Question

In: Accounting

Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. Its accountant...

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

Solutions

Expert Solution

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


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