For your individual Assignment, you will apply the fundamental concepts of accounting and finance that you are studying to complete several problems indicative to real-world business scenarios and challenges. This time, however, you will focus on some of the budgeting techniques discussed in your Lecture Notes and Learning Resources. With this in mind, you will complete two questions and submit them as you did in the previous week.

The answers should be 1000 word as a minimum and should have three peer-reviewed or academic references with Harvard style (Bibliography and in-text citation)

Q1:

Angelo Diaz has decided to go into business selling computer accessories that are popular among university students. He will operate the business in a shopping centre, mostly on weekends. He is trying to organise himself for the start of the first quarter, so he needs to prepare a few budgets. Use the following information in order to help him achieve this goal.

Angelo estimates expected sales for January to be 800, February to be 1,200, March to be 2,000 and April to be 3,000. He expects a gross profit ratio of 0.4. He will keep sixty per cent of the next month?s sales in the ending finished goods inventory.

Angelo will pay himself a monthly salary of 150. He will pay his best friend 60 to help him with miscellaneous errands. He estimates that general operating costs will be 130 monthly. In addition, since his cousin is the owner of the shopping centre where he will locate his store, he will only pay 100 per month in rent. However, he plans to upgrade his space at the shopping centre, which will cost 500, of which 200 will be paid in January and 300 in February. All other costs must be paid for as incurred. He will begin January with 400 in the bank.

He expects that forty per cent of sales will be paid for in cash. He expects customers will put the rest on credit and pay in instalments in subsequent months. For the purposes of this assignment, assume the following:

30% will be paid in the month of sale and 10% of people who pay in the month of sale will qualify for a 20% discount.

Another 20% will be received the month following the sale and 5% the second month following the sale.

5% of credit sales will never be received.

For the purposes of this Assignment, you can also assume the following:

Payments for merchandise are made 30% in the month of purchase and 70% the following month.

Interest is charged at a rate of 24% per year, and payments of interest only are due at end of each quarter.

All loans are borrowed at the very beginning of the month, and payments are made at the very end of the month.

Angelo must maintain a minimum cash balance of 1,000.

Required:

Help Angelo by doing the following:

Prepare a schedule of cash receipts for the first quarter.

Prepare a schedule of inventory purchases for the first quarter.

Prepare a schedule of cash disbursements for the first quarter.

Prepare a cash budget for January and February.

Calculate how much interest is owed on February 28.

Q2:

ABC is a company that manufactures a type of docking station for a laptop. You will analyse its income statement for the 2014 fiscal year (shown below).

Sales	2,400,000
Variable cost of goods sold	1,680,000
Variable sales commissions	120,000
Contribution margin	600,000
Selling expense	105,000
Sales commissions expense	48,000
Administrative expense	212,000
Net income	235,000

Variable costs per unit are 6.

Required: (Round all answers to 2 decimal places.)

Calculate break even in pounds.

Calculate break even in units.

Calculate break even in pounds if the sales price increases by 10% and fixed costs increase by 12,000.

Calculate break even in pounds if total sales increase by 10% and fixed costs increase by 10%.

Calculate sales (in pounds) to achieve 600,000 after tax (tax rate is 40%).

Q3:

The table below shows the cost information for Company A and Company B.

	Company A	Company B
Variable cost per unit	50	20
Total contribution margin	600,000	700,000
Total sales revenue	1,000,000	1,400,000
Fixed costs	600,000	490,000

Required: Using the table above, calculate the following:

Selling price per unit for both companies.

Break even in pounds for Company A.

Break even in units for Company B.

Q4:

The following table lists jobs and the financial events (actual costs and balances) for a crane company called SAP for the year 2014.

Jobs	Beginning Balance
Total DM cost	DLH/unit	DM 50,000
ABC 30,000	600	FG 70,000
XYZ 20,000	450	WIP 0

DM: direct material

DLH: direct labour hours

WIP: work in progress

FG: finished goods

SAP uses a job order costing system and pays workers at a rate of 20 per hour. It estimates overhead at 1,200,000 and bases it on expected operation activity of 400,000 hours. Both Job ABC and Job XYZ consist of ten cranes.

