MANAGEMENT ACCOUNTING QUESTION BANK

QUESTION ONE

A furniture-making business manufactures quality furniture to customers' orders. It has three production
departments and two services departments. Budgeted overhead costs for the coming year are as follows:

Budgeted Costs ($)

Rent and Rates 12 800

Machine Insurance 6 000
Telephone Charges 3 200
Depreciation 18 000
Production supervisors’ salaries 24 000
Heating & lighting 6 400
70 400

Three production departments - A, B and C and the two service departments - X and Y, are housed in the
new premises, the details of which, together with other statistics and information, are given below.

DEPARTMENTS

Floor area A B C X Y

Occupied (sq.metres) 3000 1800 600 600 400

Machine Value ($’000) 24 10 8 4 2

Budgeted Direct
Labour Hours: 3200 1800 1000

Labour rates per hour ($) 3.80 3.50 3.40 3.00 3.00

Allocated overheads:
Specific to each
Department ($'000) 2.8 1.7 1.2 0.8 0.6

Service department X's

Costs apportionment: 50% 25% 25% - -

Service department Y's

Costs apportionment: 20% 30% 50% - -

REQUIRED:

(a) Prepare a statement showing the overhead costs budgeted for each department, showing the basis of
apportionment used in each case. Also calculated suitable overhead absorption rates for each
department.

(b) Two pieces of furniture are to be manufactured for customers. The direct costs are as follows:

Job 123 Job 124

Direct Material ($) 154 108

Direct Labours 20 Hrs. Dept A 16 Hrs. Dept.A

12 Hrs. Dept B 10 Hrs. Dept.B
10 Hrs. Dept C 14 Hrs. Dept C

Calculate the total costs of each job passing through these departments.
(c) If the firm quotes prices to customers that reflect a required profit of 25% on selling price, calculate the
quoted selling price for each job.

(d) If material costs are a significant part of the total costs in a manufacturing company, describe a system
of material control that might be used in order to effectively control costs, paying particular attention to
stock control aspect.

QUESTION TWO

A Company produces several products, which pass through the two-production departments in its factory.
These two departments are concerned with Filling and Sealing operations. There are two other service
departments, maintenance and canteen, in the factory.

Predetermined overhead absorption rates, based on direct labour hours, are established for the two
production departments. The budgeted expenditure for these departments for the period just ended,
including the apportionment of service department overheads, was $ 110 040 for filling, and $ 53 300 for
sealing.

Budgeted direct labour hours were 13 100 for filling, and 10 250 for sealing.

Service department overheads are apportioned to other departments as follows:

Maintenance Filling 70%

Sealing 27%
Canteen 3%

Canteen Filling 60%

Sealing 32%
Maintenance 8%

During the period just ended, actual overhead costs and activity were as follows:

($) Direct Labour

Hours Consumed

Filling 74 260 12 820

Sealing 38 115 10 075
Maintenance 25 050
Canteen 24 375

REQUIRED:

(a) Calculate the overheads absorbed in the period and the extent of the under/over absorption in each of
the two production departments.

(b) State, and critically assess, the objectives of overhead apportionment and absorption in absorption
costing.

QUESTION THREE

(a) Critically examine the arguments put forward for the use of absorption and marginal costing systems
respectively.

(b) The following information is available for a firm producing and selling a single product:

$' 000
Budgeted costs (at normal of activity)

(i) Direct Materials and labour 264

(ii) Variable production Overheads 48
(iii) Fixed production overheads 144
(iv) Variable selling and administrative overheads 24
(v) Fixed selling and Administrative overheads 96

The overhead absorption rates are based upon normal activity of 240 000 units per period. During the
period just ended 260 000 units of the product were produced, and 230 000 units were sold at $3 per unit.
At the beginning of the period 40 000 units were in stock. These were valued at the budgeted costs shown
above. Actual costs incurred were as per budget.

REQUIRED:

(i) Calculate the fixed production overhead absorbed during the period, and the extent of any
under/over absorption using absorption costing.

(ii) Calculate profits for the period using absorption costing and marginal costing respectively.

