Seminar 11Answer Group 10.pptx

7/27/2019 Seminar 11Answer Group 10.pptx

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BU8101ACCOUNTING: A

USERS

PERSPECTIVE

SEMINAR 11

Group 9Wang Zeyu

Andanari Puspadin

Lee Meng Chin

Wang Haoran

Yu Qing


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Question 1


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Pearl Products Limited of Shenzhen, China,manufactures and distributes toys throughoutSouth East Asia. 3 cubic centimeters (cc) ofsolvent H300 are required to manufactureeach unit of Supermix, one of the companys

products. The company is now planning rawmaterials needs for the third quarter, thequarter in which peak sales of Supermix occur.To keep production and sales moving

smoothly, the company has the followinginventory requirements:


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A. The finished goods inventory on hand at theend of each month must equal to 3,000 units

of Supermix plus 20% of the next monthssales. The finished goods inventory on June30 is budgeted to be 10,000 units.0

B. The raw materials inventory on hand at theend of each month must be equal to one-half of the following months production

needs for raw materials. The raw materialson June 30 is budgeted to be 54,000cc of

solvent H300.

C. The company maintains no work in processinventories.


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Month Budgeted Sales in Units

July 35,000

August 40,000

September 50,000

October 30,000

November 20,000December 10,000

A sales budget for Supermix for the lastsix months of the year are as follows:


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1. Prepare a production budget for Supermix for the monthsJuly, August, September, and October

July August September October

Budgeted unit sales 35,000 40,000 50,000 30,000

Desired ending

inventory

11,000 13,000 9,000 7,000

Total units needed 46,000 53,000 59,000 37,000

Less beginninginventory

10,000 11,000 13,000 9,000

Units to produce 36,000 42,000 46,000 28,000

The finished goods inventory on hand at the endof each month must equal to 3,000 units ofSupermix plus 20% of the next months sales.


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2. Examine the production budget that you prepared in theprevious question. Why will the company produce more

units than it sells in July and August, and fewer units than itsells in September and October?


Budgeted unit sales 35,000 40,000 50,000 30,000

Desired endinginventory

11,000 13,000 9,000 7,000

Total units needed 46,000 53,000 59,000 37,000


10,000 11,000 13,000 9,000

Units to produce 36,000 42,000 46,000 28,000

Because higher number of sales were budgeted in the months ofAugust and September led to a higher desired ending inventorycompared to the beginning inventory in the months of July and

August. The opposite is true in September and October.


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Tutors additional comments

During July and August, the company isbuilding inventory in anticipation of

stronger sales in September. Thereforeproduction exceeds sales during the twomonths.

In September and October, lower sales is

anticipated for the following months, thusproduction is less than sales.


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3. Prepare a direct materials budget showing the quantityof solvent H300 to be purchased for July, August and

September, and for the quarter in total.


Units to produce 36,000 42,000 46,000 28,000

Solvent per unit 3 3 3 3

Material needs (cc) 108,000 126,000 138,000 84,000Desired endinginventory

63,000 69,000 42,000

Total material needs(cc)

171,000 195,000 180,000


54,000 63,000 69,000

Material purchases(cc)

117,000 132,000 111,000

Material purchases for the quarter = 117,000+132,000+111,000=360,000


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Question 2


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Cash BudgetP23.4B (p.1030) Peter Corporation

Peter Corporation sells its products to a single customer. At thebeginning of the current quarter, the company reports thefollowing selected account balances:

Peters management has made the following budget estimatesregarding operations for the current quarter:

Cash $ 10,000

Accounts receivable 250,000Current payables 90,000

Sales (estimated) $ 700,000

Total costs and expenses (estimated) 500,000

Debt service payment (estimated) 260,000

Tax liability payment (estimated) 50,000


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Of Peter's total costs and expenses, $40,000 is quarterlydepreciation expense, and $18,000 represents the expiration ofprepayments. The remaining $442,000 is to be financed withcurrent payables. The company's ending prepayments balanceis expected to be the same as its beginning prepaymentsbalance. Its ending current payables balance is expected to be$15,000 more than its beginning balance.

All of Peter's sales are on account. Approximately 70% of its salesare collected in the quarter in which they are made. Theremaining 30% are collected in the following quarter. Because allof the company's sales are made to a single customer, itexperiences virtually no uncollectible accounts.

Peter's minimum cash balance requirement is $10,000. Should thebalance fall below this amount, management negotiates a short-term loan with a local bank. The company's debt ratio (liabilities assets) is currently 90%.


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a. Compute Peters budgeted cash receipts for the quarter.

Current quarter

Receipts from previousquarter

$ 250,000

Receipts from currentquarter

490,000

Total cash receipts 740,000


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b. Compute Peters payments of current payables budgeted

for the quarter.

