Problem ONE
MT is a manufacturer of children's Mobile Phones. In the Budget-setting process, Budget X was prepared by lower and middle management. Budget Y was prepared by senior management.
|
Ups
|
X
|
Y
|
|
Unit Sales
|
20000
|
30000
|
|
Dollar Sales
|
$600,000
|
$900,000
|
|
Less: Variable expenses:
|
|
|
|
Direct materials
|
260,000
|
360,000
|
|
Direct Labour
|
40,000
|
60,000
|
|
Variable Overhead
|
60,000
|
75,000
|
|
Variable Selling and administrative expenses
|
60,000
|
60,000
|
|
Total Variable expenses
|
$420,000
|
$555,000
|
|
Contribution margin
|
$180,000
|
$345,000
|
|
Less: Fixed expenses:
|
|
|
|
Manufacturing Overhead
|
$60,000
|
$50,000
|
|
Selling and administrative
|
100,000
|
80,000
|
|
Taxes and Interest
|
10,000
|
10,000
|
|
Total fixed Expenses
|
$170,000
|
$140,000
|
|
Net Profit (Loss)
|
$10,000
|
$205,000
|
Required
a) Calculate the cost per unit for the Variable costs.
b) Why do you think budget X has high costs and low sales forecasts?
c) Why do you think budget Y has low costs and high sales forecasts? What are the behavioural of this top-down approach?
d) How should the two groups participate to come to a consensus on the budget? What are the advantages of this approach?
Problem TWO
WJ Company manufactures a unique model winter jacket sold throughout Australia. Sales in units for the first five months of 2014 are projected as follows:
|
July
|
35,000
|
|
August
|
20,000
|
|
September
|
15,000
|
|
October
|
8,000
|
|
November
|
6,000
|
Information relates to WJ's production and inventory policies and balances are as follows:
1. Finished goods inventory is maintained at 80% of the following month's sales. Finished goods inventory at 1 July 2014 was 28,000units
2. Two materials are required for each Jacket manufactured, as follows:
|
Direct Materials
|
meter per Unit
|
Cost per meter
|
|
Polyester
|
5
|
$8
|
|
Lining Material
|
3
|
$2
|
Raw materials inventory is maintained at 10% of the following month's production needs. Inventory at 1 July 2014 was 17,000 meters of polyester and 10,200 meters of lining.3. Direct labour used per unit is two hours. The average rate for labour is $15 per hour.
4. Overhead each month is estimated using flexible budget format, with direct labour hours used as the basis for variable costs. A summary of expected overhead costs is as follows:
Fixed Cost Variable Cost Component
|
Factory supplies
|
|
$1.00
|
|
Energy Supplies
|
|
0.75
|
|
Shop maintenance
|
$3000
|
0.50
|
|
Supervision
|
4,000
|
|
|
Depreciation
|
60,000
|
|
|
Taxes
|
5000
|
|
Other 10,000 2.00
Total $82,000 $4.25
5. Selling, general, and administrative expenses are also calculated on a flexible budget basis based on the number of units sold. Cost estimates are as follows:
Fixed Cost Component Variable Cost Component
|
Salaries
Commissions
|
$18,000
|
$3.00
|
|
Depreciation
Shipping
|
22,000
|
0.75
|
|
Other
|
10,000
|
1.50
|
Total $50,000 $5.25
6. Each Jacket sells for$85.
7. All purchases are made in cash. All sales are on account. Collection of accounts receivable is planned as follows: 90% in the month of sale; 10% in the month following the month of sale. The accounts receivable balance at July 1, 2014, is $145000, all of which is collectable. The cash balance at July 1, 2014, is $202000.
Required
A. Prepare the following portions of the operating master budget, by month, for the first quarter of 2014:
A) Sales Budget
B) Production Budget
C) Direct Materials budget
D) Direct labour budget
E) Overhead budget
F) Selling, general and administrative expense budget
G) Cash Budget
H) Suppose WJ's management believes that unseasonably warm weather in September and October could cause its sales in units to differ from the original projections as follows:
|
June
|
35,000
|
|
July
|
20,000
|
|
August
|
10,000
|
|
September
|
6,000
|
October 6,000
Explain how these fluctuations in sales will affect the other portions of the master budget developed in the previous requirements. What are the implications for the importance of forecasting sales accurately?
Problem THREE
TCC Industries Ltd produces speciality tyres in a variety of sizes and tread designs for use on trailers and farm equipment. TCC is planning to implement a standard cost accounting system. Valerie Siewert, the accountant, has accumulated the following information on the standard cost of a particular bias tractor tyre.
Each tyre requires 15 kilograms of carbon black, the basic tyre component, which is added in the mixing department. Other materials, such as zinc and sulphur, which are added in the moulding department, are required in such small quantities that they are treated as indirect materials and included as part of overhead. Each tyre requires 15 minutes of processing time to mould and cure. An additional 45 minutes of time is required to mix the ingredients in the mixing department.
The standard cost for carbon black is $3.50 per kilogram. The standard cost of direct labour in the mixing department is $10 per labour hour, while the standard cost of direct labour in the moulding department is $11 per hour.
Required
a) Develop the standard cost of materials and labour for the tractor tyre. The standard cost should identify the standard quantity, the standard rate and the total standard cost per unit. (3marks)
b) Identify the advantages of implementing a standard cost system.
c) Explain the role each of the following people would have in developing the standard costs:
1- Purchasing Power
2- Mixing department supervisor
3- Moulding department supervisor
4- Cost Accountant
5- Product engineer
d) Assume that a batch of tyres has been completed and the following actual amounts were used to produce thebatch:
1-Actual output: 4500 tyres
2- Actual carbon black utilised: 68000 kilograms
3- Carbon black purchased: 75000 kilograms at a cost of $258000
4- Direct labour in mixing department: 3220 hours at a cost of $31073
6- Direct labour in moulding department: 1075 hours at a cost of $12384
Calculate the materials price variance and the material usage variance. Also, calculate the labour rate variance and labour efficiency variance for each department.