(iii) Reconcile/Explain the difference in the profit figures that you calculated in (ii) above.

(iv) State the situations in which the profit figures calculated under both absorption costing and
marginal costing would be the same.

QUESTION FOUR

A manufacturer is considering a new product which could be produced in one of the two qualities -
standard or Deluxe. The following estimates have been made:

Standard Deluxe
($) ($)
Unit labour cost 2.00 2.50
Unit Material cost 1.50 2.00
Unit packaging cost 1.00 2.00
Proposed selling price per unit 7.00 10.00

Budgeted fixed costs per period:

0 - 99, 999 Units 200 000 250 000

100 000 and above 350 000 400 000

At the proposed selling price, market research indicates the following demand:

Standard Probability
Quality
172 000 0.1
160 000 0.7
148 000 0.2

Deluxe Probability
Quality
195 500 0.3
156 500 0.5
109 500 0.2

You are required:

(a) To draw separate break-even charts for each quality, showing the brisk-even-points.

(b) To comment on the position shown by the charts and what guidance they provide for the management.

(c) To calculate, for each quality, the expected unit sales.

(d) Using an appropriate measure of risk (variability measure), advice the management which quality
should be launched.

QUESTION FIVE

The management of Icet Ltd. is considering the next year’s production and purchases budgets. One of the
components produced by the company, which is incorporated into another product before being sold, has
the following budgeted manufacturing costs:

($)

Direct material 14
Direct labour (4 hours @ $3 per Hr.) 12
Variable overhead (4 Hr @ $ 2 per Hr.) 8
Fixed overhead (4 Hr @ $ 5 per Hr.) 20
TOTAL COST 54 per unit

Tiger Ltd has offered to supply the above component at a guaranteed price of $ 50 per unit.

REQUIRED:

(a) Considering the cost criteria only, advice the management whether the above component should be
purchased from Tiger Ltd. Calculations and assumptions made should be shown, or aspects, which
may require further investigations, should be clearly stated.

(b) Explain how your above advice would be affected by each of the two separate situations shown below.

(i) As a result of recent government legislation, if Icet Ltd continues to manufacture this
component, the company will incur additional inspection and testing expenses of $56 000. Per
annum, which are not included in the above budgeted manufacturing costs.

(ii) Additional labour cannot be recruited and if the above component is not manufactured by Icet
Ltd, the direct labour released will be employed in increasing the production of an existing
product which is sold for $ 90 and which has budgeted manufacturing costs as follows:

$
Direct Material 10
Direct Labour (8 hrs @ $ 3 per hr.) 24
Variable Overhead (8 hrs @ $2 per hr.) 16
Fixed Overhead (8 hrs @ $ 5 per hr.) 40
90 per unit
All calculations should be shown

(iii) The production director of Icet Ltd. recently said:

"We must continue to manufacture the component as only one year ago we purchased some
special grinding equipment to be used exclusively by this component. The equipment cost
$100 000, it cannot be resold or used else where and if we cease the production of this
component, we will have to write-off the written down book value which is $80 000"

Draft a brief reply to the Production Manager/Director commenting on his statement.

QUESTION SIX

Mrs Dube has taken out a lease on a shop for a down payment of $5000. Additional, the rent under the
lease amounts to $5000 per annum. If the lease is cancelled, the initial payment of $5000 is forfeited. Mrs
Dube plans to use the shop for the sale of clothing, and has estimated operations for the next 12 months as
follows:
 $ $
Sales 115 000
Less: Value added tax 15 000

Sales less VAT 100 000

Cost of goods sold: 50 000
Wages and wage related costs 12 000
Rent including down payment 10 000
Rates, heating, lighting and insurance 13 000
Audit, legal and general expenses 2 000 87 000

Net profit before taxes 13 000

In the figures no provision has been made for the compensation for Mrs Dube's lost income, but it is
estimated that one half of her time will be devoted to the business, she is undecided whether to continue
with her plans, because she knows that she can sub-let the shop to a friend for a monthly rent of $550 if she
does not use the shop herself.

Required:

(i) Explain and identify the 'sunk' and 'opportunity' costs in the situation depicted above.

