Question 5

James Records Ltd owns a chain of 14 shops selling compact discs. At the beginning

of June the business had an overdraft of $35,000 and the bank had asked for this to be

eliminated by the end of November. As a result, the directors have recently decided to

review their plans for the next six months.

The following plans were prepared for the business some months earlier:

May J u ne July August Sept Oct Nov

$000 $000 $000 $000 $000 $000 $000

Sales revenue 180 230 320 250 140 120 110

Purchases 135 180 142 94 75 66 57

Administration expenses 52 55 56 53 48 46 45

Selling expenses 22 24 28 26 21 19 18

Taxation payment 22

Finance payments 5 5 5 5 5 5 5

Shop refurbishment - - 14 18 6 - -

Notes:

1. The inventories level at 1 June was $112 000. The business believes it is preferable

to maintain a minimum inventory level of $40 000 of goods over the period to 30

November.

2. Suppliers allow one month?s credit. The first three month?s purchases are subject

to a contractual agreement, which must be honoured.

3. The gross profit margin is 40%.

4. Cash from all sales is received in the month of sale. However, 50% of customers

pay with a credit card. The charge made by the credit card business to James

Records Ltd is 3% of the sales revenue value. These charges are in addition to the

selling expenses identified above. The credit card business pays James Records Ltd

in the month of sale.

5. The business has a bank loan, which is paying off in monthly instalments of $5

000. The interest element represents 20% of each instalment.

6. Administration expenses are paid when incurred. This item includes a charge of

$15 000 each month in respect of depreciation.

7. Selling expenses are payable in the following month.

Required

a. Prepare a cash budget for the six months ending 30 November which shows the

cash balance at the end of each month.

(12 marks)

b. Compute the inventories levels at the end of each month for the six months to 30

November.

(8 marks)

(Total 20 marks)