Required: Using the information above, calculate the total cost of each job.

Managing Organisational Resources Lecture Notes Part I - Accounting and finance Week 3 Lecture Notes: Fundamentals of managerial accounting Managerial or management accounting has three main areas: differential analysis, cost accounting and management control. This lecture will cover elements from cost-volumeprofit (CVP) analysis (differential analysis), full costing (cost accounting) and budgeting (management control). Cost-volume-profit analysis Cost-volume-profit (CVP) analysis is the study of the effects of output volume on revenue (sales), expenses (costs) and net income (net profit). The major simplifying assumption is to classify costs as either variable or fixed with respect to the volume of output activity. Other assumptions are the following: All CVP relationships are linear over the relevant range. Sales and variable prices do not change with changes in volume. Efficiency and productivity will not change. The relative proportions of quantities of products that constitute total sales are constant. A difference in inventory level from the beginning to the end of a period is not significant. Cost drivers are output measures of resources and activities. Organisations can have many cost drivers. Cost in this lecture means volume-based cost drivers, which are used to examine cost behaviour. Variable and fixed costs refer to how cost behaves with respect to changes in a particular cost driver. A variable cost is a cost that changes in direct proportion to changes in the cost driver (i.e. costs per unit do not change, but total costs do change). Examples of variable costs include the costs of direct materials, sales commissions, software licenses per user and direct labour. A fixed cost is a cost that is not immediately affected by changes in the cost driver (i.e. costs per unit do change, but total costs do not change within the relevant range). Examples of fixed costs include real estate taxes, computer equipment depreciation, data centre rentals, salaries and space rentals. The relevant range of fixed costs includes the limits (i.e. time period and/or activity) of cost-driver activity where a specific relationship between costs and the cost driver is valid. For example, the fixed costs are only valid with the relevant range of 90,000 to 120,000 units. The break-even point (BEP) is the level of sales where revenues equal costs and the net income is zero. One direct use of the BEP is to assess possible risk. By comparing planned sales with the BEP, managers can determine a margin of safetyhow far sales can fall below the planned level before losses occur. The margin of safety equals the planned unit sales minus the break-even unit sales. Managing Organisational Resources 1/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 The contribution margin (CM) per unit is the sales price per unit minus the variable expenses per unit. The BEP is reached when the total contribution margin equals the total fixed costs. Dividing the total fixed costs by the CM per unit gives the BEP in number of units. The CM percentage or ratio is the portion of every sales dollar that contributes to covering fixed costs and, hopefully, provides for profit (divide the total contribution margin by total sales). Dividing total fixed costs by the CM percentage yields the sales dollars needed to break-even. Firms that produce more than one product find using the CM percentage necessary. Again, these two equations are: Break even (units) = (fixed costs)/(CM per unit) Break even (pounds) = (fixed costs)/(CM ratio) Note: Increases (or decreases) in fixed costs will increase (or decrease) the BEP. Increases (or decreases) in the CM per unit or ratio will decrease (or increase) the BEP. BEP does not take into account the time value of money. CVP analysis can be used to determine the target sales, in units and pounds, needed to earn a target income. The contribution margin equations are: Target sales volume in units = (fixed costs + target income)/(CM per unit) Target sales volume in pounds = (fixed costs + target income)/(CM ratio) For example, to illustrate the target sales volume in dollars, imagine a firm where sales are 5 million and variable costs are 3 million to yield a CM ratio of .40 [(5,000,000 - 3,000,000)/ 5,000,000]. With fixed costs at 2 million and a target income of 1 million, sales would need to reach 7.5 million. If the CM per unit were 2 (5/unit price - 3/unit variable cost), the target sales volume in units would be 1.5 million units. Another use for variable and fixed costs is to compute operating leverage. Operating leverage is the extent to which fixed costs are used in a firm's business operations. The greater the proportion of fixed operating costs, the higher the operating leverage. Operating leverage is a proxy for business risk. The higher the operating leverage, the greater the change in operating income, given a change in sales (and vice versa). This increase in operating leverage causes an increase in expected return. However, below the BEP, operating losses are greater. The degree of operating leverage (DOL) is: DOL= (sales - variable