Ask a New Question
Menu

Successful entrepreneurs understand all aspects of business, especially costs and costing systems. In the course project, you will assume the role of the owner of a small business. Apply managerial accounting principles to evaluate and manage costs related to your products and services within a costing system. In the first milestone of the project, you will determine and classify the costs necessary for opening your business.

Scenario
You plan to open a business manufacturing collars, leashes, and harnesses for pets. To begin, you will manufacture these in a standard style and size with plans to expand your range over the year. In a few weeks, you will present your company’s financial strategy to some key investors. To begin creating your strategy, you must consider and record all the costs associated with operating your business. You have decided to use the job order costing system.

Directions
Use the given operational costs provided in the Milestone One Operational Costs Data Appendix, linked in the Supporting Materials section, to complete the first two tabs, Cost Classification and Variable and Fixed Costs, in the Project Workbook, linked in the What to Submit section below.

Specifically, you must address the following rubric criteria:

Cost Classification: Accurately classify all your costs in the Cost Classification tab of your workbook.
Identify direct material, direct labor, overhead, and period costs. Note: Fixed and variable costs have been classified for you.
Variable and Fixed Costs: Complete the Variable and Fixed Costs tab of your workbook. Note: Some costs are provided for you. Fill in only the missing costs.
Determine your total variable cost per unit and the total fixed costs for each product. Show your work using calculations to the side of the table or using appropriate formulas in the table.
What to Submit
Submit the Project Workbook with the Cost Classification and Fixed and Variable Costs tabs completed.

You plan to open a small business for manufacturing pet collars, leashes, and harnesses. You have found a workshop space you can use for sewing your products. After some research and planning, you have estimates for the various operating costs for your business.

The total square footage for the sewing rooms is 1,500 square feet, which is broken into three areas that are 500 square feet each. You have taken out a loan for start-up costs. The $550 monthly payment goes into effect immediately and should be accounted for in your costs. You will also collect a modest salary for the first year of $500 per month; remember to divide evenly among the services.

Salary and Hiring Data
• One collar maker, who will be paid $16 per hour and work 40 hours per week
• One leash maker, who will be paid $16 per hour and work 40 hours per week
• One harness maker, who will be paid $17 per hour and work 40 hours per week
• One receptionist, who will be paid $15 per hour and work 30 hours per week

Other Costs
• Rent: $750 per month; allocate based on square footage
• High-tensile strength nylon webbing—$12 per yard of webbing
o 3 collars per yard of webbing
o 2 leashes per yard of webbing
o 2 harnesses per yard of webbing
• Polyester and nylon ribbons—$9 per yard of ribbon
o 3 collars per yard of ribbon
o 2 leashes per yard of ribbon
o 2 harnesses per yard of ribbon
• Buckles made of cast hardware—50¢ per buckle
o 4 buckles used per collar
o 3 buckles used per leash
o 8 buckles used per harness
• 3 industrial sewing machines at $3,300 each for a total of $9,900; depreciation is $165 per month (five-year life, zero salvage value)
• Utilities and insurance: $600 per month; allocate based on square footage
• Scissors, thread, cording: $1,200
• Price tags: $250 for 2,500 tags (10¢ each)
• Office supplies: $2,400 or $200 per month
• Other business equipment: $2,000
• Loan payment: $550 per month
• Salary drawn: $500 per month

1 answer

To address the requirements for your project related to your pet accessories manufacturing business, we can analyze and classify the costs that will be involved in your operations. Below, I'll provide a detailed breakdown of your costs into direct materials, direct labor, overhead, and period costs, as well as identify fixed and variable costs per your job order costing system.

Cost Classification

  1. Direct Material Costs

    • High-tensile strength nylon webbing:
      • Cost: $12 per yard
      • Usage for products:
        • Collars: 1/3 yard per collar (3 collars per yard)
        • Leashes: 1/2 yard per leash (2 leashes per yard)
        • Harnesses: 1/2 yard per harness (2 harnesses per yard)
    • Polyester and nylon ribbons:
      • Cost: $9 per yard
      • Usage for products:
        • Collars: 1/3 yard per collar
        • Leashes: 1/2 yard per leash
        • Harnesses: 1/2 yard per harness
    • Buckles (cast hardware):
      • Cost: $0.50 each
      • Usage for products:
        • 4 per collar
        • 3 per leash
        • 8 per harness

