Cost and Management Accounting 2nd edition
Solutions (Additional questions)
CHAPTER 10
SOLUTIONS (ADDITIONAL QUESTIONS)
10.1
D
Annual purchases this year = R547 800 / 55 x 365 =R3 635 400
Annual purchases next year = R3 635 400 x 1.15 = R4 180 710
Trade payables outstanding = R4 180 710 x 50 / 365 = R572 700
10.2
10.3
A
Sales revenue for the year
R1 500 000
Add: Cash received from last year
R242 000
Less: Trade receivables at end of year (R1 500 000 / 365 x 60)
(R246 575)
Cash received from customers
R1 495 425
C
Cash paid from previous period
540 000
Purchases for this budget period
6 800 000
7 340 000
10.4
Purchases not paid until next period (R6 800 000 x 75% x 1/12)
(425 000)
Total cash paid
6 915 000
C
Cash received from previous period
460 000
Sales for this budget period
5 400 000
5 860 000
Credit sales not paid until next period (R5 400 000 x 80% x 1/12)
(360 000)
Total cash received
5 500 000
10.5
D
10.6
C
August credit sales
= 200 000 x 60% x 97%
= R116 400
September cash sales = 204 000 x 40%
= R81 600
Total cash received
= R198 000
= R116 400 + R81 600
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
10.7
B
20% of October sales
= R 56 000
65% of November sales
= R162 500
15% of December sales x 0.95
= R 42 750
Total cash paid
= R261 250
10.8
B
10.9
B
10.10 C
10.11 A
Labour hours for production: 36 000 units x 4 hours = 144 000 hours
Idle time = 10% of total available hours, therefore total available hours need to be:
144 000 hours / 0.9 = 160 000 hours
Labour cost budget (R):
160 000 hours x 20%
= 32 000 hours x (R12 x 1.50)
= R576 000
160 000 hours x 80%
= 128 000 hours x R12
= R1 536 000
Total labour cost budget
= R2 112 000
10.12 B
Materials usage:
12 000 units x 4kg = 48 000kg
Opening inventory = 3 000kg
Closing inventory = 12 000 / 12 x 4kg x 1.1 = 4 400kg
Material purchases budget (kg):
Material usage
48 000kg
Add: Closing inventory
4 400kg
Less: Opening inventory
(3 000)kg
49 400kg
Material purchases budget (R):
49 000kg x R8 =
R392 000
400kg x R7.50 =
R3 000
Total
R395 000
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
10.13 B
Credit sales
July
Aug
36 000
38 000
Cash collected
Outstanding receivables June
Credit sales
Sept
Oct
Nov
Dec
Total
40 000 42 000
44 000
46 000
246 000
R
65 000
246 000
311 000
Less: Receivables at 31 December
100% December credit sales
(46 000)
50% November credit sales
(22 000)
25% October credit sales
(10 500)
Total cash collected
232 500
10.14 See workings below.
10.14.1
A
10.14.2
B
10.14.3
B
10.14.4
A
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
10.15 See workings below.
10.15.1
B
10.15.2
C
10.15.3
A
10.15.4
D
10.15.5
C
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
10.16 (a)
Profit and loss statements of Elmwood Medical Centre:
January
February
Budgeted patient days
1 400
2 000
Revenue @ R325/day
R455 000
R650 000
R13 650
R19 500
Net revenue
R441 350
R630 500
Variable cost @ R150/day
R210 000
R300 000
Contribution margin
R231 350
R330 500
Less: Uncollected revenue @ 3%
Staff*:
Aides @ R750
R15 000
R19 500
Nurses @ R1 600
R16 000
R20 800
R6 300
R6 300
R37 300
R46 600
R60 000
R60 000
Other
R180 000
R180 000
Total
R240 000
R240 000
Total staff and fixed costs
R277 300
R286 600
Profit
R(45 950)
R43 900
Supervising nurses @ R2 100
Total
Fixed costs:
Depreciation
*January patient days of 1400 requires 20 aides, 10 nurses and 3 supervising nurses;
February patient days of 2000 requires 26 aides, 13 nurses and 3 supervising nurses.
