In: Accounting
Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. 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 $11,250 Advertising 15,250 Cash, April 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, April 1 –0– Work in process, April 30 –0– Raw materials inventory, April 1 –0– Raw materials inventory, April 30 –0– Raw material purchases 70,000 Finished goods inventory, April 1 –0– Production and Sales Data Number of umbrellas produced 10,000 Expected sales in units for April ($40 unit sales price) 8,000 Expected sales in units for May 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 $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. Instructions Using all the data presented above, do the following.
Questions: 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 umbrella. 13. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow as indicated in the cash budget
11)
Direct material cost per unit= 1 kg. * $7/kg= $7/ unit
Direct labor cost per unit= 0.35 hour* $20 per hour= $7 per hour
Manufacturing overhead;
Depreciation on factory building $1500
Insurance on factory building $1500
Miscellaneous expense- factory $1000
Property tax on factory building $400
Rent on production equipment $6000
Utility cost- Factory $900
Total $11,300
Number of units produced = 10000 units
Manufacturing overhead cost per unit= $11300/10000= $1.13 per unit
Total manufacturing cost per unit= Direct material + Direct labor+ Manufacturing overhead
= $7+$7+$1.13= $15.13 per unit
Flexible budget for manufacturing costs
Particulars |
8000 units |
9000 units |
10000 units |
Direct materials |
8000*$7= $56000 |
9000*$7= $63000 |
10000*$7= $70000 |
Direct labor |
8000*$7= $56000 |
9000*$7= $63000 |
10000*$7= $70000 |
Manufacturing overhead |
8000*$1.13= $9040 |
9000*$1.13= $10170 |
10000*$1.13= $11300 |
Total manufacturing costs |
$121040 |
$136170 |
$151300 |
12)
If purchasing department opt for cheap material instead of current direct material using it will cause variance in the manufacturing costs. The change will result a favorable material price variance. Because material price will be lower than standard. If the material is having a lower quality because of cheap rate, it will cause an unfavorable material quantity variance. Because if the material is lower quality, production will need more material. And there is also a chance of arising unfavorable labor efficiency variance. Because lower quality material may be required more hours for production.
13)
Cash flow for the month of April
Particulars |
Amount |
Amount |
Cash receipts; |
||
Collection from customers |
8000units*$40*75% |
$240000 |
Less: Payments |
||
Administrative salaries |
$11250 |
|
Advertising |
$15250 |
|
Insurance on factory building |
$1500 |
|
Miscellaneous expenses- Factory |
$1000 |
|
Office supplies expense |
$300 |
|
Professional fees |
$500 |
|
Property taxes on factory building |
$400 |
|
Payment to suppliers |
$70000*75% |
$52500 |
Rent on production equipment |
$6000 |
|
Research & Development |
$10000 |
|
Sales commission |
$40000 |
|
Utility costs- Factory |
$900 |
|
Wages- Factory |
$70000 |
|
Total Payments |
$209600 |
|
Net cash inflow |
$30400 |
*) Assume that income tax expenses are payable and it is not paid.
Cash payback period on the proposed production
= Initial investment/ Monthly cash flow
= $720000/ $30400= 23.68= 24 months