Items about which Sam Smith seemed to be correct

Variable Direct Costs

Direct materials cost per unit $0.75

Direct labor cost per unit 1.25

Total $2.00

Variable Overhead

Indirect labor cost per unit $0.20

Electricity cost per unit 0.10

Other overhead per unit produced 0.50

Total $0.80

Fixed Costs

Indirect labor per week $100

Indirect materials per week 300

Electricity per week 75

Factory insurance per week 125

Other overhead per week 110

Total $710

The office expenses are very close to $781 per week. Of this amount, the breakdown seems to be:

Salaries (including fringe benefits and payroll tax) $400

Rent on office 200

Depreciation on office equipment 81

Utilities 100

Total $781

Direct labor is paid on a piece-rate (or piecework) basis. Workers are paid $1.25 per unit produced.

Average rate of accounts receivable collection is as follows:

During the month in which sale is made 30%

1st month after sale 40%

2nd month after sale 20%

3rd month after sale 10%

100%

Several other notations made by George Hammond

a) Brad expected to draw $1,400 per month for personal use.

b) Consulting fees will be billed at about $225 per week or $900 per month.

c) A reasonable estimation of the value of factory and equipment is $70,000. Depreciation should be monthly on the basis of an average useful life of five years. This equipment will have a salvage value of $2,500.

d) The production process to produce JAG Tray is fairly simple. Raw materials consist of a single item, which is usually entered into the process in the morning. Various machining operations take place during the day. At the end of each day, all finished units are moved into the storeroom. Because started units are always finished before the workers go home, there is never a work-in-process inventory overnight.

e) The inventory of raw materials at the beginning of the coming year will be 800 units, and there will be 750 units of finished product. Several guidelines set by George Hammond

These guidelines should be followed through the year, at which time they are to be reviewed and revised.

a) The estimates of variable costs of production are almost certainly correct.

b) Fixed costs of production are almost certainly correct at $710 per week, except that there is no estimation or allowance for depreciation. Take fixed costs of production to equal $710 plus depreciation.

c) Charge fixed factory overhead on a monthly basis. Since the $710 per week amount seems reasonable, charge a monthly amount of $710 times 4.5. The over- or under-applied overhead existing at the end of the month will be charged as part of that months cost of goods sold.

d) Establish cost accounting records on the basis of full cost, assuming that normal output is 500 units per week, or 2,250 units per month. Thus, budgeted full cost is $4.72 per unit.

e) Selling commission should be 10% on all sales, and the price on regular sales should be set at $7.00 per unit for at least the first quarter of the year.

f) All depreciation should be on a straight-line basis

Following is an estimation of the balance sheet as it will appear on January 1, when Brad Jones takes complete control of the business:

Cash $ 10,000 Accounts Payable $ 1,275

Receivables 14,700 Notes Payable 30,000

Raw material inventory 600 Capital: Brad Jones 85,687

Finished goods inventory ($4.72/unit) 3,540 Total Liabilities & SE $116,962

Office equipment 13,122

Factory Equipment 70,000

Land 5,000

Total Assets $116,962

2. Cost of Production and Flexible Budget - Required: Prepare a flexible expense budget

Janes next task was to prepare a flexible budget that could later be used to prepare a budgeted income statement and would also help Brad tell whether actual expenditures were as they should be. She decided to use the format shown in the variable budget table below. On the left, she would write in the cost formula, which would show how much should be spent on each item for any given production volume. Then she would fill in the amounts for the volume of production she had projected for the first three months of the coming year.

Projected number of units produced January February March

Cost Formula Cost Item

Materials used

Direct labor

Indirect labor

Electricity

Indirect materials

Factory insurance

Other overhead Depreciation

Total cost

Cost per unit