costs)/(sales - variable costs - fixed operating costs) or DOL= CM/operating income To use this formula, the firm must have a positive operating income; therefore, the DOL always exceeds one. DOL is not a constant. It is greatest at sales levels near the sales BEP. It decreases as sales and income rise. Managing Organisational Resources 2/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 For example, imagine a firm that has sales of 1 million, variable costs at 500,000 and fixed operating costs at 300,000. This makes operating income 200,000. Therefore, the DOL equals 500,000/$200,000, which equals 2.5. The firm's operating income grows 2.5 times as fast as its sales. If sales increase 20%, the firm can expect operating income to increase by 2.5 times this amount, or by 50%. For sales at 1.2 million, the operating income is 300,000. Full costing Product cost information serves a variety of purposes. Two of its most common uses are in financial reporting and in managerial decision-making. Manufacturing companies need product cost information to prepare financial statements in accordance with generally accepted accounting principles (GAAP). To be consistent with GAAP, the inventory balance on the balance sheet must accurately reflect the cost of producing the goods that remain in inventory at the end of the accounting period. Also, the cost of goods sold (COGS) presented on the income statement must accurately reflect the cost of the items sold during the accounting period. Because product cost information is necessary for external financial reporting, all manufacturing companies must have some type of product costing system. These systems generally produce full cost information, which GAAP requires. Product cost information also serves a variety of managerial decisions. For example, a computer manufacturer needs product cost information to make pricing decisions. Sometimes the product cost information needed for management decision-making is different from that produced for external financial reports. For external financial reports, product cost information mixes both fixed and variable manufacturing costs. Many internal management decisions, however, require information with separate fixed and variable cost components. There are two major product-costing systems: job-order and process. The type of manufacturing determines the costing system. Companies that use a job-order costing system generally produce individual products or batches of unique products, for example, Cyber power PC produces customized game computer systems. A job is an individual product or batch for which a company needs cost information. When the items that constitute the job are completed and sold, the company can match the cost of the job with the revenue it produced and obtain an appropriate measure of gross profit. Companies using job-order costing systems include construction companies, equipment and tool producers, shipbuilding companies and printing companies. In contrast, companies using a process costing system generally produce large quantities of identical items that pass through uniform and continuous production operations. Costs are accumulated by each operation, and the unit cost of items produced is determined by dividing the total costs of the production operations by the total number of identical items produced. In a process costing system, costs are not traced to specific items produced, since each item is identical. It is sufficient to assign to each item its average unit cost of production. Companies using process costing Managing Organisational Resources 3/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 systems include producers of computers, electronics, metals, chemicals, paints and plastics. Job-order costing system Product costs include three items: direct materials, direct labour and manufacturing overhead (indirect costs). In a job-order costing system, the full product cost of a job is the sum of these three cost items. A job-order costing system must be able to trace these costs to specific jobs. Both service and manufacturing firms use the job-order costing approach. An example of services can be a web development firm that uses joborder costing in order to estimate the cost of a web development project for a particular customer. However, job-order costing systems are usually found in manufacturing. In manufacturing, there are three types of inventory or stock: raw materials, work-inprocess and finished goods. Product costs are reflected in work-in-process inventory and finished goods inventory on the balance sheet and in cost of goods sold on the income statement. In a job-order costing system, work-in-process inventory includes the cost of all jobs that are currently being worked on (i.e. those that are in process). Finished goods inventory includes the cost of all jobs that are completed but not yet sold. Cost of goods sold includes the cost of all jobs that are sold during the accounting period. Costs flow through a job-order costing system based on the status of jobs. First, a company adds direct materials, direct labour and manufacturing overhead costs related to jobs in process to the