Accounting Department / Jarash Helmet Company / Due Date: 29/6/2014
Managerial Accounting (ACC 432) / Summer 2014 / Points: 5
This case involves finding the cost for a given product. In addition, it explores cost-volume-profit relationships.
The Business Situation
Jarash Helmet Company manufactures a unique model of bicycle helmet. The company began operations December 1, 2013. 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 / Account BalancesAdministrative salaries / JD15,500
Advertising for helmets / 11,000
Cash, December 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, December 1 / –0–
Work in process, December 31 / –0–
Raw materials inventory, December 1 / –0–
Raw materials inventory, December 31 / –0–
Raw material purchases / 70,000
Finished goods inventory, December 1 / –0–
Production and Sales Data:
Number of helmets produced / 10,000Expected sales in units for December (JD40 unit sales price) / 8,000
Expected sales in units for January / 10,000
Desired ending inventory / 20% of next month’s sales
Direct materials per finished unit / 1 kilogram
Direct materials cost / JD7 per kilogram
Direct labor hours per unit / 0.35 hour
Direct labor hourly rate / JD20
Cash 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: JD720,000.
Manufacturing overhead and selling and administrative costs are paid as incurred.
Desired ending cash balance: JD30,000.
Instructions
- Classify the costs as either product costs or period costs using a five-column table as shown below. Enter the JD amount of each cost in the appropriate column and total each classification.
Product Costs
Direct / Direct / Manufacturing / Period
Item / Materials / Labor / Overhead / Costs
Total…………………………….
- 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.
Variable / Fixed / Total
Item / Costs / Costs / Costs
Totals......
- Prepare a schedule of cost of goods manufactured for the month of December 2013.
- Determine the cost of producing a helmet.
- Compute the unit variable cost for a helmet.
- Compute the unit contribution margin and the contribution margin ratio.
- Calculate the break-even point in units and in sales dollars.
YarmoukUniversity / Case Study 2.0 / Type: Group Assignment
Accounting Department / Arabela Sweats, Inc / Due Date: 20/7/2014
Managerial Accounting (ACC 432) / Summer 2014 / Points: 5
This case focuses on setting up a new business. In planning for this new business, the preparation of budgets is emphasized. In addition, an understanding of cost-volume-profit relationships is required
The Business Situation
After graduating with a degree in business from YarmoukUniversity, RasheedAl-Farooq decided to go into business for himself. In thinking about his business venture, Rasheed determined that he had four criteria for the new business:
1. He wanted to do something that he would enjoy.
2. He wanted a business that would give back to the community.
3. He wanted a business that would grow and be more successful every year.
4. Realizing that he was going to have to work very hard, Rasheed wanted a business that would generate a minimum net income of JD25,000 annually.
While reflecting on the criteria he had outlined, Rasheed, realized that there was no place in Irbid to have custom sweatshirts made using a silk-screen process. Rasheed had worked as a part-time employee at Shirts and More Shopat Amman during summer vacations and had envisioned owning such a shop. He realized that a sweatshirt shop in Irbid had the potential to meet all four of his criteria.
Rasheed set up an appointment with Yara Al-Yousef, the owner of Shirts and More Shop, to obtain information useful in getting his shop started. Because Yara liked Rasheed and his entrepreneurial spirit, she answered many of Rasheed’s questions.In addition, Yara provided information concerning the type of equipment Rasheed would need for his business and its average useful life. Yara knows a competitor who is retiring and would like to sell his equipment. Rasheed can purchase the equipment at the beginning of 2015, and the owner is willing to give him terms of 50% due upon purchase and 50% due the quarter following the purchase.Rasheed decided to purchase the following equipment as of January 1, 2015.
