Advanced: Preparation of a cash budget and a decision whether to close a department and sub contract
Question:
Advanced: Preparation of a cash budget and a decision whether to close a department and sub contract The Rosrock Housing Association has two types of housing estate in the Rosburgh area (A and B).
The following information is available:
(i) The association has its own squad of painters who carry out painting and decorating work on the housing estates. The estimated cost for each house in which the work will be done in 2001 is as follows: Painting
on direct labour cost. Only 30% of material related overhead and 33'/3% of labour related overhead is variable, the remainder is fixed overhead and the ab¬ sorption rate is arrived at using the budgeted number of houses which require painting and decorating each year.
(d) Fixed overhead may be analysed into:
1. Items avoidable on cessation of the service 30%
. 2. Depreciation of equipment and premises 20%
3. Apportionment of head office costs 50%
(e) Direct material and direct labour cost are wholly variable.
(ii) The total number of houses of each type and the percentage requiring painting and decorat¬ ing each year is as follows:
(iv) Forecast balances at 31 December 2000 and other cash flow timing information is as follows:
(a) Creditors for materials: £2100. Credit purchases are 90% of purchases, the remainder being cash purchases. The credit purchases outstanding at a year end are estimated at 10% of the annual materials purchased on credit. There are no materials on hand on 31 December 2000.
(b) Labour costs accrued: £2800. Labour costs outstanding at a year end are esti¬ mated at 4% of the annual total earnings for the year.
(c) Creditors for variable overheads: £600. Variable overheads are paid 60% in the month of incidence and 40% in the month following. Variable overheads are deemed to accrue evenly each month throughout the year.
(d) Fixed overheads are paid in twelve equal amounts with no accruals or prepayments.
Required:
(a) Prepare a cash budget for the existing painting and decorating function for the period 1 January 2001 to 31 December 2003 which shows the cash flows for each of the years 2001, 2002 and 2003. (Calculations should be rounded to the nearest whole £.) (14 marks)
(b) An outside company has offered to undertake all painting and decorating work for a three year period 2001 to 2003 for a fixed fee of £135 000 per annum.
(i) Calculate whether the offer should be accepted on financial grounds using the information available in the question.
(2 marks)
(ii) List and comment upon other factors which should be taken into account by Rosrock Housing Association manage¬ ment when considering this offer.
(6 marks) (Total 22 marks)
ACCA Level 2 Cost and Management Accounting
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