Armstrong Helmet Company

Armstrong Helmet Company manufactures a unique model of bicycle helmet


Case project

Learning Objectives: Prepare practical applications of course concepts Develop analytical and critical thinking Develop decision-making capabilities Enhance professional writing and presentation skills


Facts of the case:

Armstrong Helmet Company manufactures a unique model of bicycle helmet.  The company began operations December 1, 2011. 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

Administrative salaries $15,500                                                  Advertising for helmets 11,000

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 purchased 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



Account Balances

Cash, December 1 –0–

Raw materials inventory, December 1 –0–

Raw materials inventory, December 31 –0–

Finished goods inventory, December 1 –0–

Work in process, December 1 –0–

Work in process, December 31 –0–


Production and Sales Data

Number of helmets produced 10,000

Expected sales in units for December ($40 unit sales price) 8,000

Expected sales in units for January 10,000

Desired finished goods ending inventory 20% of next month’s sales

Direct materials per finished unit 1 kilogram

Direct materials cost $7 per kilogram

Direct labor hours per unit .35

Direct labor hourly rate $20


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: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.



Using the data presented above do the following.

1. Classify the costs as either product costs or period costs using a four-column table with headings – Direct materials; Direct labor; Mfg. overhead; Periods costs.  Enter the dollar amount of each cost in the appropriate column and total each classification.

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.  Assume that Utility costs—Factory are a fixed cost.

3. Prepare a schedule of cost of goods manufactured for the month of December 2011.

4. Determine the cost of producing a helmet.

5. Identify the type of cost accounting system that Armstrong Helmet Company is probably using at this time. Explain.

6. Compute the unit variable cost for a helmet.

7. Compute the unit contribution margin and the contribution margin ratio.

8. Calculate the break-even point in units and in sales dollars.

9. Prepare the following budgets for the month of December 2011.

(a) Sales.

(b) Production.

(c) Direct materials.

(d) Direct labor.

(e) Selling and administrative expenses.

(f) Cash.

(g) Budgeted income statement.

10. Prepare a flexible budget for manufacturing costs for activity levels of 8,000, 9,000 and 10,000 units.

11. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow as indicated in the cash budget (requirement 9f).