Part I ? Budgeting, Standard Costing and Variance Analysis (45 marks)

Celebration Inc. manufactures and distributes assorted juices throughout Latin America.

Three (3) ounces of secret ingredient [XK3] is needed to produce each unit of CeleJuice, one of the company?s products.The company is planning raw material needs for the 3^rd quarter (important as it is the quarter where CeleJuice sales is at its peak.

The company has the following inventory requirements:

a.Finished goods inventory on hand at the end of each month must be equal to 3,750 bottles of CeleJuice, plus 20% of the next month?s sales.

b.The finished Goods inventory on June 30^th is budgeted to be 12,500 units.

c.The company does not maintain an inventory of work-in-progress.

d.The raw materials inventory on hand at the end of each month must be equal to one-half of the following month?s production needs for raw materials.

e.The raw material inventory on June 30^th is budgeted to be 67,500 ounces of [XK3].

Budgeted Sales units:

July

43,750

August

50,000

September

62,500

October

37,500

November

25,000

December

12,500

Required:

1.Prepare a production budget for CeleJuice for the months of July to October.(10 Marks)

2.Based on the production budget you prepared in part 1, explain why the company will produce more units than it sells in July and August, and fewer than it sells in September and October. (4 Marks)

5. Collectors Paradise is a retailer that sells stationery and office supplies.The company is planning its cash needs for the third quarter.Historically, Collector?s has had to borrow money during the third quarter to support peak sales of its products, which occur during August.

The following information has been assembled to assist in preparing a cash budget for the quarter.

i.Budgeted monthly (absorption costing) income statements for July to October are:

July

August

September

October

Sales

$40,000

$70,000

$50,000

$45,000

Cost of Goods sold

24,000

42,000

30,000

27,000

Gross Margin

16,000

28,000

20,000

18,000

Selling & Admin Exps:

Selling expense

7,200

11,700

8,500

7,300

Administrative expense

5,600

7,200

6,100

5,900

Total S&A expenses

12,800

18,900

14,600

13,200

Net Operating Income

$ 3,200

$ 9,100

$ 5,400

$ 4,800

*Includes $2,000 depreciation each month

ii.Sales are 20% cash and 80% credit.

iii.Credit sales are collected over a three-month period, with 10% collected in the month of sale, 70% I the month following sale, and 20% in the second month following the sale.May sales totaled $30,000, and June sales totaled $36,000.

iv.Inventory purchases are paid for within 15 days.Therefore, 50% of a month?s inventory purchases are paid for in the month of purchase.The remaining 50% is paid in the following month.Accounts payable for inventory purchases at June 30 total $11,700.

v.The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month.The merchandise inventory at June 30 is $18,000.

vi.Land costing $4,500 will be purchased in July.

vii.Dividends of $1,000 will be declared and paid in September.

viii.The cash balance on June 30 is $8,000; the company must maintain a cash balance of at least this amount at the end of each month

ix.The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000.The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded.The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. (20 marks)

6.Academy Associates is reeling from a decline in profits because of competition. For its most recent year end, its financial controller has prepared following variance analysis and concluded that the company has done very well controlling its costs:

BudgetedActualVariance

Variable costs:

Professional Labour$1,000,000$ 940,000$60,000F

Travel50,00040,00010,000F

Supplies100,00090,00010,000F

Fixed Costs:

Professional Labour400,000 405,000(5,000)U

Facilities Cost250,000 265,000(15,000)U

Insurance80,00078,0002,000F

Totals$1,880,000$1,818,000$62,000F

For the year Academy Associates projected (budgeted) that it would generate $2,000,000 in revenues; it generated $1,800,000. In this case sales ($) are the activity. The company has consulted with you for help in understanding what is happening.You decide to address the following items.

Required:

a)What is the major weakness in the report above and, how do you recommend addressing it? (2 marks)

b)Recast the report (using a flexible budget instead of the static one presented) to enable a more meaningful way to enable cost control evaluation. (2 marks)

c)Academy Associates uses a management by exception philosophy.Use the report you prepared in (b) above to identify and explain which costs are likely to receive additional (2 marks)

Part 2 :

1.Hendricks Pizzeria is considering the purchase of a new Oven to replace a machine that was purchased several years ago. Selected information on the two machines is given below:

Old

New

Machine

Machine

Original cost when new

$80,000

$85,000

Accumulated depreciation to date

$32,000

---

Current salvage value

$26,000

---

Annual operating cost

$ 4,000

$ 3,000

Remaining useful life

4 years

4 years

Required:

Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years.

Assume that neither machine will have any salvage value at the end of four years.

(Ignore the time value of money in this problem.) (5 marks)

2.Dumont Co. normally produces and sells 30,000 units of Red-6 each month. Red-6 is a small electrical relay used in the automotive industry as a component part in various products. Selling price is $22 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $30,000 per month.