MOCK PAPER Semester Two, 2016 ACC6020 Accounting for Managerial Planning and Control Duration 3 Hours Attempt All 5 questions Marks Assessment weighting 65% Type of Examination Closed Book examination. Special Instructions MOCK PAPER There is a total of six pages including the cover sheet. Commence the answers to each question on a new page of the booklet. Clearly write question numbers when providing answers. Calculators may be used. Do not commence the examination until you are told to do so. 1 Question 1 Machine Makers Ltd (MM) makes specialist machinery to customers' specifications. Recently, just as MM completed a particular machine for a customer, it received information that the customer had gone bankrupt with no possibility of any payment to MM being seen as likely. The total contract price was $110,000. The contract specified that payment must be made in stages, as the machine's manufacture progressed. MM had received $60,000 in progress payments for the machine. It is estimated that the machine could be sold, as it stands, for $80,000. Another potential customer has been identified for the machine, but this would require alterations to it. Details of the alterations are as follows: 1 Material A. The required quantity is held in inventories. This cost $6,000 when it was bought. It would cost $6,400 to replace it. The material is hazardous and would cost the business $1,000 to scrap it. The business uses it constantly. 2 Material B. By coincidence the appropriate quantity of this material was ordered recently for another contract that was subsequently abandoned because the material was not delivered in time. MM does not normally use this material and its scrap value is $4,000. The original cost price was agreed at $10,000. Though the contract to buy this material is binding, the supplier will accept $8,000 to compensate for the late delivery. The current market buying price is now $7,000. 3 Material C. Twenty units of this material will be required. This is in general use in the business. An order for 35 units is shortly to be placed for another job. The price for this material is $130 a unit, but the supplier allows a bulk discount of $10 a unit, for the entire order, for orders of 50 units and above. 4 Labour. Fifty hours of labour will be required for the alterations. Labour is a fixed cost to MM, because members of staff are paid in full the normal $12 an hour whether there is work for them to do or not. Twenty hours, of the required 50 hours, can be provided by members of staff who currently have no work to do. Only taking staff off other work can provide the remaining 30 hours. This other work is charged out to customers at $30 an hour. REQUIRED (a) Define the terms 'cost' and 'relevant costs' and describe the type of costs that 'relevant costs' may include. (b) Show, with supporting explanations, the minimum price that MM could charge the customer for the altered machine, such that the shareholders would be no worse off as a result. (4 + 16 = 20 marks) 2 Question 2 Kapil Ltd makes a standard product. The information for the standard product is as follows: Budget information for standard product Price per unit $4.00 Material requirement per unit 0.4 kg Material cost per kg $2.40 Labour cost per hour $8.00 Labour time per unit 6 minutes Monthly fixed overhead $4,800 The output for October was budgeted at 4,000 units. The actual results for October were as follows: Sales revenue (3,500 units) Materials (1,425 kg) Labour (345 hours) Fixed overheads Actual operating profit $13,820 $(3,420) $(2,690) $(4,900) $2,810 No inventories were held at the beginning and the end of October. Required a. Calculate the budgeted profit for October and reconcile it, through variances with the actual profit in as much detail as the information provided will allow. (14 marks) b. State which manager should be held accountable, in the first instance, for each variance calculated. (6 marks) (Total 20marks) 3 Question 3 The Greenbriar plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection $60,000 $180,000 The plant currently applies overhead using direct labour hours and has expected capacity of 20,000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job. Bid prices are calculated as full manufacturing cost plus 40% mark-up. Direct materials Direct labour Machine hours Number of inspections Direct labour hours $1,200 $6,000 300 3 400 The total expected machine hours, for all jobs, during the year is 10,000 and the total number of inspections is 1,500. REQUIRED a. Compute the total cost of the job using direct hours to assign overhead. (4 marks) b. Determine the bid price for the potential job. (2 marks) c. Compute the total cost of the job using activity-based costing and the appropriate cost drivers. (8 marks) d. Prepare a note for the plant manager recommending a bid price for the potential job. Support your recommendation by explaining which method best reflects the actual cost of the job. (6 marks) (Total 20 marks) 4 Question 4 a. Hawke Company sells logs for an average of $18 per log. The company's general manager, Bob, estimates the variable manufacturing and selling costs total $6 per log. Logging operations require substantial investments in equipment, so fixed costs are quite high and total $108,000 per month. Bob is considering making an investment in a new piece of logging equipment that will increase monthly fixed costs by $12,000. Required Assist Bob by calculating the number of additional logs that must be sold to break-even after investing in new equipment. (9 marks) b. Margaret River Company has been approached by a new customer with an offer to purchase 10,000 units of model IJ4 at a price of $4.00 each. The new customer is geographically separated from the company's other customers, and existing sales should not be affected. Margaret River Company normally produces 75,000 units of IJ4 per year but only plans to sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: Direct materials Direct labour Variable overhead Fixed overhead Total $1.50 2.00 1.00 3.25 $7.75 Fixed overhead will not be affected by whether or not the special order is accepted. Required I. What are the relevant costs and benefits of the two alternatives (accept or reject the special order)? (9 marks) II. By how much will operating income increase or decrease if the order is accepted? (2 marks) (Total 18 marks) 5 Question 5 James Records Ltd owns a chain of 14 shops selling compact discs. At the beginning of June the business had an overdraft of $35,000 and the bank had asked for this to be eliminated by the end of November. As a result, the directors have recently decided to review their plans for the next six months. The following plans were prepared for the business some months earlier: May June July August Sept Oct Nov $000 $000 $000 $000 $000 $000 $000 Sales revenue 180 230 320 250 140 120 110 Purchases 135 180 142 94 75 66 57 Administration expenses 52 55 56 53 48 46 45 Selling expenses 22 24 28 26 21 19 18 Taxation payment 22 Finance payments 5 5 5 5 5 5 5 Shop refurbishment 14 18 6 Notes: 1. The inventories level at 1 June was $112 000. The business believes it is preferable to maintain a minimum inventory level of $40 000 of goods over the period to 30 November. 2. Suppliers allow one month's credit. The first three month's purchases are subject to a contractual agreement, which must be honoured. 3. The gross profit margin is 40%. 4. Cash from all sales is received in the month of sale. However, 50% of customers pay with a credit card. The charge made by the credit card business to James Records Ltd is 3% of the sales revenue value. These charges are in addition to the selling expenses identified above. The credit card business pays James Records Ltd in the month of sale. 5. The business has a bank loan, which is paying off in monthly instalments of $5 000. The interest element represents 20% of each instalment. 6. Administration expenses are paid when incurred. This item includes a charge of $15 000 each month in respect of depreciation. 7. Selling expenses are payable in the following month. Required a. Prepare a cash budget for the six months ending 30 November which shows the cash balance at the end of each month. (12 marks) b. Compute the inventories levels at the end of each month for the six months to 30 November. (8 marks) (Total 20 marks) END OF EXAMINATION 6