Reference no: EM131032767

Assignment Question 1- Cost classifications; schedule of costs of good manufactured and sold; income statement; product costs: manufacturer

Colonial Tap Company (CTC) is a manufacturer of taps and fittings for the plumping trade, located in Brisbane. CTC manufactures an extensive range of high quality brass and chrome taps. The business is small and has never been able to employ an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses.  Prices are based on rough estimates of cost of direct materials and direct labour plus a 50% markup. With the decline in profit and constant pressure on prices, Michael Hall, CTC's manager, began to feel uneasy about the way costs and profits are calculated. The results for the month just ended were:

Sales			$ 980 000
Less Expenses
	Materials purchased Factory wages Production supervisor's salary Rent Council rates Sales staff Advertising Equipment depreciation Factory utilities Manager's salary Truck's lease	$ 300 000 250 000 35 000 80 000 5 000 110 000 18 000 25 000 12 000 80 000 10 000
Total expenses			925 000
Net profit			$ 55 000

Additional information:

- There was no beginning inventory.

- At the end of the month, 10% of inventory purchased remained on hand, work-in-process amounted to 20% of manufacturing costs incurred during the month, and finish goods inventory was negligible.

- The factory occupies 80% of the premises, the sales and administration areas 20%.

- Most of equipment is used for manufacturing, with only 5% being used for sales functions.

- Michael Hall spends about one-half of his time on factory management, one-third in the sales area and the rest on administration.

Required:

1. Define the following: direct materials costs, direct labour costs, manufacturing overhead costs, prime costs and conversion costs.

2. Distinguish between inventoriable costs and period costs.

3. Estimate the cost of goods manufactured and sold for CTC.

4. Prepare a revised income statement for the month. Explain the differences between your income statement and the one above.

5. Make recommendations for changes to be made to the company's approach to product costing, product pricing and reporting income.

Assignment Question 2- CVP analysis; sales mix

Half-Time Pty Ltd currently sells hotdogs at the local cricket grounds. In a typical summer month, the stall reports a profit of $13 500 with sales of $75 000, fixed cost totalling $31 500. The variable cost of each hotdog is $0.96.

John, the proprietor, plans to start selling wedges with chilli and sour cream dipping for $7 each. The variable cost of each serve of wedges is $2.28 and a new fryer as well as another staff member to help cook the wedges will increase monthly fixed costs by $13 212. Initial sales of wedges are expected to be 7500 serves. Some of the wedges sales will come from current hotdog purchasers; thus, John expects monthly hotdogs sales (at current price) to decline to $45 000. After six months of selling wedges, John believes that hotdogs sales will start to increase again.

Required:

1. Define cost-volume-profit (CVP) analysis and describe the assumptions underlying CVP analysis. How can CVP analysis assist managers?

2. Define contribution margin, contribution margin per unit, and contribution margin percentage, break-even point. How does an increase in income tax rate affect the break-even point?

3. Determine the monthly break-even sales in units and dollars for Half-Time Pty Ltd before adding the wedges to the menu.

4. How many hot dogs and wedges does John need to sell every month in order to break even during the first six months of wedges sales, assuming a constant sales mix of 1 hotdog to every 2 serves of wedges?

5. Given John's estimate of wedges and hotdogs sales once wedges are added to the menu, what is the estimated monthly profit assuming his estimates are realised? Should John go ahead with the plan to also sell wedges? What other factors should John consider in deciding whether to go ahead with the plan to sell wedges?

Assignment Question 3- Job costing, journal entries

Cool Beat Sound (CBS) Ltd, which uses a job costing system, had two jobs in process at the start of the year: job number 64 ($84 000) and job number 65 ($53 500). The following information is available:

(a) The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine activity for the year were anticipated to be $840 000 and 16 000 hours, respectively.

(b) The company works on four jobs during the first quarter (1 January to 31 March). Direct materials used, direct labour incurred, and machine hours consumed were as follows:

Job numbers	Direct material	Direct labour	Machine hours
64	$21 000	$35 000	1200
65	-	22 000	700
66	44 000	65 000	2000
67	15 000	8 800	500

(c) Manufacturing overhead during the first quarter included depreciation ($34 000), indirect labour ($60 000), indirect materials used ($50 000) and other factory costs ($139 500).

(d) CBS Ltd completed job number 64 and 65. Job number 65 was sold on credit, producing a profit of $34 700 for the firm.

Required:

1. Identify the seven steps in job costing.

2. Describe the flow of costs through a product costing system. What ledger accounts are involved, and how are they used? (You might want to refer to Figure 2-7 p.42 in textbook)

3. Determine the company's overhead rate.

Calculate the costs of each job as of 31 March.

Determine the ending balance of the Finish goods inventory account and Work in process account as of 31 March.

4. Prepare the journal entries for the first quarter recording the following:

(a) Issue of direct materials to production and the direct labour incurred.

(b) Manufacturing overhead incurred during the quarter.

(c) Application of manufacturing overhead to production.

(d) Completion of job numbers 64 and 65.

