ACCT 361 MANAGEMENT ACCOUNTING FALL 2015 ASSIGNMENT ...
ACCT 361 MANAGEMENT ACCOUNTING FALL 2015 ASSIGNMENT 2 DUE MONDAY NOVEMBER 16 1. Auto Lavage is a Canadian company that owns and operates a large automatic carwash facility near Quebec. The following table provides data concerning the company’s budgeted costs: Fixed Cost per Month Cleaning supplies Electricity Maintenance Wages and salaries Depreciation Rent Administrative expenses
$ 1,400 $ 4,700 $ 8,300 $ 2,100 $ 1,800
Cost per Car Washed $ 0.70 $ 0.10 $ 0.30 $ 0.40
$ 0.05
The company expects to charge customers an average of $5.90 per car washed. For November Auto Lavage had assumed that 8,000 cars would washed. The actual revenues and expenses for November are given below:
Sales Variable expenses Cleaning supplies Electricity Maintenance Wages and salaries Administrative expenses Fixed expenses Electricity Wages and salaries Depreciation Rent Administrative expenses
Actual Data for 8,100 Cars $ 49,300 6,075 891 2,187 3,402 486 1,450 4,700 8,300 2,100 1,745
Required: (25) a.
Prepare the budget for November. (10)
b.
Prepare the flexible budget variance report for November and indicate the flexible budget variance, sales volume variance and static-budget variance. (15)
a. Auto Lavage Inc. Budget November Budgeted Amount Per Unit (per car) Sales
Cars Washed 8,000
$5.90
$47,200
Cleaning supplies
0.70
5,600
Electricity
0.10
800
Maintenance
0.30
2,400
Wages and salaries
0.40
3,200
Administrative
0.05
400
1.55
12,400
$4.35
34,800
Variable expenses:
Total variable expenses Contribution margin Fixed expenses: Electricity
1,400
Wages and salaries
4,700
Depreciation Rent
8,300
Administrative
1,800
Total fixed expenses Operating income
2,100 18,300 $16,500
b.
Sales
Actual
Flexible
Flexible
Sales
Static
(8,100 cars)
Budget
Budget
Volume
Budget
Variance
(8,100 cars)
Variance
(8,000 cars)
$49,300
$1,510
F
$47,790
$590
F
$47,200
6,075
405
U
5,670
70
U
5,600
891
81
U
810
10
U
800
Maintenance
2,187
(243)
F
2,430
30
U
2,400
Wages and supplies
3,402
162
U
3,240
40
U
3,200
486
81
U
405
5
U
400
Total variable expenses
13,041
486
U
12,555
155
U
12,400
Contribution margin
36,259
1,024
F
35,235
435
F
34,800
Electricity
1,450
50
U
1,400
0
1,400
Wages and salaries
4,700
0
4,700
0
4,700
Depreciation
8,300
0
8,300
0
8,300
Rent
2,100
0
2,100
0
2,100
Administrative
1,745
(55)
F
1,800
0
1,800
18,295
(5)
F
18,300
0
18,300
$17,964
$1,029
F
$16,935
$435
Variable expenses: Cleaning supplies Electricity
Administrative
Fixed expenses:
Total fixed expenses Operating income
Total static-budget variance: $1,464 F
F
$16,500
2. Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below. The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows: January (actual) February (actual) March (actual) April May June July August September
20,000 26,000 40,000 65,000 100,000 50,000 30,000 28,000 25,000
The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units. The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. The company’s monthly selling and administrative expenses are given below: Variable: Sales commissions Fixed: Advertising Rent Wages and salaries Utilities Insurance Depreciation
4% of sales $ 200,000 18,000 106,000 7,000 3,000 14,000
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below: Assets Cash Accounts receivable ($ 26,000 February sales; $ 320,000 March sales) Inventory Prepaid insurance Fixed assets, net of depreciation Total assets
$
74,000 346,000 104,000 21,000 950,000 $ 1,495,000
Liabilities Accounts payable Dividends payable Total liabilities
$ 100,000 15,000 115,000
Shareholders’ Equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
800,000 580,000 1,380,000 $ 1,495,000
The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month. Required: (35) Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: a. A sales budget by month and in total. (2) b. A schedule of expected cash collections from sales, by month and in total. (4) c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (4) d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. (4) e. A cash budget. Show the budget by month and in total. (7) f. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach. (7) g. A budgeted balance sheet as of June 30. (7)
a.