Current quarter

Beginning balance of current payables $ 90,000

Add: Total costs and expenses (estimated) 500,000Less: Depreciation 40,000

Expiration of prepayments 18,000

Cash payments for current payables 427,000

Ending balance of current payables 105,000

(90,000+500,000) - (40,000+18,000+105,000) = 427,000


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c. Compute Peters cash prepayments budgeted for thequarter.

Current quarter

Beginning balance of prepayments $ x

Add: Cash payments for prepayments 18,000

Less: Expiration of prepayments 18,000

Ending balance of prepayments x

(x+18,000) - x = 18,000


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d. Prepare Peters cash budget for the quarter.

Current quarter

Beginning cash balance $ 10,000

Cash receipts 740,000

Total cash receipts $ 750,000

Less: Current payables $ 427,000

Prepayments 18,000

Debt service payment 260,000

Tax liability payment 50,000

Total cash payments $ 755,000

Balance before financing $ (5,000)


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e. Estimate Peters short-term borrowing requirements for thequarter.

Current quarter

Balance before financing $ (5,000)

Borrowing 15,000

Ending cash balance $ 10,000

10,000 - (-5,000) = 15,000


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f. Discuss problems Peter might encounter in obtaining short-

term financing.

(Potentially) unprofitable. Peter Corporations estimated totalcosts and expenses for the quarter outweigh their estimatedsales.

High debt-ratio. Peter Corporations debt ratio is currently 90%which may impose a higher risk to creditors (banks).


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Question 3


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A few years ago, Eastern Digital Corporation

implemented a systematic budgeting processfor profit planning and control purposes. Whilethe majority of departmental managers arehappy with the new process, the factorymanager has expressed his unhappiness with

the information being generated by the system.


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Assembly DepartmentCost ReportFor the Month Ended 31 March, 2012

PlanningBudget

ActualResults

Variance

Machine Hours 40,000 35,000

Variable Cost:

Supplies $32,000 $29,700 $2,300 F

Scrap 20,000 19,500 500 F

Indirect Materials 56,000 51,800 4,200 FFixed Costs:

Wages and Salaries 80,000 79,200 800 F

Equipment Depreciation 60,000 60,000 -

Total Cost $248,000 $240,200 $7,800 F

A typical departmental cost report for a recent period follows:


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After receiving a copy of this cost report, the

supervisor of the Assembly Department said, Thesereports are great. Its really good to see how well

things are going in my department. I cant

understand why those people up there complain somuch about the reports.

For the last several years, the companys sales and

marketing department has failed to meet the salestargets stated in the companys monthly budgets.


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(a) The companys CEO is uneasy about the cost

reports and would like you to evaluate theirusefulness to the company.

It is not useful.

The company compares cost at differentactivity levels (the machine hours), which islike comparing apples to oranges.


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Tutors Additional Comments

Different activity levelVariable costs arenaturally different

The costs report only do a good job ofshowing whether fixed costs werecontrolled

They do not do a good job showingwhether variable costs are controlled

Since sales fails to meet budget,production likely falls as well.


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(b) What changes, if any, should be made in thereports to give better insight into how welldepartmental supervisors are controlling costs?

Flex the budget to the actual level of

activity.

Keep fixed costs constant.


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(c) Prepare a new performance report,

incorporating any changes you suggested inquestion (b) above.


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Assembly DepartmentCost Report

For the Month Ended of performance March, 2012

Cost formula

per hour

Total fixed

costs

Flexible

Budget Actual Results Variances

Units of activity35,000 35,000

Variable costs

Supplies 0.8 28,000 29,700 (1,700) F

Scrap 0.5 17,500 19,500 (2,000) FIndirect materials

1.4 49,000 51,800 (2,800) F

Total variable costs2.7 94,500 101,000 (6,500) F

Fixed cost

Wages & salaries 80,000 80,000 80,000

Equipment depreciation60,000 60,000 60,000

Total fixed costs 140,000 140,000

Total costs 234,500 241,000 (5,700) F


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(d) How well were costs controlled in the AssemblyDepartment in March?

Unfavorable variance in all its variable costs,which indicates the lack of control.

Tutors comments: Flexible budgetperformance report provides a muchclearer picture.

The variances indicate that costs were notcontrolled by the Assembly Department

All 3 variable costs have unfavourablevariances.


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Question 4


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1. An accountant forgot to record four adjustmentsduring 2010. Which one of the following omissions of

adjustments will overstate assets?

A. Unearned revenue is not reduced for theportion that has been earned.

B. Interest on fixed deposits has not yet beenrecorded.

C. Office supplies are not reduced for the

portion that has been used.