work-in-process inventory. When specific jobs are completed, a company deducts the costs of those jobs (referred to as the costs of goods manufactured) from the work-in-process inventory and adds them to the finished goods inventory. When specific jobs are sold, a company removes the costs of those jobs from the finished goods inventory and adds them to the cost of goods sold. A company begins its job-order costing operations when it decides to produce a specific product for a customer's order or for inventory. It prepares a job cost sheeta form used to accumulate the cost of producing the items (i.e. the cost of the job). The company uses a material requisition form to request the release of materials from its storage. The form lists the type, quantity and cost of materials, as well as the number of the job requiring the materials. Because the form includes the job number, the company can use the form to trace material cost to specific jobs. The job cost sheet lists each material requisition form in summary. When a company purchases materials, it includes their costs in the raw materials inventory account. Removing materials from storage for a specific job decreases the raw materials inventory and increases the work-in-process inventory. Periodically (daily, weekly or monthly), the company calculates and records in the journals the total cost of materials issued to jobs. Suppose a company purchases 60,000 of materials and issues 50,000 of materials to specific jobs. To record the purchase of raw materials, the company enters a 60,000 debit to the raw materials inventory and a 60,000 credit to accounts payable. To record requisition of raw materials, the company enters a Managing Organisational Resources 4/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 50,000 debit to the work-in-process inventory and a 50,000 credit to the raw materials inventory. In a job-order costing system, workers complete time tickets (also called job tickets or work tickets) to keep track of the amount of time spent on each job. If many workers are assigned a particular job, a company may not directly post individual time tickets to job cost sheets, since that would produce too much detail. Instead, the company would use a daily labour cost summary. Periodically, the amount of direct labour cost attributed to current jobs must be debited to the work-in-process inventory. Suppose a company incurs 30,000 of direct labour cost. The appropriate journal entry is a 30,000 debit to the work-in-process inventory and a 30,000 credit to wages and salaries payable. Manufacturing overhead costs cannot be traced directly to goods produced. Thus, companies need an alternative method of assigning overhead costs to jobs. The basic approach involves assigning overhead to jobs based on some common characteristic that jobs share, such as direct labour hours or cost. This common characteristic is referred to as an allocation base. Once a company selects an allocation base, it can develop an overhead allocation rate by dividing the estimated overhead costs by the estimated quantity of the allocation base. Suppose a company anticipates 325,000 of manufacturing overhead and 20,000 labour hours during the year. With these estimates, it calculates and assigns 16.25 of overhead for every direct labour hour worked (325,000/20,000). Of course, the more labour hours a job requires, the more overhead will be assigned to it. The amount of overhead assigned to jobs is referred to as overhead applied. Note that companies assign overhead to jobs on the basis of labour hours. For example, with an overhead rate of 16.25 and 200 labour hours, a company would assign 3,250 of manufacturing overhead to a job. Recording manufacturing overhead is a two-step process. First, when a company incurs actual overhead costs, it debits those costs to manufacturing overhead and credits them to appropriate other accounts. Second, in applying overhead costs to jobs, the company credits manufacturing overhead and debits the work-in-process inventory. Since manufacturing overhead costs cannot be directly traced to jobs, a company can indirectly trace them by using an overhead rate multiplied by each job's measure of the allocation base. When a company begins work on a job, it records production costs in the work-inprocess inventory using journal entries, such as those illustrated earlier. When jobs are completed, the company reduces the work-in-process inventory by the cost of the completed jobs and increases the finished goods inventory by the same amount. When the company sells completed jobs, it reduces the finished goods inventory by the cost of the completed jobs sold and increases the cost of goods sold. For example, suppose for a company that the cost of jobs completed is 80,000 and the cost of jobs sold is 70,000. In journal entries, the company records the cost of jobs completed as an 80,000 debit to the finished goods inventory and an 80,000 credit to the work-inprocess inventory. The company records the cost of goods sold as a 70,000 debit to the cost of goods sold account and a 70,000 credit to the finished goods inventory. Managing Organisational Resources 