Sales budget:
May
June
Quarter
Budgeted sales in units
65,000
100,000
50,000
215,000
Selling price per unit
× $10
× $10
× $10
×
$650,000
$1,000,000
$500,000
Total sales b.
April
$10
$2,150,000
Schedule of expected cash collections: February sales (10%) March sales
$ 26,000
$
26,000
280,000
$ 40,000
320,000
130,000
455,000
$ 65,000
650,000
200,000
700,000
900,000
100,000
100,000
(70%, 10%) April sales (20%, 70%, 10%) May sales (20%, 70%) June sales (20%) Total cash collections c.
$436,000
$695,000
$865,000
$1,996,000
Budgeted sales in units
65,000
100,000
50,000
215,000
Add budgeted ending
40,000
20,000
12,000
12,000
105,000
120,000
62,000
227,000
Less beginning inventory
26,000
40,000
20,000
26,000
Required unit purchases
79,000
80,000
42,000
201,000
Unit cost
× $4
× $4
× $4
$316,000
$320,000
$168,000
May
June
Merchandise purchases budget:
inventory* Total needs
Required dollar purchases
×
$4
$ 804,000
*40% of the next month’s sales in units. d. Budgeted cash disbursements for merchandise purchases:
April
Quarter
March purchases (Accounts payable) April purchases
$100,000 158,000
May purchases
$ 100,000 $158,000 160,000
June purchases Total cash disbursements
$258,000
$318,000
316,000 $160,000
320,000
84,000
84,000
$244,000
$ 820,000
e.
Knockoffs Unlimited Cash Budget For the Three Months Ending June 30
April
May
$ 74,000
$ 50,000
$ 50,000
$ 74,000
Add receipts from customers (Part b.)
436,000
695,000
865,000
1,996,000
Total cash available
510,000
745,000
915,000
2,070,000
Purchase of inventory (Part d.)
258,000
318,000
244,000
820,000
Advertising
200,000
200,000
200,000
600,000
18,000
18,000
18,000
54,000
106,000
106,000
106,000
318,000
26,000
40,000
20,000
86,000
7,000
7,000
7,000
21,000
15,000
0
0
15,000
0
16,000
40,000
56,000
630,000
705,000
635,000
1,970,000
(120,000)
40,000
280,000
100,000
Borrowings*
171,717
11,835
0
183,552
Repayments
0
0
(183,552)
(183,552)
Interest**
(1,717)
(1,835)
(1,835)
(5,387)
Total financing
170,000
10,000
(185,387)
$ 50,000
$ 50,000
Cash balance, beginning
June
Quarter
Less disbursements:
Rent Salaries and wages Sales commissions (4% of sales) Utilities Dividends paid Equipment purchases Total disbursements Excess (deficiency) of receipts over disbursements Financing:
Cash balance, ending
*April: $(120,000) + X - .01X = $50,000, X = $171,717 (rounded) May: $40,000 + X - .01X - $1,717 = $50,000, X = $11,835 (rounded) **April: $171,717 x .01 = $1,717 May and June: ($171,717 + $11,835) x .01 = $1,835
$ 94,613
(5,387) $ 94,613
f.
Knockoffs Unlimited Budgeted Income Statement For the Three Months Ended June 30 Sales revenue (Part a.)
$2,150,000
Variable expenses: Cost of goods sold (215,000 units @ $4 per necklace)
$860,000
Commissions (215,000 units @ 4% of sales)
86,000
Contribution margin
946,000 1,204,000
Fixed expenses: Advertising ($200,000 x 3) Rent ($18,000 x 3) Wages and salaries ($106,000 x 3) Utilities ($7,000 x 3) Insurance ($3,000 x 3) Depreciation ($14,000 x 3) Operating income Less interest expense (Part e) Net income
600,000 54,000 318,000 21,000 9,000 42,000
1,044,000 160,000 5,387 $ 154,613
g.
