(Management Accounting)
- Recommend all the calculations are done using Excel Spreadsheet
(45 marks) Case - Food Truck Business You and your best friend recently graduated with a business diploma. Both of you have similar interest to start a business. Both of you have interest in food since young, Right after graduation you and your future business partner did some market research on the food industry and found out that one of the fastest growing segment in the food industry is the food truck segment which attracts mostly the young professionals and college students. Research shown that this particular market segment have the spending power and is willing to spend on quality, fast serving, and healthy food. You and your partner decided to start a food truck business offering quick and healthy burgers targeted at the young adult market. Due to the high risk and very competitive market segment the partners decided, for the initial launch, to offer 2 items on the menu. The decision to limit the offering to two items is because it is easier to manage and more importantly maintain the quality of food to ensure that first time customers will have a pleasant experience and hope it will encourage repeat purchase. If the business goes well in the first three months, the plan is to gradually increase the number of items to the menu. Below are descriptions of the two items that will be offered: 1. Sesame Bun Burger (SBB) - 80 g quality beef pattie wrapped with two toasted whole wheat bread, topped with fresh lettuce, tomato, cheddar cheese, and special sauce served with french fries and carbonated soft drinks. 2. Soy Burger (SB) - 100g of soya based pattie wrapped with two thick slices of sour dough bread and topped with sauted button mushroom served with sweet potato chips and iced green tea. Below are forecasted cost data: I. Initial start-up costs: A Food truck: i. Purchase food truck for RM70.000, paid RM10,000 cash and taking RM60,000 loan from Small and Medium Enterprise (SME) program with an interest of 6% per annum with monthly interest payment. ii. Estimated truck life 7 years with salvage value of RM20,000 iii. Straight line depreciation B. Lap top computer with business programs: i. Purchase price - RM3,600; paid cash ii. Estimated life - 3 years with no salvage value iii. Straight-line depreciation II. Standard raw material cost per serving Bread Toppings Fries Menu Sesame Bun Burger (SBB) Soy Burger (SB) Pattie RM3.00 RM1.50 RMD 50 RM080 RM1.50 RM1.50 Packaging R0.20 RM0 20 Drinks RMOL50 RM0,50 RM1.00 RM1.00 Page 2 of 6 III Budgeted monthly fixed operating costs: Budgeted Fixed Operating Cost Per Month Activities Operating Costs Advertising RM 50.00 Local council business permit RM 80.00 Gas RM 200.00 Food truck maintenance RM 200.00 Petrol RM 200.00 Utilities RM 100.00 Food truck loan - interest payment RM ? Worker salary* RM 4,000.00 Food truck depreciation expense RM ? Computer depreciation expense RM ? *worker costs - the whole operation will be managed by the two partners whom will be paid a monthly salary of RM 2,000. Besides the monthly salary, the two partners will also share profit earned A. Product Costing & Pricing (10 marks) Below is the forecasted monthly demand for the first three months: Menu 1. Sesame Bun Burger (SBB) 2. Soy Burger (SB) Total units per month Forecasted Sales Units Month #1 Month #2 Month #3 1050 1176 1330 450 504 570 1500 1680 1900 Required: 1. Calculate the full absorption cost of each of the product. Monthly fixed overhead will be allocated to each product based on estimated units sold (you can use monthly cost and demand data to estimate unit costs). 11 Determine the price of each product based on 50% cost mark-up. III Prepare pro forma contribution margin income statement for each product for the first 3 months. Page 3 of 6 B. Budgeting (12 marks) 1. Prepare a monthly raw material purchase budget for the first 3 months. Below is information about raw materials purchase: To maintain the quality and freshness, raw materials are purchased every week (assume 4 weeks in a month). . Due to weekly fluctuating demand, the partners planned to have a 10% minimum reserve (desired ending raw material inventory) of raw materials to anticipate any unexpected surge in weekly demand. II. Prepare a monthly raw material purchase payment schedule. Below is information about raw materials purchase: All purchases are channelled through reliable suppliers who allowed Y&M 7 days credit III. Prepare cash budget for the first 3 months of operations. Below are cash receipts and payments information: All sales are cash basis Monthly operating expenses are paid in full in the month it is incurred. Monthly principle cash repayment for truck loan - RM714/month Paid cash, RM3600 for purchase of computer at the start of the business. Truck loan interest incurred in the month will be paid at the end of the month. If there is a cash deficit for the month, business will borrow to cover the deficit at the beginning of the month at 12% interest per annum; interest will be paid on a monthly basis (interest incurred in the month of outstanding loan will be paid the beginning of the following month. Business want to maintain a minimum cash balance of RM 1,000, Partners planned to start the business with RM1,000 cash. IV. You and your partner decided to adopt cost mark-up method to set price (Cost/unit calculated in Part A). Calculate the price of