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Exercise 1. Absorption and marginal costing Max Ltd. Is drafting a budget on the basis of following data: Direct material $ 10 per unit Direct labour $5 per unit Variable production expenses 35 8 per unit Fixed production expenses $ 27,000 per month Normal output 9,000 units per month 90% capacity Sales price $ 30 per unit In order to build up inventory in anticipation of an increase in demand which is expected later in year, production is to exceed sales in first three months of the year as follows: Production Required: 1. Prepare two profit statements. Each in comparative columnar form, covering each of three months a. On a marginal costing basis b. On a full absorption costing basis 2. Reconcile the difference in profits for each month. Exercise 2 Process costing HiGrowth company produces frames. Every frame goes through 2 departments: the assembly department and the finishing department. The process costing system at HiGrowth has a single direct-cost category (direct materials) and a single indirect-cost category (conversion costs). This problem focuses on the finishing department. Frames that have undergone the assembly department directly go to finishing department. Direct materials are added when the finishing department process is 80% complete. Conversion costs are added evenly during the finishing department's process. When those operations are done, the frames are immediately transferred to Finished Goods. The following data for the assembly department in June 2016 is provided below: Physical units Transferred-in Direct material Conversion costs costs WIP, June 1, 2016 1,050 USD 32,550 USD 0 USD 13,650 Level of completion 100% 0% 50% Transferred during 2,400 June Completed and 2,700 transferred out during Junem2016 WIP, June 30, 2016 750 Level of completion 100% 0% 70% Total costs added USD 129,600 USD 23,490 USD 70,200 during the month Required: 1. Summarize total finishing department costs for June 2016, and assign these costs to units completed (and transferred out) and to units in ending work in process using weighted average method. 2. Prepare journal entries for June transfers from the assembly department to the finishing department and from the finishing department to Finished Goods. 3. Suppose that HiGrowth company uses the FIFO method instead of the weighted-average method in all of its departments. The only changes to Problem above under the FIFO method are that total transferred-in costs of beginning work in process on June 1 are $36,750 (instead of $32,550) and that total transferred-in costs added during June are $124,800 (instead of $129,600).Exercise 3 Budgeting ABC company is at the stage of preparation of master budget for next year. The management of the company is thinking about purchasing of special equipment which will enhance and improve the production process. The cost of the equipment is USD 1,000,000. The company will obtain the loan from local bank at 10% p.a. interest rate. The loan to be rapid during 1 year by equal quarterly installments of USD 250,000. The interest fee is also to be repaid on quarterly basis. Based on following information, you are asked to prepare master budget for coming 2017 year on improved production process including financing of new equipment. ABC company manufactures metal picture frames. The plant has 2 production lines for producing 2 types of frames: A frames (5*7 inches) and B frames (8*10 inches). The direct raw materials are flexible metal strips and 9-inch by 24 inch glass sheets. Each A frame requires 2-foot metal strip; and B frame requires a 3-foot strip. The company can produce either 4 A frames or 2 B frames put of a glass sheet. Other raw materials such as cardboard backing are insignificant in cost and treated as indirect materials. The following additional information is also available: 1. Sales in 4th quarter of 2016 are expected to be 50,000 A frames and 40,000 B frames. The sales manager predicts that over next two years sales in each product line will grow byy 5,000 units each quarter over previous quarter. 2. Sales history of the company shows that 60% of all sales are made on account with remainder of sales in cash. The collection experience shows that 80% of credit sales are collected during quarter in 3. which sale is made, while remaining 20% is collected in the following quarter. The A frame sells for USD 10, and the B frame sells for USD 15. The prices are expected to be constant during 2017. 4. Production manager of the company plans to end each quarter with enough finished goods inventory in each product line to cover 20% of following quarter's sales. Moreover, an attempt is made to end each quarter with 20% of glass sheet needed for the following quarter's production. Since metal strips are purchased locally, ABC company buys them on JIT basis; inventory is negligible. 5. All company's direct material purchases are made on account. And 80 % of each quarter purchases are paid in cash during the same quarter as the purchase. The rest of the debt is paid in next quarter. 6. Indirect materials are purchased as needed and paid in cash. WIP inventory is negligible. 7. Projected manufacturing costs are as follows:A frame B frame Direct material Metal strips A: 2ft. at $1 per foot $2 B: 3ft at $1 per foot $3 Glass sheets A: 14 sheet at $8 per sheet $2 B: 12 sheet at $8 per sheet $4 Direct labor 0.1 hour at $20 $2 $2 Manufacturing overhead 0.1 direct labor*$10 per hour $1 $1 Total manufacturing cost per unit $7 $10 8. The predetermined overhead rate is $10 per direct labor hour. The following manufacturing overhead are budgeted for 2017. 1" quarter 2" quarter 3"d quarter 4th quarter Entire year Indirect 10,200 11,200 12,200 13,200 46,800 material Indirect labor 40,800 44,800 48,800 52,800 187,200 Other overhead 31,000 36,000 41,000 46,000 154,000 Depreciation 20,000 20,000 20,000 20,000 80,000 Total overhead 102,000 112,000 122,000 132,000 468,000 All these costs will be paid in cash during quarter incurred except for the depreciation charges. 9. Quarterly administrative and selling expenses are USD 100,000 paid in cash 10. The company is going to pay dividends of USD 5,000 each quarter in cash 11. The projected balance sheet be the end of 2016 is following: Cash 95,000 Accounts receivable 132,000 Inventory Raw material 59,200 Finished goods 167,000 PPE (net of accumulated depreciation) 8,000,000 Total assets 8,453,200 Accounts payable 99,400 Common stock 5,000,000Retained earnings 3,353,800 Total liabilities and equity 8.453,200 Required: 1. Prepare sales budget 2. Production budget 3. Direct material and labor budgets 4. Manufacturing overhead budget 5. Unit costs of ending finished goods inventory 6. Ending inventories budget 7. Cost of goods sold budget 8. Cash budget (including receipts and disbursements) 9. Budgeted income statement and balance sheet