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.
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