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Armstrong helmet company Essay

CASE 7
ARMSTRONG HELMET COMPANY
1.

Item
Administrative salaries
Advertising for helmets
Depreciation on factory building
Depreciation on office equipment
Insurance on factory building
Miscellaneous expenses—factory
Office supplies expense
Professional fees
Property taxes on factory building
Raw materials used
Rent on production equipment
Research and development
Sales commissions
Utility costs—factory
Wages—factory
Totals

© 2008

For Instructor Use Only

Direct
Materials

Product Costs
Direct
Manufacturing
Labor
Overhead

Period
Costs
$15,500
11,000

$ 1,500
800
1,500
1,000
300
500
400
$70,000
6,000
10,000
40,000
900
$70,000
$70,000

$70,000

$11,300

$78,100

Case 7-1

CASE 7 (Continued)
2.
Item
Administrative salaries ……………………….
Advertising for helmets ………………………
Depreciation on factory building ………
Depreciation on office equipment …….
Insurance on factory building ……………
Miscellaneous expenses—factory ……
Office supplies expense ……………………..
Professional fees………………………………….
Property taxes on factory building …..
Raw materials used ……………………………..
Rent on production equipment………….
Research and development ……………….
Sales commissions………………………………
Utility costs—factory …………………………..
Wages—factory…………………………………….
Totals………………………………………………………

© 2008

For Instructor Use Only

Variable
Costs

$

Fixed
Costs
$15,500
11,000
1,500
800
1,500

1,000
300
500
400
70,000
6,000
10,000
40,000
900

70,000
$181,000

$48,400

Total
Costs
$15,500
11,000
1,500
800
1,500
1,000
300
500
400
70,000
6,000
10,000
40,000
900
70,000
$229,400

Case 7-2

CASE 7 (Continued)
3.
ARMSTRONG HELMET COMPANY
Cost of Goods Manufactured Schedule
For the Month Ended December 31, 2008
Work in process, December 1 …………..
Direct materials
Raw materials inventory …………….. $
0
(Dec. 1)
Raw materials purchased …………… 70,000
Less: Raw materials inventory
(Dec. 31) ………………………………
0
Direct materials used………………………….
Direct labor …………………………………………. Manufacturing overhead
Rent on production equipment…….. $ 6,000
Insurance on factory building ……. 1,500
Depreciation on factory
building…………………………………….. 1,500
Utility costs—factory……………………
900
Property taxes on factory
building……………………………………..
400
Miscellaneous expenses—
factory ………………………………………. 1,000 Total manufacturing costs…………………
Total cost of work in process ……………
Less: Work in process (Dec. 31)……….
Cost of goods manufactured …………….

$

-0-

$70,000
70,000

11,300
$151,300
151,300
-0$151,300

4.

Production cost per helmet = $151,300 [from 3.] ÷ 10,000 = $15.13.

5.

The Armstrong Helmet Company likely uses a process cost system. Process costing is used when large volumes of a homogenous product are produced on a

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continuous basis. Armstrong Helmet Company would find it useful, using a process costing system, to identify the cost of each production batch of bicycle helmets.

6.

If Armstrong Helmet Company decides to produce additional helmets (e.g., baseball, hockey, football, etc., or different models of bicycle helmets), it may find it useful to move to a job order costing system.

© 2008

For Instructor Use Only

Case 7-3

CASE 7 (Continued)
7. Unit variable cost
8.

= $181,000 ÷ 10,000 helmets
= $18.10 per helmet

Contribution margin per unit = Unit selling price – Unit variable costs = $40.00 – $18.10
= $21.90
Contribution margin ratio

= Contribution margin per unit ÷ Unit
selling price
= $21.90 ÷ $40.00
= 54.75%

9. Break-even point in dollars: Sales dollars at the break-even point = Fixed costs ÷ Contribution margin ratio
X = $48,400 ÷ 54.75%
X = $88,402
Break-even point in units = Fixed costs ÷ Contribution margin per unit X = $48,400 ÷ $21.90
X = 2,210 helmets
10.
(a)
ARMSTRONG HELMET COMPANY
Sales Budget
For the Month Ended December 31, 2008
Expected unit sales……………………………………………………………. Unit selling price………………………………………………………………… Total sales………………………………………………………………
……………

8,000
X
$40
$320,000

(b)
ARMSTRONG HELMET COMPANY
Production Budget
For the Month Ended December 31, 2008
Expected unit sales……………………………………………………………. Add: Desired ending finished goods units
(10,000 X 20%)………………………………………………………………… Total required units……………………………………………………………. Less: Beginning finished goods units ……………………………. Required production units ………………………………………………..