(b)
Cash budget for February:
Cash receipts for February
Month of service
30%
R650 000
R195 000
First month after
30%
R455 000
R136 500
Second month after
30%
R357 500
R132 275
Total
R463 775
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Cash payments for operating expenses:
Variable expenses:
Month incurred
40%
R120 000
Next month
60%
R126 000
Month incurred
55%
R99 000
Next month
45%
R81 000
Month incurred
50%
R23 300
Next month
50%
R18 650
Fixed expenses:
Staff:
10.17 (a)
Total
R467 950
Change in cash
R(4 175)
Cash balance, start of month
R184 000
Cash balance, end of month
R179 825
Budgeted cash collections for December:
Month of sale
(b)
Sales
December
January
November
R400 000
R152 000
December
R440 000
R264 000
R167 200
January
R300 000
________
R180 000
Total cash collections
R416 000
R347 200
Budgeted (loss) for December:
December
January
Sales revenue
R440 000
R300 000
Less: Cost of goods sold (75% of sales)
R330 000
R225 000
Gross margin (25% of sales)
R110 000
R75 000
R17 600
R12 000
R8 800
R6 000
Depreciation (R432 000 / 12)
R36 000
R36 000
Other expenses
R25 200
R25 200
Total operating expenses
R87 600
R79 200
Income before taxes
R22 400
R(4 200)
Less: Operating expenses
Variable operating expenses 4% of sales)
Bad debts expense (2% of sales)
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(c)
Projected balance in accounts payable on December 31 and January 31:
The December 31 balance in accounts payable will be equal to December’s
purchases of inventory. Since the store’s gross margin is 25% of sales, its cost of
goods sold must be 75% of sales.
Month
Cost of sales
Goods sold
December
R440 000
R330 000 20%
January
R300 000
R225 000 80%
February
R280 000
R210 000 80%
Total
December
January
purchases
purchases
R66 000
R180 000 20%
R45 000
168 000
R246 000
R213 000
purchases
Therefore, the December 31 balance in accounts payable will be R246 000 and the
January 31 balance will be R213 000.
10.18 (a)
Sales budget:
January
February
March
5 000
6 000
7 500
R50
R50
R50
R250 000
R300 000
R375 000
January
February
March
Sales
5 000
6 000
7 500
Add: Desired ending inventory
1 200
1 500
1 500
Total requirements
6 200
7 500
9 000
Less: Projected beginning inventory
1 000
1 200
1 500
Planned production
5 200
6 300
7 500
January
February
March
5 200
6 300
7 500
10
10
10
Sales (in sets)
Sales price per set
Sales revenue
(b)
(c)
Production budget (in sets):
Direct material purchases:
Planned productions (sets)
Direct material required per set
(metres)
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Direct material required for
production (metres)
Add: Desired ending inventory of
direct material (metres)
Total requirements
Less: Projected beginning inventory
of direct material (metres)
Cost per board foot
Planned purchases of direct material
(dollars)
52 000
63 000
75 000
6 300
7 500
8 000
58 300
70 500
83 000
5 200
6 300
7 500
R.50
R.50
R.50
R26 550
R32 100
R37 750
April production – 7 500 + 0.20 (10 000) – 1 500 = 8 000
Desired DM inventory = 10 x 8 000 x 10% = 8 000 metres
(d)
Direct labour budget:
Planned production (sets)
January
February
March
5 200
6 300
7 500
1.5
1.5
1.5
7 800
9 450
11 250
R20
R20
R20
R156 000
R189 000
R225 000
Direct labour hours per set
Direct labour hours required
Cost per hour
Planned direct labour cost
10.19 (a)
The cash that TabComp can expect to collect during April is calculated below.