A major customer (one of the leading purchasers of Red-6) due to internal problems has reduced its usual order to only 8,000 units.Dumont projects that the problems will last for two months, after which time sales of Red-6 should return to normal.Due to the current low-level sales, Dumont is considering closing its factory for the two months.

If Dumont closes the factory, it is estimated that Fixed Manufacturing Overhead costs can be reduced to $105,000 per month and that fixed selling costs can be reduced by 10%.Startup costs at the end of the shutdown period would total $8,000.Dumont uses JIT production methods and no inventories are on hand.

Required:

Assume that the problems continue for two months, as projected, would you recommend that Dumont Co. close its own plant? (Show computations in good form.)

(10 marks)

3.Holt Channing has proposed to the Board of Directors (BOD) that the company [Holt & Co.] should cease producing their own drums and instead outsource it.He believes that by manufacturing the drum inhouse the company is incurring more cost than if they were to outsource the drum.Specifically, at least one supplier has offered to provide the drums at a cost of $36 per drum. On the other hand, [Holt & Co], current cost of manufacturing one drum (based on 120,000 drums per year) is $46 broken down as follows:

Direct Material

$20.70

Direct Labor

12.00

Variable Overhead

3.00

Fixed Overhead ($5.60 being general company o/h, $3.20 is depreciation and $1.50 is supervision)

10.30

Total cost per drum

$46.00

The company uses 120,000 drums annually and would therefore save approximately $600,000 on an annual basis. Since the equipment being used to make the drums must be replaced (at a cost of $1,620,000, it has a 6-year useful life and no salvage value) if they are to continue making the drum inhouse.Alternatively, they can outsource the drums from the supplier at $36 each under a 6-year contract.

The BOD has been asked to decide whether to purchase new equipment or outsource the drums.

Required:

What are five (5) factors (other than the financial implications) that the company should consider in making their decision? (10 marks)