Equipment / Cost / Useful LifeHand-operated press that applies ink to the shirt / JD7,500 / 5 yrs
Light-exposure table / 1,350 / 10 yrs
Dryer conveyer belt that makes ink dry on the shirts / 2,500 / 10 yrs
Computer with graphics software and color printer / 3,500 / 4 yrs
Display furniture / 2,000 / 10 yrs
Used cash register / 500 / 5 yrs
Rasheed has decided to use the sweatshirt supplier recommended by Yara.He learned that a gross of good-quality sweatshirts to be silk-screened would cost JD1,440. Yara has encouraged Rasheed to ask the sweatshirt supplier for terms of 40% of a quarter’s purchases to be paid in the quarter of purchase, with the remaining 60% of the quarter’s purchases to be paid in the quarter following the purchase.
Rasheed also learned from talking with Yara that the ink used in the silk-screen process costs approximately JD0.75 per shirt.
Knowing that the silk-screen process is somewhat labor-intensive, Rasheedplans to hire six students from Yarmouk university to help with the process. Each one will work an average of 20 hours per week for 50 weeks during the year. Rasheed estimates total annual wages for the workers to be JD72,000.In addition, Rasheed will need one person to take orders, bill customers, and operate the cash register. Salam Al-Khalid, who recently graduated from YarmoukUniversity with a degree in marketing, has approached Rasheed about a job in sales.Rasheed thinks Salam can bring in a lot of business. In addition she also has the clerical skills needed for the position. Because of her contacts, Rasheed is willing to pay SalamJD1,200 per month plus a commission of 10% of sales. Rasheed estimates Salam will spend 50% of the workday focusing on sales, and the remaining 50% will be spent on clerical and administrative duties.
Rasheed realizes that he will have difficulty finding a person skilled in computer graphics to generate the designs to be printed on the shirts. Yara recently hired a graphics designer in that position for Shirts and More Shop at a rate of JD500 per month plus JD0.10 for each shirt printed. Rasheed believes he can find a university graphics design student to work for the same rate Yara is paying her designer.
Rasheed was fortunate to find a commercial building for rent near the university and the downtown area. The landlord requires a one-year lease. Although the monthly rent of JD1,000 is more than Rasheed had anticipated paying, the building is nice, has adequate parking, and there is room for expansion. Rasheed anticipates that 75% of the building will be used in the silk-screen process and 25% will be used for sales.
Yara has encouraged Rasheed to advertise weekly in Al-Waseet newspaper. Upon inquiring, Rasheed found that a 30X3X30 ad would cost JD25 per week. Rasheed also plans to run a weekly ad in Al-Rai newspaper that will cost him JD75 per week.
Rasheed wants to sell a large number of quality shirts at a reasonable price. He estimates the selling price of each customized shirt to be JD16. Yara has suggested that he should ask customers to pay for 70% of their purchases in the quarter purchased and pay the additional 30% in the quarter following the purchases.
After talking with the insurance agent and the property valuation administrator in his municipality, Rasheed estimates that the property taxes and insurance on the machinery will cost JD2,240 annually; property tax and insurance on display furniture and cash register will total JD380 annually.
Yara reminded Rasheed that maintenance of the machines is required for the silk-screen process. In addition, Rasheed realizes that he must consider the cost of utilities. The building Rasheed wants to rent is roughly the same size as the building occupied by Shirts and More Shop. In addition, Shirts and More sells approximately the same number of shirts Rasheed plans to sell in his store. Therefore, Rasheed is confident that the maintenance and utility costs for his shop will be comparable to the maintenance and utility costs for Shirts and More, which are as follows within the relevant range of zero to 8,000 shirts.
