Management Accounting Exams
Question 1
June Sales: 50,000 units
July Sales: 56,000 units
August Sales 70,000 Units
Workings
| June | July | Aug | Sept | October | November | |
| Unit Sold | 50,000 | 56,000 | 70,000 | 77,000 | 84,700 | 93,170 |
| Price Per Unit | 180 | 180 | 180 | 180 | 180 | 180 |
| Total Sales | 9,000,000 | 10,080,000 | 12,600,000 | 13,860,000 | 15,246,000 | 16,770,600 |
| Discount 2% | 180,000 | 201,600 | 252,000 | 277,200 | 304920 | 335,412 |
| Net Sales | 8,820,000 | 9878400 | 12348,000 | 13,582,800 | 14,941,080 | 16,435,188 |
| Collection
30% |
0 | 3,000,000 | 3,024,000 | 3,780,000 | 4,158,000 | 4,573,800 |
| Collection
50% |
0 | 0 | 4,500,000 | 5,040,000 | 6,300,000 | 7,623,000 |
| 20% | 1,764,000 | 1,975,680 | 2,469,600 | 2,716,560 | 2,988,216 | 3,287,038 |
| Totals | 1,764,000 | 4,975,680 | 9,993,600 | 11,536,560 | 1,3446,216 | 15,483,838 |
| Closing Inventory | 2,016.000 | 2,520,000 | 2,772,000 | 3,049,200 | 3,354,120 |
Cash Budget for the Months
| June | July | Aug | Sept | October | November | |
| Opening Balance | 0 | 0 | 500,000 | 0 | 0 | 0 |
| Sales Receipts | 1,764,000 | 4,975,680 | 9,993,600 | 11,536,560 | 1,3446,216 | 15,483,838 |
| Total Receipts | 1,764,000 | 4,975,680 | 10,493,600 | 11,536,560 | 1,3446,216 | 15,483,838 |
| Expenses | ||||||
| Fixed manufacturing overhead | 740,000 | 740,000 | 740,000 | 740,000 | 740,000 | 740,000 |
| Fixed Selling and administrative costs | 500,000 | 500,000 | 500,000 | 500,000 | 500,000 | 500,000 |
| Purchase New equipment | 0 | 0 | 3,000,000 | 0 | 0 | 0 |
| Production cost | ||||||
| Direct Labor | 3000,000 | 3360,000 | 4,200,000 | 4,620,000 | 5,082,000 | 5,590,000 |
| Variable production overhead | 400,000 | 448,000 | 560,000 | 616,000 | 677600 | |
| Purchases | 1800,000 | 2,016,000 | 2,520,000 | 2772000 | ||
| Total Expenses | 4240000 | 5000000 | 10688000 | 8436000 | 9458000 | 10279600 |
| Balance B/d | -2476000 | -24320 | -194400 | 3100560 | 3988216 | 5204238 |
Role of Cash Budget
The cash budget is instrumental in determining the inflow and outflow of cash. The cash flow may be used to control the liquidity of the firm as well as balance the inflows and outflows in the organization. Some of the inflows will improve the company cash flows, and it includes sales of assets, cash sales, and receipt from debtors, and borrowing cash. On the other hand, cash outflows include the disbursement of materials purchases, taxes, and divides. The cash budget seeks to highlight the company’s income or deficit over the period. This is aimed at increasing the sales and reducing the expenditures.one of the benefit of the cash budget is that it seeks to identify the company’s future financing requirement, whether it can be met or not. Additionally, provide analysis or in-depth need for corrective action. This allows one to review, amend, and recommend the steps to be undertaken to improve future financial performance. Some of the notable roles of the cash budget include:
- Financing the needs and costs
The cash budget is aimed at the anticipation of the cash deficit that exists and the extent to which it creates a deficit. It also shows how the deficit may be supplemented either through borrowing or from external sources of financing. The short term financing will be required in the acquisition of inventory as well as meeting the operational expenses.
- Analyzing the cash requirement,
The company may be in an excellent position to assess future business opportunities and their probable financing needs as well as costs. Such financing cost may have an impact on the company’s key decision-makers, which might even affect the profitability and selecting the organization that will meet the requirement. Lastly, the cash budget will assist in the selection of the organizational goals, which are financially feasible. Take corrective action on cash flow related issues
The cash budget provides an avenue in which the company cash may be required to meet the financial objectives. It is reviewed, corrected, and take corrective action when the cash budget experiences a deficit or cash flow problems. For instance, the company that is experiencing a huge deficit will be required to borrow the money in the short term and purchase of equipment as well as remitting the tax liabilities. This means that the company will be required to respond to the decline in the market that will adjust the spending as well as negotiating the issue with the favorable objectives.