Knockoffs Unlimited Budgeted Balance Sheet June 30
Assets Cash (Part e)
$ 94,613
Accounts receivable (see below)
500,000
Inventory (12,000 units @ $4 per unit)
48,000
Prepaid insurance ($21,000 – $9,000)
12,000
Fixed assets, net of depreciation ($950,000 + $56,000 – $42,000)
964,000
Total assets
$1,618,613
Liabilities and Shareholders’ Equity Accounts payable, purchases (50% × $168,000 from Part c)
$ 84,000
Dividends payable
15,000
Common shares
800,000
Retained earnings (see below)
719,613
Total liabilities and equity
$1,618,613
Accounts receivable at June 30: 10% × May sales of $1,000,000
$100,000
80% × June sales of $500,000
400,000
Total
$500,000
Retained earnings at June 30: Balance, March 31
$580,000
Add net income (Part f)
154,613
Total
734,613
Less dividends declared Balance, June 30
15,000 $719,613
3. Oxford Concrete Inc. (OCI) processes and distributes various types of cement. The company buys quarried local rock, limestone, and clay from around the world and mixes, blends, and packages the processed cement for resale. OCI offers a large variety of cement types that it sells in one-kilogram bags to local retailers for small do-it-yourself jobs. The major cost of the cement is raw materials. However, the company’s predominantly automated mixing, blending, and packaging processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labour. Some of OCI’s cement mixtures are very popular and sell in large volumes, while a few of the recently introduced cement mixtures sell in very low volumes. OCI prices its cements at manufacturing cost plus a 25% markup, with some adjustments made to keep the company’s prices competitive. For the coming year, OCI’s budget includes estimated manufacturing overhead cost of $4,400,000. OCI assigns manufacturing overhead to products on the basis of direct labour-hours. The expected direct labour cost totals $1,200,000, which represents 100,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use $10,000,000 of raw materials (mostly quarried rock, limestone, and clay) during the year. The expected costs for direct materials and direct labour for one-kilogram bags of two of the company’s cement products appear below:
Direct materials Direct labour (0.02 hours per bag)
Normal Portland $ 9.00 $ 0.24
High Sulphate Resistance $ 5.80 $ 0.24
OCI’s controller believes that the company’s traditional costing system may be providing misleading cost information. To determine whether this is the case, the controller has prepared an analysis of the year’s expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool
Activity Measure
Purchasing Materials handling Quality control
Purchase orders Number of setups Number of batches Mixing hours Blending hours Packaging hours
Mixing Blending Packaging
Expected Activity for the Year 4,000 orders 2,000 setups 1,000 batches 190,000 mixing hours 64,000 blending hours 48,000 packaging hours
Total MOH cost
Expected Cost for the Year $ 1,120,000 $ 386,000 $ 180,000 $ 2,090,000 $ 384,000 $ 240,000 $ 4,400,000
Data regarding the expected production of Normal Portland and High Sulphate Resistance cement mixes are presented below:
Expected sales Batch size Setups Purchase order size Mixing time per 100 kilogram
Normal Portland 160,000 kilograms 10,000 kilograms 4 per batch 20,000 kilograms 3 mixing hours
High Sulphate Resistance 8,000 kilograms 500 kilograms 4 per batch 500 kilograms 3 mixing hours
Blending time per 100 kilogram Packaging time per 100 kilogram
1 blending hour 0.6 packaging hours
1 blending hour 0.6 packaging hours
Required: (40) a. Using direct labour-hours as the base for assigning manufacturing overhead cost to products, do the following: i. Determine the predetermined overhead rate that will be used during the year. (2) ii. Determine the unit product cost of one kilogram of the Normal Portland cement and one kilogram of the High Sulphate Resistance cement. (3) b. Using ABC as the basis for assigning manufacturing overhead cost to products, do the following: i. Determine the total amount of manufacturing overhead cost assigned to the Normal Portland cement and to the High Sulphate Resistance cement for the year. (8) ii. Using the data developed in b. i. above, compute the amount of manufacturing over-head cost per kilogram of the Normal Portland cement and the High Sulphate Resistance cement. Round all computations to the nearest whole cent. (12) iii. Determine the unit product cost of one kilogram of the Normal Portland cement and one kilogram of the High Sulphate Resistance cement. (5) c. Write a brief memo to the president of OCI explaining what you found in (a) and (b) above, and discuss the implications to the company of using direct labour as the base for assigning manufacturing overhead cost to products. (10)
a. i.
The predetermined overhead rate would be computed as follows:
Expected manufacturing overhead cost $4,400,000 = Estimated direct labour-hours 100,000 DLHs =$44 per DLH ii. The unit product cost per kilogram, using the company’s present costing system, would be:
Normal Portland (NP) Direct materials (given) Direct labour (given)
High Sulphate Resistance (HSR)
$ 9.00
$5.80
0.24
0.24
0.88
0.88
$10.12
$6.92
Manufacturing overhead: 0.02 DLH × $44 per DLH Total unit product cost
b. i.
