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Financial & Management

Accounting
(ACC2002L)

Question Pack

Topic 1 Introduction to Accounting

Question 1
Susan Chan has extracted the following balances from her accounts as at 30
September 2010:


Creditors 14,000 Land and buildings 200,000
Long-term loan 14,000 Plant and machinery 80,000
Net Profit 48,000 Motor vehicles 28,000
Drawings 12,000 Stock 36,500
Cash 8,200 Debtors 28,300

Required:

Prepare Susan Chans balance sheet as at 30 September 2010. Note that capital can
be arrived at by deduction.

Question 2
123 Companies

You are required to construct the balance sheets as at 31 December 2010 for each of

the following manufacturing companies, filling in the missing figures to complete the

accounting equation and ensure the balance sheet totals are equal.

Co1 Co2 Co3


Owners Equity 4,200 ? ?
Plant & machinery 2,000 1,000 6,000
Cash/bank 100 200 NIL
Loan payable 2013 2,000 1,000 NIL
Inventory 400 2,000 3,500
Land & buildings 2,500 6,000 2,000
Debtors/Receivables 1,300 3,000 1,500
Creditors/Payables 300 1,000 2,000
3 month Deposit 900 NIL 2,000
Bank overdraft 700 NIL 1,500

Question 3

Derek Powell has extracted the following balances from his accounts year ending 30
September 2010:


Opening Stock 9,000 Purchases 53,000
Closing Stock 8,500 Purchases returns 1,250
Sales 102,000 Sales returns 300
Carriage inwards 2,000

Required:

2
Draw up Derek Powells trading account for the year ended 30 September 2010.

Question 4

Poppy imports and sells display fireworks. She supplies her customers on credit
terms, requiring payment of invoices within 30-days. In order to encourage early
payment, she offers customers a discount of 0.5% of invoice value for receipt of
payment within 30-days. The following is a list of Poppys account balances for all
sales and expense items at 28th February 2010:


Staffing costs 9,777
Opening stock (1st March 2009) 7,140
Sales returns 3,997
Import duties 9,911
Rental 17,211
Discounts allowed 716
Telephone charges 1,227
Purchases 123,057
Insurance 8,204
Marketing 1,888
Administrative expenses 922
Electricity 1,604
Delivery van expenses 2,107
Sales 220,713
Closing stock (28th February 2010) 7,393

Prepare Poppys profit and loss account for the year ending 28th February 2010.

Question 5

Abbey owns a wholesale business dealing in beauty products.

At 30 November 2010 she has the following information relating to sales and
expenses in her accounting records:


Insurance 1,280
Delivery charges (for deliveries to customers) 2,667
Sales 254,450
Opening stock at 1 December 2009 19,950
Purchases returns 220
Staffing costs 13,220
Telephone 1,042

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Other administration expenses 5,750
Premises costs 9,630
Purchases 188,434
Sundry expenses 4,075
Closing stock at 30 November 2010 22,670

Notes

1. Abbey estimates that an accrual of 245 for telephone charges will be


required.
2. Of the insurance total of 1,280, 250 relates to the following accounting
period and should be treated as a prepayment.

Required:

(a) Prepare Abbeys profit and loss account for the year ending 30 November
2010.

Question 6

A Trading Company
The assets/liabilities of a business at the start of the week are as follows:

Premises 145,000

Furniture & fittings 63,000

Inventory 28,000

Debtors/receivables 33,000

Creditors/Payables 23,000

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Bank overdraft 43,000

Share Capital/Equity 203,000

During the week the following transactions took place:

Sold inventory for 11,000 cash. This inventory had cost 8,000.

Sold inventory for 23,000 on credit. This inventory had cost 17,000.

Received cash from trade debtors totalling 18,000.

The owners of the business introduced an additional 100,000 of their own

money, which was placed in the business bank account

The owners brought a van, valued at 10,000 into the business.

Bought inventory on credit for 14,000.

Paid trade creditors 13,000.

Required: Show the balance sheet at the end of the week after all of these transactions

have been reflected.

