SECTION A

Case Number 01

General Electric Company had cash of $14,000 on hand on January 1. During the year, the company expected the following cash collections from customers by quarter: (06)

First Second Third Cash collections 110,000 177,500 183,700

Direct materials purchases in tons were budgeted as follows: First Second Third

Direct materials purchase 65,000 75,000 55,000 The production budget showed the following unit production by quarter with an average labor rate of $40.00:

First Second Third Fourth Units to be produced 1,500 2,000 1,700 1,500

General Electric Company planned to pay dividends of $10,000 per quarter during the year. During July, new equipment costing $60,000 will be purchased. An additional $16,000 was planned to installation costs during the fourth quarter.

The company was required to maintain a minimum cash balance of $15,000. A line of credit was available for short-term borrowings in increments of $1,000. All borrowings will be made at the beginning of a quarter and repaid at the end of a quarter. Interest on the short-term borrowings will be paid at 0.5% per quarter on the amount repaid in any quarter when a loan repayment is made. All other interest expense will be accrued each quarter.

Required: Prepare a cash budget by quarter and for the year in total. Case Number 02

An investor named Shadab Khan is in search for the business opportunity in Afghanistan. After detail study and analysis, he found that massive copper reserves are available in Logar province. China is being interested in extraction copper and made one the biggest foreign direct investment in history of Afghanistan. Finally, he decided of make an investment in extraction of copper by having his own mining where he will extract copper.

His company has collected the following information about the cash inflows and outflows associated with this project:

• Equipment needed for new mine: $1,000,000

• Working capital required for new mine: $230,000

• Expected annual cash inflow from the sale of coal: $850,000 2

Fourth 136,000

Fourth 50,000

• Expected annual cash expenses associated with the new mine: $500,000

• Road repairs required after 5 years: $110,000

• Upgrading mine based on mining standard of the country: 55,000

  The coal in the mine would be exhausted after 15 years. The equipment would be sold for its salvage value of $250,000 at the end of 15-year period. The company uses straight line method of depreciation and does not take into account the salvage value for computing depreciation for tax purpose. The tax rate of the company is 30%.

  Required:

1. Compute net present value (NPV) of the new coal mine assuming a 15% after-tax cost of capital. (03)

2. On the basis of your computations in requirement 1, conclude whether the coal mine should be opened or not. (01)

3. Discuss why net present value method is one of the most effective capital budgeting technique for the acceptance and rejection of the projects throughout globe. (02)

Case Number 03

Alkozay Ltd. Manufactures started production of its new product line (shirts) in the month of November, which it sells to customers for embroidering with various slogans and emblems. The standard cost card for the shirts is as follows.

	Standard Price	Standard Quantity	Standard Cost
Direct materials	AFN 1.60 per yard	1.25 yards	AFN 2.00
Direct labor	AFN 12 per DLH	0.25 DLH	3.00
Variable overhead	AFN 4 per DLH	0.25 DLH	1.00
Fixed overhead	AFN 6 per DLH	0.25 DLH	1.50
AFN 7.50

Bilal Nabi, operations manager, was reviewing the results for November when he became upset by the unfavorable variances he was seeing. In an attempt to understand what had happened, Bilal Nabi asked CFO Muhammad Javid for more information. He provided the following overhead budgets, along with the actual results for November.

The company purchased and used 112,000 yards of fabric during the month. Fabric purchases during the month were made at AFN 1.45 per yard. The direct labor payroll ran AFN 249,260, with an actual hourly rate of AFN 12.10 per direct labor hour. The annual budgets were based on the production of 1,000,000 shirts, using 250,000 direct labor hours. Though the budget for November was based on 80,000 shirts, the company actually produced 82,000 shirts

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during the month.