(ii) State what decision Mrs Dube should make according to the information given; support your
answer/conclusion with a financial statement.

(iii) Explain the measuring and use of “notional" (or imputed) costs and quote two supporting
examples.

QUESTIONS SEVEN

What is a flexible budget? Construct a flexible budget from the following information: show the forecast
of profit or loss at 60, 70, 90 and 100 per unit capacity working:

Capacity worked 50%

Fixed expenses:

$ $
Salaries 50 000
Rent & taxes 40 000
Depreciation 60 000
Administration expenses 70 000 220 000

Variable expenses:

Material 200 000

Labour 250 000
Others 40 000 490 000

Semi-Variable expenses:

Repairs 100 000

Indirect Labour 150 000
Others 90 000 340 000

It is estimated that the fixed expenses remain constant for all levels of capacity worked, semi-variable
expenses do not move when capacity worked ranges between 45 percent to 60 percent of capacity, rise by
10 percent when production goes beyond 60 percent but is not more than 75 percent of capacity, a further
rise by 5 percent as soon as the production crosses the 75 percent capacity figure and there after there is no
change up to 100 percent of capacity.

Possible sales at various levels of working are: % capacity worked sales ($)

60 11,00,000
70 13,00,000
90 15,00,000
100 17,00,000

QUESTION EIGHT

Ruff Ltd. arranges low-cost financing for prospective homeowners who have a job. Ruff charges 1 percent
of the loan amount it arranges. During 2000, the average loan per customer was $60 000 and in 2001, the
average loan amount was $70 000. Ruff Ltd. assumes an average loan of $750 000 for 2002. Budgeted
cost information per loan application for 2002 was as follows:

Professional fees per application: 6 Labour hours @ $1200 per hour.

Administrative cost per application: $3000

Verification of credit worthiness $1000 per application

Mailing services $500 per application

Fixed overheads were budgeted at $300 000 per month for 2002

Actual loan applications for May - 2002 were 100. Other actual information was as follows:

Consultation fees: 7.2 hours per loan at $ 1250 per hour.

Administrative Costs:
Cost per application: $1000
Verification check for credit worthiness $750 per application
Postal services $400 per application
Other overheads were $275 000
Average loan amount was $800 000

Ruff Ltd. receives 1% on all loans.

REQUIRED:

(a) Prepare a fixed budget for May 2002 assuming 90 loan applications were processed.

(b) Prepare a variance report for Ruff for May 2002 at this level.

QUESTION NINE

Abu Ltd. is using an ABC - approach to costing and budgeting. The following fixed budget information for
the production department is available:

Fixed costs Variable costs Activity level

Direct cost: $ $ $ (10 000 units)

Direct material - 10 per unit 100 000

Direct labour - 8 per unit 80 000
Indirect material - 2 per unit 20 000
Sub total 200 000

Cost driver Machine Hours

Fixed Variable Activity level
 8000 Machine hours
Total Cost ($)
Mantainance 20 000 5 per machine 60 000
Energy 15 000 2 per machine 31 000
Subtotal 91 000

Cost driver: Number of Batches

Fixed Variables Activity level
($) ($) 25 Batches
Total cost ($)

Receiving 6 000 200 per order 30 000

Total costs 471000

Note: Total cost of a given level of activity is given by: y=a+b

Where: y = total costs

a = fixed costs
b = rate unit of cost driver
x = number of units of cost driver resource consumed/ level of
activity.

The actual activities levels for 2002 were: Actual production 20 000 units
Actual Machine hours 16 000 hours
Actual batches processed 30 batches
Actual numbering of orders 150 orders

Actual costs for 2002 were as follows: $

Direct Materials 204 000

Direct labour 158 000
Supplies 44 000
Maintenance 114 000
Energy 39 000
Set-ups 27 000
Inspections 154 000
Receiving 31 000

REQUIRED:

(a) Compile a flexible budget based on the actual activities achieved during the period.

(b) Compile a cost report (variance) for the production department.