5/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 Common measures of activities include direct labour hours, direct labour cost, machine hours and direct materials cost. In selecting the allocation base, a company should consider whether the production process is labour intensive, materials intensive or machine intensive. Typically, companies base overhead rates on estimates of overhead cost and estimates of the level of the allocation base rather than on actual costs and quantities. Overhead rates calculated by estimation are referred to as predetermined overhead rates. Once a company establishes the estimated overhead cost and estimated allocation base, it can calculate the predetermined overhead rate by dividing the estimated total overhead cost by the estimated level of the allocation base. A company makes two types of entries to the manufacturing overhead account: the debit entries record actual overhead costs incurred, and the credit entries record the amount of overhead applied to jobs in process. Unless the estimates for overhead and the level of the allocation base equal their actual amounts, the amount of overhead a company applies to jobs using a predetermined overhead rate will not equal actual overhead cost incurred. Because estimates are seldom perfectly accurate, there is likely to be a difference between the debits to manufacturing overhead (recording actual overhead costs) and the credits to manufacturing overhead (recording the amount of overhead applied to jobs using the predetermined overhead rate). This difference is referred to as under-applied overhead when actual overhead is greater than the amount of overhead applied or as over-applied overhead when actual overhead is less than the amount applied. At the end of the accounting period, the amount of under- or over-applied overhead is equal to the balance in manufacturing overhead; the company must close the account, eliminating the balance. If the company has done a reasonable job of estimating its predetermined overhead rate, the amount of over- or under-applied overhead will not be large. In this case, the company simply would close the account and adjust the cost of goods sold. For example, suppose a company had 50,000 of actual overhead and applied 48,000 to jobs using a predetermined overhead rate. In this example, the company under-applied overhead by 2,000, the debit balance in the manufacturing overhead account. To close this account, the company makes the following journal entry: debit cost of goods sold for 2,000 and credit manufacturing overhead for 2,000. If the difference is significant, the company should apportion the amount of under- or over-applied overhead among the work-in-process inventory, finished goods inventory and cost of goods sold. This follows from the fact that the use of a predetermined rate results in job costs that differ from their actual costs by the amount of over- or underapplied overhead. Because the work-in-process inventory, finished goods inventory and cost of goods sold reflect the costs of jobs, the company should adjust all these accounts to reflect actual overhead costs. Apportioning costs among these three accounts can be accomplished based on the relative cost recorded in those accounts. Activity-based costing Many companies allocate overhead to jobs using a single overhead rate with an allocation base of direct labour. However, a variety of factors cause overhead costs; Managing Organisational Resources 6/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 allocating costs solely on the basis of labour, or any single allocation base, may seriously distort product costs. Activity-based costing (ABC) is a method of assigning overhead costs to products using a number of different allocation bases. In the ABC approach, the company first identifies the major activities that create overhead costs and then groups these costs into cost pools. By dividing the amount of each cost pool by a measure of its corresponding activity (referred to as a cost driver), the company calculates multiple overhead rates. The company then assigns overhead to a product based on how much of each activity (cost driver) it caused. Examples of cost pools (activities) and cost drivers are shown in Table 1: Activity Receiving Production Material handling Assembly Quality assurance Storage Shipping Cost Driver Number of receipts Machine hours Material handling labour hours Assembly labour hours Quality assurance labour hours Number of items Number of products shipped Table 1: Cost pools and cost drivers A simplified example with only two products and two cost pools illustrates how ABC results in more accurate cost information. Suppose a company produces two products, A and B, and has two major cost pools. The first cost pool is 600,000, and the related driver is the labour cost. The second cost pool is 400,000, and the related driver is the number of set-ups. In the current year, the company expects 200,000 of labour and 40 set-ups. Product A, a high-volume product with annual production of 40,000 units, requires 150,000 of labour and 20 set-ups. Product B, a low-volume product with annual production of only 1,000 units, requires only 