Overhead rates by activity centre:
Activity Centre
(a) Estimated Overhead Costs
Purchasing
(b) Expected Activity
(a) ÷ (b) Predetermined Overhead Rate
$1,120,000
4,000 orders
$280 per order
Material handling
$386,000
2,000 setups
$193 per setup
Quality control
$180,000
1,000 batches
$180 per batch
Mixing
$2,090,000
190,000 mixing hours
$11 per mixing hour
Blending
$384,000
64,000 blending hours
$6 per blending hour
Packaging
$240,000
48,000 packaging hours
$5 per packaging hour
Before we can determine the amount of overhead cost to assign to the products we must first determine the activity for each of the products in the six activity centers. The necessary computations follow: Number of purchase orders: NP: 160,000 kilograms ÷ 20,000 kilograms per order = 8 orders HSR: 8,000 kilograms ÷ 500 kilograms per order = 16 orders Number of batches: NP: 160,000 kilograms ÷ 10,000 kilograms per batch = 16 batches HSR: 8,000 kilograms ÷ 500 kilograms per batch = 16 batches Number of setups: NP: 16 batches × 4 setups per batch = 64 setups HSR: 16 batches × 4 setups per batch = 64 setups Mixing hours: NP: 160,000 kilograms × 3 mixing hours per 100 kilograms = 4,800 mixing hours HSR: 8,000 kilograms × 3 mixing hours per 100 kilograms = 240 mixing hours Blending hours: NP: 160,000 kilograms × 1 blending hour per 100 kilograms = 1,600 blending hours HSR: 8,000 kilograms × 1 blending hour per 100 kilograms = 80 blending hours Packaging hours: NP: 160,000 kilograms × 0.6 packaging hours per 100 kilograms = 960 packaging hours HSR: 8,000 kilograms × 0.6 packaging hours per 100 kilograms = 48 packaging hours
ii. Using the activity figures, manufacturing overhead costs can be assigned to the two products as follows:
Normal Portland Activity Rate
Expected Activity
Amount
Purchasing
$280 per order
8 orders
$ 2,240
Material handling
$193 per setup
64 setups
12,352
Quality control
$180 per batch
16 batches
2,880
Mixing
$11 per mixing hour
Blending
$6 per blending hour
Packaging
$5 per packaging hour
4,800 mixing hours 1,600 blending hours 960 packaging hours
Total overhead cost
52,800 9,600 4,800 $84,672
High Sulphate Resistance Activity Rate
Expected Activity
Amount
Purchasing
$280 per order
16 orders
$ 4,480
Material handling
$193 per setup
64 setups
12,352
Quality control
$180 per batch
16 batches
2,880
Mixing
$11 per mixing hour
240 mixing hours
2,640
Blending
$6 per blending hour
80 blending hours
480
Packaging
$5 per packaging hour
48 packaging hours
240
Total overhead cost
$23,072
iii. According to the activity-based costing system, the manufacturing overhead cost per kilogram is:
Normal Portland
High Sulphate Resistance
Total overhead cost assigned (above) (a)
$84,672
$23,072
Number of kilograms manufactured (b)
160,000
8,000
$0.53
$2.88
Cost per kilograms (a) ÷ (b)
(rounded)
The unit product costs according to the activity-based costing system are:
Normal Portland Direct materials (given)
$9.00
$5.80
Direct labour (given)
0.24
0.24
Manufacturing overhead
0.53
2.88
$9.77
$8.92
Total unit product cost c.
High Sulphate Resistance
MEMO TO THE PRESIDENT: Analysis of OCI’s data shows that several activities other than direct labour drive the company’s manufacturing overhead costs. These activities include purchase orders issued, number of setups for material processing, and number of batches processed. The company’s present costing system, which relies on direct labour time as the sole basis for assigning overhead cost to products, significantly under costs low-volume products, such as the High Sulphate Resistance cement, and significantly over costs high-volume products, such as our Normal Portland cement. An implication of the activity-based costing analysis is that our low-volume products may not be covering the costs of the manufacturing resources they use. For example, High Sulphate Resistance cement is currently priced at $8.65 per kilogram ($6.92 plus 25% markup), but this price is below its activity-based cost of $8.92 per kilogram. Under our present costing and pricing system, our highvolume products, such as our Normal Portland cement, may be subsidizing our low-volume products. Some adjustments in prices may be required.