  2. Direct Labor Costs

    • Collar Maker: $16/hour * 40 hours/week = $640/month
    • Leash Maker: $16/hour * 40 hours/week = $640/month
    • Harness Maker: $17/hour * 40 hours/week = $680/month
    • Receptionist: $15/hour * 30 hours/week = $450/month

  3. Overhead Costs

    • Rent: $750/month
    • Depreciation on sewing machines: $165/month
    • Utilities and insurance: $600/month
    • Other business equipment: $2,000 (Capital Expenditure, not monthly but to be considered)
    • Scissors, thread, cording: $1,200 (one-time initial cost, also a capital expenditure)
    • Office supplies: $2,400/year or $200/month
    • Loan payment: $550/month

  4. Period Costs

    • Salary drawn: $500/month
    • Price tags: $250 for 2,500 tags
    • These costs are not directly tied to production and are treated as selling and administrative expenses.

Variable and Fixed Costs

  1. Fixed Costs

    • Rent: $750/month
    • Loan Payment: $550/month
    • Depreciation on sewing machines: $165/month
    • Utilities and insurance: $600/month
    • Office Supplies: $200/month
    • Salary Drawn: $500/month
    • Total Fixed Costs = $750 + $550 + $165 + $600 + $200 + $500 = $2,765 per month

  2. Variable Costs (per unit dependent on production)

    • Direct Materials:
      • High-tensile strength nylon webbing and ribbon usage based on production volume.
      • Buckles cost per unit.
    • Direct Labor:
      • Prorated based on production.

Total Variable Cost Calculation

Let’s assume you intend to produce:

  • 100 collars
  • 100 leashes
  • 100 harnesses

Calculate Direct Material Costs for 100 units each:

  • Webbing:

    • Total for Collars:
      • \(100 \text{ collars} \times \frac{1}{3} \text{ yard/collar} = 33.33 \text{ yards} \times 12 = 400\)
    • Total for Leashes:
      • \(100 \text{ leashes} \times \frac{1}{2} \text{ yard/leash} = 50 \text{ yards} \times 12 = 600\)
    • Total for Harnesses:
      • \(100 \text{ harnesses} \times \frac{1}{2} \text{ yard/harness} = 50 \text{ yards} \times 12 = 600\)
    • Total Direct Material Cost (Webbing): 400 + 600 + 600 = $1,600

  • Ribbons:

    • Total for Collars:
      • \(100 \text{ collars} \times \frac{1}{3} \text{ yard/collar} = 33.33 \text{ yards} \times 9 = 300\)
    • Total for Leashes:
      • \(100 \text{ leashes} \times \frac{1}{2} \text{ yard/leash} = 50 \text{ yards} \times 9 = 450\)
    • Total for Harnesses:
      • \(100 \text{ harnesses} \times \frac{1}{2} \text{ yard/harness} = 50 \text{ yards} \times 9 = 450\)
    • Total Direct Material Cost (Ribbons): 300 + 450 + 450 = $1,200

  • Buckles:

    • For Collars: \(100 \times 4 = 400 \text{ buckles} = 200\)
    • For Leashes: \(100 \times 3 = 300 \text{ buckles} = 150\)
    • For Harnesses: \(100 \times 8 = 800 \text{ buckles} = 400\)
    • Total Direct Material Cost (Buckles): 200 + 150 + 400 = $750

All Variable Material Costs:

  • Total = $1,600 (webbing) + $1,200 (ribbon) + $750 (buckles) = $3,550

Direct Labor Costs (for 100 units):

  • For the three makers (assume all work the same time over one month):
  • Collar Maker: \( \frac{640}{100} = 6.4\)
  • Leash Maker: \( \frac{640}{100} = 6.4\)
  • Harness Maker: \( \frac{680}{100} = 6.8\)

Thus total direct labor cost for 100 units will be ( (640 + 640 + 680) = $1,960.

Summary

  • Total Variable Costs per unit:

    • Total Direct Material Costs = $3,550
    • Total Direct Labor Costs = $1,960
    • Total Variable Costs = $3,550 + $1,960 = $5,510 (for 100 units total)

  • Total Fixed Costs: $2,765

These calculations should form the basis of the information and analysis you will incorporate in your Project Workbook. Be sure to fill in your respective tables with categorized costs and include calculations clearly noted on the side. Good luck with presenting your financial strategy to the investors!