QUESTION TEN

The management of Rhino Ltd. has supplied you with the following information:

1. Actual and budgeted sales: ($)

July 2000 160 000

August 2000 180 000
September 2000 200 000
October 2000 210 000
November 2000 190 000
December 2000 180 000

2. An abridged balance sheet on 30th September 2000:

$ $
 Shareholder's equity 322 500

Fixed assets 100 000

Current assets:
Inventory 120 000
Debtors 220 500
Bank 2 000
342 000
Less: Liabilities:
Creditors 120 000 222 500
Capital employed: 322 500

3. Rent and Insurance amounted to $ 120 000 per annum, and payable monthly.
4. Variable selling and administrative expenses are estimated at 20% of sales. It was payable during the
month of sale.
5. The gross profit percentage was 40% on sales.
6. Depreciation on fixed assets amounted to $ 14 400 per annum.
7. Cash sales were estimated at 10% of total sales. Debtors were expected to settle their accounts as
follows:
75% within the first month of sales.
25% within two month of sale.

8. The purchases for each month were based on the expected sales of the following month, whereas
creditors were paid in the month following that of sales.

Required:
Compile the following

(a) A monthly cash budget for October, November and December for 2000 in a columnar form.

(b) A budgeted income statement for the three months ending on 31st December 2000.

(c) A budgeted balance sheet on 31st December 2000.

QUESTION ELEVEN

(a) Write a short note on variance analysis as a tool of managerial control. Illustrate your answer - with an
example.
(b) M/s Shiva Mohan has specified the following standard cost for a product:
Time 10 hrs per unit
Cost $5 per hour

For the period ending 31st December 2002 and the actual performance were:

Production: 1000 units

Hours taken: Production 10 400 hours
Idle time: 400 hours
Total: 10 800 hours

Payments made $56 160 (Average per hour $5.20)

Calculate labor variances.

QUESTION TWELVE

The following information was taken from the books of Bic Ltd, which manufactures only one product:

Budgeted Actual
Closing stock 0 0
Opening stock 0 0
Units manufactured 5 600 5 000
Material used (kg.) 28 000 26 000
Labor hours 56 000 55 000

$ $

Material purchased 140 000 133 000

Wages 168 000 170 500
Variable Manufacturing Overheads 28 000 26 000
Sales 672 000 605 000
Fixed Manufacturing Overheads 84 000 94 000

REQUIRED:

(i) Calculate the budgeted and actual net profits.

(ii) Calculate the necessary variances to reconcile/explain the differences between budgeted and actual
net profits.
i.e. Variances:
Material: (a) Price
(b) Quantity

Labor:
(a) Rate
(b) Efficiency

Overheads: (a) Variables

(i) Rate
(ii) Efficiency

(b) Fixed
(i) Expenditure
(ii) Volume

Sales: (a) Price

(b) Volume

(iii) Reconcile the net profits as calculated in (i) above.

Because there was no opening and closing stocks, all the products manufactured are sold. Further, the
material usage is equivalent to the material purchases.

QUESTION THIRTEEN

Muss Ltd. manufactured and sells transformers. The enterprise expanded to supply farmers with 80 KVA
transformers. This additional investment centre was called Petra co. Ltd. The Muss Ltd. uses the rate of
return (ROI) as a performance measurement for management bonuses. The desired ROI for all the units
was 18%.

Petra’s average ROI for the past 4 years was 21%. During 2003 the unit refused an investment opportunity
with an estimated ROI of 18% because the additional investment would have lowered the units’ average
ROI.

The units' total Investment for 2003 was $6 930 000, 5% higher than 2002. The income statement for Petra
co Ltd. was as follows:

Income statement for December 2003

 $'000

Income 13 200
Cost of sales 8 690
Gross profit 4 510

Administrative costs (1 177)

Marketing costs (1 943)
Net profit 1 390

REQUIRED:

(a) Calculate Petra’s ROI for 2003 based on average investment.

(b) Calculate Petra's residual income based on average investment.
(c) Would Petra have accepted the investment opportunity in 2003 if performance were based on RI?
Argue your answer with supporting calculations.
(d) Identify the cost and income items that Petra co. Ltd. must control to be evaluated fairly according to
ROI and RI performance measurements respectively.