$ 1,400 $ 4,700 $ 8,300 $ 2,100 $ 1,800
Cost per Car Washed $ 0.70 $ 0.10 $ 0.30 $ 0.40
$ 0.05
The company expects to charge customers an average of $5.90 per car washed. For November Auto Lavage had assumed that 8,000 cars would washed. The actual revenues and expenses for November are given below:
Sales Variable expenses Cleaning supplies Electricity Maintenance Wages and salaries Administrative expenses Fixed expenses Electricity Wages and salaries Depreciation Rent Administrative expenses
Actual Data for 8,100 Cars $ 49,300 6,075 891 2,187 3,402 486 1,450 4,700 8,300 2,100 1,745
Required: (25) a.
Prepare the budget for November. (10)
b.
Prepare the flexible budget variance report for November and indicate the flexible budget variance, sales volume variance and static-budget variance. (15)
a. Auto Lavage Inc. Budget November Budgeted Amount Per Unit (per car) Sales
Cars Washed 8,000
$5.90
$47,200
Cleaning supplies
0.70
5,600
Electricity
0.10
800
Maintenance
0.30
2,400
Wages and salaries
0.40
3,200
Administrative
0.05
400
1.55
12,400
$4.35
34,800
Variable expenses:
Total variable expenses Contribution margin Fixed expenses: Electricity
1,400
Wages and salaries
4,700
Depreciation Rent
8,300
Administrative
1,800
Total fixed expenses Operating income
2,100 18,300 $16,500
b.
Sales
Actual
Flexible
Flexible
Sales
Static
(8,100 cars)
Budget
Budget
Volume
Budget
Variance
(8,100 cars)
Variance
(8,000 cars)
$49,300
$1,510
F
$47,790
$590
F
$47,200
6,075
405
U
5,670
70
U
5,600
891
81
U
810
10
U
800
Maintenance
2,187
(243)
F
2,430
30
U
2,400
Wages and supplies
3,402
162
U
3,240
40
U
3,200
486
81
U
405
5
U
400
Total variable expenses
13,041
486
U
12,555
155
U
12,400
Contribution margin
36,259
1,024
F
35,235
435
F
34,800
Electricity
1,450
50
U
1,400
0
1,400
Wages and salaries
4,700
0
4,700
0
4,700
Depreciation
8,300
0
8,300
0
8,300
Rent
2,100
0
2,100
0
2,100
Administrative
1,745
(55)
F
1,800
0
1,800
18,295
(5)
F
18,300
0
18,300
$17,964
$1,029
F
$16,935
$435
Variable expenses: Cleaning supplies Electricity
Administrative
Fixed expenses:
Total fixed expenses Operating income
Total static-budget variance: $1,464 F
F
$16,500
2. Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below. The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows: January (actual) February (actual) March (actual) April May June July August September
20,000 26,000 40,000 65,000 100,000 50,000 30,000 28,000 25,000
The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units. The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. The company’s monthly selling and administrative expenses are given below: Variable: Sales commissions Fixed: Advertising Rent Wages and salaries Utilities Insurance Depreciation
4% of sales $ 200,000 18,000 106,000 7,000 3,000 14,000
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below: Assets Cash Accounts receivable ($ 26,000 February sales; $ 320,000 March sales) Inventory Prepaid insurance Fixed assets, net of depreciation Total assets
$
74,000 346,000 104,000 21,000 950,000 $ 1,495,000
Liabilities Accounts payable Dividends payable Total liabilities
$ 100,000 15,000 115,000
Shareholders’ Equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
800,000 580,000 1,380,000 $ 1,495,000
The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month. Required: (35) Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: a. A sales budget by month and in total. (2) b. A schedule of expected cash collections from sales, by month and in total. (4) c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (4) d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. (4) e. A cash budget. Show the budget by month and in total. (7) f. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach. (7) g. A budgeted balance sheet as of June 30. (7)
a.
Sales budget:
May
June
Quarter
Budgeted sales in units
65,000
100,000
50,000
215,000
Selling price per unit
× $10
× $10
× $10
×
$650,000
$1,000,000
$500,000
Total sales b.