Question 7

Dale has been in business for some years. The following is his trial balance at
31 October 2010:

DR CR

Bank 700
Capital 85,000
Accumulated depr. (1 Nov 2009)
Office equipment 14,000
Vehicles 4,000
Drawings 12,300
Heating & lighting 3,000
Office expenses 27,000
Office equipment, at cost 35,000

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Rates 12,000
Purchases 240,000
Sales 350,000
Stock (1 November 2009) 20,000
Trade creditors 21,000
Trade debtors 61,000
Vehicles, at cost 16,000
Wages & salaries 47,000 _
474,000 474,000

Additional information:

1. Stock at 31 October 2010: 26,000


2. Amount owing for electricity at 31 October 2010: 1,500
3. At 31 October 2010, 2,000 had been paid in advance for rates
4. Depreciation is to be charged on the office equipment for the year to 31
October 2010 at a rate of 20% on cost and on vehicles at a rate of 25% on cost.

Required:

Prepare Dales Income Statement for the year ended 31 October 2010 and a balance
sheet as at that date.

Question 8

J Green

From the following balances prepare J. Green's Trading and Profit and Loss Account
for the year ended 30th June, 20X8, and a Balance Sheet as at that date:


Purchases
Bad debts
Sales
Repairs
General expenses
Light and heat
Debtors
Travellers salaries and commissions

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Discount allowed
Trade creditors
Stock 1st July 20X7
Fixtures & fittings
Capital account
Drawings
Premises
Rent received
Cash in hand
Rates and taxes
Cash at bank
Salaries
Wages
Discount received
5% Mortgage on premises
Mortgage interest paid
Printing & stationery

Make a Bad Debts Provision of 450.


Depreciate Fixtures and Fittings 5%.
Rent received in advance 30.
Rates prepaid 60.
Wages accrued due 50.
Stock on hand at 30th June 20X8 was valued at 3,372.

The 5% Mortgage had been in existence for a number of years.

MCQs
1. Adnans balance sheet shows the following totals:

Current assets 158,500


Current liabilities 84,300
Long-term liabilities 30,000
Capital 116,200

Which of the following is the total for fixed assets?

a) 156,600
b) 12,000
c) 96,600
d) 72,000

2. Astrids business for the year ending 31 March 20X9 has the
following totals relevant to sales and purchases:

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Sales 983,007
Purchases 668,450
Sales returns 15,266
Purchases returns 28,289

Opening stock was 65,442 and closing stock was 72,320.

What is Astrids gross profit for the year?

a) 334,458
b) 321,435
c) 308,412
d) 364,990

3. Which of the following contains only liabilities?

A. Trade creditors, accruals, rent prepaid, dividends payable;


B. Wages payable, prepayments, salaries payable, salaries expense;
C. Interest payable, loans payable, dividends payable;
D. Estimated taxation liability, debtors, dividends payable;

4. Using the following information, calculate the working capital (current assets less
current liabilities)

Debtors 12,000
Bank balance 2,000
Accruals 5,000
Share capital 1,000
Creditors 7,000
Stock 5,000

A. 6,000
B. (2,000)
C. 0
D. 7,000
5. Which of the following assets are not fixed?

A. Land and buildings


B. Motor vehicles
C. Fixtures and fittings
D. Debtors

6. William Ayletts business has the following balances:

Sales 200,000
Opening stock 50,000
Closing stock 75,000
Purchases 150,000
Expenses 25,000.

Is William Ayletts net profit?

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A. 50,000
B. 150,000
C. 75,000
D. 100,000

7. Which of the following accounts would you not expect to usually have a debit
balance?

A. Electricity
B. Motor van
C. Purchases returns
D. A debtor account

8. The trading account consists of:

A. Gross profit less expenses


B. Sales less cost of sales less expenses
C. Assets less liabilities
D. Sales less cost of sales

9. Which of the following balance sheets are incorrect?

Company 1 Company 2 Company 3



Current assets 4,000 2,000 3,000
Ordinary share capital 1,000 3,000 2,000
Long-term loan 2,000 4,000 3,000
Current liabilities 2,000 1,000 1,000
Fixed assets 4,000 8,000 4,000
Profit and loss account 3,000 2,000 5,000

(a) Company 1
(b) Company 2
(c) Company 3
(d) Both companies 1 and 2 are incorrect
10. On 1st January 2010, GREEN Ltds working capital was 216,000. During
January 2000 the following transactions occurred:

Stock valued at 500 was sold on two months credit for 1,150.
Receipts from debtors amounted to 10,000
Debts of 1,250 were written off.
Payments to creditors amounted to 15,000

. Working capital on 31st January 2010 was

(a) 200,400
(b) 214,250
(c) 215,400
(d) 230,400

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Topic 2 Cash Flow statements

Question 9
From the information below, you are required to complete a worksheet to determine
expected cash receipts from customers, and a cash budget for the three months, June,
July, August.

