Solution Code: 1FGD
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Task
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Question 1
The management accountant at Pat’s Tennis Supplies Company has provided the following information to prepare the cash budget for July.
? 40% of sales are cash sales. 60% of sales are credit sales.
? Of the credit sales, cash is received for 30% of credit sales within the month of sale
and all credit sales collected within the month receive a 5% discount. A further 40% of credit sales are collected in the following month the sale; while the remaining credit sales are collected in the second month after the sale. There are no bad debts.
? Sales for the relevant period are as follows:
Date Sales Purchases ? April ? $ 500,000 ? ? May ? $ 600,000 ? ? June ? $1,000,000 ? 296,400 ? July ? $1,140,000 ? 312,000
? Raw material purchases in July are $312,000. Raw material purchases in June were$296,400.
? 50% of raw materials purchases are paid for in the month of purchase. The remainder is paid for in the following month.
? Wages are $100,000 per month and are paid in the month incurred.
? Budgeted monthly operating expenses are $376,000, of which $26,000 is depreciation. Expenses are paid in the same month incurred.
? Old equipment will be sold for $35,200 on July 4.
? On July 13 new equipment costing $175,000 will be purchased with cash.
? The cash balance on July 1 is $127,000.
Required:
(a) Prepare a cash collection schedule from sales that you expect to collect during July
(b) Prepare a cash payments schedule for purchases that you expect to pay during July
(c) Prepare a cash budget FOR JULY ONLY.
Question 2
Table 1 provides the annual overhead costs while Table 2 provides the budgeted input quantities per chair and budgeted costs per chair. The budgeted overhead rate is also shown in Table 2. The actual results are shown in Table 3.
Table 1: Budgeted (Standard) Manufacturing Overhead Costs for 1 year
Budgeted Fixed Manufacturing Overhead -$4,200
Budgeted Fixed Overhead Rate per Direct Labour Hour -$1.20
Budgeted Variable Overhead Rate per Direct Labour Hour - $1.20
Table 2: Standard (Budgeted) Manufacturing Cost per Chair
Per unit
Direct Materials (1.1 metres per chair @ $5.90 per metre) - $ 6.49
Direct Labour (3.1 hours per chair @ $6.30 per hour) - 19.53
Variable Manufacturing Overhead @ $1.20 overhead rate (based on Direct Labour hours as the cost allocation base) -3.72
Fixed Manufacturing Overhead @ $1.20 overhead rate (based on Direct Labour hours as the cost allocation base) -3.72
Total Budgeted Cost per Chair - $33.46
Table 3 contains data for one year of operations. The actual annual output was 1,000 chairs:
Table 3: Actual Manufacturing Costs for 1,000 Chairs for 1 year
Total
Actual Direct Materials purchased and used (1,020 metres @ $6.30)
Actual Direct Labour cost (3,000 hours used @ $6.45)
Actual Variable overhead cost - $4,200
Actual Fixed overhead cost - $4,300
Total Actual Costs for 1,000 Chairs
Requirements:
Compute the following variances and in your answer identify variances as favourable or unfavourable, show all workings and clearly label answers.
(a) Material price and Materials efficiency variances
(b) Labour price and Labour efficiency variances
(c) Variable overhead spending and Variable overhead efficiency variances
(d) Fixed overhead spending and Fixed overhead production-volume variances
(e) Suggest a reason for what may have caused the direct materials efficiency variance
and the direct materials price variance.
(f) Suggest a reason for the variance results that show connections between thedifferent types of variances. (E.g. how the Dir. Lab. and/or Dir. Mat. variance may affect each other or the overhead variances).
Question 3
Pretty Good Picture framing is costing a large job (no. 60) for a client. The current costing system allocates manufacturing overhead based on machine hours. However the accountant is considering introducing an ABC costing system and has obtained the following information:
Budgeted overheads (Costs)
Budgeted quantity of cost drivers
Material handling $ 40,000
Material moves 500
Machine maintenance $ 231,000
Machine Hours 10,000
Product inspection $ 18,000
Inspections 1,200 TOTAL Mfg Overhead $ 289,000
JOB 60
Number of materials moves - 10
Machine hours - 40
Number of inspections - 9
Required:
a) What amount of overhead would be allocated to Job 60 under the current costing system?
b) Calculate the cost of Job 60’s overhead under ABC costing, using appropriate cost drivers for the three identified activities.
c) Describe which costing system is more accurate and explain why there aredifferences between traditional costing and ABC costing allocated amounts. Explain the need for these more modern (ABC) costing systems.
d) Some of the activities in the budget above may be classified as either value-added or non-value added or grey areas (partly value-added and partly non-value added).
i) Identify two of the activities in the budget above that may be classified as greyareas (both value-added and non-value added).
ii) Describe why some activities have a value-added portion and a non-value added portion. How the ABC information may be used to improve managerial decision- making (activity-based management (ABM)) to reduce the non-value added portion. Give examples.