April cash receipts:
April cash sales (R400 000 x 0.25)
April credit card sales (R400 000 x 0.30 x 0.96)
R100 000
115 200
Collections on open account:
March (R480 000 x 0.45 x 0.70)
February (R500 000 x 0.45 x 0.28)
January (uncollectible)
Total collections
151 200
63 000
0
R429 400
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(b)
The number of units that TabComp should order in January is calculated as follows:
March sales
110 units
Add: Desired ending inventory (90 units x 0.30)
Total needs
27 units
137 units
Less: Beginning inventory (110 units x 0.30)
33 units
Required purchases
104 units
10.20 (a)(i) Cash budget:
January
February
March
April
R
R
R
R
10 000
9 000
3 890
9 090
-
15 200
57 100
80 000
10 000
24 200
60 990
89 090
Purchases (W3)
-
11550
24500
26 950
Wages (W4)
-
4 800
19 800
22 200
Variable overhead (W5)
-
960
4 600
7 080
1 000
3 000
3 000
3 000
1 000
20 310
51 900
59 230
9 000
3 890
9 090
29 860
Sales (W1)
Fixed overhead (W6)
Workings:
W1 Sales:
January
January
February
80 000
March
90 000
April
100 000
May
100 000
February
March
April
R
R
R
15 200
40 000
16 000
17 100
45 000
19 000
15 200
57 100
80 000
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
W2 Production (units):
January
January
February
March
April
800(25%)
February
2 400(75%)
March
900(25%)
April
2 700(75%)
1 000(25%)
May
3 000(75%)
1 000(25%)
800
3 300
3 700
4 000
January
February
March
1 650 units
1 650 units
W3 Purchases at R7 per unit:
Production
February
3 300 units
March
3 700 units
April
4 000 units
1 850 units
1 850 units
2 000 units
Total units
3 850 units
purchases
@R7
R11 550
R24 500
W4 Direct wages:
February payment
800 x R6 = R4 800
March payment
3 300 x R6 = R19 800
April payment
3 700 x R6 = R22 200
W5 Variable overhead at R2 per unit:
February
January
960
February
March
May
640
3 960
March
960
April
4 600
2 640
4 440
2 960
7 080
2 960
R26 950
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
W6 Fixed overhead:
January
January
February
R
R
1 000
2 000
February
March
1 000
March
April
R
R
2 000
1 000
April
2 000
1 000
1 000
3 000
3 000
3 000
(a)(ii) It is assumed that the question relates to the amount received from customers in May
and not the amount due. The answer is R93 400 (see W1).
(b)
A software package would eliminate the tedious arithmetical calculations that are
necessary to produce cash budgets. Furthermore, it would enable alternative
scenarios to be considered, such as what the outcome would be if any of the
parameters were changed.
10.21 (a)
Sales budget for the year ending 31 December 2011:
Product
%
2010
2011 Budget
Budgeted
Budgeted
Actual
sales units
unit price
revenue
(R)
(R)
[40 000 x (1 – 10%)]
[100 x (1 + 5%)]
3 780 000
= 36 000
= 105
[20 000 x (1 + 20%)]
[100 x (1+10%)]
= 24 000
= 110
[40 000 x (1 + 25%)]
[100 x (1-2%)]
= 50 000
= 98
sales units
Bux
Ace
Croc
40%
20%
40%
100 000
40 000
20 000
40 000
110 000
Calculations:
100 000 x 40% = 40 000
100 000 x 20% = 20 000
100 000 x 40% = 40 000
36 000 x R105 = R3 780 000
24 000 x R110 = R2 640 000
50 000 x R98 = R4 900 000
11 320 000
2 640 000
4 900 000
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(b)
Budgeted cost of sales for 2011:
Raw
2010
2010 Budgeted
2011 Budgeted
2011 Budgeted
Budget
per unit cost
per unit cost
cost of sales
(R)
(R)
(R)
(R)
3 000 000
30.00
(30 x 1.04)
3 432 000
materials
Direct
= 31.20
1 300 000
13.00
labour
Overheads
(13 x 1.04)
1 487 200
= 13.52
1 700 000
17.00
17.53
1 927 800
60.00
62.25
6 847 000
Calculations:
Raw materials:
R3 000 000 / 100 000 units = R30
R 30 + 4% increase = R31.20
R31.20 x 110 000 budgeted sales units = R3 432 000
Direct labour:
R1 300 000 / 100 000 units = R13
R13 + 4% increase = R13.52
R13.52 x 110 000 budgeted sales units = R1 487 200
Overheads calculation:
2010 – Budget
2010 – cost
2011 – Budget
per unit
Variable
(1 700 000 x 34%)
R5.78*
= 578 000
Fixed
(1 700 000 x 66%)