(a) The bank balance at 1 June was an overdraft of 850

(b) Estimated cash sales for the period June to August


June 7,600
July 4,780
August 5,830

(c) Wages normally amount to an average of 2,300 per month.

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(d) Actual credit sales amount to: -
March 6,300
April 4,900
May 2,700

(e) Customers normally pay off their debts at the following rate: -
80% in first month after sale;
20% in second month after sale.

(f) Estimated credit Sales for the period of June to August

June 4,400
July 5,100
August 3,800

(g) Estimated cash purchases for the period June to August

June 1,980
July 3,150
August 3,060

(h) Taxation amounting to 1,500 is payable in August.

(i) Goods purchased on credit are not paid for until the month following the
month of purchase. Estimated credit purchases to be made during the period
June to August are: -

June 5,105
July 2,175
August 4,285

(j) At the end of May accounts payable are owed a total of 2,550.

Question 10

Explain the importance of cash to the viability of a business and why one
cannot assume a profitable business is necessarily generating sufficient cash
resources to remain viable.
(3 marks)

You are starting a new Health Club and have agreed a 5,000 long-term bank
loan (to be received on 1 July 2005) as well as a 1,000 bank overdraft facility.
You expect to have 20 new members join in the July 2005 and for membership
numbers to increase by 5 new members per month from August to December
2005. Membership subscriptions are 15 per month. The local community
hall requires an initial deposit of 1,500 (payable on 1 July 2005) plus 100
per month for rent of the hall (payable on the first day of each month). The
cost of adapting the hall for the health club purposes amounts to 4,000, which
you will pay 50% in July 2005 and 50% in August 2005. Registration of the

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club costs the club 5 per member per month. Other outgoings will be 150
per month.

Calculate the expected bank account balance at the end of each month for the
first six months of the Clubs existence and comment on the sufficiency of the
financing arrangements.
(7 marks)

(Total 10 marks)

Question 11

The following information relates to The Marshes Gallery, which has been set up by
Ciara Pilbeam to help rural craftspeople to sell their products to the tourist trade.
Ciara is submitting a business plan to Midlays Bank plc. She has found what she
thinks are ideal premises: a disused colliery building in South Wales. She has saved
4,000 as initial capital, which she would pay into the Gallerys bank account on 1
July 2010, which will be the effective starting date of the enterprise. Forecast
information for the six months to 31 December 2010 is as follows:

The landlord requires a deposit of 3,000, and rent of 1,000 per month,
payable quarterly in arrears. The deposit will be paid on 1 July 2010, the first
quarters rent on 2 October 2010, the second quarter on 3 January 2011.
Income will be generated from commission on works of art sold through the
gallery. The average commission taken by the gallery will be 40%, and sales
of artworks are forecast as follows:

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July August September October November December
8,000 4,000 7,000 12,000 18,000 24,000

All sales are for cash, and are banked immediately without deduction.
Amounts due to artists are paid one month after the relevant sales are made.
The Gallery will receive a one-off grant of 5,000 from the Welsh Tourist
Board in August.
The cost of redecorating the building will be 7,000, payable in two
instalments: 4,000 in August, the balance in September.
General overheads (including any bank interest payable) are expected to be
2,000 per month, payable one month in arrears.
Wages to assistants will be 750 per month and are payable at the end of the
month.
Ciara Pilbeam will draw 600 per month until December, when she will draw
900.
Various items of equipment will be purchased for 3,000 in July, payable two
months later. Depreciation for the six months will be 150.
Initial advertising will cost 500, payable in August.

Prepare a cash flow forecast for The Marshes Gallery for the six months to 31
December 2010. Comment on the forecast, and state whether you think that the
project appears feasible.

