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 need to provide the following information. A number of assumptions are required; clearly note all assumptions that you make.
Instructions
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(a)
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Identify the types of costs that would likely be involved in making this product.
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(b)
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Set up five columns as indicated.
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Product Costs
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Item
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Direct Materials
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Direct Labor
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Manufacturing Overhead
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Period Costs
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Classify the costs you identified in (a) into the manufacturing cost classifications of product costs (direct materials, direct labor, and manufacturing overhead) and period costs.
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(c)
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Assign hypothetical monthly dollar figures to the costs you identified in (a) and (b).
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(d)
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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.
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(e)
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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 figures you assigned accordingly.
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(f)
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What type of cost accounting system will you likely use-job order or process costing?
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(g)
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Explain how you would assign costs in either the job order or process costing system you plan to use.
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(h)
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Classify your costs as either variable or fixed costs. For simplicity, assign all costs to either variable or fixed, assuming there are no mixed costs, using the format shown.
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Item
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Variable Costs
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Fixed Costs
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Total Costs
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(i)
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Compute the unit variable cost, using the production number you determined in(e).
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(j)
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Project the number of helmets you anticipate selling the first month of operations. Set a unit selling price, and compute both the contribution margin per unit and the contribution margin ratio.
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(k)
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Determine your break-even point in dollars and in units.
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(l)
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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:
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Direct materials budget:
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Quantity of direct materials required to produce one helmet; cost per unit of quantity; desired ending direct materials (assume none).
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Direct labor budget:
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Direct labor time required per helmet; direct labor cost per hour.
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Budgeted income statement:
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Income tax expense is 45% of income from operations.
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(m)
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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%.
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(n)
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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.
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(o)
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Identify one potential cause of materials, direct labor, and manufacturing overhead variances for your product.
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(p)
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Assume that you wish to purchase production equipment that costs $720,000. Determine the cash payback period, utilizing the monthly cash flow that you computed in part (m) multiplied by 12 months (for simplicity).
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(q)
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Identify any nonfinancial factors that should be considered before commencing your business venture.
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