April
$10
$2,150,000
Schedule of expected cash collections: February sales (10%) March sales
$ 26,000
$
26,000
280,000
$ 40,000
320,000
130,000
455,000
$ 65,000
650,000
200,000
700,000
900,000
100,000
100,000
(70%, 10%) April sales (20%, 70%, 10%) May sales (20%, 70%) June sales (20%) Total cash collections c.
$436,000
$695,000
$865,000
$1,996,000
Budgeted sales in units
65,000
100,000
50,000
215,000
Add budgeted ending
40,000
20,000
12,000
12,000
105,000
120,000
62,000
227,000
Less beginning inventory
26,000
40,000
20,000
26,000
Required unit purchases
79,000
80,000
42,000
201,000
Unit cost
× $4
× $4
× $4
$316,000
$320,000
$168,000
May
June
Merchandise purchases budget:
inventory* Total needs
Required dollar purchases
×
$4
$ 804,000
*40% of the next month’s sales in units. d. Budgeted cash disbursements for merchandise purchases:
April
Quarter
March purchases (Accounts payable) April purchases
$100,000 158,000
May purchases
$ 100,000 $158,000 160,000
June purchases Total cash disbursements
$258,000
$318,000
316,000 $160,000
320,000
84,000
84,000
$244,000
$ 820,000
e.
Knockoffs Unlimited Cash Budget For the Three Months Ending June 30
April
May
$ 74,000
$ 50,000
$ 50,000
$ 74,000
Add receipts from customers (Part b.)
436,000
695,000
865,000
1,996,000
Total cash available
510,000
745,000
915,000
2,070,000
Purchase of inventory (Part d.)
258,000
318,000
244,000
820,000
Advertising
200,000
200,000
200,000
600,000
18,000
18,000
18,000
54,000
106,000
106,000
106,000
318,000
26,000
40,000
20,000
86,000
7,000
7,000
7,000
21,000
15,000
0
0
15,000
0
16,000
40,000
56,000
630,000
705,000
635,000
1,970,000
(120,000)
40,000
280,000
100,000
Borrowings*
171,717
11,835
0
183,552
Repayments
0
0
(183,552)
(183,552)
Interest**
(1,717)
(1,835)
(1,835)
(5,387)
Total financing
170,000
10,000
(185,387)
$ 50,000
$ 50,000
Cash balance, beginning
June
Quarter
Less disbursements:
Rent Salaries and wages Sales commissions (4% of sales) Utilities Dividends paid Equipment purchases Total disbursements Excess (deficiency) of receipts over disbursements Financing:
Cash balance, ending
*April: $(120,000) + X - .01X = $50,000, X = $171,717 (rounded) May: $40,000 + X - .01X - $1,717 = $50,000, X = $11,835 (rounded) **April: $171,717 x .01 = $1,717 May and June: ($171,717 + $11,835) x .01 = $1,835
$ 94,613
(5,387) $ 94,613
f.
Knockoffs Unlimited Budgeted Income Statement For the Three Months Ended June 30 Sales revenue (Part a.)
$2,150,000
Variable expenses: Cost of goods sold (215,000 units @ $4 per necklace)
$860,000
Commissions (215,000 units @ 4% of sales)
86,000
Contribution margin
946,000 1,204,000
Fixed expenses: Advertising ($200,000 x 3) Rent ($18,000 x 3) Wages and salaries ($106,000 x 3) Utilities ($7,000 x 3) Insurance ($3,000 x 3) Depreciation ($14,000 x 3) Operating income Less interest expense (Part e) Net income
600,000 54,000 318,000 21,000 9,000 42,000
1,044,000 160,000 5,387 $ 154,613
g.