Question 12

K Records Limited own a chain of 14 shops selling DVDs and compact discs. At the
beginning of December 2010 the company had an overdraft of 25,000.

The following forecast information was prepared for the business:

December January February March


Sales 180,000 230,000 320,000 250,000


Purchases 135,000 180,000 142,000 94,000
Administration expenses 52,000 55,000 56,000 53,000
Selling expenses 22,000 24,000 28,000 26,000
Wages 13,000 14,000 16,000 15,000

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Taxation payment - - - 22,000
Loan repayments 5,000 5,000 5,000 5,000
Shop refurbishments - 32,000 - -

Notes:
(i) 50% of the sales will be cash sales. The remaining 50% of sales will be paid
for with a credit card. The charge made by the credit card company to K
Records Limited is 3% of the sales value. The credit card company pays K
Records Limited in the month following sale.

(ii) All purchases are credit purchases. Suppliers allow one months credit.

(iii) Administration expenses are paid when incurred. This item includes a charge
of 15,000 each month in respect of depreciation

(iv) Selling expenses will be paid as follows: 60% in the month incurred and 40%
in the following month.

(v) The lag in payment of wages is 1\4 month (ie. one weeks wages owing at the
end of each month).

(vi) The company has a bank loan which it is paying off in monthly instalments.

(vii) The company will undertake shop refurbishments in January (costing


32,000). Half the payment for this will be made in February and the balance in
March.

(viii) A commission of 2% is paid to sales staff on all the sales. This is paid
in the month following the sales to which it relates.

Required:
Prepare a cash budget for January, February and March 2010. Comment briefly on
the results of your cash budget

MCQs

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The following relates to Item 1 and 2

The balance sheet of Cold Ltd at 31 December 2004 includes the following:

Stock 16,000
Debtors 38,000
Creditors 61,875

Additional information is provided:

Sales for January and February 2005 are budgeted at 110,000 and 120,000 respectively.

Sixty per cent (60%) of sales will be for cash with the balance being collected in the month
following sale.

The gross margin on sales is 25%. Purchases for each month are 75% of the cost of the
following months projected sales. Suppliers give one months credit.

Monthly expenses amount to 20,000 including depreciation of 5,000

Item 1

The budgeted cash collection for January 2005 is:

A. 66,000
B. 104,000
C. 148,000
D. 44,000

Item 2

The projected payments to creditors during the month of January 2005 are:

A. 61,875
B. 67,500
C. 82,500
D. 90,000

The following information applies to Items 3 to 4:


The following information pertains to the January operating budget for Casey
Corporation:
Budgeted sales for January 100,000 and February 200,000.
Collections for sales are 60% in the month of sale and 40% the next month.
Gross margin is 30% of sales.
Administrative costs are 10,000 each month.
Beginning accounts receivable (debtors) 20,000.
Beginning inventory 14,000.
Beginning accounts payable (creditors) 60,000. (All from inventory
purchases.)
Purchases are paid in full the following month.
Desired ending inventory is 20% of next months cost of goods sold (COGS).

Item 3
For January, budgeted cash collections are:

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a) 20,000
b) 60,000
c) 80,000
d) None of the above.

Item 4
At the end of January, budgeted accounts receivable are:
a) 20,000
b) 40,000
c) 60,000
d) None of the above.

Topic 3 Interpretation of financial statements

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Question 13

Colin Bailey has the following balance sheet extracts as at 30 June 2010.


Current Assets
Stock 23,801
Debtors 12,233
Cash 3,608
Current Liabilities
Creditors 11,968
Long-Term Creditors 26,123
Total net assets 168,500

Required:

Calculate the following ratios: (i) current ratio, (ii) quick ratio and (iii) gearing ratio.