QUESTION FOURTEEN

Delta Limited has two profit centres, namely Alpha and Beta units that manufactured hunting rifles. Alpha
manufactured the rifle barrels and Beta assembles the rifles into final products. A market for both rifles and
rifle barrels exists. The transfer price is based on current market prices.

The following information is available.

$
Sales price per rifle 3 800
Sales price per rifle barrel 2 000
Cost price of rifle barrel 900
Other parts and assembling costs of rifles 1 250

REQUIRED:

(a) If Alpha has no excess capacity, should there be a transfer of goods to Beta? Is the market price the
correct transfer price?
(b) If Alpha's capacity is 1000 units per month and the sales of rifle barrels are 800 units per month should
200 rifle barrels be transferred t o Beta? What should the transfer price be in this case?
(c) If Alpha determines a transfer price of $1600 per unit for the 200 units, what will the marginal income
for Delta Limited be as a whole if the transfers took place. Should Beta purchase the rifle barrels at
$1600 per unit? Argue your answer.

Question Fifteen

(a)
(i) What do you understand by performance budgeting?
(ii) What are its objectives?
(iii) Explain the process of performance budgeting.

(b) Budgetary control is defined as "the establishment of departmental budgets relating to

responsibilities of executives to the requirements of a policy, either to secure by individual action
the objectives of the policy or to provide a firm basis for its revision”. Explain this statement.
(c) How is cash budget important in ensuring adequate cash is available? Describe the various methods
for preparing a cash budget.
(d) What is a master budget? Describe the usual subsidiary budgets of Master budgets.
Question Sixteen:

Qatar Suppliers Limited was incorporated on 1st September 2002 with an authorized share capital of 200
000 ordinary shares of $1.00 each. On that date the company issued 150 000 of these shares at par for cash
and the amount was paid in full. During the month the company also managed to secure the following:

 A bank loan of $ 100 000 with an effective interest (yield) rate of 18% p.a, and
 An overdraft facility of $ 1 000 000 on its current account.

The company purchased plant and machinery for $ 120 000. The plant and machinery was given as a
security for the bank loan. The loan is repayable in arrears in five (5) annual installments of $32 000. The
company operations are scheduled to begin immediately in the month of September. The production and
sale targets for the first year was 270 000 units.

The selling price for the company’s product was fixed at $ 20.

The structure of budgeted company costs was as follows;

% of Sales.

Raw materials 35%

Labor costs 25%
Production Overhead (including depreciation
on plant and machinery at the rate of 10% p.a
straight line) 10%
Selling and distribution expenses (excluding
interest on the bank loan) 5%

The company expects to sell its goods on credit. Sales are expected to be spread evenly throughout the year.
The company allows its customers 30 days credit from the date of delivery. Five percent of the debtors are
expected to be irrecoverable according to the industrys’ past experience.

The company gets 45 days credit by its suppliers of raw materials. All the other expenses (except
depreciation and provision for bad debts) are to be paid in cash in the month the service is consumed.

1. Raw materials stock should be sufficient to provide for the production requirements
of the next three months. Raw material stock is to be valued at cost.
2. There should be no work in progress at the financial year end of 31st August 2003
3. Finished goods inventory at the beginning of each month should be sufficient to
provide for the budgeted sales of the next two months. Finished goods stock is
valued at standard marginal production cost.

Required:

a.) Prepare a cash budget (including the actual cash flows for the first month) and for the
company for the first year of business, showing clearly the monthly budgets and the
annual budget in a columnar form.
b.) Prepare a projected income statement for the year ended 31 August 2003 and the
budgeted balance sheet as at 31st August 2003.
c.) This company’s banker is worried whether their loan is secure and therefore has
approached you for an advice. Using suitable ratios and basing them on your answers
to part (b), Write a report to this banker touching on the financial status of this
organization. Your workings should not form the main body of the report, but should
appear as appendices.

Question Seventeen:

Gilligan & Co. Ltd manufactures gazebos and currently operates an absorption costing system for valuing
its inventory, but the company’s financial controller, Leslie Axelby, has suggested that the company is
considering switching to variable costing. To help him understand the impact of the change the managing
director of the company has asked Mr. Axelby to produce statements that show last month’s results using
both approaches.

Details relating to last month’s operating results were:

Opening inventory (Units) Nil

Units produced 500
Closing inventory (Units) 100

Manufacturing Costs: $

Direct Materials 37 500

Direct labor 25 000
Overheads 40 000
Sales revenue 120 000

The manufacturing overheads have not always been split between fixed and variable categories, but it is
estimated that a fixed overhead rate would approximate $3.00 per unit of direct labor hour worked as per
budget. However the direct labor rate paid during the month worked out to be $4.00 on the direct labor
paid.

Required:

(a.) Value the inventory at the month end using (i.) absorption and (ii.) variable costing approaches
respectively.
(b.) Prepare statements that show the trading results of the last month under:

(i.) Absorption costing

(ii.) Variable costing.

Question Eighteen:

The profit and loss account for Delany’s Departmental store’s most recent operating period is shown below.
The approach adopted is one that shows departmental performance on the full cost basis.

Depart 1 Depart 2 Depart 3 Total

$ $ $ $ $ $ $

Sales Revenue 200 000 300 000 500 000 1000 000
Cost of Sales 100 000 250 000 450 000 800 000

Gross Profit 100 000 50 000 50 000 200 000

Expenses:

Selling 10 000 15 000 25 000 50 000

Administration 12 000 22 000 18 000 33 000 30 000 55 000 60 000 110 000

Net Profit/Loss 78 000 17 000 (5 000) 90 000

Administrative expenses, which represent the only fixed cost, have been assigned to departments on the
basis of their relative sales volumes.

Required

A reasoned recommendation as to whether or not Department 3 should be closed.

Question Nineteen:
The production and other operating data for Kay (Chronometers) Ltd last year was as follows:

Sales (Units) 100 000

Production (Units) 120 000

$
Selling Price per Unit 16
Opening Inventory 0

Manufacturing cost per unit:

Direct Material 4
Direct Labor 6
Variable overheads 1
Fixed Overheads 3

Marketing and Administrative Costs:

Variable 50 000
Fixed 80 000

Required:

(a.) Calculate the company’s profit under:

(i.) Absorption costing;

(ii.) Variable Costing: and explain the difference.

(b.) Determine the company’s:

(i) Break even point

(ii) Margin of safety.

Question Twenty:

Baldwin Enterprises Ltd is a small manufacturing company that makes standard product widely available
from alternative sources and other products to customer specification. The company’s management
accountant, John Ellis, prepared the following income statement for the last year:

Standard Customer
Product specified
Products Total
$ $ $

Sales revenue 250 000 500 000 750 000

Material 80 000 100 000 180 000

Labor 90 000 200 000 290 000
Depreciation 36 000 63 000 99 000
Power 4 000 7 000 11 000
Rent 10 000 60 000 70 000
Heat and Light 1 000 6 000 7 000
Others 9 000 4 000 13 000

Total expenses 230 000 440 000 670 000

Net Profit 20 000 60 000 80 000

i. The depreciation charges relate to equipment used currently only for the standard products or
customer specified products in separate departments.
 ii. Power costs are apportioned in accordance with estimates of power consumed. Rent, heat and
light costs are apportioned according to the floor space occupied by the departments
manufacturing standard products on the one hand and customer specified products on the
other.
iii. The building has been leased for 10 years at an annual rental charge of $ 70 000.
iv. All other costs are direct costs of the product line to which they have been charged.
v. Stephen Cook, who is a regular customer of the company, has asked if 5000 units of a special
item can be produced for him with some urgency. Baldwin Enterprises is currently operating
at full capacity and it is clear that some other business would have to be given up to meet Mr.
Cook’s request. However, the company’s sales director is unwilling to renege on other orders
for customer specified products that have already been accepted.
vi. One way of accommodating Mr. Cook’s order would be to cut back on the production of the
company’s standard product by about 50% for a year and devote the capacity thus freed to Mr.
Cook’s order. The unit costs are estimated to be:

Direct material $20. 00

Direct labor $36. 00

vii. A special piece of plant will be needed to help make the product and this will cost $ 20 000
with no likely value at the end of the year.
viii. Mr. Cook is willing to pay $ 70.00 per unit.