50,000 of labour but also requires 20 set-ups. How much cost will the company assign to products A and B if the company uses an ABC system with labour and set-ups as the cost drivers? The overhead rate for labourrelated costs is 3 per 1 of labour (600,000 overhead/200,000 labour cost). The overhead rate for set-up-related costs is 10,000 per set-up (400,000 overhead/40 setups). With these overhead rates, the company assigns product A 650,000 of total overhead (450,000 of labour-related overhead and 200,000 of set-up-related overhead) and product B 350,000 of total overhead (150,000 of labour-related overhead and 200,000 of set-up-related overhead). A traditional approach uses labour cost as the allocation base. Under the traditional approach, the overhead rate would be 5 per 1 of labour (1 million of total overhead/200,000 of total labour cost). Product A would receive an allocation of 750,000, and product B would receive an allocation of 250,000. Managing Organisational Resources 7/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 Note that when the company uses only a single allocation base (labour cost), product A receives a much larger allocation (750,000 versus 650,000 using ABC). The reason is that product A is a high-volume product using a lot of labour, which is the only allocation base for overhead. However, this allocation is not accurate. Much of overhead is due to setting up the production lines. Product A requires no more set-ups than product B and should, therefore, receive the same allocation of those costs. The ABC approach recognises this important fact. With more accurate product cost information, managers can make better product pricing decisions. For example, managers might decide to decrease the price of product A and increase the price of product B. Budgeting A budget is a management tool for both planning and control. It is the plan or standard for the period (month, quarter and/or year), and it requires all organisation units to establish their goals and objectives for the upcoming period. Consequently, a budget is a formal, quantitative expression of management plans. Managers also use the budget as a dashboard or compass to direct their business activities. Finally, management uses the budget as the control device against which it measures its performance. In summary, company managers use budgets in allocating resources, maintaining control and measuring and rewarding progress. A budgeting process may start with developing budgeting directives and assumptions for the period. Managers create a master budget, which contains a variety of supporting budgets that relate to individual financial statements. For example, the sales, cost of goods sold and operating expenses budgets relate to the income statement. The sales budget often drives the forecasted unit-volume and product mixes, which in turn affect the other income statement-related budgets (e.g. the operating expenses budget and the cost of goods sold budget). Managers prepare the direct materials, direct labour and manufacturing overhead budgets based on the volumes and timings in the sales budget and use them to determine the cost of goods sold budget. Example for budgeting Inventories for Computer-Keyboard-Us, a computer keyboard manufacturer company, for 1 April were as follows: Direct material (DM) Work-in-process (WIP) Finished goods (FG) 0 0 0 The company's cost for RM is 2.50 per ten ounces of plastic. However, it expects that cost to increase by 20% in the third quarter. It makes payments for purchases in two consecutive equal payments beginning in the month of purchase. Managing Organisational Resources 8/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 Unit sales in February were 6,400, March 8,000 and April 10,000 units. It estimates sales to increase at a rate of 20% per month thereafter. Sales are made on credit, and the company collects them 10% in the month of sale, 80% the month following the sale and 5% the second month following the sale. It assumes that any remaining balance is uncollectable. Generally, the company desires to end each month with 10% of the next month's requirement for production and materials. Exceptionally, it made no purchases of DM in March. Overhead costs are 100,000 per month and include 20,000 of amortisation. Workers are paid 20 per hour. Workers average 30 minutes per keyboard. It takes 40 ounces of plastic material to make one keyboard. It sells a keyboard for 50. It will purchase new injection plastic machines costing 140,000 in May. A minimum cash balance of 200,000 must be maintained at all times. Unless otherwise indicated, the company pays all expenses as incurred. Practise activity: Prepare a cash budget for the month of May considering Computer-Keyboard-Us ends April with 231,880 cash on hand. Managing Organisational Resources 9/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 Solution: Production Sales + end (10%) - beg. DM: Plastic material (in 10s of ounces) + end (10%) Cost per 10 ounces Sales: increase by 20% per month April 10,000 1,200 11,200 0 11,200 May 12,000 1,440 13,440 1,200 12,240 June 14,400 1,728 16,128 1,440 14,688 April 11,200 *4 May 12,240 *4 June 