D. Income taxes owed but not yet paid areignored.


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A = L + OE

CommonStock

Revenue Expense Dividends+ - -

Net Income

Retained Earnings


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A = L + OE

CommonStock

Revenue Expense Dividends+ - -

Net Income

Retained Earnings


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3. Unison Company reported net credit sales of

&2,800,000 and cost of goods sold of &1,800,000 for 2010.

Its beginning balance of accounts receivable was&320,000. During 2010, the accounts receivable balance

decreased by &60,000. What is Unisons accounts

receivable turnover rate for 2010(rounded to two

decimal places)?

A. 6.21

B. 9.66

C. 8.00

D. 5.14


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Accounts Receivable Turnover =

AccountsReceivableTurnover

Net Sales

Average Net Acc. Receivable=

2,800,000

320,000+(320,000-60,000)

2

= 9.66


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4. Art & Co. sold goods to Party House on 28December 2009, with shipping terms of FOB

destination point. Party House received the goodson 3 January 2010. Which of the following is true?

A. Art & Co. should record the sales revenue on

28 December 2009.

B. Party House should pay the transportationcosts.

C. Party House should include the goods in itsinventory at 31 December 2009.

D. Party House should record a liability for thepurchase on 3 January 2010.


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5. For the most recent year, DC Banks current ratiowas significantly lower than that for the industry.

What is the best possible explanation for thissituation?

A. The other companies in the industry were

profitable.

B. DC Banks liquidity has improved.

C. DC Bank has less equity than the rest of the

industry.

D. DC Banks liquidity is worse than the rest ofthe industry.


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Monthly depreciation: ( $40,000 - $5,000 ) / 60 = $5833

Residual value when selling on 1 July 2010:

$40,000 - $5833 * 30 = $22,500 > $7,000

Lost of sale of assets

A = L + OE

Lost in stockholders equity


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7.Energy Consultants had total assets of $750,000and total shareholders equity of $250,000 at the

beginning of the year. During the year, total assetsincreased by $550,000 and total liabilities increasedby $200,000. The company also paid $200,000 individends. No other transactions occurred exceptrevenues and expenses. How much is net incomefor the year?

A. $950,000

B. $750,000

C. $650,000D. $550,000


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Extended accounting equation:

Assets=Liabilities+(Common Stock + Net Income

- Dividends)

Net income = change of A - change of L + change of D

= $550,000 - $200,000 + $200,000

= $550,000


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8. Fong Manufacturing has current assets (mainlycash) of $100,000, total assets of $250,000, current

liabilities of $20,000, and long-term liabilities of$50,000. Fong wants to buy new plant assets. Howmuch of its existing cash can Fong use to acquireplant assets without allowing its current ratio todecline below 2.0 to 1?

A. $ 40,000

B. $150,000

C. $180,000

D. $ 60,000


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Current ratio = current assets / current liabilities

= ( $100,000 - X ) / $20,000

=2.0 : 1

So X = $60,000


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9. H & Co. Has 5,000 3% cumulative preference sharesof $5 each, outstanding and 25,000 ordinary shares of

$2 each, outstanding. No dividends have been paidfor the past two years. If H & Co. Wishes to distribute$2 per share to the ordinary shareholders, what is thetotal amount of dividends to be declared in the

current year?

A. $50,750

B. $52,250

C. $50,000D. $2,250


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Dividends in arrears: 5,000 * $5 * 3% * 2

Dividends this year: 5,000 * $5 * 3% + 25,000 * $2

Total dividends to be declared in the current year:$52,250


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10.Which of the following will not cause a

change in the owners equity of a business?

A. Withdrawal of cash by the owner.B. Profit from sale of properties.

C. Settlement of a note payable.

D. Losses from discontinued operations.


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Accounting equation:

Assets = Liabilities + Owners Equity


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MCQ


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1.Which of the benefits derived from budgeting

increases management's awareness of thecompany's external economic environment?

A. Enhanced management responsibility

B. Assignment of decision-makingresponsibilities

C. Coordination of activities

D. Performance evaluation


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2. Which of the benefits derived from budgetingprovides a yardstick with which to measure eachdepartment's actual performance?

A. Enhanced management responsibility

B. Assignment of decision-makingresponsibilities

C. Coordination of activities

D. Performance evaluation


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3. You are responsible for preparing the followingbudgets or schedules:

In which ordershould you prepare these budgets andschedules?

1 Sales Budget

2 Manufacturing Cost Budget

3 Cash Budget

4 Production Schedule

5 Operating Expenses Budget6 Budgeted Balance Sheet

A. 1, 3, 4, 5, 2, 6B. 1, 4, 3, 5, 2, 6C. 1, 4, 2, 5, 3, 6D. 3, 6, 1, 2, 4, 5


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4. With a March 1 inventory of 12,000 units, howmany units must be produced to provide an ending

inventory of 8,000 units if Acorn Supply expectsMarch sales to be 36,000 units at $1 per unit?

