Ask Question, Ask an Expert


Ask Accounting Basics Expert

problem 1: Budgeting  
Your friend Peter is planning to set up a new business which will manufacture and sell wooden tables. The parts that make up the table consist of a wooden table top measuring 1m by 0.5m, four legs and 3m of trim. The wooden table top supplied by the vendor measures 1m by 1m and has to be cut into two halves before assembly. The legs are also supplied by the same vendor. The trim is supplied by another supplier and comes in rolls of 30m.
Peter knows you are a management accountant and has asked you to help him prepare a budget for his new business so that he knows whether he can make any profit in the first six months. The following is Peter’s plan and estimates:
The new business will begin operations on 1 Jan 2013.
Peter will put in $65,000 of his personal funds into the business and he has obtained a loan of $50,000 from a bank to be available on 1 Jan 2013. The loan interest is 5% per annum on the loan outstanding and interest is to be paid on the last day of each month. A principal payment of $1,000 will also be made at the end of each month.
Plant and machinery will be purchased on 1 Jan at a cost of $36,000, to be paid in three equal monthly installments interest free. The plant and machinery is to be depreciated on a straight line basis over 5 years. Office equipment will be purchased on 1 Jan at a cost of $30,000 to be paid in full in Feb. The office equipment will be depreciated on a straight line basis over 3 years.
Sales will start in Feb and Peter estimates that sales volume will be 400 units in Feb, increasing by 100 units every month until it reaches the production capacity of 1,000 units per month. Selling price is set at $145 per unit. 75% of the sales is expected to be on credit and the rest for cash. For the credit sales, Peter predicts that 60% will pay in the month following the sale, 30% in the second month following the sale and 10% in the third month of the sale.
Unit costs for the parts are:

Table top (1m by 1m)  $50
Leg (each)   $4
Trim (30m roll)  $100
Labour costs are:
Direct labour   1.5 hours per table
Direct labour rate  $30 per hour
Peter wishes to have an ending finished goods inventory equal to 20% of the sales requirements of the following month. The  ending inventory for table top and legs should equal 30% of the production requirement of the next month. As for trims, it should be 10% of the production requirement of the next month rounded down to the nearest roll. There are no WIP inventories. Terms on purchases are 40% cash on delivery (COD) and 60% payable in the next month. A 2% discount is available for COD payments. Discounts received are reported as “Other Income” in the income statement. The company follows the terms of payment to take advantage of the COD discount. Direct labour cost is paid one month in arrears.
Variable manufacturing overhead is estimated to be $2 per table. Fixed manufacturing overhead (excluding depreciation) is expected to be $6,000 per month. Variable selling & administration expenses are expected to be 5% of sales. Fixed selling & administration expenses (excluding depreciation) are budgeted to be $3,000 per month.
All manufacturing overhead and selling & administration expenses are paid in the month incurred.

The company uses absorption costing to determine its product cost.

Based on the information given, and ignoring GST and taxation, prepare the following from Jan to June 2013 for Peter’s company:
a) A monthly sales budget     
b) A monthly production budget     
c) A monthly purchase budget    
d) A monthly cash receipts budget   
e) A monthly cash disbursement budget for material purchase 
f) A monthly cash disbursement budget for other items including the payment of long term loan principal and interest 
g) A cash flow budget     
h) A budgeted income statement for the six months from 1 Jan to 30 June 2013  
i) A budgeted balance sheet as of 30 June 2013  
j) A budgeted movement of owner’s equity for the six months

problem 2: Performance measurement
Brabham Enterprises manufactures tires for  the Formula One motor racing circuit. For August 2011, Brabham budgeted to manufacture and sell 3,000 tires at a variable cost of $74 per tire and a total fixed cost of $54,000. The budgeted selling price was $110 per tire.  Actual results in August 2011 were 2,800 tires manufactured and sold at a selling price of $112 per tire. The actual total variable costs were $229,600 and the actual fixed costs were $50,000.

a) Prepare a performance report that uses a flexible budget and static budget showing the different variances between the actual and the static budget and the flexible budget      
b) Discuss the difference between a static budget and a flexible budget and comment on the results based on the performance report you have prepared for Brabham.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91970

Have any Question? 

Related Questions in Accounting Basics

Assignmentthe company that i chose to research came to me

Assignment The company that I chose to research came to me on the way home from work this week while sitting in traffic. A string of several ads came on the radio and got a little frustrated that my Christmas tunes were ...

International accountingpart 1the weeks discussion covered

INTERNATIONAL ACCOUNTING PART 1 The week's discussion covered the following International Accounting Standards (IAS): #21 The Effects of Changes in Foreign Exchange Rates #27 Consolidated and Separate Financial Statement ...

Project assignmentdo investors react to stock

Project Assignment Do Investors React to Stock Dividends? Financial accounting theory predicts that there should be no market reaction to a company's stock dividend. This is because the market value of the shares should ...

Activity your accounting firm pennypacker amp vandelay llc

Activity: Your accounting firm, Pennypacker & Vandelay, LLC, has been asked by the Chairman of Harris Memorial Hospital and Harris Community Foundation to attend the annual board meeting to present the report of the Inde ...

Internal control procedures are required for all

Internal control procedures are required for all transaction cycles within an accounting cycle. This week you are addressing the control procedures that would be the most effective in the general ledger and reporting sys ...

A company is considering to replace an existing machine for

A Company is considering to replace an existing machine for which two suppliers have given quotation. Supplier A has proposed a machine costing Rs. 180 lakh that uses the existing boiler while supplier B has quoted for t ...

In your own words explain the recording process and the

In your own words, explain the recording process and the accounting equation to someone who has no accounting experience. Then, give your opinion on the elements or areas that might cause the most confusion or be the mos ...

Problem -using the following proforma information regarding

Problem - Using the following proforma information regarding GE, Inc. based on analysts' forecast in early 2016:   2016E 2017E Next 3 years EPS 1.29 1.56 Growth at 7.59% DPS 0.92 1.11 Growth at 10% The book value of GE's ...

Question 1on december 31 2014 rayco inc had the following

Question 1 On December 31, 2014, Rayco Inc. had the following balances (all balances are normal): Accounts Amount Preferred Stock, ($100 par value, 5% noncumulative, 50,000 shares authorized, 10,000 shares issued and out ...

Question 1the board of directors is considering updating

Question 1 The board of directors is considering updating the fleet of vehicles of the company which are used to ship goods to markets all around the United States. They will be leasing the vehicles as opposed to purchas ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen