BU8101 ACCOUNTING: A USERS PERSPECTIVE SEMINAR 11

Group 9 Wang Zeyu Andanari Puspadin Lee Meng Chin Wang Haoran Yu Qing

Question 1

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. 3 cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the companys products. The company is now planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

A.

The finished goods inventory on hand at the end of each month must equal to 3,000 units of Supermix plus 20% of the next months sales. The finished goods inventory on June 30 is budgeted to be 10,000 units.0
The raw materials inventory on hand at the end of each month must be equal to onehalf of the following months production needs for raw materials. The raw materials on June 30 is budgeted to be 54,000cc of solvent H300. The company maintains no work in process inventories.

B.

C.

A sales budget for Supermix for the last six months of the year are as follows:
Month July August September Budgeted Sales in Units 35,000 40,000 50,000

October
November December

30,000
20,000 10,000

1.

Prepare a production budget for Supermix for the months July, August, September, and October
July August September October

Budgeted unit sales

Desired ending inventory Total units needed Less beginning inventory Units to produce

35,000
11,000 46,000 10,000 36,000

40,000
13,000 53,000 11,000 42,000

50,000
9,000 59,000 13,000 46,000

30,000
7,000 37,000 9,000 28,000

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

2.

Examine the production budget that you prepared in the previous question. Why will the company produce more units than it sells in July and August, and fewer units than it sells in September and October?
July August 40,000 13,000 53,000 11,000 September 50,000 9,000 59,000 13,000 October 30,000 7,000 37,000 9,000 35,000 11,000 46,000 10,000

Budgeted unit sales Desired ending inventory Total units needed Less beginning inventory

Units to produce

36,000

42,000

46,000

28,000

Because higher number of sales were budgeted in the months of August and September led to a higher desired ending inventory compared to the beginning inventory in the months of July and August. The opposite is true in September and October.

Tutors additional comments

During

July and August, the company is building inventory in anticipation of stronger sales in September. Therefore production exceeds sales during the two months. In September and October, lower sales is anticipated for the following months, thus production is less than sales.

3.

Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August and September, and for the quarter in total.
July August 42,000 3 126,000 69,000 195,000 63,000 132,000 3 108,000 63,000 171,000 54,000 117,000 September 46,000 3 138,000 42,000 180,000 69,000 111,000 October 28,000 3 84,000

Units to produce Solvent per unit Material needs (cc) Desired ending inventory Total material needs (cc) Less beginning inventory Material purchases (cc)

36,000

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

Question 2

Cash Budget P23.4B (p.1030) Peter Corporation

Peter Corporation sells its products to a single customer. At the beginning of the current quarter, the company reports the following selected account balances:
Cash Accounts receivable Current payables $ 10,000 250,000 90,000

Peters management has made the following budget estimates regarding operations for the current quarter:
Sales (estimated) Total costs and expenses (estimated) Debt service payment (estimated) Tax liability payment (estimated) $ 700,000 500,000 260,000 50,000

Of Peter's total costs and expenses, $40,000 is quarterly depreciation expense, and $18,000 represents the expiration of prepayments. The remaining $442,000 is to be financed with current payables. The company's ending prepayments balance is expected to be the same as its beginning prepayments balance. 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 sales are collected in the quarter in which they are made. The remaining 30% are collected in the following quarter. Because all of the company's sales are made to a single customer, it experiences virtually no uncollectible accounts. Peter's minimum cash balance requirement is $10,000. Should the balance fall below this amount, management negotiates a shortterm loan with a local bank. The company's debt ratio (liabilities assets) is currently 90%.

a.

Compute Peters budgeted cash receipts for the quarter.

Current quarter Receipts from previous quarter $ 250,000

Receipts from current quarter

Total cash receipts

490,000
740,000

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)

Less: Depreciation Expiration of prepayments Cash payments for current payables Ending balance of current payables

500,000
40,000 18,000 427,000 105,000

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

c.

Compute Peters cash prepayments budgeted for the quarter.

