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 Cost per Car Washed Cleaning supplies $ 0.70 Electricity $ 1,400 $ 0.10 Maintenance $ 0.30 Wages and salaries $ 4,700 $ 0.40 Depreciation $ 8,300 Rent $ 2,100 Administrative expenses $ 1,800 $ 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: Actual Data for 8,100 Cars Sales $ 49,300 Variable expenses Cleaning supplies 6,075 Electricity 891 Maintenance 2,187 Wages and salaries 3,402 Administrative expenses 486 Fixed expenses Electricity 1,450 Wages and salaries 4,700 Depreciation 8,300 Rent 2,100 Administrative expenses 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 Cars Washed (per car) 8,000 Sales $5.90 $47,200 Variable expenses: 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 Total variable expenses 1.55 12,400 Contribution margin $4.35 34,800 Fixed expenses: Electricity 1,400 Wages and salaries 4,700 Depreciation 8,300 Rent 2,100 Administrative 1,800 Total fixed expenses 18,300 Operating income $16,500
b. Actual Flexible Flexible Sales Static (8,100 cars) Budget Budget Volume Budget Variance (8,100 cars) Variance (8,000 cars) Sales $49,300 $1,510 F $47,790 $590 F $47,200 Variable expenses: Cleaning supplies 6,075 405 U 5,670 70 U 5,600 Electricity 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 Administrative 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 Fixed expenses: 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 Total fixed expenses 18,295 (5) F 18,300 0 18,300 Operating income $17,964 $1,029 F $16,935 $435 F $16,500 Total static-budget variance: $1,464 F
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) 20,000 February (actual) 26,000 March (actual) 40,000 April 65,000 May 100,000 June 50,000 July 30,000 August 28,000 September 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 4% of sales Fixed: Advertising $ 200,000 Rent 18,000 Wages and salaries 106,000 Utilities 7,000 Insurance 3,000 Depreciation 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 $ 74,000 Accounts receivable ($ 26,000 February sales; $ 320,000 March sales) 346,000 Inventory 104,000 Prepaid insurance 21,000 Fixed assets, net of depreciation 950,000 Total assets $ 1,495,000 Liabilities Accounts payable $ 100,000 Dividends payable 15,000 Total liabilities 115,000 Shareholders Equity Common shares 800,000 Retained earnings 580,000 Total shareholders equity 1,380,000 Total liabilities and shareholders equity $ 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: April May June Quarter Budgeted sales in units 65,000 100,000 50,000 215,000 Selling price per unit $10 $10 $10 $10 Total sales $650,000 $1,000,000 $500,000 $2,150,000 b. Schedule of expected cash collections: February sales (10%) $ 26,000 $ 26,000 March sales 280,000 $ 40,000 320,000 (70%, 10%) April sales 130,000 455,000 $ 65,000 650,000 (20%, 70%, 10%) May sales 200,000 700,000 900,000 (20%, 70%) June sales (20%) 100,000 100,000 Total cash collections $436,000 $695,000 $865,000 $1,996,000 c. Merchandise purchases budget: Budgeted sales in units 65,000 100,000 50,000 215,000 Add budgeted ending 40,000 20,000 12,000 12,000 inventory* Total needs 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 $4 Required dollar purchases $316,000 $320,000 $168,000 $ 804,000 *40% of the next month s sales in units. d. Budgeted cash disbursements for merchandise purchases: April May June Quarter March purchases (Accounts payable) $100,000 $ 100,000 April purchases 158,000 $158,000 316,000 May purchases 160,000 $160,000 320,000 June purchases 84,000 84,000 Total cash disbursements $258,000 $318,000 $244,000 $ 820,000
e. Knockoffs Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Cash balance, beginning $ 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 Less disbursements: Purchase of inventory (Part d.) 258,000 318,000 244,000 820,000 Advertising 200,000 200,000 200,000 600,000 Rent 18,000 18,000 18,000 54,000 Salaries and wages 106,000 106,000 106,000 318,000 Sales commissions (4% of sales) 26,000 40,000 20,000 86,000 Utilities 7,000 7,000 7,000 21,000 Dividends paid 15,000 0 0 15,000 Equipment purchases 0 16,000 40,000 56,000 Total disbursements 630,000 705,000 635,000 1,970,000 Excess (deficiency) of receipts over disbursements (120,000) 40,000 280,000 100,000 Financing: 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) (5,387) Cash balance, ending $ 50,000 $ 50,000 $ 94,613 $ 94,613 *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
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) 86,000 946,000 Contribution margin 1,204,000 Fixed expenses: Advertising ($200,000 x 3) 600,000 Rent ($18,000 x 3) 54,000 Wages and salaries ($106,000 x 3) 318,000 Utilities ($7,000 x 3) 21,000 Insurance ($3,000 x 3) 9,000 Depreciation ($14,000 x 3) 42,000 1,044,000 Operating income 160,000 Less interest expense (Part e) 5,387 Net income $ 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 15,000 Balance, June 30 $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: Normal Portland High Sulphate Resistance Direct materials $ 9.00 $ 5.80 Direct labour (0.02 hours per bag) $ 0.24 $ 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 Expected Activity for the Year Expected Cost for the Year Purchasing Purchase orders 4,000 orders $ 1,120,000 Materials handling Number of setups 2,000 setups $ 386,000 Quality control Number of 1,000 batches $ 180,000 batches Mixing Mixing hours 190,000 mixing hours $ 2,090,000 Blending Blending hours 64,000 blending hours $ 384,000 Packaging Packaging hours 48,000 packaging hours $ 240,000 Total MOH cost $ 4,400,000 Data regarding the expected production of Normal Portland and High Sulphate Resistance cement mixes are presented below: Normal Portland High Sulphate Resistance Expected sales 160,000 kilograms 8,000 kilograms Batch size 10,000 kilograms 500 kilograms Setups 4 per batch 4 per batch Purchase order size 20,000 kilograms 500 kilograms Mixing time per 100 kilogram 3 mixing hours 3 mixing hours
Blending time per 100 kilogram 1 blending hour 1 blending hour Packaging time per 100 kilogram 0.6 packaging hours 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) High Sulphate Resistance (HSR) Direct materials (given) $ 9.00 $5.80 Direct labour (given) 0.24 0.24 Manufacturing overhead: 0.02 DLH $44 per DLH 0.88 0.88 Total unit product cost $10.12 $6.92
b. i. Overhead rates by activity centre: Activity Centre (a) Estimated Overhead Costs (b) Expected Activity (a) (b) Predetermined Overhead Rate Purchasing $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 4,800 mixing hours 52,800 Blending $6 per blending hour 1,600 blending hours 9,600 Packaging $5 per packaging hour 960 packaging hours 4,800 Total overhead cost $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 Cost per kilograms (a) (b) (rounded) $0.53 $2.88 The unit product costs according to the activity-based costing system are: Normal High Sulphate Portland Resistance Direct materials (given) $9.00 $5.80 Direct labour (given) 0.24 0.24 Manufacturing overhead 0.53 2.88 Total unit product cost $9.77 $8.92 c. 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.