Section 2: Budgeting Systems and Variance Analysis 25 marks

Part 1 10 marks

The manager ofThe Bookstoreis updating their budget for the upcoming two months, November and December. The following information is available:

• The following balances are expected for the end of this month (31 October): cash $140,000; accounts receivable $220,000, accounts payable $80,000 and unpaid expenses $15,000. The manager separately estimated that 90% of the amount outstanding from customers at the end of this month is to be collected in November and the remainder uncollectable.
• 60% of monthly sales are on credit. Typically receipts from credit customers are approximately 50% in the month of sale, 48% in the month following the sale, and the remainder is uncollectable.
• Projected balances for the next two months are as follows:

	November	December
Sales revenue	370,000	374,000
Purchases	128,000	130,000
Other expenses	25,000	26,000
Salaries	60,000	60,000
Depreciation	10,000	10,000

• The Bookstorehas placed an order for new furniture in November that will cost $40,000. The scheduled payment date is in January next year.
• 40% of goods purchased are paid for in the month of purchase and the remaining is paid in the following month.
• Salaries are paid before the end of each month. 50% of other monthly expenses are paid for in the month incurred and the remainder paid in the following month.

Required:

Prepare the schedule of cash payments for November and December. (10 marks)

Part 2 15 marks

Half Light Ltdproduces a single product. The engineers and accountants have set the following production standard:

Direct material	Direct labour	Manufacturing overhead
Quantity (kgs)	10	Quantity (hrs)	5	Quantity (hrs)	5
Price per kg	$ 2.50	Rate per hour	$ 26.00	Rate per hour	$ 2.25

The annual budgeted manufacturing overhead totals $324,000, of which $72,000 is variable.Half Light Ltdallocates overhead costs based on direct labour hours and calculates separate rates for variable and fixed overheads. The planned level of production for the year is 28,800 units and the normal annual level of direct labour hours is 144,000 hours.

Actual costs incurred in the production of 2,500 units in July were as follows:

Direct material	Direct labour	Manufacturing overhead
Quantity (kgs)	26,250	Quantity (hrs)	13,000	Variable cost	$ 11,000
Total cost	$ 63,000	Total cost	$ 338,000	Fixed cost	$ 26,000

All materials purchased in July were used in production.

Required:

1. Calculate the following variances for July, indicating whether each is favourable or unfavourable.
   1. Direct material price variance and quantity variance. (4 marks)
   2. Variable overhead spending variance and efficiency variance. (4 marks)
   3. Fixed overhead budget variance and volume variance. (4 marks)

1. Prepare the journal entry to record the use of direct materials in production. (3 marks)