Identify the type of cost accounting system.
Armstrong Helmet Company manufactures a unique model of bicycle helmet. The company began operations December 1, 2006. 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:
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Cost items and account balances
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Administrative salaries
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$15,500
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Advertising for helmets
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11,000
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Cash, December 1
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0
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Depreciation on factory building
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1,500
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Depreciation on office equipment
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800
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Insurance on factory building
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1,500
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Miscellaneous expense - factory
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1,000
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Office supplies expense
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300
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Professional fees
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500
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Property taxes on factory building
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400
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Raw materials used
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70,000
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Rent on production equipment
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6,000
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Research and development
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10,000
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Sales commissions
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40,000
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Utility costs - factory
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900
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Wages - factory
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0
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Work in progress, December 1
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0
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Work in progress, December 31
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0
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Raw materials inventory, December 31
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0
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Raw materials purchases
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70,000
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Finished goods inventory, December 1
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0
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Production and sales data
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Number of helmets produced
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10,000
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Expected sales in units for December ($40 unit sales price)
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8,000
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Expected sales in units for January
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10,000
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Desired ending inventory
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20% of next month's sales
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Direct materials per finished unit
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1 kilogram
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Direct materials cost
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$7 per kilogram
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Direct labor hours per unit
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0.35
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Direct labor hourly rate
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$20
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Cash flow data
Cash collections from customers: 75% in month of sale & 25% the following month.
Cash payments to suppliers: 75% in month of purchase & 25% the following month.
Income tax rate: 45%.
Cost of proposed production equipment: $720,000.
Manufacturing overhead and selling & admin costs are paid as incurred.
Desired ending cash balance: $30,000.
Using the data presented above, do the following:
1. Classify the costs as either product costs or period costs using a five-column table as show below. Enter the dollar amount of each cost in the appropriate column & total each classification.
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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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2. Classify the costs as either variable or fixed costs. Assume there are no mixed costs. Enter the dollar amount of each cost in the appropriate column and total each classification. Use the format shown below. Assume that Utility costs - factory are a fixed cost.
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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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3. Prepare a schedule of cost of goods manufactured for the month of December 2006.
4. Determine the cost of producing a helmet.
5. Identify the type of cost accounting system that Armstrong Helmet Company is probably using at this time. Explain.
6. Under what circumstances might Armstrong use a different cost accounting system?
7. Compute the unit variable cost for a helmet.
8. Compute the unit contribution margin and the contribution margin ratio.
9. Calculate the break-even point in units and in sales dollars.
10. Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and 10,000 units, in 1,000 unit increments.
11. Identify one potential cause of materials, direct labor, and manufacturing overhead variances in the production of the helmet.
Calculate the per unit cost amounts before you prepare the 3 flexible budgets. This is asking for a flexible budget for a very specific item.
Check figures:
a. Total Period Costs = $78,100
b. Total Manufacturing Overhead = $11,300
c. Total Variable Costs = $181,000
d. Total Costs = $229,400
e. Miscellaneous expenses - factory are considered to be variable.