Current quarter Beginning balance of prepayments Add: Cash payments for prepayments Less: Expiration of prepayments Ending balance of prepayments $ x 18,000 18,000 x

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

d.

Prepare Peters cash budget for the quarter.

Current quarter Beginning cash balance Cash receipts Total cash receipts Less: Current payables Prepayments Debt service payment Tax liability payment Total cash payments Balance before financing $ $ 10,000 740,000 $ 750,000 $ 427,000 18,000 260,000 50,000 $ 755,000 (5,000)

e.

Estimate Peters short-term borrowing requirements for the quarter.

Current quarter

Balance before financing

Borrowing Ending cash balance

$
$

(5,000)
15,000 10,000

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

f.

Discuss problems Peter might encounter in obtaining shortterm financing. (Potentially) unprofitable. Peter Corporations estimated total costs and expenses for the quarter outweigh their estimated sales. High debt-ratio. Peter Corporations debt ratio is currently 90% which may impose a higher risk to creditors (banks).

Question 3

A few years ago, Eastern Digital Corporation implemented a systematic budgeting process for profit planning and control purposes. While the majority of departmental managers are happy with the new process, the factory manager has expressed his unhappiness with the information being generated by the system.

A typical departmental cost report for a recent period follows:

Assembly Department Cost Report For the Month Ended 31 March, 2012 Planning Budget Machine Hours Variable Cost: Supplies Scrap Indirect Materials Fixed Costs: Wages and Salaries Equipment Depreciation Total Cost 80,000 60,000 $248,000 79,200 60,000 $240,200 800 $7,800 F F $32,000 20,000 56,000 $29,700 19,500 51,800 $2,300 500 4,200 F F F 40,000 Actual Results 35,000 Variance

After receiving a copy of this cost report, the supervisor of the Assembly Department said, These reports are great. Its really good to see how well things are going in my department. I cant understand why those people up there complain so much about the reports. For the last several years, the companys sales and marketing department has failed to meet the sales targets stated in the companys monthly budgets.

(a) The companys CEO is uneasy about the cost reports and would like you to evaluate their usefulness to the company. It is not useful. The company compares cost at different activity levels (the machine hours), which is like comparing apples to oranges.

Tutors Additional Comments

Different

activity level Variable costs are naturally different The costs report only do a good job of showing whether fixed costs were controlled They do not do a good job showing whether variable costs are controlled Since sales fails to meet budget, production likely falls as well.

(b) What changes, if any, should be made in the reports to give better insight into how well departmental supervisors are controlling costs?

Flex the budget to the actual level of activity. Keep fixed costs constant.

(c) Prepare a new performance report, incorporating any changes you suggested in question (b) above.

Assembly Department Cost Report For the Month Ended of performance March, 2012 Cost formula per hour Units of activity Variable costs Total fixed costs Flexible Budget Actual Results Variances

35,000

35,000

Supplies
Scrap Indirect materials Total variable costs

0.8
0.5

28,000
17,500

29,700
19,500

(1,700)
(2,000)

F
F

1.4
2.7

49,000
94,500

51,800
101,000

(2,800)
(6,500)

F
F

Fixed cost
Wages & salaries Equipment depreciation Total fixed costs Total costs 80,000 60,000 80,000 60,000 140,000 234,500 80,000 60,000 140,000 241,000 (5,700) F

(d) How well were costs controlled in the Assembly Department in March? Unfavorable variance in all its variable costs, which indicates the lack of control. Tutors comments: Flexible budget performance report provides a much clearer picture. The variances indicate that costs were not controlled by the Assembly Department All 3 variable costs have unfavourable variances.

Question 4

1. An accountant forgot to record four adjustments during 2010. Which one of the following omissions of adjustments will overstate assets?
A.

Unearned revenue is not reduced for the portion that has been earned. Interest on fixed deposits has not yet been recorded. Office supplies are not reduced for the portion that has been used.

B.

C.

D.

Income taxes owed but not yet paid are ignored.

OE

Common + Revenue - Expense - Dividends Stock

Net Income

Retained Earnings

2. In October, an inexperienced bookkeeper capitalized the cost of replacing the car battery of a 5-year old companys car to an asset account. This entry
A.

B.

C.

D.

Overstates the total book value of plant assets on the Octobers balance sheet but has no effect on the amount of net income reported during October. Overstates the total book value of plant assets on the Octobers balance sheet and understates amount of net income reported during October. Overstates the total book value of plant assets reported on the Octobers balance sheet and the amount of net income reported during October. Has no effect on the book value of plant assets on the Octobers balance sheet or the amount of net income reported during October.

OE

Common + Revenue - Expense - Dividends Stock

Net Income

Retained Earnings

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. B. C. D.

6.21 9.66 8.00 5.14

Accounts Receivable Turnover

Net Sales Average Net Acc. Receivable

Accounts Receivable Turnover = 2,800,000 = 9.66

320,000+(320,000-60,000)
2

4. Art & Co. sold goods to Party House on 28 December 2009, with shipping terms of FOB destination point. Party House received the goods on 3 January 2010. Which of the following is true?
A.

Art & Co. should record the sales revenue on 28 December 2009. Party House should pay the transportation costs.

B.

C.

Party House should include the goods in its inventory at 31 December 2009.
Party House should record a liability for the purchase on 3 January 2010.

D.

5. For the most recent year, DC Banks current ratio was significantly lower than that for the industry. What is the best possible explanation for this situation?
A.

The other companies in the industry were profitable. DC Banks liquidity has improved. DC Bank has less equity than the rest of the industry. DC Banks liquidity is worse than the rest of the industry.

B. C.

D.

6.Logistics Transport purchased a truck on 1 January 2008 for $40,000. The truck had an estimated life of 5 years and an estimated residual value of $5,000. Logistics used the straight-line method to depreciate the asset. On 1 July 2010, the truck was sold for $7,000 cash. The journal entry to record the sale of the truck in 2010
A.
B. C. D.

Decreases stockholders equity. Increases total assets. Decreases total expenses. Increased net income.

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

7.Energy Consultants had total assets of $750,000 and total shareholders equity of $250,000 at the beginning of the year. During the year, total assets increased by $550,000 and total liabilities increased by $200,000. The company also paid $200,000 in dividends. No other transactions occurred except revenues and expenses. How much is net income for the year?
A.

B.
C. D.

$950,000 $750,000 $650,000 $550,000

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

8. Fong Manufacturing has current assets (mainly cash) 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. How much of its existing cash can Fong use to acquire plant assets without allowing its current ratio to decline below 2.0 to 1?
A. B. C. D.

$ 40,000 $150,000 $180,000 $ 60,000

Current ratio = current assets / current liabilities = ( $100,000 - X ) / $20,000 =2.0 : 1 So X = $60,000

9. H & Co. Has 5,000 3% cumulative preference shares of $5 each, outstanding and 25,000 ordinary shares of $2 each, outstanding. No dividends have been paid for the past two years. If H & Co. Wishes to distribute $2 per share to the ordinary shareholders, what is the total amount of dividends to be declared in the current year?
A. B. C. D.

$50,750 $52,250 $50,000 $2,250

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

10.Which of the following will not cause a change in the owners equity of a business?

A. B. C. D.

Withdrawal of cash by the owner. Profit from sale of properties. Settlement of a note payable. Losses from discontinued operations.

Accounting equation: Assets = Liabilities + Owners Equity

MCQ

1.Which of the benefits derived from budgeting increases management's awareness of the company's external economic environment?
A.
B. C. D.

Enhanced management responsibility Assignment of decision-making responsibilities Coordination of activities Performance evaluation

2. Which of the benefits derived from budgeting provides a yardstick with which to measure each department's actual performance?
A. B. C. D.