- Analyzing future investment performance the cash budget
A cash budget analyses the company’s financial position to the stakeholders and hence the interest in the company. The increased cash flow may call for robust demand for increasing opportunities for the company to expand and create a signal to the investor. Therefore in the event, the company expenses are growing more than the inflow, it will tell the investor that there is a looming risk and, therefore, a barrier to demand for additional investment. Similarly, declining cash flow may also make it challenging to obtain credit for vendors and meet the operational expenses in the long run.
Recommendation
I recommend the company needs to change some of their policies in which the cash sales need to be 50 % cent whereas the month after-sales are 30 percent and the two-month sales be 20 in the final month. Additionally, obtain an external financing option in June –august to increase the cash flow and consequently improve the liquidity position of the firm.
Question 2
Sells product Z = £50 each
The standard (budgeted) variable production cost of product Z = £20 per unit
The fixed production overhead (Overhead Absorption Rate) = £4 per unit.
Selling And Distribution Cost Of £2 Per unit
Marginal Costing
| Months | January | February | March |
| Sales (units) | 4,000 | 4,200 | 3,800 |
| Selling Price Per Unit | £50 | £50 | £50 |
| Sales £ | 200,000 | 210,000 | 190,000 |
| Less Cost of Sales | |||
| Opening Inventory | 0 | 10,000 | 10,000 |
| Production (units) | 4,500 | 4,200 | 3,600 |
| Variable Production Cost | £20 | £20 | £20 |
| Total Variable Production Cost | (90,000) | (84,000) | (72,000) |
| Less Closing Inventory | 10,000 | 10,000 | 6000 |
| (80,00) | (74,000) | (66,000) | |
| Contribution Margin | 120,000 | 136,000 | 124,000 |
| Actual fixed production overhead (£) | £18,000 | £16,000 | £15,000 |
| Fixed selling and distribution costs | 20,000 | 20,000 | 20,000 |
| Net Income | 82,000 | 100,000 | 89,000 |
Absorption Costing
| Months | January | February | March |
| Sales (units) | 4,000 | 4,200 | 3,800 |
| Selling Price Per Unit | £50 | £50 | £50 |
| Sales £ | 200,000 | 210,000 | 190,000 |
| Less Cost of Sales | |||
| Opening Inventory | 0 | 10,000 | 10,000 |
| Production (units) | 4,500 | 4,200 | 3,600 |
| £20 | £20 | £20 | |
| Total Variable Production Cost | (90,000) | (84,000) | (72,000) |
| Actual fixed production overhead (£) | (£18,000) | (£16,000) | (£15,000) |
| Total Production Overhead | 108000 | 100,000 | 87,000 |
| Less Closing Inventory | (12,000) | (12,000) | (7200) |
| Total cost of sales | 96000 | 88,000 | 79,800 |
| Gross Profit | 104,000 | 122,000 | 110,200 |
| Fixed selling and distribution costs | (20,000) | (20,000) | (20,000) |
| Net Income | 84,000 | 102,000 | 90,200 |
Discuss why profits calculated in part (a) differ under the costing methods
Marginal costing shows that the fixed periodic cost will changes with time rather than the activities and identify variable production for the additional units. On the other hand, the production of one extra unit will incur an increase in the variable costs. It includes direct materials, direct labor, direct expenses, and variable overhead, which increases the marginal costs. In absorption costing, it absorbs the production costs in each output unit through the application of the overhead absorption rate. Thus, the more units that will be produced, it will be cheaper and cost per unit
Different approaches are used in which marginal costing and absorption costing will be used to treat the fixed cost. The two techniques will produce different profitability due to the difference in the closing inventory. This is because, in marginal costing, the closing stock will be valued at the variable cost of production. In contrast, the absorption costing includes the portion of fixed production in the closing inventory valuation. The table relates to the effect of the marginal costing and absorption costing on the statement of profit or loss in the business. This means that the marginal cost approach is used to assist in short term decision making. However, the financial report for the absorption costing will be used for the inventory valuation to comply with the requirement of the IAS 2.
The provision of the IAS 2 shows that the inventories, closing inventory valuation will be based on the costs of direct materials, direct labor, and any direct expenses if available as well as the production overhead. It is essential to understand that the non-production overheads are not part of this; hence need to be charged in full statement of the profit and loss in the year in which it relates. The Closing inventories as of January were 500units since 4,000 units are sold, and 5000 units are produced. Therefore, this results in a production cost, as shown above, under the absorption costing. Therefore, only the fixed production overhead will be treated differently using the existing techniques under marginal and absorption costing, which is charged non-production overhead in the profit or loss in the year in which they relate. The marginal costing and amount of the fixed production overhead will be charged in the benefit. However, the absorption costing will be part of the fixed production, which will be carried forward under the inventory valuation.