Required:

(a.) Calculate the following figures:

1. the incremental cost of Mr. Cook’s order

2. the full cost of the order;
3. the opportunity cost to Baldwin Enterprises of accepting the order;
4. the sunk cost related to the order.

(b.) If you were John Ellis would you recommend that the order be accepted?

Question Twenty-One:

The management of Chi Ltd has before it three mutually exclusive investment project proposals. Each
project will require an initial investment of $ 50 000 and will have no residual value.

It is expected that the revenues less the outlays, receivable at the end of each year, will be as follows:

Project X: $ 35 000 p.a for 2 years.

Project Y: $ 20 000 p.a for 5 years.

Project Z: $ 12 000 p.a for 10 years.

The minimum acceptable rate of return to Chi Ltd is 15%

1. Calculate for each of the three projects:

(a.) the pay-back period;
(b.) the accounting rate of return base on the initial investment;
(c.) the net present value to the nearest dollar, and then rank the projects under each method.

2. Advise the management which of the projects should be accepted.

Extract from the discount tables:

The present value of $1.00 per annum

Years 15%
1 0.8696
2 1.6257
3 2.2832
4 2.8549
5 3.3522
6 3.7845
7 4.1604
8 4.4873
9 4.7716
10 5.0188

Question Twenty-Two

The Management of BHP Company has just decided that it would be useful to prepare budgets on a regular
basis. The following data is available for the first four months of the year:

Month Budgeted Sales Budgeted Production

in units in units

January 6 000 10 000

February 6 000 10 000
March 6 000 12 000
April 15 000 12 000

(i.) Direct material cost = $ 8.00 per unit of production.

(j.) Desired closing inventory at month end is equal to ½ of next month’s production
requirements.
(k.) The usual payment policy is to pay for 75% of all material purchases in the month of purchase
and the remainder in the month after.

Required:

(a.) Prepare a materials purchase budget for the period January – March.
(b.) Prepare a cash disbursements budget for materials purchase for the period January – March.

Question Twenty-Three:

ANU Company manufactures a single product called Nurdle. The manufacturing costs for the product are
as shown below:
$
Direct Materials 4.00 per unit
Direct Labor 2.00 per unit
Variable factory overhead 0.40 per unit
Fixed overhead (includes depreciation
of $ 2 000) 10 000 per month

In addition, budgeted sales and production for the period June – August are as follows:

Month Units Sales Budgeted Unit Production budgeted

June 6 000 10 000

July 6 000 10 000
August 9 000 12 000

Other information is as follows:

 (i.) There are to be no opening inventories.
(ii.) Selling and administrative expenses are all fixed and equal to $3 000.
(iii.) Office depreciation $600
(iv.) The selling price of a unit of Nurdle is $5.00.
(v.) Collections are: 80% in the month of sales; 18% in the month following sales; 2%
uncollectible.
(vi.) Closing inventories of direct materials will be ½ of next month’s production
requirements.
(vii.) Payments for direct labor, factory overhead, and selling and administrative expenses
will be made in the month in which the expenses are incurred.
(viii.) Payments for direct materials are made monthly; 75% of each month’s purchases
will be paid for in the month of purchase, and the remainder will be paid for in the
following month.

Required:

Prepare a budget of the cash receipts and disbursements for the period June – August.

Question Twenty-Four:

The Doddery Company has two divisions, Q and R, and evaluates its managers on the ROI criterion.

Budgets for the next year are as follows:

Q R Total
$’000 $’000 $’000

Investment 1 200 1 000 2 200

Revenue 600 300 900
Operating Expenses 300 200 500

Profit 300 100 400

A new investment opportunity has arisen and could be adopted by either division. It requires an investment
of $ 200 000 and promises annual operating profits of $ 40 000.