Fixed Overhead Budget
	Annual Budget	NovemberActual
Supervisory salaries	AFN 260,000	AFN 22,000
Insurance	350,000	25,500
Property taxes	80,000	6,500
Depreciation	320,000	30,000
Utilities	210,000	21,600
Quality inspection	280,000	29,700
Total	AFN 1,500,000	AFN 135,300

Variable Overhead Budget
	Annual Budget	Per Shirt	November Actual
Indirect materials	AFN 450,000	AFN 0.45	AFN 36,000
Indirect labor	300,000	0.30	33,700
Equipment repair	200,000	0.20	16,400
Equipment power	50,000	0.05	12,300
Total	AFN 1,000,000	AFN 1.00	AFN 98,400

Requirement

1. Calculate and determine the direct materials price and quantity variances for the month of November. (03)

2. Calculate and determine the direct labor rate and efficiency variances for the month of November. (03)

3. Calculateanddeterminethevariableoverheadspendingandefficiencyvariancesfor the month of November. (03)

4. Provide a brief explanation of the possible causes of each variance in direct material,

direct labor and overhead variance.

(02)

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Case Number 04

ABC Company sells a single product. Each unit takes two pounds of material and costs $3.00 per pound. Company A has prepared a production budget by quarters for Year 2 and for the first quarter of Year 3, as follows:

Year 2 First Second Third

Budgeted production 30,000 60,000 90,000

Fourth 100,000

Year 3 First 50,000

The ending inventory at the end of a quarter must be equal to 25% of the following quarters production needs. 26,000 pounds of material are on hand to start the first quarter of Year 2. Purchases are paid for 40% in the quarter of purchase and 60% in the following quarter.

Requirement

1. a) Prepare direct materials budget for the chips by quarter and in for Year 2 in total including the dollar amount of purchases. (03)

2. b) Prepare cash disbursements budget for the chips by quarter and in for Year 2 in total including

the dollar amount of purchases.

(03)

SECTION B

You are required to read each statement carefully and present your agreement or disagreement with the statement. You must support your answer with logical answers. Your answer should not exceed three statements for each statement. ATTEMPT ALL (08)

1. The production budget shows both unit production data and unit cost data. Is this true? Explain.

2. Are selling and administrative expenses treated as product costs or as period costs under variable costing?

3. What is meant by a products contribution margin ratio? How is this ratio useful in planning business operations?

4. As the discount rate increases, the present value of a given future cash flow also increases. Do you agree? Explain.

5. Why are discounted cash flow methods of making capital budgeting decisions superior to other methods?

6. Parker Company had $5,000,000 in sales and reported a $300,000 loss in its annual report to stockholders. According to a CVP analysis prepared for managements use, $5,000,000 in sales is the break-even point for the company. Did the companys inventory level increase, decrease, or remain unchanged? Explain

7. Cost-volume-profit (CVP) analysis is based entirely on unit costs. Do you agree? Explain.

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8. E Company has forecast sales to be $225,000 in February, $235,000 in March, $250,000 in April, and $240,000 in May. All sales are made on credit and sales are collected 60% in the month of sale, and 40% the month following. What is the budgeted Accounts Receivable balance on May 31?

SECTION C Multiple Choice Questions: Attempt all three.

1. A cash budget is: (01)

   1. Beginning cash balance Cash receipts Cash from financing Cash

      disbursements Ending cash balance.

   2. Beginning cash balance Cash receipts Cash disbursements Financing

      Ending cash balance.

   3. Beginning cash balance Net income Cash dividends Ending cashbalance.

   4. Beginning cash balance Cash revenues Cash expenses Ending cash balance.

2. XYZ Industries is considering two capital budgeting projects. Project A requires an initial investment of $48,000. It is expected to produce net annual cash flows of $7,000. Project B requires an initial investment of $75,000 and is expected to produce net annual cash flows of $12,000. Using the cash payback technique to evaluate the two projects, Siegel should accept: (01)

   1. (a) Project A because it has a shorter cash payback period.

   2. (b) Project B because it has a shorter cash payback period.

   3. (c) Project A because it requires a smaller initial investment.

   4. (d) Project B because it produces a larger net annual cash flow.

      of the following statements regarding graphs of fixed and variable costs is

      (01)

   1. (a) Variable costs can be represented by a straight line where costs are the same

      for each data point.

   2. (b) Fixed costs can be represented by a straight line starting at the origin and

      continuing through each data point.

   3. (c) Fixed costs are zero when production is equal to zero.

   4. (d) Variable costs are zero when production is equal to zero.

   5. (e) Fixed and Variable costs are curvilinear form above zero on the Y axis.