Knockoffs Unlimited Budgeted Balance Sheet June 30
Assets Cash (Part e)
$ 94,613
Accounts receivable (see below)
500,000
Inventory (12,000 units @ $4 per unit)
48,000
Prepaid insurance ($21,000 – $9,000)
12,000
Fixed assets, net of depreciation ($950,000 + $56,000 – $42,000)
964,000
Total assets
$1,618,613
Liabilities and Shareholders’ Equity Accounts payable, purchases (50% × $168,000 from Part c)
$ 84,000
Dividends payable
15,000
Common shares
800,000
Retained earnings (see below)
719,613
Total liabilities and equity
$1,618,613
Accounts receivable at June 30: 10% × May sales of $1,000,000
$100,000
80% × June sales of $500,000
400,000
Total
$500,000
Retained earnings at June 30: Balance, March 31
$580,000
Add net income (Part f)
154,613
Total
734,613
Less dividends declared Balance, June 30
15,000 $719,613
3. Oxford Concrete Inc. (OCI) processes and distributes various types of cement. The company buys quarried local rock, limestone, and clay from around the world and mixes, blends, and packages the processed cement for resale. OCI offers a large variety of cement types that it sells in one-kilogram bags to local retailers for small do-it-yourself jobs. The major cost of the cement is raw materials. However, the company’s predominantly automated mixing, blending, and packaging processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labour. Some of OCI’s cement mixtures are very popular and sell in large volumes, while a few of the recently introduced cement mixtures sell in very low volumes. OCI prices its cements at manufacturing cost plus a 25% markup, with some adjustments made to keep the company’s prices competitive. For the coming year, OCI’s budget includes estimated manufacturing overhead cost of $4,400,000. OCI assigns manufacturing overhead to products on the basis of direct labour-hours. The expected direct labour cost totals $1,200,000, which represents 100,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use $10,000,000 of raw materials (mostly quarried rock, limestone, and clay) during the year. The expected costs for direct materials and direct labour for one-kilogram bags of two of the company’s cement products appear below:
Direct materials Direct labour (0.02 hours per bag)
Normal Portland $ 9.00 $ 0.24
High Sulphate Resistance $ 5.80 $ 0.24
OCI’s controller believes that the company’s traditional costing system may be providing misleading cost information. To determine whether this is the case, the controller has prepared an analysis of the year’s expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool
Activity Measure
Purchasing Materials handling Quality control
Purchase orders Number of setups Number of batches Mixing hours Blending hours Packaging hours
Mixing Blending Packaging
Expected Activity for the Year 4,000 orders 2,000 setups 1,000 batches 190,000 mixing hours 64,000 blending hours 48,000 packaging hours
Total MOH cost
Expected Cost for the Year $ 1,120,000 $ 386,000 $ 180,000 $ 2,090,000 $ 384,000 $ 240,000 $ 4,400,000
Data regarding the expected production of Normal Portland and High Sulphate Resistance cement mixes are presented below:
Expected sales Batch size Setups Purchase order size Mixing time per 100 kilogram
Normal Portland 160,000 kilograms 10,000 kilograms 4 per batch 20,000 kilograms 3 mixing hours
High Sulphate Resistance 8,000 kilograms 500 kilograms 4 per batch 500 kilograms 3 mixing hours
Blending time per 100 kilogram Packaging time per 100 kilogram
1 blending hour 0.6 packaging hours
1 blending hour 0.6 packaging hours
Required: (40) a. Using direct labour-hours as the base for assigning manufacturing overhead cost to products, do the following: i. Determine the predetermined overhead rate that will be used during the year. (2) ii. Determine the unit product cost of one kilogram of the Normal Portland cement and one kilogram of the High Sulphate Resistance cement. (3) b. Using ABC as the basis for assigning manufacturing overhead cost to products, do the following: i. Determine the total amount of manufacturing overhead cost assigned to the Normal Portland cement and to the High Sulphate Resistance cement for the year. (8) ii. Using the data developed in b. i. above, compute the amount of manufacturing over-head cost per kilogram of the Normal Portland cement and the High Sulphate Resistance cement. Round all computations to the nearest whole cent. (12) iii. Determine the unit product cost of one kilogram of the Normal Portland cement and one kilogram of the High Sulphate Resistance cement. (5) c. Write a brief memo to the president of OCI explaining what you found in (a) and (b) above, and discuss the implications to the company of using direct labour as the base for assigning manufacturing overhead cost to products. (10)
a. i.
The predetermined overhead rate would be computed as follows:
Expected manufacturing overhead cost $4,400,000 = Estimated direct labour-hours 100,000 DLHs =$44 per DLH ii. The unit product cost per kilogram, using the company’s present costing system, would be:
Normal Portland (NP) Direct materials (given) Direct labour (given)
High Sulphate Resistance (HSR)
$ 9.00
$5.80
0.24
0.24
0.88
0.88
$10.12
$6.92
Manufacturing overhead: 0.02 DLH × $44 per DLH Total unit product cost
b. i.