14,688 *4 44,800 4.896 49,696 48,960 5,875.20 54,835.20 58,752 * 2.50 124,240 * 2.50 124,848 17,280 Cash collections The easiest way to calculate the cash collection is to prepare a schedule of cash collections. Managing Organisational Resources 10/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 Schedule of cash collections Total sales 10% in month 80% next month 5% 2nd month Feb 6,400*50 320,000 32,000 Overhead (OH): Plastic injection machines: TOTAL disbursements: April 10,000*50 500,000 50,000 May 12,000*50 600,000 60,000 256,000 Cash disbursements April Direct labour (DL): 11,200 *.5 5,600 20 112,000 DM: 124,240 *.5 62,120 March 8,000*50 400,000 40,000 320,000 16,000 386,000 400,000 20,000 480,000 May 12,240 *.5 6,120 20 122,400 124,848 *.5 62,424 +62,120 124,544 80,000 (1/2 of April) (100,000-20,000) 140,000 466,944 Cash budget Beg. balance Cash collections Cash available - disbursements DM DL OH Equipment Total disbursements Ending balance May 231,880 480,000 711,880 -124,544 -122,400 - 80,000 -140,000 -466,944 244,936 Managing Organisational Resources 11/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 The sales budget is the foundation of the entire master budget. For example, a company may plan how many products it intends to sell in the next period. Management translates this plan into a detailed sales budget with sales amounts broken down by product line, geographic region, customer and/or sales representative. Once the period passes, managers can compare the budgeted amounts with actual amounts to arrive at variances. Management can then adjust future budgets or take other actions based on this information. Sales Product A Budget (Million) 50 Product B Total Actual (Million) 40 80 130 Variance (Million) 10 Adverse 100 20 Favourable 140 10 Favourable Table 2: Example of a sales budget by product The Table 2 is an example of a sales budget by product. One part of the budget review is variance analysis: actual versus budget/plan. At most companies, responsible managers have to explain significant variances, both under budget and over budget. The capital expenditures budget and the cash budget compose the budgeted balance sheet. The capital expenditures budget is the company's plan to buy additional fixed or long-lived assets during the budget period. The cash budget shows the expected cash inflows and outflows for the budget period. This determines whether a company will need to acquire cash through financing or will have excess cash to invest. The cash budget also relates to the statement of cash flows. Most organisations use a budgeting process to plan, evaluate and control their business activities for a given time period. There are two major types of budgets: static and flexible. The type that an organisation uses depends on factors such as the type of business, the size of the organisation, the organisational structure and its complexity of operations. Organisations create a static budget at the beginning of the budgeted period that is valid only for the one planned level of activity. Companies also design a flexible budget to cover a range of activity and can use it to develop budgeted costs at any point within that range for comparison to actual costs incurred at that point. The flexible budget provides better management control. There is always uncertainty and risk in the budgeting system. Managers cannot predict the future, so budgets often contain amounts that represent the best estimates at the time the managers created the budgets. Budgetary slack is a common term companies use for the practice of purposely setting budgets too high or too low. While managers may use budgetary slack to address uncertainty, when used to excess it often results in inefficient or unplanned shifts in resources. Regardless of these issues, the advantages of budgets are that the following: Managing Organisational Resources 12/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 They compel managers to think ahead by formalising their responsibilities for planning. They provide definite expectations that are the best framework for judging subsequent performance. They aid managers in coordinating their efforts so that the objectives of the organisation as a whole match the objectives of its parts. A number of groups within an organisation use a budget. For example, unit or site managers use budgets to gauge the performance of their operating units and direct business activities within the unit to reach its budgeted goals. The accounting and finance unit use the budget to report the actual financial results of the company. In this way, the company can see how it is doing in achieving its stated goals and objectives. Upper management use the budget to evaluate the performance of operating units, to communicate with investors and lenders, to judge strategic direction and often to set compensation targets. In closing This lecture has covered three diverse chapters on management accounting. You should work through the self-assessment questions, review questions and selected exercises with solutions at the end of the Atrill and McLaney (2013) textbook. Reference: Atrill, P. & McLaney, E. (2013) Accounting and finance for non-specialists. 