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This case involves finding the cost for a given product. In addition, it explores cost-volume-profit
relationships.
Instructions
1. 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…………………………….
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.
Totals............................................................
3. Prepare a schedule of cost of goods manufactured for the month of December 2013.
6. Compute the unit contribution margin and the contribution margin ratio.
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
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 Shop at 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.
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, Rasheed plans 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 Yarmouk University 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 Salam
JD1,200 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.
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 would be 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
1. 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?
2. 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.)
3. Prepare a sales budget (by quarter) for the year ending 2015.
5. 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.
8. Prepare a selling and administrative expenses budget for Sweats Galore, Inc. for the year ending
December 31, 2015.
9. Prepare a silk-screen overhead expenses budget for Sweats Galore, Inc. for the year ending December
31, 2015.
10. 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.
11. 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.
12. 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.
13. Using the information contained in the case and the previous budgets:
a) Calculate the estimated contribution margin per unit for 2015. (Hint: Silk-screened labor
and 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.
14. Rasheed is very disappointed that the company did not have an income of JD25,000 for its first
year of budgeted operations as he had wanted.
a) How many shirts would the 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?
15. Do you think it was a good idea to offer Salam a salary plus 10% of sales? Why or why not?
Yarmouk University 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.
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 North East
Division Division Division
JD JD 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.
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)
South North East
Measures Year Division Division Division
Non-productive time: Non-productive direct labour hours 2013 4% 4% 6%
(percentage of total hours paid). 2014 4.1% 3.8% 7.5%
Customer complaints (percentage of total number of 2013 1% 1.2% 5%
customers) 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.
Table (3)
South North East
Division Division Division
JD JD 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
1. 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?
4. Do you agree with the company's decision to, only, focus on financial measures in evaluating
performance and ignore non-financial measures? Why?