Overhead rates by activity centre:
Activity Centre
(a) Estimated Overhead Costs
Purchasing
(b) Expected Activity
(a) ÷ (b) Predetermined Overhead Rate
$1,120,000
4,000 orders
$280 per order
Material handling
$386,000
2,000 setups
$193 per setup
Quality control
$180,000
1,000 batches
$180 per batch
Mixing
$2,090,000
190,000 mixing hours
$11 per mixing hour
Blending
$384,000
64,000 blending hours
$6 per blending hour
Packaging
$240,000
48,000 packaging hours
$5 per packaging hour
Before we can determine the amount of overhead cost to assign to the products we must first determine the activity for each of the products in the six activity centers. The necessary computations follow: Number of purchase orders: NP: 160,000 kilograms ÷ 20,000 kilograms per order = 8 orders HSR: 8,000 kilograms ÷ 500 kilograms per order = 16 orders Number of batches: NP: 160,000 kilograms ÷ 10,000 kilograms per batch = 16 batches HSR: 8,000 kilograms ÷ 500 kilograms per batch = 16 batches Number of setups: NP: 16 batches × 4 setups per batch = 64 setups HSR: 16 batches × 4 setups per batch = 64 setups Mixing hours: NP: 160,000 kilograms × 3 mixing hours per 100 kilograms = 4,800 mixing hours HSR: 8,000 kilograms × 3 mixing hours per 100 kilograms = 240 mixing hours Blending hours: NP: 160,000 kilograms × 1 blending hour per 100 kilograms = 1,600 blending hours HSR: 8,000 kilograms × 1 blending hour per 100 kilograms = 80 blending hours Packaging hours: NP: 160,000 kilograms × 0.6 packaging hours per 100 kilograms = 960 packaging hours HSR: 8,000 kilograms × 0.6 packaging hours per 100 kilograms = 48 packaging hours
ii. Using the activity figures, manufacturing overhead costs can be assigned to the two products as follows:
Normal Portland Activity Rate
Expected Activity
Amount
Purchasing
$280 per order
8 orders
$ 2,240
Material handling
$193 per setup
64 setups
12,352
Quality control
$180 per batch
16 batches
2,880
Mixing
$11 per mixing hour
Blending
$6 per blending hour
Packaging
$5 per packaging hour
4,800 mixing hours 1,600 blending hours 960 packaging hours
Total overhead cost
52,800 9,600 4,800 $84,672
High Sulphate Resistance Activity Rate
Expected Activity
Amount
Purchasing
$280 per order
16 orders
$ 4,480
Material handling
$193 per setup
64 setups
12,352
Quality control
$180 per batch
16 batches
2,880
Mixing
$11 per mixing hour
240 mixing hours
2,640
Blending
$6 per blending hour
80 blending hours
480
Packaging
$5 per packaging hour
48 packaging hours
240
Total overhead cost
$23,072
iii. According to the activity-based costing system, the manufacturing overhead cost per kilogram is:
Normal Portland
High Sulphate Resistance
Total overhead cost assigned (above) (a)
$84,672
$23,072
Number of kilograms manufactured (b)
160,000
8,000
$0.53
$2.88
Cost per kilograms (a) ÷ (b)
(rounded)
The unit product costs according to the activity-based costing system are:
Normal Portland Direct materials (given)
$9.00
$5.80
Direct labour (given)
0.24
0.24
Manufacturing overhead
0.53
2.88
$9.77
$8.92
Total unit product cost c.
High Sulphate Resistance
MEMO TO THE PRESIDENT: Analysis of OCI’s data shows that several activities other than direct labour drive the company’s manufacturing overhead costs. These activities include purchase orders issued, number of setups for material processing, and number of batches processed. The company’s present costing system, which relies on direct labour time as the sole basis for assigning overhead cost to products, significantly under costs low-volume products, such as the High Sulphate Resistance cement, and significantly over costs high-volume products, such as our Normal Portland cement. An implication of the activity-based costing analysis is that our low-volume products may not be covering the costs of the manufacturing resources they use. For example, High Sulphate Resistance cement is currently priced at $8.65 per kilogram ($6.92 plus 25% markup), but this price is below its activity-based cost of $8.92 per kilogram. Under our present costing and pricing system, our highvolume products, such as our Normal Portland cement, may be subsidizing our low-volume products. Some adjustments in prices may be required.