8th ed. Harlow: Pearson Education. Managing Organisational Resources 13/13 CopyrightLaureate Online Education All rights reserved, 2000-2015. The Module, in all its partssyllabus, guidelines, technical notes, images and any additional materialis copyrighted by Laureate Online Education B.V. Last update: 30 March 2015 For your individual Assignment, you will apply the fundamental concepts of accounting and finance that you are studying to complete several problems indicative to real-world business scenarios and challenges. This time, however, you will focus on some of the budgeting techniques discussed in your Lecture Notes and Learning Resources. With this in mind, you will complete two questions and submit them as you did in the previous week. The answers should be 1000 word as a minimum and should have three peer reviewed or academic references with Harvard style (Bibliography and in-text citation) Q1: Angelo Diaz has decided to go into business selling computer accessories that are popular among university students. He will operate the business in a shopping centre, mostly on weekends. He is trying to organise himself for the start of the first quarter, so he needs to prepare a few budgets. Use the following information in order to help him achieve this goal. Angelo estimates expected sales for January to be 800, February to be 1,200, March to be 2,000 and April to be 3,000. He expects a gross profit ratio of 0.4. He will keep sixty per cent of the next month's sales in the ending finished goods inventory. Angelo will pay himself a monthly salary of 150. He will pay his best friend 60 to help him with miscellaneous errands. He estimates that general operating costs will be 130 monthly. In addition, since his cousin is the owner of the shopping centre where he will locate his store, he will only pay 100 per month in rent. However, he plans to upgrade his space at the shopping centre, which will cost 500, of which 200 will be paid in January and 300 in February. All other costs must be paid for as incurred. He will begin January with 400 in the bank. He expects that forty per cent of sales will be paid for in cash. He expects customers will put the rest on credit and pay in instalments in subsequent months. For the purposes of this assignment, assume the following: 30% will be paid in the month of sale and 10% of people who pay in the month of sale will qualify for a 20% discount. Another 20% will be received the month following the sale and 5% the second month following the sale. 5% of credit sales will never be received. For the purposes of this Assignment, you can also assume the following: Payments for merchandise are made 30% in the month of purchase and 70% the following month. Interest is charged at a rate of 24% per year, and payments of interest only are due at end of each quarter. All loans are borrowed at the very beginning of the month, and payments are made at the very end of the month. Angelo must maintain a minimum cash balance of 1,000. Required: Help Angelo by doing the following: Prepare a schedule of cash receipts for the first quarter. Prepare a schedule of inventory purchases for the first quarter. Prepare a schedule of cash disbursements for the first quarter. Prepare a cash budget for January and February. Calculate how much interest is owed on February 28. Q2: ABC is a company that manufactures a type of docking station for a laptop. You will analyse its income statement for the 2014 fiscal year (shown below). Sales 2,400,000 Variable cost of goods sold 1,680,000 Variable sales commissions 120,000 Contribution margin 600,000 Selling expense 105,000 Sales commissions expense 48,000 Administrative expense 212,000 Net income 235,000 Variable costs per unit are 6. Required: (Round all answers to 2 decimal places.) Calculate break even in pounds. Calculate break even in units. Calculate break even in pounds if the sales price increases by 10% and fixed costs increase by 12,000. Calculate break even in pounds if total sales increase by 10% and fixed costs increase by 10%. Calculate sales (in pounds) to achieve 600,000 after tax (tax rate is 40%). Q3: The table below shows the cost information for Company A and Company B. Company A Company B Variable cost per unit 50 20 Total contribution margin 600,000 700,000 Total sales revenue 1,000,000 1,400,000 600,000 490,000 Fixed costs Required: Using the table above, calculate the following: Selling price per unit for both companies. Break even in pounds for Company A. Break even in units for Company B. Q4: The following table lists jobs and the financial events (actual costs and balances) for a crane company called SAP for the year 2014. Jobs Beginning Balance Total DM cost DLH/unit DM 50,000 ABC 30,000 600 FG 70,000 XYZ 450 WIP 0 20,000 DM: direct material DLH: direct labour hours WIP: work in progress FG: finished goods SAP uses a job order costing system and pays workers at a rate of 20 per hour. It estimates overhead at 1,200,000 and bases it on expected operation activity of 400,000 hours. Both Job ABC and Job XYZ consist of ten cranes. Required: Using the information above, calculate the total cost of each job