Instructions:

(a) Identify the types of costs that would likely be involved in making this product.

(b) Set up five columns as indicated.

Product Costs

Direct Direct Manufacturing

Item Materials Labor Overhead Period Costs

Classify the costs you identified in (a) into the manufacturing cost classifications of product costs (direct materials, direct labour, and manufacturing overhead) and period costs.

(c) Assign hypothetical monthly dollar figures to the costs you identified in (a) and (b).

(d) Assume you have no raw materials or work in process beginning or ending inventories.

Prepare a projected cost of goods manufactured schedule for the first month of operations.

(e) Project the number of helmets you expect to produce the first month of operations. Compute the cost to produce one bicycle helmet. Review the result to ensure it is reasonable; if not, return to part (c) and adjust the monthly dollar fgures you assigned accordingly.

(f) What type of cost accounting system will you likely use—job order or process costing?

(g) Explain how you would assign costs in either the job order or process costing system you plan to use.

(h) Classify your costs as either variable or fxed costs. For simplicity, assign all costs to either variable or fxed, assuming there are no mixed costs, using the format shown Item Variable Costs Fixed Costs Total Costs .

(i) Compute the unit variable cost, using the production number you determined in (e).

(j) Project the number of helmets you anticipate selling the frst month of operations. Set a unit selling price, and compute both the contribution margin per unit and the contribution margin ratio.

(k) Determine your break-even point in dollars and in units.

(l) Prepare projected operating budgets (sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative expense, and income statement). You will need to make assumptions for each of the following: Direct materials budget: Quantity of direct materials required to produce one helmet; cost per unit of quantity; desired ending irect materials (assume none).

Direct materials budget: Quantity of direct materials required to produce one helmet; cost per unit of quantity; desired ending direct materials (assume none).

Direct labor budget: Direct labor time required per helmet; direct labor cost per hour.

Budgeted income statement: Income tax expense is 45% of income from operations.

(m) Prepare a cash budget for the month. Assume the percentage of sales that will be collected from customers is 75%, and the percentage of direct materials that will be paid in the current month is 75%.

(n) Determine a relevant range of activity, using the number of helmets produced as your activity index. Recast your manufacturing overhead budget into a flexible monthly budget for two additional activity levels.

(o) Identify one potential cause of materials, direct labor, and manufacturing overhead variances for your product.

(p) Assume that you wish to purchase production equipment that costs $720,000. Determine thecash payback period, utilizing the monthly cash flow that you computed in part (m) multiplied by 12 months (for simplicity).

(q) Identify any nonfnancial factors that should be considered before commencing your business venture.

Answer 1

a. The types of costs that would likely be involved in making this product are as follows:

• Design Cost : For starters, you need a design. That's probably a substantial part of the cost, since it involves a design staff or consultants, other development costs including prototypes, lab testing, some market research, use of focus groups, tooling for the design etc. That's a fixed cost that is spread over the number of helmets of that design to be manufactured.
• Cost of Material : some EPS bead for the liner, a small sheet of PET plastic for the shell, tape or glue to attach the shell, some plastic fittings for the straps including the buckle. Then there is the strap material, perhaps nylon or polypro
• Cost Of Labour : Cost of salary to the Employees, workers, overtime cost, Employee welfare Expenses such as food compensation, conveyance etc will be incurred
• Cost of machinery: you need machinery, or you need to have a company do all that for you and all the assembly work.
• Cost of packaging : You need a box and packaging, including tags and stickers and a manual and lots of lawyer-proof warnings
• Cost of Trasportation : You will need transporter for shipping or exporting or to send to the godown.
• Cost of Marketing : On the back end you have marketing costs: advertising, distribution costs, sales people to call on bike stores or big box store buyers, a booth at Interbike. If you don't have your own sales apparatus you pay a middleman markup to a distributor who does.
• Mis. Overhead Expenses :  Then you have to estimate how much in miscellaneous business overhead costs to assign to that helmet. You have to buy legal insurance, run a headquarters office staff, Web site, all that other stuff. That adds probably another dollar. Allow for some spoilage, returns, etc,
• Depreciation cost : Cost of depreciation of the plant and machinery set up and their repairs and maintenance expenses over a period of time will incurr.

b.  

Cost of Material	Raw materials, goods, all the parts of the helmet to be made
Cost of Labour	Employee Costs, Wages, Labour Cost
Manufacturing Overhead	Processing Costs, Cost of Machinery, Misc Overhead Expenditure, Packing Cost
Period Cost	Selling and Distribution, Research Cost, Design Cost, Depreciation Cost

c. Hypothetical Cost :

Cost Of material	$ 400
Cost of Labour	$ 250
Manufacturing Overhead	$ 200
Period Cost	$ 1000

d.

Cost Of material	$ 400
Cost of Labour	$ 250
Manufacturing Overhead	$ 200
Sales	$ 1500
Cost Of Good Sold = ( Sales- Direct Cost)	$ 650