Managerial Accounting assigment - MBA

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 1 of 16

MASTER OF BUSINESS ADMINISTRATION

INTERNATIONAL PROGRAM

SEMESTER 2 – 2013

BMAC5203 – ACCOUNTING FOR DECISION MAKING

Lecturer: Dr. Pham Thi Ngoc Bich

Student Name: Nguyen Manh Ha

ID No: 15030

MBAOUM0313 - Class K08A

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 2 of 16

TASK 1: CVP Analysis (Cost-Volume-Profit)

Angie Silva recently opened The Sandal Shop, a store that specializes in fashionable sandals.

Angie has just received a degree in business and she anxious to apply the principles she has

learned to her business. In time, she hopes to open a chain of sandal shops. As a first step, she

has prepared the following analysis for her new store:

Sales price per pair of sandals (units) $40

Variable costs per pair of sandals (units) $25

Fixed costs per year

Building rental $15,000

Equipment depreciation $7,000

Selling $20,000

Administrative $18,000

Total fixed costs $60,000

Required:

1) How many pairs of sandals must be sold each year to break even? What does this represent in

total sales dollars?

Sollution:

Pairs of sandals (units) must be sold to reach break-even means the Operation income or net

operation income must equal zero profit.

Information will be expressed as following tables:

Total Per unit Ratio

Sales X 40$ 100%

(VC) Y 25$ 62.5%

CM 15$ 37.5%

(FC) 60,000$

NI Z

We have NI = Sales – VC – FC = (Price * Break-even units) – (VC per unit * Break-even units)

– FC

0 = Break-even units (Price – VC per unit) – FC

Break-even units = FC / CM per unit (whereas MC per unit = Price – VC per unit = 15$)

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 3 of 16

Break-even Units = 60,000/15 = 4,000 Units or pairs of sandals.

And Total sales in Dollars = 4,000*40$ = 160,000$ or Break-even sales in Dollars = FC/CM

Ratio = 60,000$/0.375 = 160,000$ = X => Y = 25*4000 = 100,000

Required:

2) Angie has decided that she must earn at least $15,000 in the first year to justify her time and

effort. How many pairs of sandals must be sold to reach this target profit?

Sollution:

To reach target profit 15,000$:

15,000 = Sales – VC – FC = (Price * Number of units sold) – (VC in unit – Number of units

sold) – FC = Numbers of units sold (Price – VC in unit) – FC Numbers of units sold = (15,000

+FC)/CM

Number of units sold = (15,000 + 60,000)/15 = 5000units or pairs of sandals.

Required:

3) Angie now has two salespersons working in store – one full time and one part time. It will cost

her an additional $8,000 per year to convert the part-time position to a full-time position.

Angie believes that the change would bring in an additional $25,000 in sales each year. Should

she convert the position? Explain your answer

Sollution:

STORE has additional cost 8,000$ with expected sales increasing additional 25,000$ each

year.

Base on the additional information, Angie would have:

Additional NI (net operation income or operating income) = additional CM – additional

cost (whereas additional CM = CM ratio * additional sales = 25,000$ * 0.375 = 9,375$)

So additional NI = 9,375 – 8,000 = 1,375$ (profit is positive)

She should convert the position because the additional contribution margin greater than the

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 4 of 16

aditional cost would bring her the profit gain.

Required:

4) Refer to the original data and ignore the proposition in question c. During the first year, the

store sold only 5,000 pairs of sandals.

a) Prepare the income statement in a contribution format for the Sandal Shop’s first year.

b) Angie is confident that with a more intense sales effort and with a more creative advertising

she can increase sales by 20% next year? What would be the expected percentage increase in

net operating income?

Sollution:

4-a) Prepare the income statement refer to original data. During the first year, the store sold only

5,000 pairs of sandals (consider as units).

Total Per Unit Ratio

Sales (5000 units @40$) 200,000$ 40$ 100%

(VC) (5000 units @25$) (125,000$) (25$) 62.5%

CM Total contribution margin 75,000$ 15$ 37.5%

(FC) Total fix expenses or costs (60,000$)

NI (Operation income) 15,000$

4-b) Expected percentage increase in net operating income assuming that sales increase by 20%

next year.

Percentage change in NI = DOL* Change in sales = 5 *20% = 100%

(Whereas DOL = CM/NI = 5 & change in sales or increase sales expected = 20%)

DOL means Degree of Leverage.

