Comprehensive Problem: Chapters 19 to 26 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 (a) � Identify the types of costs that would likely be involved in making this product. (b) � Set up five columns as indicated. � � � � � � � � Product Costs � � � � � � . Item � Direct Materials � � Direct Labor � Manufacturing � Overhead � Period Costs 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. (c) � Assign hypothetical monthly dollar figures to the costs you identified in (a) and (b). (d) � 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. (e) � 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. (f) � What type of cost accounting system will you likely use”�job order or process costing? (g) � Explain how you would assign costs in either the job order or process costing system you plan to use. (h) � 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. Item � Variable Costs Fixed Costs � Total Costs (i) � Compute the unit variable cost, using the production number you determined in(e). (j) � 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. (k) � Determine your break-even point in dollars and in units. (l) � 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: Direct materials budget: � � Quantity of direct materials required to produce one helmet; cost per unit of quantity; desired ending direct materials (assume none). Direct labor budget: � Direct labor time required per helmet; direct labor cost per hour. Budgeted income statement: Income tax expense is 45% of income from operations. (m) � 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%. (n) � 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. (o) � Identify one potential cause of materials, direct labor, and manufacturing overhead variances for your product. (p) � 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). (q) � Identify any nonfinancial factors that should be considered before commencing your business venture.
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