Required:

(a.) Which (if either) of the divisional managers would accept the new project? Explain.
(b.) If an RI criterion (With minimum ROI of 18%) were in use, which manager would accept the
new project? Explain.
(c.) With minimum ROI of 18%, should the new project be accepted from the viewpoint of the
Doddery Company as a whole? Explain.

Question Twenty-Five:

The following schedule of investment possibilities has been drawn up by the manager of the Marsupial
Division of the Marsfield Company to show the required investment and anticipated annual operating profit
from each potential project:

Project Required Anticipated

Investment operating profit

$’ 000 $’ 000
A 500 90
B 700 200
C 1 000 230
D 1 100 300
E 1 200 280
At the present the total investment in the Marsupial Division amounts to $ 5 000 000 and the annual
operating profit for the current year is expected to be $ 1 250 000.

Required:

(a.) If the manager of the Marsupial Division wishes to maximize his ROI:

1. Which projects will he select

2. What ROI will he earn?

(b.) If the manager of the Marsupial Division wishes to maximize RI for that Division with a
minimum ROI requirement of 15%:

1. Which Projects will he select?

2. What RI will he earn?
3. Will your answer to b (1.) and b (2.) differ if the minimum ROI requirement was
20%?

Question Twenty-Six:

John Swann, managing director of Post Electronic Corporation, glanced at the summary profit and loss
statement for 2001, which he was holding (see the data below) and tossed it to Sandy Cunningham. Swann
looked out of the Window of his office and declared, somewhat smugly, “As you can see, Sandy, we
exceeded our sales goal for the year, improved our margin, and earned more profit than we had planned.
Although some of our expenses seemed to grow a little faster than sales, 2001 was a pretty good year for
us, don’t you think?”

Post Electric Corporation: 2001 Operating Results

Budget Actual
$’000 $’000

Sales 5 400 5 710

Manufacturing Costs 2 000 2 090
3 400 3 620

G & A expenses 1 500 1 650

Net Income before Taxes 1 900 1 970

Sandy Cunningham, a recent graduate of a highly regarded business school, was serving a training period
as an executive assistant to Swann. He looked over the figures and nodded his agreement. Swann
continued: “Sandy, I ‘d like you to prepare s short report for the board meeting next week summarizing the
Key factors that account (explain) for the favorable overall profit variance of $ 70 000. I think you are
about ready to make a presentation to the board if you can pull together a good report. Check with the
controller’s office for any additional data you may want. Remember, the board doesn’t want a long
complex presentation. See what you can come up with”. Sandy Cunningham agreed to the assignment and
gathered the data shown below:

Additional data:
Post Electric Corporation’s products are grouped into two main lines of business for internal
reporting purposes. Each line includes many separate products, which are averaged together for the
purposes of the question.

Meters Generators

Budgeted Actual Budgeted Actual

 $’ 000 $ ‘000 $’000 $’000
Price 30 29 150 153
Manufacturing Cost 15 16 40 42
Margin 15 13 110 111

Units Sold 80 000 65 000 20 000 25 000

Industry’s Sales (Units) 800 000 700 000 200 000 250 000

Required:

How can he present an analysis of 2001 operating results to the board?

Question Twenty-Seven:

Pi Ltd operates a system of standard costs. For a given four – week period, budgeted for sales of 10 000
units at $ 5 per unit, actual sales were 9 000 units at $ 5.125 per unit. Costs relating to that period were as
follows:

Standard Actual
$ $

Materials 25 000 25 740

Wages 7 500 7 087
Fixed Overhead 2 000 1 881
Variable overheads 1 000 925
Semi – variable overheads 270 243
Standard Hours 50, 000 -
Actual Hours - 40 500

Additional Information:
(i.) The standard material content of each unit is estimated at 26 kg at 11 cents per Kg.
(ii.) The standard wages per unit are 5 hours at 15 cents per unit; actual wages were 4.5 hours
at 17.5 cents.
(iii.) Semi – variance overhead cost consists of five – ninths fixed expenses and four – ninths
variable costs.
(iv.) There were no opening stocks and the whole production for the period was sold.
(v.) The four – week period was a normal period.

You are required to draft a statement reconciling the standard net profit for the period with the net profit
actually realized.