= 745 800
R11.22*
= 1 122 000
Total production
1 700 000
(R5.78 + R1) x 110 000
(1 122 000 + 60 000)
= 1 182 000
R17.00
1 927 800
overheads
* Used the budgeted sales units of 100 000 for 2010 as per point 2 of additional
information.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(c)
Budgeted income statement for the year 2011:
Sales
110 000 units
R
Sales revenue
11 320 000
Less: Cost of sales
(6 847 000)
Raw material
(3 432 000)
Direct labour
(1 487 200)
Overheads
(1 927 800)
Gross profit
4 473 000
Less: Operating expenses
(4 222 977)
Administration (R55 245 x 1.035)
57 179
Insurance (R2 450 x 1.035)
2 536
Motor vehicle expenses (R68 950 x 1.035)
71 363
Administrative expenses (R98 450 x 1.035)
101 896
Rent (R65 500 x 1.035)
67 793
Salaries and wages
3 565 583
Telephone (R75 585 x 1.035)
78 230
Water and electricity
278 397
Profit before finance charges
250 023
Less: Interest on debt
(215 000)
Net profit before tax
35 023
Calculations:
Salaries and wages: 2011 – Budget (R)
Current 2010 employees adjustment
(3 258 650 x 1.05) = 3 421 583
New employees (2 new)
(2 x 6 000 x 12) = 144 000
Total salaries and wages
3 565 583
Water and electricity:
2010 – Actual
2011 – Budget
Current split
Water
Electricity
35%
60%
(245 500 x 35%)
(85 925 x 1.035)
= 85 925
= 88 932
(245 500 x 60%)
(147 300 x 1.2)
= 147 300
= 176 760
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
Rates
5%
Total
(245 500 x 5%)
(12 275 x 1.035) = 12
= 12 275
705
245 500
278 397
Interest on debt: First semester
( R2 000 000 x 11% x 6/12 )
R110 000
Second semester
( R2 000 000 x 10.5% x 6/12)
R105 000
Total
R215 000
10.22 Production budget for Product D:
Units
Opening inventory
(6 000)
Sales
36 000
Closing inventory
Production
3 000
i.e. 36 000 / 12
33 000
Purchases budget for raw material C:
Kg
Opening inventory
(2 000)
Production
66 000
i.e. 33 000 x 2kg
6 000
i.e. 3 000 x 2kg
Closing inventory
Purchases
70 000
The purchases budget for raw material C is therefore: 70 000 kg x R8 per kg = R560 000
10.23 (a)
Cash budget:
January
February
March
R
R
R
80% credit sales
128 000
128 000
136 000
20% credit sales
30 000
32 000
32 000
158 000
160 000
168 000
Purchases
42 500
45 000
47 500
Labour and overheads
71 000
74 000
76 000
Receipts
Total receipts
Payments
Machinery
100 000
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
(b)
Total payments
113 500
119 000
223 500
Opening balance
15 000
59 500
100 500
Net cash flow
44 500
41 000
(55 500)
Closing balance
59 500
100 500
45 000
Advantages:
1. It avoids the complacency inherent in the traditional incremental approach where
it is assumed that future activities will be very similar to current ones.
2. It encourages a questioning approach by focusing attention not only on the cost of
the activity but on the benefits is provides. This will force the public sector
managers to articulate the benefits, encouraging them to think clearly about the
activities.
3. Preparation of decision packages will normally require the involvement of many
employees. This involvement may produce many ideas and promote job
satisfaction.
Disadvantages:
1. The creation of decision packages and their subsequent ranking is very time
consuming and costly. The public sector organisation will need to assess whether
the benefits of the system outweigh the costs involved.
2. The ranking process is very difficult and value judgements are inevitable. In a
public sector organisation the decision packages are very disparate and difficult to
compare.
3. In applying ZBB, ‘activities’ may continue to be identified with traditional
functional departments rather than cross functional activities and thus distract
attention from the real cost-reduction issues.
10.24 (a)
An annual budgeting system is a system of preparing a set of budgets for a 12-month
period, usually coinciding with the financial year of the company.