Question 14

Deakin Plc has the following summary accounts:

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Profit and Loss Account Year Ended 31 December 2010

000
Sales 2,000
Cost of Sales (1,000)
Gross Profit 1,000
Administrative expenses (includes debenture interest 5,000) (600)
Distribution expenses (200)
Profit before Taxation 200
Taxation (50)
Profit after Taxation 150
Preference dividends (10)
Ordinary dividends (65)
Retained Profit 75

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Balance Sheet as at 31 December 2010

000 000
Fixed Assets 1,140
Current Assets
Stock 60
Debtors 70
Cash 40
170
Creditors: Amounts Falling Due (60) 110
Within One Year

Net Current Assets


Total Assets Less Current Liabilities 1,250

Creditors: Amounts Falling Due


After More than One Year (100)

Total Net Assets 1,150

Share Capital and Reserves 000


Share Capital
Ordinary share capital (1 each) 650
Preference share capital (1 each) 400
1,050
Reserves
Capital Reserves
Share premium account 15
Other Reserves
Profit and loss account 85
Total shareholders funds 1,150

Share price 3.00

Required:

From the above accounts prepare the following ratios:

1. Profitability ratios. 4. Gearing ratios.


2. Efficiency ratios. 5. Investment ratios.
3. Liquidity ratios.

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Question 15

Srilankan Software Ltd.


Balance sheet as at 31st December 20X8
000 000
Tangible fixed assets 1,230
Current assets
Debtors 3,512
Cash 10,134
13,646
Creditors (amounts falling due within one year)
Bank loans and overdrafts 154
Trade and other creditors 208
Corporation tax 897
1,259
Net current assets 12,387
Total assets less current liabilities 13,617

Creditors (amounts falling due after more than


one year)
Loans 5,208
Capital and reserves
Called-up share capital
Equity share capital (shares of 1 each) 400
Profit and loss account 8,009
Shareholders funds 8,409
13,617

Srilankan Software Ltd.


Profit and loss account for the year ended 31st December 20X8
20X8 20X7
000 000
Turnover 30,840 20,145
Cost of sales 14,079 10,890
Gross profit 16,761 9,255
Operating costs 8,296 8,100
Profit before interest and tax 8,465 1,155
Interest payable and similar charges (net) 500 251
Profit on ordinary activities before taxation 7,965 904
Taxation on profit on ordinary activities 801 87
Profit on ordinary activities after taxation 7,164 817
Dividends - -
Retained profit for the financial year 7,164 817

Earnings per Ordinary Share 1,791c 204c

Other information:

Srilankan Software Ltd. is a computer software company based in Colombo. It was


founded about ten years ago by four computer programmers (graduates from NIBM).
They each own 25% of the shares in the company. Over the last two years the
company has been extremely successful. It develops and sells software that helps to
secure computer systems.

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The four owners have heard that computer companies are highly valued on the stock
exchange. They wish to establish how much investors would be willing to pay for
their shares in Srilankan Software Ltd.

Listed companies in the same industry have price earnings ratios of about 30.
Srilankan Software Ltd. has never paid a dividend. However, if shares in the company
are sold to the public, the directors feel that the company could afford a dividend of
4.00 per share. They expect this would increase by 10% a year. An investment
banker has estimated Srilankan Software Ltd.'s cost of capital at 17%.

Required:

(1) Analyse the performance of Srilankan Software Ltd. using the following ratios:
(a) Current ratio.
(b) Return on shareholders funds.
(c) Debt to capital employed.
(d) Gross profit ratio.
(e) Debtors days (number of days sales in debtors).

Comment on each of these ratios, paying particular attention to the fact that the
company is in the software industry.

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MCQs

1.Calculate the gross profit percentage (to nearest %) from the following information:
Sales 12,000, Opening Stock 3,000, Purchases 8,000, Closing Stock 5,000

A. 70%
B. 100%
C. 17%
D. 50%

2. The current assets of a business consist of stock 10,000, debtors of 20,000 and an
unknown amount of money in the bank. The current liabilities are 15,000 and the
current ratio is 3:1. What is the bank balance?

A. 15,000
B. 30,000
C. 5,000

3. The balance sheet of STICK Ltd. (STICK) as at 31st December 2005 showed the
following:

000 000
Tangible fixed assets 800 1 ordinary shares 100
Stock 300 Profit and loss account 650
Trade debtors 100 750
Cash 20
Bank overdraft (40)
Trade creditors (180)
Long-term loan (250)
750

The gearing ratio of STICK as at 31st December 2005 is

(a) 25.0%
(b) 27.9%
(c) 33.3%
(d) 38.7%

4. The formula for calculating the rate of stock turnover is

(a) cost of goods sold divided by average stock at cost


(b) average stock at cost dividend by cost of goods sold
(c) sales divided by average stock at cost
(d) sales divided by average stock at selling price

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5. The balance sheet of BLUE Ltd. as at 31st December 2000 showed the following:

000
Fixed assets 800
Current assets 300
Current liabilities 100
Long-term liabilities 300
Share capital and reserves 700

Profit before interest and tax and retained profits for the year were
240,000 and 120,000 respectively for the ended 31st December 2000.

