Reference no: EM132302017

Question 1: Budget

Resort Island University is preparing its budget for the upcoming academic year. This is a specialised private university that charges fees for all degree courses. Currently, 15,000 students are enrolled on campus. However, the university is forecasting a 5 % growth in student numbers in the coming year, despite an increase in fees of $3,500 per subject. The following additional information has been gathered from an examination of the university records and conversations with university managers:

• Resort Island is planning to award scholarships to 150 students, which will cover their fees.
• The average class has 80 students, and the typical student takes 4 subjects per semester. Resort Island operates 2 semesters per year.
• The average academic staff salary is $120,000 per annum including on-costs.
• Resort Island's academic staff are evaluated on the basis of teaching, research administration and professional/community service. Each of the academic staff teaches the equivalent of three subjects during the academic year.

Required:

1. Prepare a revenue budget for the upcoming academic year
2. Determine the number of staff needed to cover classes.
3. Assume there is a shortage of full-time academic staff. List at least five actions that Resort Island might take to accommodate the growing student numbers.
4. You have been requested by the university's deputy vice chancellor (DVC) to construct budgets for other areas of operation (such as library, grounds, cafeteria, and maintenance). The DVC noted: 'The most important resource of the university is academic staff. Now that you know the number of staff needed, you can prepare the other budgets. Academic staff are indeed the key driver - without them we don't operate.' Does the DVC really understand the linkages with the budgeting process? Explain.

Question 2: Standard Costing

Good Health Insurance Company uses a flexible overhead budget for its new policy department. The firm offers five types of policy, with the following standard hours allowed for policy clerical processing:

Health	1 hour
Life	1.5 hours
Automobile	2 hours
Renter	2 hours
Homeowner	5 hours

The following numbers of insurance applications were processed during April:

Health	375
Life	300
Automobile	150
Renter	600
Homeowner	300

The accountant estimates that the variable overhead rate in the application processing department is $10 per hour, and the fixed overhead costs will amount to $6,000 per month.

Required:

1. Calculate the number of standard clerical hours allowed in April, given the number of applications processed.

2. Explain why the company's flexible budget should be based on the number of clerical hours allowed rather than on the number of applications processed.

3. Using Excel, construct a formula flexible overhead budget for the company, and calculate the flexible budget for total overhead cost in April. Include both the formula view and results view of your spreadsheet in your Word document.

4. Prepare a short memorandum to the management of Good Health evaluating the benefits that standard costing systems can offer a business.

Question 3: Activity based costing

The Accountant for Pix Photographic supply Ltd has estimated the following activity cost pools and activity drivers for the coming year:

Activity	Budgeted overhead cost $	Activity driver	Required level for activity driver	Cost per unit of activity driver
Machine setups	300,000	No. of setups	100	$3,000 per setup
Material Handling	150,000	Weight of raw material	50,000 kg	$3 per kg
Hazardous waste control	75,000	Weight of hazardous chemicals used	10,000 kg	$7.50 per kg
Quality control	112,500	No. of inspections	1,000	$112.50 per inspection
Other overhead costs	300,000	Machine hours	20,000	$15 per machine hour
Total	937,500

An order for 1,000 boxes of film development chemicals has the following production requirements:

Machine setups	4 setups
Raw material	10,000 kg
Hazardous materials	2,000 kg
Inspections	10 inspections
Machine hours	500 machine hours

Required
1. Calculate the total overhead that should be assigned to the order for development of chemicals.
2. What is the overhead cost per box of chemicals?
3. If Pix Photographic Supply wee to use a plant-wide predetermined overhead rate based on machine hours, calculate he rate per hour.
4. Under the approach in requirement 3, how much overhead would be assigned to the order for development chemicals:
1. in total
2. per box of chemical?
5. Explain why these two product costing systems result in such widely differing costs. Which system do you recommend? Why?
6. Calculate the unit cost of a production order for 100 specially coated plates used in film development. In addition to direct material costing $180 per plate and direct labour costing $60 per plate, the order requires the following:

Machine setups	2 setups
Raw material	800 kg
Hazardous materials	300 kg
Inspections	3 inspections
Machine hours	50 machine hours

Question 4: Relevant information for decisions

Cool Pool Ltd produces equipment and chemical supplies for the swimming pool industry. In one joint process, 10,000 litres of GSX are processed into 7,000 litres of xenite and 3,000 litres of banolide. The cost of the joint process including the GSX, is $40,000. Cool Pool allocates $28,000 of the joint cost to the xenolite and $12,000 of the cost to the banolide. the 3,000 litres of banolide can be sold at the split-off point for $5,000, or they can be processed further into a product called kitrocide. The sales value of the 3,000 litres of kitrocide is $20,000, and the additional processing cost is $26,200.

Cool Pool also manufacture pool vacuum cleaners. A new product is now available from India and Cool Pool's management are considering buying in these new vacuum cleaners and badging them as Cool Pool cleaners.

Cool Pool's managing director has asked your consulting firm to make a recommendation as to whether the banolide should be sold at the split-off point or processed further and to provide them with details of the issues that they should consider when making the decision to outsource this product.

Required

1. Write a letter providing an analysis and a recommendation with respect to whether the banolide should be sold at split off or processed further. Also include in this letter the key issues that the management should consider when making the outsourcing decision.

Question 5: Variable costing

Slumberworld Pty Ltd's planned production for the current year was 15,000 units. This production level was achieved, but only 13,500 units were sold at $60 each. Other data are as follows:

	$
Direct material used	120,000
Direct labour cost incurred	60,000
Fixed manufacturing overhead (actual and planned)	75,000
Variable manufacturing overhead (actual and planned)	36,000
Fixed selling and administrative expenses	90,000
Variable selling and administrative expenses	13,500
Finished goods inventory, 1 January	None

The company uses normal costing. There were no work in process inventories at the beginning or end of the year.

Required
1. Prepare an income statement for Slumberworld for the current year using:
1. absorption costing
2. variable costing

2. Which costing method, absorption costing or variable costing, shows a higher operating profit? Why?

3. What would be Slumberworld's finished goods inventory cost on 31 December, under:
1. absorption costing
2. variable costing

4. Which costing method, variable or absorption, would you recommend to Slumberworld's management? Why?