A. 20,000 unitsB. 48,000 units

C. 32,000 units

D. 56,000 units

36,000 + 8,00012,000 = 32,000


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5. Projected Sales Forecast:

The desired ending inventory is 10% of the projected

unit sales of the subsequent period. How many unitswill be produced in thesecond time period?

TimePeriods

1st 2nd 3rd 4th

ProjectedUnit Sales

12,000 13,000 15,000 10,000

A. 13,100B. 13,200

C. 11,900D. 12,100

13,000 + 0.1*15,000 - 0.1*13,000 = 13,200


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6. Which of the following statement is not trueabout the relationship within the master budget?

A. The production budget are based in large part onthe sales forecast.

B. In many elements of the master budget, theamounts budgeted for the upcoming quarter are

reviewed and subdivided into monthly budgetfigures.

C. The operating budgets affect the budgetedincome statement, the cash budget, and the

budgeted balance sheet.D. The capital expenditures budget affects the direct

materials budget.


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7. The portion of the master budget relating toan individual responsibility center is called

which of the following?

A. Operating budget

B. Responsibility budgetC. Flexible budget

D. Financial budget


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Lecture11

Budgeting

LectureReview


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Budget

A budget is a comprehensive financial plan thatspecifies how resources will be acquired andused during a specified period of time.


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Budgeting

Provide standards

used for performanceevaluation and control

Provide information that

can be used to improvedecision making

Force managers to

plan for resourcerequirements

Improve communication

and coordination


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The Budgetary Process

Vision (Strategic Goal)

Formulate strategies to achieve vision

Prepare long-term budgets

Prepare short-term budgets (Operating Budgets)

Assign decision rights

Compare actual results to budgets


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Budget Periods

Operating budgets ordinarily cover aone--year period corresponding to acompanys fiscal year.

Many companies divide their annualbudget into quarterly & monthly budgets.

Operating budgets are more operationalthan strategic in nature, done by lower-

level managers.


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Types of Budgets

Sales Budget

Selling and Administrative Budget

Production Budget

Cash Budget

Direct Materials Budget

Direct Labor Budget

Manufacturing Overhead Budget


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The Sales Budget

Sales Budget =

Estimated Unit Sales Estimated Unit Price


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The Production Budget

Budgeted product sales in units

+ Desired product units in ending inventory

= Total product units needed

Product units in beginning inventory

= Product units to produce

Inventory Policy


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Material Purchases

Units to produce Material needed per unit

= Material needed for units to produce

+ Desired units of material in ending inventory

= Total units of material needed

Units of material in beginning inventory

= Units of material to purchase


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Direct Labor

Units to Produce Hours per Unit

= Total Hours RequiredWage Rate per Hour

= Direct Labor Cost


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Manufacturing Overhead

Units to Produce Variable Overhead Rate

= Variable Overhead Cost

+ Fixed Overhead

= Total Manufacturing Overhead Cost

- Depreciation

= Manufacturing Overhead

High-Low Method


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Selling and Administrative

Expense Budget

Budgeted Unit Sales Variable S&A per Unit

= Variable S&A Expense

+ Fixed S&A Expense

= Total S&A Expense

- Depreciation

= S&A Expense

High-Low Method


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Cash Budget

Cash receipts section lists all cash inflowsexcluding cash received from financing.

Cash disbursements section consists of all cashpayments excluding repayments of principal

and interest. Cash excess or deficiency section determines if

the company will need to borrow money or if itwill be able to repay funds previously borrowed.

Financing section details the borrowings andrepayments projected to take place during thebudget period.


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The Budgeted

Income StatementManufacturing Overhead Cost per Unit

= Total Manufacturing Overhead

Total Labor Hours Required

(Direct Materials + Direct Labor + Mfg. Overhead) Quantity

= Total Unit Cost


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Static vs. Flexible Budgets

Static Budgets: Traditional Budgets areprepared for a fixed activity level.

Flexible Budgets: Flexible Budgets areprepared for multiple activity levels


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Drawbacks of Static Budgets

Performance evaluation is difficult whenactual activity differs from the activity

originally budgeted.


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Flexible Budgeting

Show expenses that should haveoccurred at the actual level of activity.

May be prepared for any activity level inthe relevant range.

Reveal variances due to good costcontrol or lack of cost control.

Improve performance evaluation.


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Flexible Budgeting

Total variable costs change in directproportion to changes in activity.

Total fixed costs remain unchanged withinthe relevant range.

To flex a budget for different activity levels, wemust know how costs behave with changes inactivity levels.


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Thank you and wish you

good luck for the comingexam!

Documents

Seminar 11Answer Group 10.pptx