Question 1 Tokyo Ltd manufactures one product; ZYX. The financial director of Tokyo Ltd has asked for your assistance in producing the cash budget for the month of June 20X1. The sales and production budgets for the months of April, May, and June 20X1 have already been prepared and you are provided with the following data: April May June Quarter Sales budget (unit) 200,000 225,000 250,000 675,000 Production budget (unit) 227,500 252,500 277,500 757,500 The following additional information has also been provided to you: . Each unit of ZYX requires 2 kg of materials and incurs 30 minutes of direct labour to be completed. The cost price of materials is 0.50 per kg while direct labour is paid at the rate of 12 per hour. All of the firm's direct labour are on zero-hour contracts. Variable production overheads are incurred in direct proportion to number of direct labour hours worked and the rate is 1.20 per direct labour hour. Monthly fixed production overheads are 12,000, including a fixed depreciation charge of 1,000 for machinery and equipment. Other fixed administration and selling overheads are 2,000 per month. Tokyo Ltd pays for its purchases of materials one month after the purchase. . Wages for labour are paid in the month they are incurred. All of the fixed overheads (production, administration and selling) are paid for one month in arrears, i.e., the following month. Half of the variable production overheads are paid in the month incurred and the remainder the following month. Tokyo Ltd sells each unit of ZYX at 10. 30% of its customers pay the month following their purchases. Another 30% take two months to pay and the remainder is on a cash basis. Tokyo Ltd allows a 5% cash discount on all its cash sales and it does not anticipate any bad debt in the foreseeable future. Required: (a) Prepare Tokyo's cash budget for the month June 20X1. Assume the firm will have a cash balance of 90,000 on 1st of June 20X1. (10 marks) (b) Describe the main objective of a cash budget. (5 marks) (Total 15 marks) Question 2 Rome Ltd, a premium food manufacturer, uses a variance analysis system to monitor its performance. The company operates a standard costing system and manufactures one product, ZzII. The market for the purchase of materials and the sales of product Zzil has been, and is expected to be, stable. The company is currently reviewing operations of its various departments for the month of March 20X1. The following standard revenue and cost data per unit of product ZZII for the month of March 20X1 is available: Selling price 40 Direct materials 4 kg at 3 per kg Direct labour 1.5 hours at 10 per hour Budgeted production and sales for March 20X1 were 12,000 units of product ZZII. Fixed production overheads for the month March 20X1 were expected to be 40,000. Actual data for March 20X1 was as follows: Sales and production - 10,500 units of ZZll were produced and sold for 378,000 Direct materials - 52,500 kg were used at a cost of 105,000 Direct labour employees worked for 10,500 hours at a cost of 126,000 Fixed production overheads for March 20X1 were 41,000. The following decisions were also made for the month March 20X1: The production manager suggested that employee morale is poor, and she feels they should do something about it. She suggested to increase the wage rate. Following this suggestion, the company increased the wage rate to 12 per hour. This means in March 20X1, employees were paid at the rate of 12 per hour. To save the company in purchasing costs, the purchasing manager started purchasing the required quantity of materials from a new supplier which offered materials at a lower price. Required: (a) Calculate the following variances: Sales price and volume variances Material price and usage variances Labour rate and efficiency variances Fixed production overhead variance You should state clearly whether a variance is favourable (F) or adverse (A). (7 marks) (b) Using the variances calculated in part (a) and the information provided, comment on the performance of the company as a whole and its departments and reach a conclusion as to whether or not they have performed well. (11 marks) Question 3 London Ltd is a small specialist manufacturer of electronic components and much of its output is used by the makers of aircraft for both civil and military purposes. One of the few aircraft manufacturers has offered a contract to London Ltd for the supply, over the next 12 months, of 800 identical components. The data relating to the production of components is as follows: Material requirements per component 6 kg material MM1 (see note 1 below) 4 kg material PP2 (see note 2 below) 2 parts no. 687 (see note 3 below) Note 1: material MM1 is in continuous use by the company. 2,000 kg are currently held in stock at a book value of 4.70 per kg but it is known that future purchases will cost 5.50 per kg. Note 2: 4,400 kg of material PP2 are held in stock. The original cost of this material was 4.30 per kg but, as the material has not been required for the last two years, it has been written down to 1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for material PP4 (in current use), but this would involve further processing costs of 1.60 per kg. The current cost of material PP4 is 3.60 per kg. Note 3: It is estimated that part no. 687 could be bought for 50 each. Labour requirements Each component would require 10 hours of skilled labour. Employees possessing the necessary skills are available and are currently paid 12 per hour. A replacement would, however, have to be obtained at a rate of 13 per hour for the work which would otherwise be done by the skilled employees. Each component would require 10 hours of semi-skilled labour. The current rate for semi-skilled work is 10 per hour and additional employees could be appointed for this work. Overheads If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by 3,200. A price of 420 per component has been suggested by a large company which makes aircraft. London Ltd considers charging the same price. Required: (a) State whether or not the contract should be accepted and support your conclusion with appropriate figures for presentation to management. (10 marks) (b) Comment on the main factors which management ought to consider, and which may influence their decision. (7 marks) (Total 17 marks) Question 4 In decision making, full (absorption) costing approach has become entirely useless as it leads to wrong decisions. Critically discuss the above statement, provide examples to support your discussion