Circumstances Would It Be Preferable To Use Either Method
- When the inventory level rises or decreases, then the profit will differ under both absorption and marginal costing. In the event where the inventory level rises, the absorption costing will be used as it generates higher profit
- When the inventory levels are decreasing, the marginal costing will result in a higher profit. This is due to the fact that the fixed overhead will be brought forward in opening inventory and thus result in increasing the cost of sales and reducing profits.
Question 3
Sales volume variance
Sales Volume Variance=
Sales price Variance=
Material A cost, Material A price and Material A usage variances;
Material Cost Variance =
Material A Price Variance=AQ (SP-AP) = (24-29.25)*15,500=-81,375 A
Material A usage variance = (SQ-AQ) SP = (15000-15,500)*24 =-12,000 A
Material B cost, Material B price and Material B usage variances
Material Cost Variance =
Material B Price Variance=AQ (SP-AP) = (30-27)*15,500=46500F
Material A usage variance = (SQ-AQ) SP = (15000-15,500)*30 =–4500A
Labor cost, Labor rate and Labor efficiency variances
Labor Cost variance = standard cost –actual cost
=675000-744000
=-69,000 A
Labor rate variance = standard hours (Standard Rate-Actual; rate)
= 135000(9-8) =135000 F
Labor efficiency = Actual rate (Standard hours- Actual Hours)
= 8*(135000-93000) =336000 F
Variable production overhead cost, Variable production overhead expenditure, and Variable production overhead efficiency variances
Variable production overhead cost = standard – Actual
=100*15000-1,987,875
=487,875A
Variable production overhead expenditure = 15000*15-372000
=-147,000 A
Variable production overhead efficiency variances
Actual production units (Standard cost- Actual cost)
15500(3-4) =-15000 A
Fixed production overhead expenditure variance
Standard Fixed production OH- Actual fixed production OH
1200, 000-75,000 =1125000 F
To: CEO of Somnath Ltd
From: Management Accountant
Subject: Variance analysis and organization efficiency
The efficiency in the performance of the company depends on the variance analysis. This approach assists in the management of operation as well as comparing the standard cost and the Actual cost the organization utilizes in running the operation. According to the assessment, some of the operations in the purchase and operation department have shown a mixture of variances, which are positive and negative. The reason for the claim is that despite the challenges in the organization, we managed to obtain a profit of 417,125. However, the variance, attributed to increasing cost for the material prices and labor rate variances. The assessment shows that there is a need or justification to allow the employees to enjoy their bonuses. This is due to our proposal that if we exceed our set target, the company will award the bonus option scheme. However, to make this reality, we need to assess the variances in the corresponding purchases and production department staff who have played a crucial role in the reduction of cost.
In the purchasing department, the material cost variance was not impressive per se due to the inflation rate. The suppliers fix on the price to recoup a substantial profit margin for their company. As an organization, we kept the cost efficiency strategy by selecting the best supplier in an open bidding process. The lowest bidder was selected, but the result was also adverse. In this case, we expect to improve in the next option by taking advantage of their current offers and comparing them to obtain a cheaper material cost.
Furthermore, the variation in the price led to the variance to be favorable despite the actual quantities exceeding the standard units required during the production. This is due to the rising demand for the product by our customers. This showed impressive results in the purchasing department, showing an improved performance aspect in this segment. In the production department, the labor cost variance was relatively higher, resulting in an adverse value. This was caused by the increase in the number of units to satisfy the demand in the market.
Additionally, the unionist trade movement’s pressure was also a driving force that sets the minimum wage of the employees in the care of the production department. Thus affecting our labor cost variances. However, some components of labor cost were impressive and recorded favorable variances, such as the usage and labor rate variances. One of the noted concern is the considerable variance that was evident in the fixed production overhead. This variance raises a signal to the management that, indeed, we need to be very cautious in setting a reasonable and attainable standard. It also makes us feel that the motive towards setting the fixed production overhead was not justified or not based on consultation and reasonableness.
I recommend that in the future, the company needs to identify the standard units the employee must carry out in their shift or day, and any other increase in production must also be explained. Furthermore, review the previous fixed cost budget and estimate an accurate standard value to reduce inconsistencies or to set unreasonable limits or standards. In conclusion, the increase in bonus needs to be subjected to the discussion to assess the amount to be offered to the employees as a bonus. This will be a motivating factor for the employees in the organization.