(e) Sale of job number 65.

5. When do under- or overallocated overhead costs occur? Briefly describe three alternative ways to dispose under- or overallocated overhead costs.

Calculate the amount of under- or overallocated overhead of the company for the first quarter. Show the journal entry to write off this amount to Cost of goods sold.

Assignment Question 4- Decision making: special order

Mercury Company manufactures skateboards. Several weeks ago, the firm received an offer from Venus Ltd to purchase 11,000 units of the Champion skateboards if the order can be completed in three months. The costs per unit for Mercury's Champion skateboards are:

Direct material                                                                                    $16.40

Direct labour (0.25 hours @ $18 per hour)                                             4.50

Total manufacturing overhead (0.5 machine hours @ $40 per hour)         20.00                    

The following additional information is available:

- The normal selling price of the Champion model is $53; however, Venus has offered Mercury only $31.50 because of the large quantity it is willing to purchase.

- Venus requires a modification of the design that will allow a $4.20 reduction in direct material cost.

- Mercury's production supervisor notes that the company will incur $7400 in additional setup costs and will have to purchase a $4800 special device to manufacture these units. The device will be discarded once the special order is completed.

- Total manufacturing overhead costs are applied to production at the rate of $40 per machine hour.

- Budgeted yearly fixed overhead is $1,500,000 and planned production activity is 60,000 machine hours (5000 hours per month).

- Mercury will allocate $3600 of existing fixed administrative costs to the order as part of the cost of doing business.

Required:

1. Briefly describe the five-step sequence in a decision making process. Explain the role of the management accountant in this process.

2. Explain these terms: relevant costs, sunk costs, incremental costs, avoidable costs, opportunity costs. Give an example of each.

3. Assume that present sales will not be affected. Should the order be accepted from a financial point of view (that is, is it profitable?) Why? Show calculations.

4. Assume that Mercury's current production activity consumes 70% of planned machine-hour activity. Can the company accept the order and meet Venus's deadline without affecting normal production?

5. What options might Mercury consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm?    

Assignment Question 5- Master budget

DangCorp Ltd is a retail distributor for MZB-33 computer hardware units. Sales forecasts for the first six months of 2014 are as follows:

                       Units                      Dollars                                                                                 

January              130                         390,000                                                                

February             120                         360,000                

March                 110                         330,000                

April                    90                           270,000                

May                    100                         300,000                

June                    125                         375,000                

Total                   675                     2,025,000

Total sales consist of 25% cash sales, 30% credit cards sales and 45% sales on account. The cash sales and cash from credit cards sales are received in the month of sale. Credit card sales are subject to a 4% discount. The cash receipts for sales on account are 70% in the month following the sale and 28% in the second month after the sale. The remaining 2% are estimated to be uncollectable.

DangCorp's month end inventory requirement for computer hardware units is 30% of the next month's sales. The purchase price is $1800 per unit. Approximately 60% of the purchases in a month are paid in that month and the rest paid in the following month.

Selling and administration expenses are equal to 10% of the current month's sales, including $2000 of depreciation. These expenses are paid as incurred.

Required:

1. What is the master budget? What is the operating budget? Outline the steps in preparing an operating budget.

2. 'Strategy, plans and budgets are unrelated to one another'. Do you agree? Explain.

3. Prepare a schedule of cash collections for April 2014.

4. Prepare the budgets for purchases in units and in dollars for the months of March and April. Prepare a schedule of cash payments for April 2014.

5. Prepare a cash budget for April 2014, assuming the cash balance as of 1 April is $10,000.

Assignment Question 6- Flexible budgets, direct cost variances

Terrigal Pots manufactures clay pots. All pots are the same size. Each unit requires the same amount of resources. The following information is from the static budget for 2015:

Expected production and sales                  32 000 units

Direct materials                                       48 000 kg

Direct labour                                           16 000 hours

Total fixed costs                                       $75 000

Standard quantities, price and unit costs follow for direct materials and direct labour:

	Standard quantity	Standard price	Standard unit cost
Direct materials	1.5 kg	$2.5 per kg	$3.75
Direct labour	0.5 hours	$25 per hour	$12.50

During 2015, actual number of units produced and sold was 35 000 units. Actual cost of direct materials used was $141 487.50, based on 57 750 kg purchased at $2.45 per kg. Direct labour hours actually used were 21 000 hours, at the rate of $21.50 per hour. As a result, actual direct labour costs were $451 500. Actual fixed costs were $85 000. There was no beginning or ending inventory.

Required:

1. What is the key difference between a static budget and a flexible budget? Why might managers find a flexible-budget analysis more informative than a static-budget analysis?

2. How does variance analysis help in continuous improvement? Why is it important that managers do not evaluate variances in isolation?

3. Prepare a flexible-budget-based variance analysis (similar to Table 11-3 p.426 textbook) for each of the three cost categories.

4. Calculate price and efficiency variances for direct materials and direct labour.

5. Comment on the results in parts 3 and 4 and provide a possible explanation for them.