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Question 1
a) Cash collection schedule from sale
Cash sale (‘000) | April | May | June | July |
April | 200 | |||
May | 240 | |||
June | 400 | |||
July | 456 | |||
Credit sale (‘000) | April | May | June | July |
April | 90 | 120 | 90 | |
May | 108 | 144 | 108 | |
June | 180 | 240 | ||
July | 205.2 |
Discount 5% for credit sale (‘000) | April | May | June | July |
4.5 | 5.4 | 9 | 10.26 |
Pat’s Tennis Supplies Company
Cash collection schedule from sales
For the month of July
(‘000) | July | ||
May | 108 | ||
June | 240 | ||
July | 650.94 | ||
Total | 998.94 |
b) Cash payment schedule for purchase
Pat’s Tennis Supplies Company
Cash payment schedule for purchase
For the month of July
(‘000) | July | ||
June | 148.2 | ||
July | 156 | ||
Total | 304.2 |
c) Cash budget
Pat’s Tennis Supplies Company
Cash Budget
For the month of July
(‘000) | July |
Beginning cash balance | 127 |
Cash receipts | |
Sales | 998.94 |
Old equipment sold | 35.2 |
Total cash receipts | 1,161.14 |
Cash payment | |
Purchase | 304.2 |
Operating expense | 350 |
New equipment purchased | 175 |
Total cash payment | 829.2 |
Ending cash balance | 331.94 |
Question 2
Actual direct materials purchased and used = 1,020/1,000 = 1.02/unit
Actual direct labor hour = 3,000/1,000 = 3 hours / unit
Actual variable overhead cost = 4,200/1,000 = 4.2
a) Material price variance = actual quantity x actual price – actual quantity x standard price
= 1.02 x 6.3 – 1.02 x 5.9 = 0.408 (Favorable)
Material efficiency variance = actual quantity x standard price – standard quantity x standard price = 1.02 x 5.9 – 1.1 x 5.9 = -0.472 (Favorable)
b) Labor price variance = actual quantity x actual rate – actual quantity x standard rate
= 3 x 6.45 – 3 x 6.3 = 0.45 (Unfavorable)
Labor efficiency variance = actual quantity x standard rate – standard quantity x standard rate = 3 x 6.3 – 3.1 x 6.3 = -0.63 (Favorable)
C
c) Variable overhead spending variance = actual manufacturing overhead cost – actual hours x standard variable overhead rate per hour
= 4.2 – 3 x 1.2 = 0.6 (Unfavorable)
Variable overhead efficiency variance = standard hours x standard variable overhead rate per hour – actual hours x standard variable overhead rate per hour
= 3.1 x 1.2 – 3 x 1.2 = 0.12 (Favorable)
d) Fixed overhead spending variance = actual fixed overhead – budgeted fixed overhead
= 4,200 – 4,300 = 100 (Unfavorable)
Fixed overhead production-volume variance = actual output x fixed overhead absorption rate per unit – budgeted output x fixed overhead absorption rate per unit
Fixed overhead absorption rate per unit = budgeted fixed manufacturing overhead/budget hours = 4,200/(3.1 x 1,000) = 1.35
It is assumed that the actual annual output and the budgeted output were 1,000. Therefore, fixed overhead volume variance = 0 (Favorable). The variance is favorable because it means the manager predicts accurately the real output.
e) Needles and Crosson (2013) define the direct materials efficiency variance as the multiplying difference between standard and actual material quantity and standard price. Thus, the direct material efficiency variance probably steams from the difference of expected and actual material amount. The efficient workers and monitor practices may lead to the difference of material quantity.
The direct materials price variance is calculated by the difference of standard price and actual price of materials multiplying actual quantities purchased (Needles & Crosson 2013). The direct materials price variance is caused when the difference takes place. Manager of company may not negotiate at the excepted price and it results in the variance of prices.
f) There is a possible linkage between direct labor variance and direct material variance. The low price purchased materials would contribute negative attributes to the production even though it achieves a favorable material variance. The negative attributes from low quality materials might add more hours to complete. So, it will lead to unfavorable direct labor efficiency variance. As a result, the relationship between direct labor and material variance is built.
Question 3
a) The amount of overhead allocated to Job 60 using the current costing system
Manufacturing cost overhead per hour = total manufacturing cost overhead/machine hours = 289,000/10,000 = 28.9
The overhead of manufacturing cost (Job 60) = 28.9 x 40 = 1,156
b) The amount of overhead allocated to Job 60 using ABC costing system
The overhead unit cost of material move = material handling/material moves
= 40,000/500 = 80
The overhead unit cost of machine hour = machine maintenance/machine hours
= 231,000/10,000 = 23.1
The overhead unit cost of product inspection = product inspection/inspections
= 18,000/1,200 = 15
For Job 60
The overhead cost of material move = 80 x 10 = 800
The overhead cost of machine hour = 23.1 x 40 = 924
The overhead cost of production inspection = 15 x 9 = 135
The total overhead cost = 800 + 924 + 135 = 1,859
c) In the traditional cost system, it can only traces after direct materials and labor costs to the production, while in ABS system, the activities performance such as products, customers and services and the cost of these activities to the final product are linked together (Akyol, Tuncel & Bayhan 2007).
The ease of use and simple system of the traditional accounting cost differs from specific activities costs involved in production line of the ABS cost method. The ABS cost model is more detailed than the old one by determining cost drivers measuring the activities like number of units product, labor hours, machine hour or number of orders (Akyol, Tuncel & Bayhan 2007). Furthermore, the ABS system classifies activites as value-added and non-value-added activities (Akyol, Tuncel & Bayhan 2007). This means the ABS model deals with more costs compared to the traditional one, which results in more accurate cost and information. Because of simple calculation of the traditional costing system, it only engages in the direct activities of production such as direct materials and direct labors. The cost may not cover all loss or profit of processing products, so it ought to produce less correct costs.
Although the advantage of the ABC system is more accurate information, there are some limitations of it such as more efforts to obtain cost of these activities and more cost to determine the needed information.
d) Value-added, non-valued added and grey areas (partly value-added and partly non-value added)
1. Grey areas:
2. David (1999) claims that there are some essential non-value added activities existing. Those activities do not add value to the customers, but they are essential for production line. For example, the cost of transporting and storing raw materials for production does not add value to the customers; however, it cannot be removed. This action will definitely contribute to the processing of product, so it may be seen as a value-added activity or grey area.
Managerial decision-making can be improved by using the ABC information via 4 ways (Hasen, Mowen & Guan 2007):
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