Question

*THE BUSINESS CASE*

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 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 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 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 the data presented above, do the following...

2. Classify the costs as either variable or fixed costs. Assume there are no mixed costs. Enter the dollar amount of each costs in the appropriate column and toal each classification. use the format show below. Assume that utility costs - factory costs are fixed.

Item Variable costs Fixed costs Total Costs

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 helment.

Answer 1

Answer 2.
	Variable Costs	Fixed Costs	Total Costs
Administrative salaries	-	15,500.00	15,500.00
Advertising for helmets	-	11,000.00	11,000.00
Depreciation on factory building	-	1,500.00	1,500.00
Depreciation on office equipment	-	800.00	800.00
Insurance on factory building	-	1,500.00	1,500.00
Miscellaneous expenses—factory	1,000.00	-	1,000.00
Office supplies expense	-	300.00	300.00
Professional fees	-	500.00	500.00
Property taxes on factory building	-	400.00	400.00
Raw materials used	70,000.00	-	70,000.00
Rent on production equipment	-	6,000.00	6,000.00
Research and development	-	10,000.00	10,000.00
Sales commissions	40,000.00	-	40,000.00
Utility costs - Factory	-	900.00	900.00
Wages—factory	70,000.00	-	70,000.00
Total Costs	181,000.00	48,400.00	229,400.00

Answer 11.
Flexible Budget
For Manufacturing Costs
	8,000 Units	9,000 Units	10,000 Units
Raw materials used	56,000.00	63,000.00	70,000.00
Wages—factory	56,000.00	63,000.00	70,000.00
Factory Overhead
Miscellaneous expenses—factory	800.00	900.00	1,000.00
Depreciation on factory building	1,500.00	1,500.00	1,500.00
Insurance on factory building	1,500.00	1,500.00	1,500.00
Miscellaneous expenses—factory	1,000.00	1,000.00	1,000.00
Property taxes on factory building	400.00	400.00	400.00
Rent on production equipment	70,000.00	70,000.00	70,000.00
Research and development	6,000.00	6,000.00	6,000.00
Utility costs - Factory	10,000.00	10,000.00	10,000.00
Total Costs	203,200.00	217,300.00	231,400.00

Answer 12:-

For Material:-

a. Inferior Quality

b. Purchase Price.

For LAbour

a. Effieciency and productivity

b. LAbour Rate

c. Unaticipated Overtime.

For VAriable Overhead VAriance:

a. Rate

b. Increase decrease in Supplier price.