Required:

5) “CVP analysis is a useful planning tool because it is so accurate.” Comment on this statement

Sollution:

Of course CVP analysic is a useful planning tool but it is not accurate one hundred percent, it is

an important tool used widely by managerial accountants and helps the managers make better

decisions and allowing managers to do sensitivity analysis by examining the impact of various

price or cost on levels on profit. ! Since CVP analysis can address many issues such as number

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 5 of 16

units that must be sold to break-even, show how revenues, expenses, profit behave as volume

changes.

TASK 2: Contrasting ABC and traditional costing

Required:

1) Using ABC (Activity-based-costing), determine the amount of manufacturing overhead

cost that could be allocated to each standard briefcase and each specialty briefcase?

Sollution:

Information given:

Breakdown of the manufacturing cost for each CarryAll’s product lines is given:

Standard Briefcases Specialty Briefcases

Units produced each month 10,000 2,500

Direct materials:

- Leather 15$ 7.5$

- Fabric 5$ 5$

- Synthetic 0$ 5$

Total direct materials 20$ 17.5$

Direct labor (0.5DLH & 0.25DLH@12$ per

DLH

6$ 3$

Manufacturing overhead (0.5DLH &

0.25DLH@18$ per DLH

9$ 4.5$

Total cost per unit 35$ 25$

And information given from part d, we can find out the activity rate base on the estimate

overhead cost and expected activity (Activity rate = Est. overhead cost / Expected activity)

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 6 of 16

Activity cost pools Activity measures Estimated overhead cost Ativity rate

Purchasing No of orders 12,000$ 60

Material handling No of reciepts 15,000 50

Production orders and

setup

Setup hours 20,250 81

Inspection Inspection hours 16,000 20

Frame assembly Assembly hours 8,000 5

Machine related Machine hours 30,000 3

Total overhead cost 101,250$

Expected Activity

Activity measures Standard Briefcases Specialty Briefcases Total

No of orders:

- Leather 34 6 40

- Fabric 48 12 60

- Synthetic 0 100 100

Total of orders 82 118 200

No of receipts:

- Leather 52 8 60

- Fabric 64 16 80

- Synthetic 0 160 160

Total of receipts 116 184 300

Setup hours 50 200 250

Inspection hours 300 500 800

Assemblly hours 800 800 1,600

Machine hours 5,000 5,000 10,000

Denote:

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 7 of 16

- Setup hours are given in part (a), 50 setups for the standard items each month @ 01 hour

required and 100 setups for specialty items @ 2 hours required

- Inspection time is given in part (b), a total 300 hours spent on the standard briefcases and

500 hours spent on the specialty briefcases each month.

- Machine time is given in part (c), 0.5 hour of machine time for standard briefcases and 2

hours for specialty briefcases. Means the machine hour multiply by units produced each month.

+ For standard briefcases: 0.5*10,000= 5000

+ For Specialty briefcases: 2* 2,500 = 5000

Find out amount of standard briefcaces & specialty briefcase base on activity rate:

Activity/ activity measures Standard

briefcases

Standard

amount

Ativity

rate

Specialty

amount

Specialty

briefcases

Purchasing (no of orders) 82 4,920 60 7,080 118

Material handling (no of receipts) 116 5,800 50 9,200 184

Production orders and setup (setup H) 50 4,050 81 16,200 200

Inspection (inspection hours) 300 6,000 20 10,000 500

Frame assembly (assembly hours) 800 4000 5 4000 800

Machine related (machine hours) 5000 15,000 3 15,000 5000

Total overhead cost asigned for

each kind of briefcases

39,770 61,480

Number of units produced 10,000 2,500

Overhead cost per unit 3.98 24.59

Required:

2) Determine the unit product cost of each product line from the perspective of ABC system

Sollution:

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 8 of 16

Activity-Based Costing Direct Labor- House Base

Standard

briefcases

Specialty

briefcases

Standard

briefcases

Specialty

briefcases

DM $20.00 $17.50 $20.00 $17.50

DL $ 6.00 $ 3.00 $ 6.00 $ 3.00

MOH $ 3.98 $24.59 $ 9.00 $ 4.50

Total unit product cost $29.98 $45.09 $35.00 $25.00

Required:

3) Evaluate the president’s concern about the profitability of the two production lines, giving

opinion about the president’s decision on sifting the company’s resources entirely to production

of specialty briefcases.

Sollution:

Based on the ABC analysis, it found that the GM of standard briefcases are positive while the

specialty briefcases are negative due to the higher unit cost more than the selling price,

Therefore, the company should not shift it resources to produce specialty products.

Standard products Specialty products

Selling price per unit $36.00 $40.00

Cost per unit $29.98 $45.09

Gross margin per unit $ 6.02 ($ 5.09)

Required:

4) Sally Henrie stated that “the competition hasn’t been able to touch our price” on specialty

business. Do you agree with the statement of Sally, the marketing manager? Explain.