© 2008

For Instructor Use Only

8,000
2,000
10,000
0
10,000

Case 7-4

CASE 7 (Continued)
(c)
ARMSTRONG HELMET COMPANY
Direct Materials Budget
For the Month Ended December 31, 2008
Units to be produced ………………………………………………………… Direct materials per unit …………………………………………………… Total kilograms needed for production ………………………….. Add: Desired ending direct materials (kilograms) ………… Total materials required……………………………………………………. Less: Beginning direct materials (kilograms) ……………….. Direct materials purchases………………………………………………. Cost per kilogram………………………………………………………………. Total cost of direct materials purchases…………………………

10,000
1kg
10,000
0
10,000
0
10,000
X
$7
$70,000
X

(d)
ARMSTRONG HELMET COMPANY
Direct Labor Budget
For the Month Ended December 31, 2008
Units to be produced ………………………………………………………… Direct labor time (hours) per unit …………………………………….
Total required direct labor hours…………………………………….. Direct labor cost per hour ………………………………………………… Total direct labor cost ……………………………………………………….

10,000
X
0.35
3,500
X
$20
$70,000

(e)
ARMSTRONG HELMET COMPANY
Selling and Administrative Expenses Budget
For the Month Ended December 31, 2008
Variable expenses
Sales commissions……………………………………………………….. Total variable ……………………………………………………………………… Fixed expenses
Administrative salaries…………………………………………………. Advertising for helmets………………………………………………… Depreciation on office equipment……………………………….. Office supplies expense……………………………………………….. Research and development …………………………………………. Professional fees…………………………………………………………… Total fixed …………………………………………………………………………… Total selling and administrative expenses……………………..

© 2008

For Instructor Use Only

$40,000
$40,000
$15,500
11,000
800
300
10,000
500
38,100
$78,100

Case 7-5

CASE 7 (Continued)
(f)
ARMSTRONG HELMET COMPANY
Cash Budget
For the Month Ended December 31, 2008
Beginning cash balance……………………………………………………. Add: Receipts
Collections from customers
(75% of sales, $320,000) …………………………………… Total receipts ………………………………………………… Total available cash …………………………………………………………… Less: Disbursements

Direct materials……………………………………………….. (75% of direct materials
purchases, $70,000)
Direct labor………………………………………………………. Manufacturing overhead
($11,300 from part (1) – $1,500
depreciation)……………………………………………. Selling and administrative expenses
($78,100 from part (e) – $800
depreciation)……………………………………………. Total disbursements………………………………
Excess (deficiency) of available cash over
disbursements ………………………………………………………….. Financing: Borrowing……………………………………………………… Ending cash balance ……………………………………………………….

$

-0240,000
240,000
240,000
52,500
70,000
9,800
77,300
209,600

30,400
-0$ 30,400

(g)
ARMSTRONG HELMET COMPANY
Budgeted Income Statement
For the Month Ended December 31, 2008
Sales (8,000 X $40) …………………………………………………………….. Cost of goods sold [8,000 X $15.13 (from part (4.)]……….. Gross profit ………………………………………………………………………… Selling and administrative expenses………………………………. Income from operations ……………………………………………………. Income tax expense (45%)………………………………………………… Net income………………………………………………………………………

© 2008

For Instructor Use Only

$320,000
121,040
198,960
78,100
120,860
54,387
$ 66,473

Case 7-6

CASE 7 (Continued)
11.
ARMSTRONG HELMET COMPANY
Monthly Flexible Manufacturing Costs Budget
For the Month Ended December 31, 2008
Activity level
Production in units ……………….
8,000
Variable costs
Raw materials ($7)………………… $ 56,000
Wages ($7) …………………………….. 56,000
Miscellaneous ($0.10) …………..
800
Total variable costs…….. 112,800
Fixed costs………………………………………
Total fixed costs ……………………. 10,300*
Total costs………………………………………. $123,100

9,000

10,000

$ 63,000
63,000
900
126,900

$ 70,000
70,000
1,000
141,000

10,300
$137,200

10,300
$151,300

*$11,300 [from (1)] – $1,000 miscellaneous (variable cost). 12. Potential causes of a materials variance: price paid for plastics or any other raw materials included in helmet; employees; faulty equipment Potential causes of a direct labor variance: change in pay rates; inexperienced employees; faulty equipment

Potential causes of a manufacturing overhead variance: change in use of

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