each product based on 50% mark-up and prepare a monthly pro forma Profit & Loss Statement for each product. C. Cost Control (8 marks) The partners believed that controlling cost is critical to their long term profitability. The following are budgeted and actual activities and cost for the first month of business SBB SB Budget 1050 Actual 990 Budget 450 Actual 475 Units Page 4 of 6 RM Pattie Bread Toppings Fries Packaging Drinks O/H RM RM RM RM RM RM RM 3,150 525 1,575 840 210 525 4,074 RM RM RM RM 3.100 520 1,550 800 200 500 4.014 RM RM RM 675 450 675 450 RM RM RM RM RM RM RM 730 490 720 455 96 250 1.746 RM RM RM RM RM 90 225 1,746 RM Required: 1. Prepare a cost performance report for the first month of operation (Compare actual costs with flexible budgeted costs). II. Discuss the possible causes for significant costs variances (favourable and unfavourable) and recommend correction actions to rectify the costs variances. D. Short-term Profit Planning - Cost Volume Profit Analysis (15 marks). After the first three months of operations, forecast sales for the coming Month #4 expected to be low due to the period after personal income tax filling. Potential customers are expected to cut down on eating out for the month of April. April Expected Sales Data Menu 1. Sesame Bun Burger (SBB) 2. Soy Burger (SB) Total servings Expected Sales (units) 900 386 1,286 Price/unit RM 15.57 RM 14.37 Required: 1. Although total expected sales will be lower, expect the sales mix for its 2 items will remain the same as the first 3 months expected sales volume. Calculate how many units SBB and SB to break-even for the coming Month #4. Assuming the costs do not change. II. Estimate how many of each product you need to sell if your target before tax profit for Month #4 is RM 5,000 (assuming your business exempted from tax for the first year). III. Due to the lower expected sales for Month #4, the partners intend to run a promotion event to capture new customers from other food vendors. The promotion is "buy any three (3) servings get one (1) free servings of the lower priced item". With the promotion forecasted combine sales will increase from 1,286 combine paid servings to 1,886 combine paid servings (excluding the free serving). Do you recommend to the partners to go ahead with the "buy 3 get 1 free" promotion? Support your decision with cost/benefit analysis. Note: You can use the "with/without" income comparison approach or the incremental benefit/costs approach). Page 5 of 6 IV. When applying the concept of "Cost-Volume-Profit" analysis for multiple products. certain assumptions have to be considered. Describe these assumptions and explain why these assumptions are important in assisting managers in short-term decision making Page 6 of 6 (45 marks) Case - Food Truck Business You and your best friend recently graduated with a business diploma. Both of you have similar interest to start a business. Both of you have interest in food since young, Right after graduation you and your future business partner did some market research on the food industry and found out that one of the fastest growing segment in the food industry is the food truck segment which attracts mostly the young professionals and college students. Research shown that this particular market segment have the spending power and is willing to spend on quality, fast serving, and healthy food. You and your partner decided to start a food truck business offering quick and healthy burgers targeted at the young adult market. Due to the high risk and very competitive market segment the partners decided, for the initial launch, to offer 2 items on the menu. The decision to limit the offering to two items is because it is easier to manage and more importantly maintain the quality of food to ensure that first time customers will have a pleasant experience and hope it will encourage repeat purchase. If the business goes well in the first three months, the plan is to gradually increase the number of items to the menu. Below are descriptions of the two items that will be offered: 1. Sesame Bun Burger (SBB) - 80 g quality beef pattie wrapped with two toasted whole wheat bread, topped with fresh lettuce, tomato, cheddar cheese, and special sauce served with french fries and carbonated soft drinks. 2. Soy Burger (SB) - 100g of soya based pattie wrapped with two thick slices of sour dough bread and topped with sauted button mushroom served with sweet potato chips and iced green tea. Below are forecasted cost data: I. Initial start-up costs: A Food truck: i. Purchase food truck for RM70.000, paid RM10,000 cash and taking RM60,000 loan from Small and Medium Enterprise (SME) program with an interest of 6% per annum with monthly interest payment. ii. Estimated truck life 7 years with salvage value of RM20,000 iii. Straight line depreciation B. Lap top computer with business programs: i. Purchase price - RM3,600; paid cash ii. Estimated life - 3 years with no salvage value iii. Straight-line depreciation II. Standard raw material cost per serving Bread Toppings Fries Menu Sesame Bun Burger (SBB) Soy Burger (SB) Pattie RM3.00 RM1.50 RMD 50 RM080 RM1.50 RM1.50 Packaging R0.20 RM0 20 Drinks RMOL50 RM0,50 RM1.00 RM1.00 Page 2 of 6 III Budgeted monthly fixed operating costs: Budgeted Fixed Operating Cost Per Month Activities Operating Costs Advertising RM 50.00 Local council business permit RM 80.00 Gas RM 200.00 Food truck