Sollution:

I agree with Sally, the marketing manager with her statement that “the competition hasn’t been

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 9 of 16

able to touch our price” because the competitior specialty biefcase is too higher price 50$

compare with company’s price just only 40$ with the traditional costing, however with the ABC

costing the the cost higher 45.09$ so the company will have small profit margin if they control

the selling price below 50$ as their competitor’s price for special one.

Task 3: Flexible budget and flexiible budget perfomance report

Required:

a) Prepare flexible budgeds for the company at sales volumes of 18,000 and 24,000 units.

Sollution:

Based on the information given in the fixed budget report for year ended December 31, 2012, we

will find out the cost formular per units or variable cost per unit then multiply by target sale

volume the find each level cost.

Note: Revenue of Dorilane company 2012Y equal 3,000,000$@ 20,000units, therefore unit cost

will be 150$. And each level of variable cost divides by 20,000 in order to know the cost per

unit.And with sale volumes 18,000* 150$ = 2,700,000 (revenues); & 24,000*150$ = 3,600,000$

= Total sales or revenue

Prepare flexible budget

Sale volumes (units)

Level of costs Fixed cost

Variable

cost per

unit

20,000 18,000 24,000

Variable cost

DM cost 60 1,200,000$ 1,080,000 1,440,000

DL cost 13 260,000 234,000 312,000

Machinery repair

(Mantenance) 2.85 57,000 51,300 68,400

Utilities (25% of 200,000 is

VC) 2.5 50,000 45,000 60,000

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 10 of 16

Packaging 4 80,000 72,000 96,000

Shipping 5.8 116,000 104,400 139,200

Total variable cost 88.15 1,763,000 1,586,700 2,115,600

Fixed expenses

Depreciation-machinery 250,000 250,000 250,000

Plant manager salaries 140,000 140,000 140,000

Sale salary (fixed annual

amount) 160,000 160,000 160,000

Advertising expenses 81,000 81,000 81,000

Salaries 241,000 241,000 241,000

Entertainment expenses 90,000 90,000 90,000

Ultilities (75% is fixed cost) 150,000 150,000 150,000

Total fixed cost 1,112,000 1,112,000 1,112,000

Total cost 2,875,000 2,698,700 3,227,600

Total sales 3,000,000 2,700,000 3,600,000

NI = Total sale – Total cost 125,000$ 1,300$ 372,400$

Required:

b) The actual income statement for 2012 follows…

b-1) Prepare a flexible budget performance report for 2012

Sollution:

Note: 3,648,000/150 = 24,320units (actual sales)

Flexible budget peformance

Budgeted Budgeted Actual Variance

Level of costs Fixed cost

Variabl

e cost

per unit

20,000 24,320 24,320

Variable cost

DM cost 60 1,200,000$ 1,459,200 1,400,000 59200F

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 11 of 16

DL cost 13 260,000 316,160 360,000 43,840U

Machinery repair

(Mantenance) 2.85 57,000 69,312 60,000 9,312F

Utilities (25% of

218,000 is VC) 2.5 50,000 60,800 54,500 6,300F

Packaging 4 80,000 97,280 90,000 7,280F

Shipping 5.8 116,000 141,056 124,000 17,056F

Total variable cost 88.15 1,763,000 2,143,808 2,088,500 55,308F

Fixed expenses

Depreciation-

machinery 250,000 250,000 0

Plant manager

salaries 140,000 155,000 15,000U

Sale salary (fixed

annual amount) 160,000 162,000 2000U

Advertising

expenses 81,000 104,000 23,000U

Salaries 241,000 232,000 9000F

Entertainment

expenses 90,000 100,000 10,000U

Ultilities (75% is

fixed cost) 150,000 163,500 13,500U

Total fixed cost 1,112,000 1,166,500 54,000U

Total cost 2,875,000 3,255,808 3,255,000 808F

Total sales 3,000,000 3,648,000

NI = Total sale –

Total cost 125,000$ 392,192$ 393,000$

b-2) Analyze and interpret the direct materials variance and direct labor variance.

Direct material variance is the difference between the budgeted material cost for a product and

the actual material costs after production. The direct material variance is broken into two

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 12 of 16

categories: direct material price variance and direct material usage variance.

Direct Material Price Variance is the difference between the actual cost of direct material and

the standard cost of quantity purchased or consumed. Direct materials price variance is calculated

either at the time of purchase of direct materials or at the time when the direct materials are used.

When this variance is computed at the time of purchase of materials it is called direct materials

purchase price variance. When this variance is computed at the time of usage this is typically

called direct materials price usage variance.