The return on capital employed is:

(a) 12%
(b) 17.1%
(c) 24%
(d) 34.3%

6. The current and quick ratios of REIGN Ltd. are 1.4:1 and 0.3:1 respectively. In
which business is REIGN Ltd. most likely to operate?

A Auctioneering
B Electrical appliances discount warehouse chain
C Restaurant chain
D Travel agency

Information Common to 7 and 8

The following balance sheet is available for Rooney Ltd as at 31st December
2007.

000
Fixed assets 400
Current assets
Stock (opening stock 125,000) 130
Debtors 140
Bank 120
390
Creditors: amounts falling due within one year:
Trade creditors 210
Net current assets 180
Creditors; amounts falling due after more than
one year:
10% debentures 2050 (50)
Total net assets 530
Financed by:
Capital and Reserves
Ordinary shares of 1 each 150

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8% preference shares of 1 each 100
Retained profit for 20X7 30
Retained profit brought forward 250
530

Other additional information:


(1) Turnover for 2007 - 850,000
(2) All sales and purchases are on credit
(3) Purchases of raw material for 2007 - 450,000.
(4) No ordinary dividend was proposed for 2007 and the entire preference
dividend was paid before the year end
(5) There are 365 days in the year
(6) Taxation should be ignored.

7. Which of the following is fully correct based on the information supplied in the
question?

(a) Debtors days are 113.6 days and stock turnover is 3.5 times
(b) Debtors days are 113.6 days and creditors days are 210.8 days
(c) Creditors days are 170.33 days and stock turnover is 3.5 times
(d) Debtors days are 60.12 days and creditors days are 210.8 days.

8. Debt/capital employed ratio is

(a) 7.4%
(b) 8.6%
(c) 9.4%
(d) 11.3%

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Topic 4 Costing/Job costing

Question 16

Classify the following as either direct materials, direct labour, production overheads,
administrative expenses or selling and distribution costs:

(a) Factory supervisors wages (f) Machine shop workers wages


(b) Advertising campaign costs (g) Raw materials
(c) Machinery maintenance costs (h) Cost of computer for wages
(d) Personnel officers salary (i) Bank Interest
(e) Depreciation on sales van (j) Depreciation on factory computer

Question 17

Any Factory Plc has the following costs:



General administrative overheads 8,000
Salaries of administrative employees 65,000
Wages of factory supervisors 80,000
Computer overhead expenses
(1/3 in factory, 1/3 in administration, 1/3 distribution) 12,000
Interest on loan 2,000
Wages: selling and distribution 26,000
Salaries: marketing 35,000
General selling and distribution overheads 16,000
Royalties 4,000
Raw materials used in production 400,000
Labour costs directly connected with production 100,000
Other production overheads 60,000
Commission paid to sales force 5,000
Auditing costs 3,500
Telephone costs (1/3 office, 2/3 selling and distribution) 15,000
Depreciation
Machinery used for production 9,000
Office fixtures and fittings 2,000
Delivery vans 4,000
Buildings (1/3 factory, 1/3 office, 1/3 sales) 9,000

Required:

A determination of Any Factory Plcs (i) prime cost, (ii) production cost, and (iii) total
cost.

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Question 18

Computer Ltd manufactures computer equipment. It uses a predetermined


overhead rate in applying factory overhead to production orders on a labour hour basis
for Department X and on a machine-hour basis for Department Y. At the beginning of
the year, the company made the following predictions:

Dept.X Dept.Y
Direct labour cost 160,000 35,000
Factory overhead 320,000 150,000
Direct labour hours 16,000 5,000
Machine hours 1,000 30,000

During the month of November, the cost sheet for production order No.679 shows the
following:

Dept. X Dept. Y
Materials requisitioned 38 42
Direct labour cost 32 23
Direct labour hours 6 3
Machine hours 3 14

Required:

(a) Calculate the total production cost of order No. 679.

