Accounting -AW-Q390

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Question One: Product Costing
ASR Group of Companies Ltd has four categories of overheads. The four categories and the expected overhead costs for each category for next year are as follows
Maintenance $150,000
Materials handling 70,000
Set-ups 60,000
Inspection 100,000
Currently, overheads are applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 60,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The factory manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 40%.
Estimates for the proposed job are as follows
Direct materials $6,000
Direct labour $8,500
Number of materials moves 9
Number of inspections 7
Number of set-ups 4
Number of machine hours 400
In the past, full manufacturing cost has been calculated by allocating overheads using a volume-based cost driver – direct labour hours. Mr AR the director has heard of a new way of applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows
Machine hours 18,000
Material moves 6,000
Set-ups 3,000
Quality inspections 9,000
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a. Determine the amount of overheads that would be allocated to the proposed job if direct labour hours are used as the volume-based cost driver.
 Determine the total cost of the proposed job.
 Determine the company’s bid if the bid is based upon full manufacturing cost plus 40%.
b. Determine the amount of overheads that would be applied to the proposed job if activity-based costing is used.
 Determine the total cost of the proposed job if activity-based costing is used.
 Determine the company’s bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30%.
c. Which product costing method produces the more accurate costing? Briefly explain.
Question Two: Budgets
The Balance Sheet of Best Photo Industries Limited, a distributor of photographic supplies, as of March 31 2011 is given below
Best Photo Industries Limited
Balance Sheet
31st March 2011
Assets $
Bank 10,000
Accounts Receivable 72,000
Inventory 38,000
Buildings, Equipments and other fixed assets 500,000
Total Assets 620,000
Liabilities and Stockholders Equity
Accounts Payable 90,000
Notes Payable 15,000
Capital Stock 430,000
Retained Earnings 85,000
Total Liabilities and Stockholders Equity 620,000
Best Photo Limited., has not budgeted previously, and for this reason it is limiting its master budget planning horizon to just one month ahead, namely, April.
The company has assembled the following budgeted data relating to April
 Budgeted Sales is $250,000.
 This includes $60,000 cash sales; the remainder will be credit sales.
 50% of a month’s credit sales are collected in the month the sales,
 50% is collected in the following month.
 All of the March 31 accounts receivable will be collected in April.
 Purchases of inventory are expected to total $200,000 during April.
 These purchases will all be on account.
 40% of all inventory purchases are paid for in the month of purchase;
 The remainder are paid in the following month.
 All of the March 31 accounts payable (suppliers) will be paid during April.
 The April 30 inventory balance is budgeted at $40,000.
 Selling and administrative expenses for April are budgeted at $52,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 for the month.
 The note payable on the March 31 balance sheet will be paid during April. The company’s interest expense for April (on all borrowing) will be $700, which will be deducted from the bank account
 New warehouse equipment costing $9,000 will be purchased for cash during April.
 During April, the company will borrow $18,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.
a. Since the company has no budgeting experience, the CEO would like you to make a brief presentation slides about the advantages of budgeting (giving at least 2 advantages)
b. Prepare a cash budget for April. Support your budget with a schedule of expected cash collections from sales and a schedule of expected cash disbursements for inventory purchases.
c. Prepare a budgeted income statement for April.
d. Prepare a budgeted balance sheet as of April 30.
Question Three: Non Financial Indicators
The Royal Botanical Gardens has been established for more than 120 years and has the following mission statement:
“The Royal Botanical Gardens belongs to the Nation. Our mission is to increase knowledge and appreciation of plants, their importance and their conservation, by managing and displaying living and preserved collections and through botanical and horticultural research.”
Located toward the edge of the city, the Gardens are regularly visited throughout the year by many local families and are an internationally well-known tourist attraction. Despite charging admission it is one the top five visitor attractions in the country. Every year it answers many thousands of enquiries from Universities and research establishments, including pharmaceutical companies from all over the world and charges for advice and access to its collection. Enquiries can range from access to the plant collection for horticultural work, seeds for propagation or samples for chemical analysis to seek novel pharmaceutical compounds for commercial exploitation. It receives an annual grant in aid from Central Government, which is fixed once every five years.
The grant in aid is due for review in three years’ time. The Finance Director has decided that, to strengthen its case when meeting the Government representatives to negotiate the grant, the Management Board should be able to present a balanced scorecard demonstrating the performance of the Gardens. He has asked you, the Senior Management Accountant, to assist him in taking this idea forward. Many members of the board, which consists of eminent scientists, are unfamiliar with the concept of a balanced scorecard. To manage this task you are assigned with the following responsibilities
a. For the benefit of the Management Board, prepare a briefing paper based on the following approaches to performance measurement
i. Non financial indicators that are used in performance evaluation
ii. Bench making
iii. Balanced scorecard
b. Discuss at least eight non financial indicators that can be used to evaluate the usefulness for The Royal Botanical Gardens.
c. Evaluate the process you would employ to develop a suitable balanced scorecard for The Royal Botanical Gardens and give examples of measures that would be incorporated within it.
Question Four Cost-Volume- Profit Analysis
The Redco Company manufactures two products. Information about the two product lines is as follows
Product A Product B
Selling price per unit $90 $40
Variable costs per unit 45 15
Contribution margin per unit $45 $25
The company expects fixed costs to be $200,000. The firm expects 60% of its sales (in units) to be Product A (a sales mix of 3:2).
a. Calculate the contribution margin per package.
b. Determine the break-even point in units for Product A and Product B.
c. If Redco had to discontinue one of the two products – would it be Product A or Product B and why?
d. What other factors should be considered when making a decision to continue or discontinue a product line or segment.
e. The manager of Redco wants to know how much sales would be necessary to generate a before-tax profit
 Product A – $300,000
 Product B – $500,000
f. Briefly discuss the limitations of cost-volume-profit analysis.
Product Code-Accounting -AW-Q390
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