Direct labor variance analysis involves two separate variances: the labor rate variance and labor

efficiency variance. The labor rate variance is the difference between actual costs for direct labor

and budgeted costs based on the standards. The labor efficiency variance is the difference

between the actual number of direct labor hours worked and budgeted direct labor hours that

should have been worked based on the standards.

Task 4: Cash Budgeting & Control

Required:

a) Prepare schedule of cash collection of its sales in each of the month of March and April

Sollution:

Given Information:

All sales are on credit,

40% of credit sales are collected in the month of the sale, 35% in the month of after sale

23% in the second month after the sale, 2% uncollectible (bad debt)

Sales Budget

January (A) February (A) March (B) April (B) May (B)

Sales in Units 18,000 22,500 19,000 18,750 21,000

Sales per Unit 22$ 22$ 22$ 22$ 22$

Budget sales 396,000$ 495,000$ 418,000$ 412,500 462,000

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 13 of 16

Schedule Cash collection

January (A) February

(A)

March (B) April (B) May (B)

Budget sales 396,000$ 495,000$ 418,000$ 412,500 462,000

Source Credit sales received on account from

January (7920) 158,400 138,600 91,080

February (9900) 198,000 173,250 113,850

March (8360) 167,200 146,300 96,140

April 165,000 144,375

Total cash collection of March & April 431,530$ 425,150$

Required:

b) Prepare a merchandise purchases budget for February, March $ April. Report

calculations in units and then show the dollar amount of purchases of each month.

Sollution:

Given information:

The product purchase price is 12$ per unit

Ending monthly inventory of 20% of next month unit sales plus a safety stock of 100 units

(Jan & Feb periods actual level of inventory is consistent with policy)

Merchandise purchases budget for February, March & April

Jan Feb Mar Apr May

Sales in unit 18,000 22,500 19,000 18,750 21,000

EI (20% next month unit sale plus

100units)

4,600 3,900 3,850 4,300

BI (equal last period of EI) 4,600 3,900 3,850 4,300

Monthly merchandise purchase

(Unit sales +EI –BI)(1)

21,800 18,950 19,200

Cost of merchandise (12$) (2) 12$ 12$ 12$ 12$ 12$

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 14 of 16

Total $ amount of each month

purchase [(1) +(2)]

261,600 227,400 230,400

Required:

c) Prepare a schedule of cash payments on product purchases for March and April.

Sollution:

Given information:

Total amount of each month purchase of March & April

30% of purchases made in month and other 70% is paid in the next month

Schedule of Cash payment on product purchase for March & April

Jan Feb Mar Apr May

Total $ amount of monthly purchase 261,600 227,400 230,400

Source from Feb Mar Apr

Feb 78,480 183,120

March 68,220 159,180

April 69,120 161,280

Total cash needed: 251,340$ 228,300$

Required:

d) Prepare cash budget for March and April, including any loan activity and interest

expense. Compute the loan balance at the end of each month.

Sollution:

Given information:

Cash collection from cash collection schedule showed in part a

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 15 of 16

And disbursements: Payment on product purchase for March & April from schedule of cash

payment are showed in part c. (DM) & Selling & Administrative expense 1,920,000 paid evenly

throughout the year means monthly paid will be 1,920,000/12 = 160,000$ per month.

Company’s minimum cash balance for month-end is 50,000$.

Feb 28 balance loan is 12,000$ with annual rate 12% means monthly interest rate equal

12,000*12%/12 = 120$ monthly rate & Company’s cash balance is 50,000$.

Cash budget for March and April

Jan Feb March April May

Beg cash balance 50,000$ 58,070

(Add) Cash collection 431,530 425,150

Total cash available: 481,530 483,220

(Less) Disbursements - -

DM 251,340 228,300

DL - -

MOH - -

Selling & Ad. Expenses 160,000$ 160,000$

Equipment purchase - -

Dividends - -

Total dibursements 411,340$ 388,300$

Excess (deficiency) of cash

available over disbursement

70,190$ 94,920$

Financing:

Borrowing - -

Repayment 12,000$ -

Interest 120$ -

Total financing 12,120$ -

Ending Balance 58,070$ 94,920$

Required:

Intake: March 2013

[email protected] Assignment for Managerial Accounting Page 16 of 16

e) Refer to answer in part d, Martin’s cash budget indicate whether the company must

borrow additional fund at the end of March. Suggest some resons that knowing this

information in February would be helpul to management.

Sollution:

Based on Cash budget information, the Company must not borrow additional fund at the end

of March because the ending balance 58,070$ without loan is excess the minimum cash

balance request for the month-end.