maintenance RM 200.00 Petrol RM 200.00 Utilities RM 100.00 Food truck loan - interest payment RM ? Worker salary* RM 4,000.00 Food truck depreciation expense RM ? Computer depreciation expense RM ? *worker costs - the whole operation will be managed by the two partners whom will be paid a monthly salary of RM 2,000. Besides the monthly salary, the two partners will also share profit earned A. Product Costing & Pricing (10 marks) Below is the forecasted monthly demand for the first three months: Menu 1. Sesame Bun Burger (SBB) 2. Soy Burger (SB) Total units per month Forecasted Sales Units Month #1 Month #2 Month #3 1050 1176 1330 450 504 570 1500 1680 1900 Required: 1. Calculate the full absorption cost of each of the product. Monthly fixed overhead will be allocated to each product based on estimated units sold (you can use monthly cost and demand data to estimate unit costs). 11 Determine the price of each product based on 50% cost mark-up. III Prepare pro forma contribution margin income statement for each product for the first 3 months. Page 3 of 6 B. Budgeting (12 marks) 1. Prepare a monthly raw material purchase budget for the first 3 months. Below is information about raw materials purchase: To maintain the quality and freshness, raw materials are purchased every week (assume 4 weeks in a month). . Due to weekly fluctuating demand, the partners planned to have a 10% minimum reserve (desired ending raw material inventory) of raw materials to anticipate any unexpected surge in weekly demand. II. Prepare a monthly raw material purchase payment schedule. Below is information about raw materials purchase: All purchases are channelled through reliable suppliers who allowed Y&M 7 days credit III. Prepare cash budget for the first 3 months of operations. Below are cash receipts and payments information: All sales are cash basis Monthly operating expenses are paid in full in the month it is incurred. Monthly principle cash repayment for truck loan - RM714/month Paid cash, RM3600 for purchase of computer at the start of the business. Truck loan interest incurred in the month will be paid at the end of the month. If there is a cash deficit for the month, business will borrow to cover the deficit at the beginning of the month at 12% interest per annum; interest will be paid on a monthly basis (interest incurred in the month of outstanding loan will be paid the beginning of the following month. Business want to maintain a minimum cash balance of RM 1,000, Partners planned to start the business with RM1,000 cash. IV. You and your partner decided to adopt cost mark-up method to set price (Cost/unit calculated in Part A). Calculate the price of each product based on 50% mark-up and prepare a monthly pro forma Profit & Loss Statement for each product. C. Cost Control (8 marks) The partners believed that controlling cost is critical to their long term profitability. The following are budgeted and actual activities and cost for the first month of business SBB SB Budget 1050 Actual 990 Budget 450 Actual 475 Units Page 4 of 6 RM Pattie Bread Toppings Fries Packaging Drinks O/H RM RM RM RM RM RM RM 3,150 525 1,575 840 210 525 4,074 RM RM RM RM 3.100 520 1,550 800 200 500 4.014 RM RM RM 675 450 675 450 RM RM RM RM RM RM RM 730 490 720 455 96 250 1.746 RM RM RM RM RM 90 225 1,746 RM Required: 1. Prepare a cost performance report for the first month of operation (Compare actual costs with flexible budgeted costs). II. Discuss the possible causes for significant costs variances (favourable and unfavourable) and recommend correction actions to rectify the costs variances. D. Short-term Profit Planning - Cost Volume Profit Analysis (15 marks). After the first three months of operations, forecast sales for the coming Month #4 expected to be low due to the period after personal income tax filling. Potential customers are expected to cut down on eating out for the month of April. April Expected Sales Data Menu 1. Sesame Bun Burger (SBB) 2. Soy Burger (SB) Total servings Expected Sales (units) 900 386 1,286 Price/unit RM 15.57 RM 14.37 Required: 1. Although total expected sales will be lower, expect the sales mix for its 2 items will remain the same as the first 3 months expected sales volume. Calculate how many units SBB and SB to break-even for the coming Month #4. Assuming the costs do not change. II. Estimate how many of each product you need to sell if your target before tax profit for Month #4 is RM 5,000 (assuming your business exempted from tax for the first year). III. Due to the lower expected sales for Month #4, the partners intend to run a promotion event to capture new customers from other food vendors. The promotion is "buy any three (3) servings get one (1) free servings of the lower priced item". With the promotion forecasted combine sales will increase from 1,286 combine paid servings to 1,886 combine paid servings (excluding the free serving). Do you recommend to the partners to go ahead with the "buy 3 get 1 free" promotion? Support your decision with cost/benefit analysis. Note: You can use the "with/without" income comparison approach or the incremental benefit/costs approach). Page 5 of 6 IV. When applying the concept of "Cost-Volume-Profit" analysis for multiple products. certain assumptions have to be considered. Describe these assumptions and explain why these assumptions are important in assisting managers in short-term decision making Page 6 of 6