Shirts Sold Maintenance Costs Utility Costs
January 2,000 JD1,716 JD1,100
February 2,110 1,720 1,158
March 2,630 1,740 1,171
April 3,150 1,740 1,198
May 5,000 1,758 1,268
June 5,300 1,818 1,274
July 3,920 1,825 1,205
August 2,080 1,780 1,117
September 8,000 1,914 1,400
October 6,810 1,860 1,362
November 6,000 1,855 1,347
December 3,000 1,749 1,193
Rasheed estimates the number of shirts to be sold in the first five quarters, beginning January 2015, to be:
First quarter, year 1 8,000
Second quarter, year 1 10,000
Third quarter, year 1 20,000
Fourth quarter, year 1 12,000
First quarter, year 2 18,000
Rasheed decides to establish his company as a corporation. He will invest JD10,000 of his personal savings in the company. Seeing how determined his son was to become an entrepreneur, Rasheed’s father offered to co-sign a note for an amount up to JD20,000 to help Rasheed open his sweatshirt shop, Arabela Sweats, Inc. However, when Rasheed and his father approached the loan officer at Amman Bank, the loan officer asked Rasheed to produce the following budgets for 2015.
- Sales budget
- Schedule of expected collections from customers
- Shirt purchases budget
- Schedule of expected payments for purchases
- Silk-screen labor budget
- Selling and administrative expenses budget
- Silk-screen overhead expenses budget
- Budgeted income statement
- Cash budget
- Budgeted balance sheet
The loan officer advised Rasheed that the interest rate on a 12-month loan wouldbe 8%. Rasheed expects the loan to be taken out as of January 1, 2015.
Rasheed has estimated that his income tax rate will be 20%. He expects to pay the total tax due in 2016.
Instructions
- Do you think it was important for Rasheed to stipulate his four criteria for the business (see page 1), including the goal of generating a net income of at least JD25,000 annually? Why or why not?
- If the company has sales of JD12,000 during January of the first year of business, determine the amount of variable and fixed costs associated with utilities and maintenance using the high-low method for each. (Round unit variable costs to three decimal places where necessary.)
- Prepare a sales budget (by quarter) for the year ending 2015.
- Prepare a schedule of expected collections from customers.
- Rasheed learned from talking with Yara that the supplier is so focused on making quality sweatshirts that many times the shirts are not available for several days. She encouraged Rasheed to maintain an ending inventory of shirts equal to 25% of the next quarter’s sales. Prepare a shirt purchases budget for shirts.
- Prepare a schedule of expected payments for purchases.
- Prepare a silk-screen labor budget.
- Prepare a selling and administrative expenses budget for Sweats Galore, Inc. for the year ending December 31, 2015.
- Prepare a silk-screen overhead expenses budget for Sweats Galore, Inc. for the year ending December 31, 2015.
- Using the information found in the case and the previous budgets, prepare a budgeted income statement for Sweats Galore, Inc. for the year ended December 31, 2013.
- Using the information found in the case and the previous budgets, prepare a cash budget for Sweats Galore, Inc. for the year ended December 31, 2015.
- Using the information contained in the case and the previous budgets, prepare a budgeted balance sheet for Sweats Galore, Inc. for the year ended December 31, 2015.
- Using the information contained in the case and the previous budgets:
a)Calculate the estimated contribution margin per unit for 2015. (Hint: Silk-screened laborand the taxes are both fixed costs.)
b)Calculate the total estimated fixed costs for 2015 (including interest and taxes).
c)Compute the break-even point in units and dollars for 2015.
- Rasheed is very disappointed that the company did not have an income of JD25,000for its first year of budgeted operations as he had wanted.
a)How many shirts wouldthe company have had to sell in order to have had a profit of JD25,000? (Ignore changes in income tax expense.)
b)Why does the company’s net income differ from its ending cash balance?
- Do you think it was a good idea to offer Salam a salary plus 10% of sales? Why orwhy not?
YarmoukUniversity / Case Study 3.0 / Type: Group Assignment
Accounting Department / Petra Engineering / Due Date: TAL
Managerial Accounting (ACC 432) / Summer 2014 / Points: 5
This case covers the concept of responsibility centers. Emphasis is on the different ways a business can evaluate performance. Consideration must be given to whether an operation is to be evaluated according to cost control, profit generation, or investment returns. Examples are used to show how reporting methods should align with the affixing of responsibility.