Management Accounting FINA 6014 Graded Assignment #2 Summer 2017 This assignment is comprised by 2 sections and is worth a maximum of 10% of total course grade. Students must complete all sections to obtain full credit. Submissions must be typed. . There are no extensions or make-up questions available for this assignment. Due Date: July 28th, 2017 by 11:00pm Please submit electronically into the Graded Assignment #2 file folder in the FOL dropbox. Evaluation: Section Part 1 - Chapter 7 & 11 Budgeting, and Budget Variance Analysis Part 2 - Chapter 9 Relevant Costing Mark Possible Short Answer questions and Comprehensive Problems Short Answer questions and Comprehensive Problems Total 45 30 75 Page 1 Mark Received Part I - Budgeting, Standard Costing and Variance Analysis (45 marks) 1. What is a budget? (1 mark) A budget is a key tool in the budgeting process. It is quantitative plan for acquiring and using financial and other resources. It is a medium to communicate-quantitativelymanagement's objectives for sales, production, purchasing, distribution, and financing activities. It is also the instrument that guides and coordinates the firm's activities among all of these areas. 2. What is the principle purpose of a cash budget? (2 marks) 3. Name four major benefits to be gained from budgeting. (2 marks) 4. Celebration Inc. manufactures and distributes assorted juices throughout Latin America. Three (3) ounces of secret ingredient [XK3] is needed to produce each unit of CeleJuice, one of the company's products. The company is planning raw material needs for the 3rd quarter (important as it is the quarter where CeleJuice sales is at its peak. The company has the following inventory requirements: a. Finished goods inventory on hand at the end of each month must be equal to 3,750 bottles of CeleJuice, plus 20% of the next month's sales. b. The finished Goods inventory on June 30th is budgeted to be 12,500 units. c. The company does not maintain an inventory of work-in-progress. d. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month's production needs for raw materials. e. The raw material inventory on June 30th is budgeted to be 67,500 ounces of [XK3]. Budgeted Sales units: July August September October 43,750 50,000 62,500 37,500 Page 2 November December 25,000 12,500 Required: 1. Prepare a production budget for CeleJuice for the months of July to October. (10 Marks) 2. Based on the production budget you prepared in part 1, explain why the company will produce more units than it sells in July and August, and fewer than it sells in September and October. (4 Marks) 5. Collectors Paradise is a retailer that sells stationery and office supplies. The company is planning its cash needs for the third quarter. Historically, Collector's has had to borrow money during the third quarter to support peak sales of its products, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter. i. Budgeted monthly (absorption costing) income statements for July to October are: July August Sales $40,000 $70,000 Cost of Goods sold 24,000 42,000 Gross Margin 16,000 28,000 Selling & Admin Exps: Selling expense 7,200 11,700 Administrative expense 5,600 7,200 Total S&A expenses 12,800 18,900 Net Operating Income $ 3,200 $ 9,100 *Includes $2,000 depreciation each month September $50,000 30,000 20,000 October $45,000 27,000 18,000 8,500 6,100 14,600 $ 5,400 7,300 5,900 13,200 $ 4,800 ii. Sales are 20% cash and 80% credit. iii. Credit sales are collected over a three-month period, with 10% collected in the month of sale, 70% I the month following sale, and 20% in the second month following the sale. May sales totaled $30,000, and June sales totaled $36,000. iv. Inventory purchases are paid for within 15 days. Therefore, 50% of a month's inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable for inventory purchases at June 30 total $11,700. v. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,000. vi. Land costing $4,500 will be purchased in July. vii. Dividends of $1,000 will be declared and paid in September. viii. The cash balance on June 30 is $8,000; the company must maintain a cash balance of at least this amount at the end of each month Page 3 ix. The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. (20 marks) 6. Academy Associates is reeling from a decline in profits because of competition. For its most recent year end, its financial controller has prepared following variance analysis and concluded that the company has done very well controlling its costs: Variable costs: Professional Labour Travel Supplies Fixed Costs: Professional Labour Facilities Cost Insurance Totals Budgeted Actual Variance $1,000,000 50,000 100,000 $ 940,000 40,000 90,000 $ 60,000 10,000 10,000 F F F 400,000 250,000 80,000 $1,880,000 405,000 265,000 78,000 $1,818,000 (5,000) (15,000) 2,000 $ 62,000 U U F F For the year Academy Associates projected (budgeted) that it would generate $2,000,000 in revenues; it generated $1,800,000. In this case sales ($) are the activity. The company has consulted with you for help in understanding what is happening. You decide to address the following items. Required: a) What is the major weakness in the report above and, how do you recommend addressing it? (2 marks) Page 4 b) Recast the report (using a flexible budget instead of the static one presented) to enable a more meaningful way to enable cost control evaluation. (2 marks) c) Academy Associates uses a management by exception philosophy. Use the report you prepared in (b) above to identify and explain which costs are likely to receive additional (2 marks) Part II - Relevant Costing (30 marks) 1. What is a relevant cost? (1 mark) 2. Define incremental cost, opportunity cost and sunk cost and identify which of these costs are relevant? (3 marks) 3. \"All future costs are relevant in decision making\". Do you agree with the statement? Why/why not? (1 mark) Page 5 4. Hendricks Pizzeria is considering the purchase of a new Oven to replace a machine that was purchased several years ago. Selected information on the two machines is given below: Original cost when new Accumulated depreciation to date Current salvage value Annual operating cost Remaining useful life Old Machine $80,000 $32,000 $26,000 $ 4,000 4 years New Machine $85,000 ----$ 3,000 4 years Required: Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years. Assume that neither machine will have any salvage value at the end of four years. (Ignore the time value of money in this problem.) (5 marks) 5. Dumont Co. normally produces and sells 30,000 units of Red-6 each month. Red-6 is a small electrical relay used in the automotive industry as a component part in various products. Selling price is $22 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $30,000 per month. A major customer (one of the leading purchasers of Red-6) due to internal problems has reduced its usual order to only 8,000 units. Dumont projects that the problems will last for two months, after which time sales of Red-6 should return to normal. Due to the current low-level sales, Dumont is considering closing its factory for the two months. If Dumont closes the factory, it is estimated that Fixed Manufacturing Overhead costs can be reduced to $105,000 per month and that fixed selling costs can be reduced by 10%. Startup costs at the end of the shutdown period would total $8,000. Dumont uses JIT production methods and no inventories are on hand. Required: Assume that the problems continue for two months, as projected, would you recommend that Dumont Co. close its own plant? (Show computations in good form.) (10 marks) Page 6 6. Holt Channing has proposed to the Board of Directors (BOD) that the company [Holt & Co.] should cease producing their own drums and instead outsource it. He believes that by manufacturing the drum inhouse the company is incurring more cost than if they were to outsource the drum. Specifically, at least one supplier has offered to provide the drums at a cost of $36 per drum. On the other hand, [Holt & Co], current cost of manufacturing one drum (based on 120,000 drums per year) is $46 broken down as follows: Direct Material Direct Labor Variable Overhead Fixed Overhead ($5.60 being general company o/h, $3.20 is depreciation and $1.50 is supervision) Total cost per drum $20.70 12.00 3.00 10.30 $46.00 The company uses 120,000 drums annually and would therefore save approximately $600,000 on an annual basis. Since the equipment being used to make the drums must be replaced (at a cost of $1,620,000, it has a 6-year useful life and no salvage value) if they are to continue making the drum inhouse. Alternatively, they can outsource the drums from the supplier at $36 each under a 6-year contract. The BOD has been asked to decide whether to purchase new equipment or outsource the drums. Required: What are five (5) factors (other than the financial implications) that the company should consider in making their decision? (10 marks) Page 7