Reference no: EM132798293
ACC00724 Accounting for Managers - Southern Cross University
The Overall Scenario
You work as a management consultant and one of your clients, Planet Pets, has asked you to complete a few planning and control initiatives that they would like to put in place with your help. These include;
1. To better manage their cash flow requirements - preparation of a cash budget and recommendations as to any potential financing arrangements that may be required.
2. Prepare and interpret a variance analysis based on Planet Pets' operational budget.
3. Advise Planet Pets on sources of finance.
These jobs are all due to be completed by 17 February 2021.
1. Planet Pets manufacture chemical free toys for domestic animals and designer collars for customers' pets. Both of their products are manufactured and warehoused in Williamstown and sold to various wholesalers and retail outlets throughout Australia.
The business has experienced significant growth over the last year and the owner of the business has decided that now is a really good time to start forward planning and develop a more sophisticated control system, to ensure that there is sufficient cash available in order to meet the operational needs of the business.
As the management consultant of Planet Pets, you have been tasked with preparing a cash budget for 6 months that will be incorporated into the business' overall business plan.
The following information has been obtained from the sales department regarding the upcoming sales forecasts for the next six (6) months January to June:
Budgeted sales (in dollars)
|
Sales information (in dollars)
|
November
|
December
|
January
|
February
|
March
|
April
|
May
|
June
|
|
Pet Toys
|
80,000
|
110,000
|
100,000
|
90,000
|
85,000
|
95,000
|
70,000
|
62,500
|
|
Designer
Collars
|
100,000
|
150,000
|
145,000
|
125,000
|
95,000
|
87,500
|
68,000
|
60,000
|
Cash collections - Percentage %
|
Cash Sales
|
20%
|
|
Credit Sales
|
80%
|
|
Collected in month of sale
|
30%
|
|
Collected in the following month
|
50%
|
|
Collected in the 2nd month following sale
|
20%
|
The following information has been obtained from the production department regarding the upcoming production forecasts for the next six (6) months. The costs are related to budgeted raw materials and labour costs.
Budgeted raw materials and labour costs (in dollars)
|
Cost information (in dollars)
|
November
|
December
|
January
|
February
|
March
|
April
|
May
|
June
|
|
Pet Toys
|
65,000
|
85,000
|
80,000
|
65,000
|
72,500
|
70,000
|
50,000
|
41,500
|
|
Designer Collars
|
75,000
|
105,000
|
95,000
|
87,000
|
85,000
|
67,500
|
47,000
|
48,500
|
Raw materials and labour are paid as follows %
|
All raw materials and labour:
|
|
|
Paid in month incurred
|
30%
|
|
Paid in the month following
|
70%
|
Additional Information:
• The business currently rents factory and warehouse premises. The monthly rental is $7,500 per month. Rent is paid in the month it is incurred.
• Monthly utilities charges are budgeted for the months of Nov - Mar at $4,500 per month and Apr
- June at $4,250 per month. Utilities are paid one month after they are incurred
• The production supervisor's salary is budgeted at $110,000 per annum. The production supervisor is paid one month in arrears.
• Administration wages are currently $300,000 per annum. Administration wages are paid one month in arrears.
• The company is planning on purchasing and paying for a new piece of machinery in March for
$20,000. This new piece of machinery will be used for the designer collar product line and have a useful life of 5 years.
• The first service on the new machinery is expected in June at a cost of $450 and is paid in cash on the day.
• Annual insurance for the business totals $9,000. Insurance is renewed on the 1st January each year and paid in February.
• General office expenses are budgeted at $12,000 per month. Office expenses are paid in the month they are incurred.
• Cash on hand at the end of December was $36,000.
• Ignore taxation and GST implications.
Required:
a) Prepare a cash budget for 6 months beginning January (9 marks)
b) Advise the company on the debt financing that could be used to deal with cash shortfalls and any major payments in the cash budget. Your advice in this part should explain and provide reasons for your recommendations. (Maximum 200 words) (6 marks)
2. The following relates to information used in preparing the operational budget for Pet Planet for July and the pet toys product line.
• Selling price for pet toys $25 each
Actual unit sales for pet toys for July were 4,200. Direct materials cost $36,000, Direct labour
$18,900, Rent $4,500, Utilities $2,500, Administration wages $7,000, Production supervisor salary $4,000.
Budgeted amounts for July were as follows:
|
Pet Toys (sales)
|
6,000 units
|
|
Direct materials
|
$45,000
|
|
Direct labour
|
$30,000
|
|
Utilities
|
$2,750
|
|
Fixed Costs:
|
|
|
Administration wages
|
$5,000
|
|
Production supervisor salary
|
$7,000
|
|
Rent
|
$4,500
|
|
|
|
|
Profit/(Loss)
|
$55,750
|
a) Prepare a variance analysis for July. This analysis should show the original budget, a flexed budget, actuals and relevant variances.
b) To assist the owner of Planet Pets with their planning and control initiatives, briefly interpret and provide possible reasons for the non-zero variances in July. (Maximum 200 words)
3. Now that Planet Pets has some effective planning and control tools in place, they have decided that it is time to expand the business and offer some additional products to their product mix. This will require additional investment in new equipment and additional funds to support working capital needs initially until sufficient sales are generated.
Joseph, the owner of Planet Pets believes that short term debt is cheaper than long term debt. Discuss the risks involved in taking on only short term debt to finance the business.
What recommendations would you make to Joseph as to suitable external financing arrangements that may meet his needs for the expansion of the business?
Your boss wants to review your proposed presentation prior to you advising Joseph. He is currently overseas and, due to the time differences, he has asked you to video your presentation (maximum 5 minutes).
Attachment:- Accounting for Managers.rar