The Business Situation
Petra is an industrial company with three divisions (North, South, and East). Both the South Division and the North Division are long established. Senior managers are concerned that these divisions have a high percentage of products that are near the end of their product life-cycle. The East Division was acquired in 2009. At that time senior managers were optimistic that this division has very good growth potential. Forecast sales increases over the next 5 years are expected to be in the region of 4%-5% per annum.
Since 2009 the head office has ranked all divisions according to their net operating income. All managers believe that the rankings are important for future promotions and career development. The data for 2014 shows the South Division to be the most profitable followed by the North Division. The East Division is making losses for the third consecutive year.
The managers at the divisions provided the following information for the head office. The information represents the balances at 31/12/2014.
Table (1)
South DivisionJD / North Division
JD / East Division
JD
Sales / 1,280,000 / 1,560,000 / 1,112,000
Total costs / 1186000 / 1480000 / 1212000
Net operating income / 94,000 / 80,000 / -100,000
Ranking / (1) / (2) / (3)
A small number of other performance measures (non-financial) are also used by managers. These include:
1. Non-productive time: Non-productive direct labour hours (percentage of total hours paid). Non-productive time includes time wasted as a result of production delays or material shortages.
2. Customers: Customer complaints (percentage of total number of customers)
3. Lead time: Time from order to delivery
These performance measures were agreed by all managers in 2009. At the time it was thought that managers should focus on only financial measures.
Table (2)
Measures / Year / SouthDivision / North Division / East Division
Non-productive time: Non-productive direct labour hours (percentage of total hours paid). / 2013 / 4% / 4% / 6%
2014 / 4.1% / 3.8% / 7.5%
Customer complaints (percentage of total number of customers) / 2013 / 1% / 1.2% / 5%
2014 / 1.1% / 1.1% / 6%
Response time: Time required to meet customer order / 2013 / 10 days / 9 days / 15 days
2014 / 11 days / 9 days / 18 days
The Board of directors is meeting to discuss the contract for the North Division Manager (Khalid Al-Yaya) which expires next month. One member of the board, Ali Al-Salim, would like to offer Mr. Al-Yaya a five-year extension contract with a significant bump in the salary. Moreover, thousands of shares of stock options to be distributed to the employees at the South division for the positive achievement of their division. Another issue to be discussed in the meeting is the proposal of Mr. Al-Salim to discontinue the East Division. When asked why, Mr. Al-Salim pointed to the losses incurred by this Division for the third consecutive year.
Another board member, Samar Al-Basheer, disagreed with Al-Salim and questioned the criteria used to evaluate and rank the performance of the Divisions. She asked the management accountant to come up with other measures of performance evaluation that go beyond simply looking at the net operating income.
Other information provided by the management accountant
Table (3)
South DivisionJD / North Division
JD / East Division
JD
Average operating assets / 1,250,000 / 1,100,000 / 825,000
Total Variable costs / 1,000,000 / 750,000 / 480,000
Total Fixed costs / 186,000 / 730,000 / 732,000
Traceable Fixed costs / 180,000 / 480,000 / 170,000
The minimum required rate of return (cost of capital) / 10% / 10% / 10%
Instructions
- Based on the data provided in Table (1), comment on the ranking made by the company for the three divisions? Explain why using net operating income as criteria for evaluating performance is misleading?
- Prepare segment income statement using the contribution margin format.
a)What does the segment income statement tells you about each division?
b)What is the new ranking for the divisions now? Discuss why the ranking of the divisions changes?
c)Do you think Mr. Al-Yaya qualifies for the contract extension and the salary raise proposed? Why?
d)Do you agree with Mr. Al-salim proposal to discontinue East Division? Why?
- Compute the ROI and the RI for each division.
a)Discuss how the ranking of the divisions will change based on each of these measures?
b)What are the major problems associated with using ROI as a criteria for evaluating performance
- Do you agree with the company's decision to, only, focus on financial measures in evaluating performance and ignore non-financial measures? Why?