A rolling budget system is a system of budgeting that is continuous. Once the budget
has been prepared, it is added to each month, or perhaps quarterly, thus ensuring that
a budget always exists for the next 12 months and possibly for longer depending on
the company’s budgeting policy.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
One of the key differences between these two systems is that when a rolling budget
system is being used, managers see budgeting as part of their ongoing planning and
decision-making processes, rather than as a separate exercise which is used to
measure their performance.
In some organisations, where rolling budgets are used, the unexpired portion of the
budget is also updated monthly or quarterly to reflect any changes in operational
circumstances since the budget was originally prepared. There is much debate as to
whether this amounts to changing the original budget or preparing a latest annual
forecast.
(b)
The manager of the southern depot has raised two specific issues with the current
annual budgeting system:
One of these is his argument that the budgets become out of date due to changing
operational circumstances. Whether or not rolling budgets provide a solution to this
issue, depends on the organisation’s philosophy of the use of rolling budgets. If the
view is that they should be used to plan for future budget years so as to ensure that
managers can make better decisions for those years, but not change the current year’s
budget, then a rolling budget will not be the solution to this problem. However, the
manager can now effect changes to future budget periods, as yet unapproved, in the
light of those circumstances.
If the rolling budget system allows revision of the remaining part of the plan for the
current budget year, their use will solve the argument that the original budget has
become out of date.
It is important to consider the use of the budget. There are two main uses:
operational control and strategic decision making. From an operational control
perspective care must be taken to ensure that a rolling budget does not become a
vehicle for eliminating variances caused by actual performance. Once a budget has
been set and approved, any unexpected changes to circumstances should be reported
via the budgetary control system using variance analysis, including planning
variances as appropriate.
From a strategic decision-making perspective, it is important to use the rolling
budget process to determine whether strategies need to be revised in the light of the
current operational circumstances.
The second of the manager’s arguments relates to the lack of authority for actions in
Cost and Management Accounting 2nd edition
Solutions (Additional questions)
respect of future periods. The rolling budget method does have a role here because as
it is continuously being updated, and if each update is approved by the board of
directors, managers will always have authority to carry out decisions in line with the
approved budget for the next 12 months or more. This is a weakness of the annual
budgeting system, especially towards the end of the current year when the following
year’s budget is still to be approved. Managers can often find that they do not have
authority for decisions which will impact on the early part of the next budget year
until that year has almost started.
If DW were to introduce a system of rolling budgets, it would enable the depot
manager to plan and improve their decisions, for example with regard to recruiting
and training employees, and to evaluate alternative operating methods and possible
capital investments based on the budgets that have been agreed on for the next 12
months or more.
10.25 (a)
If the store managers overstate their budgeted costs and resource requirements, the
following planning and decision-making problems could arise within CW:

It may cause CW to order excess items which would result in higher inventory
holding costs as the items remain unused, or result in inefficient handling/theft of
items as the store managers try to prove that their budget was correct and not
draw attention to themselves by having favourable variances in their performance
reports.

It may cause CW to recruit and train additional employees in order to meet the
budgeted resource requirements. This will lead to higher than necessary staff
levels, higher payroll and employee costs and possibly future redundancies or
inefficient operations as the store managers try to prove that their budget was
correct and not draw attention to themselves by having favourable variances in
their performance reports.

It may cause CW to invest in new additional equipment which is not really
needed and which would therefore be a drain on the cash resources of CW. This
could prevent them from investing in other areas of the business that would
represent a more profitable use of the money available.
Cost and Management Accounting 2nd edition
Solutions (Additional questions)

It may cause CW to borrow funds in order to fund the new capital investment or
the additional working capital in the business. This funding would not really be
required but if taken would cause CW to incur additional financing costs.
(b)
Behavioural issues could arise from the removal of the excess costs and resources
from the managers’ budgets if it is removed without agreement from the managers.
There are two main difficulties here:

If the manager agrees that the excess can be removed, it is an admission that their
original budget was wrong and as a result their integrity as a manager is
questioned. They are vulnerable to the accusation that they do not understand
their own store and as a result their ability to be a manager is also questioned.

If the excesses are removed without the manager’s agreement, then there is the
risk that the manager will disown their budget and as a result they will not be
motivated towards achieving it. They may even take operational decisions that
lead to adverse variances when measured against the amended budget to try to
ensure that the performance reports show that their original budget was correct.