Enhanced management responsibility Assignment of decision-making responsibilities Coordination of activities Performance evaluation

3. You are responsible for preparing the following budgets or schedules:

1 2 3 4 5 6 Sales Budget Manufacturing Cost Budget Cash Budget Production Schedule Operating Expenses Budget Budgeted Balance Sheet

In which order should you prepare these budgets and schedules?

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

4. With a March 1 inventory of 12,000 units, how many units must be produced to provide an ending inventory of 8,000 units if Acorn Supply expects March sales to be 36,000 units at $1 per unit?

A.

B.
C. D.

20,000 units 48,000 units 32,000 units 56,000 units

36,000 + 8,000 12,000 = 32,000

5. Projected Sales Forecast:

Time Periods
Projected Unit Sales

1st
12,000

2nd
13,000

3rd
15,000

4th
10,000

The desired ending inventory is 10% of the projected unit sales of the subsequent period. How many units will be produced in the second time period?
A. 13,100 B. 13,200 C. 11,900 D. 12,100 13,000 + 0.1*15,000 - 0.1*13,000 = 13,200

6. Which of the following statement is not true about the relationship within the master budget?
A. B.

C.

D.

The production budget are based in large part on the sales forecast. In many elements of the master budget, the amounts budgeted for the upcoming quarter are reviewed and subdivided into monthly budget figures. The operating budgets affect the budgeted income statement, the cash budget, and the budgeted balance sheet. The capital expenditures budget affects the direct materials budget.

7. The portion of the master budget relating to an individual responsibility center is called which of the following?
A. B. C.

D.

Operating budget Responsibility budget Flexible budget Financial budget

Lecture11 Budgeting

Lecture Review

Budget

A budget is a comprehensive financial plan that specifies how resources will be acquired and used during a specified period of time.

Provide standards used for performance evaluation and control

Provide information that can be used to improve decision making

Budgeting
Force managers to plan for resource requirements Improve communication and coordination

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

Budget Periods
Operating budgets ordinarily cover a one--year period corresponding to a companys fiscal year. Many companies divide their annual budget into quarterly & monthly budgets. Operating budgets are more operational than strategic in nature, done by lowerlevel managers.

Types of Budgets

Sales Budget Selling and Administrative Budget

Direct Materials Budget

Production Budget
Cash Budget

Direct Labor Budget Manufacturing Overhead Budget

The Sales Budget

Sales Budget = Estimated Unit Sales Estimated Unit Price

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

The Production Budget 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

The Production Budget Direct Labor

Units to Produce Hours per Unit = Total Hours Required Wage Rate per Hour = Direct Labor Cost

The Production Budget Manufacturing Overhead

Units to Produce Variable Overhead Rate = Variable Overhead Cost + Fixed Overhead = Total Manufacturing Overhead Cost - Depreciation = Manufacturing Overhead

High-Low Method

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

Cash Budget
Cash receipts section lists all cash inflows excluding cash received from financing. Cash disbursements section consists of all cash payments excluding repayments of principal and interest. Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed. Financing section details the borrowings and repayments projected to take place during the budget period.

The Budgeted Income Statement

Manufacturing Overhead Cost per Unit = Total Manufacturing Overhead Total Labor Hours Required (Direct Materials + Direct Labor + Mfg. Overhead) Quantity = Total Unit Cost

The Budgeted Income Statement

Sales Cost of Goods Sold = Gross Margin - Selling and Administrative Expense = Operating Income - Interest Expense = Net Income

Balance Sheet

Static vs. Flexible Budgets

Static Budgets: Traditional Budgets are prepared for a fixed activity level. Flexible Budgets: Flexible Budgets are prepared for multiple activity levels

Drawbacks of Static Budgets

Performance evaluation is difficult when actual activity differs from the activity originally budgeted.

Flexible Budgeting
Show expenses that should have occurred at the actual level of activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation.

Flexible Budgeting
To flex a budget for different activity levels, we must know how costs behave with changes in activity levels.

Total variable costs change in direct proportion to changes in activity.

Total fixed costs remain unchanged within the relevant range.

Thank you and wish you good luck for the coming exam!