(b) If a blanket overhead rate based on direct labour hours is used, re-calculate the
total production cost of order No. 679.

(c) Comment briefly on the differences between your answers to (a) and (b)
above.

Question 19

Galle Company applies manufacturing overhead costs using a budgeted rate per
machine-hour. The following data are available for 2004:

Budgeted manufacturing overhead costs 5,700,000


Budgeted machine hours 380,000
Actual manufacturing overhead costs 5,820,000
Actual machine hours 390,000

Required:

(a) Calculate the predetermined manufacturing overhead rate for 2004.


(b) Compute the manufacturing overhead applied during 2004.
(c) Calculate the amount of under-absorbed or over-absorbed manufacturing
overhead.
(d) Why do firms use predetermined overhead rates as opposed to actual overhead
rates?

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Question 20

Grex Products Limited organises its production into three cost centres: processing,
assembly and packaging. The company plans to produce 76,000 units of product in
the forthcoming year 20X8. Further details of its production plans for 20X8 are as
follows:

Cost Centre Production Machine hours Direct labour


overhead hours

Processing 993,500 60,000 8,000


Assembly 442,000 2,500 18,000
Packaging 196,600 10,000 6,000

You are required to:

(a) Calculate the overhead recovery rates for each department on the following
bases:

(i) processing machine hours


(ii) assembly labour hours
(iii) packaging units of production

(b) Suggest reasons why the company has selected these bases for calculation of
overhead recovery rates in each department.

27
Question 21

A manufacturing Company uses a job-costing system. The plant has a Machining


Department and an Assembly Department. Its job-costing system has two direct-cost
categories (direct materials and direct manufacturing labour) and two manufacturing
overhead cost pools (the Machining Department overhead, applied to jobs based on
actual machine-hours, and the Assembly Department overhead, applied to jobs based
on actual direct manufacturing labour cost). The 2004 budget for the plant is:
Machining Assembly
Department Department
Manufacturing overhead 1,800,000 3,600,000
Direct manufacturing labour cost 1,400,000 2,000,000
Direct manufacturing labour-hours 100,000 200,000
Machine-hours 50,000 200,000

Required:
(a) During February, the jobcost record for Job 494 contained the following:
Machining Assembly
Department Department
Direct materials used 45,000 70,000
Direct manufacturing labour costs 14,000 15,000
Direct manufacturing labour-hours 1,000 1,500
Machine-hours 2,000 1,000

Calculate the total manufacturing overhead costs allocated to Job 494.

(b) At the end of 2004, the actual manufacturing overhead costs were 2,200,000
in Machining and 3,800,000 in Assembly. Assume that 55,000 actual
machine-hours were used in Machining and that actual direct manufacturing
labour costs in Assembly were 2,300,000.

Calculate the over or under applied manufacturing overhead for each department.

28
Question 22

The following job is being carried out by Lima Products for one of its largest
customers:
Dept. R Dept. T
Materials issue 8,000 7,000
Direct labour hours 600 hours 400 hours
Direct labour rate per hour 8 12

Departmental overheads are absorbed on a direct labour cost basis of 80% per . For
quotation/sales price purposes, general administration and selling costs are charged at
25% of full production cost and the profit margin is 20% of the selling price.

Required:

a. Calculate the selling price for the job

b. Critically evaluate the cost-plus approach to pricing used in (a) above.

29
Question 23

The Lamda Company uses a job-costing system at its Cork plant. The plant has a
Machining Department and a Finishing Department. Lamda has two manufacturing
overhead cost pools (the Machining Department, with machine-hours as the
absorption base, and the Finishing Department, with direct manufacturing labour costs
as the absorption base): The 2004 budget for the plant is as follows:

Machining Department Finishing Department


Manufacturing overhead 10,000,000 8,000,000
Direct manufacturing labour costs 1,000,000 4,000,000
Direct manufacturing labour-hours 30,000 160,000
Machine hours 200,000 40,000

Required:

(a) What is the budgeted overhead rate that should be used (a) in the Machining
Department and (b) in the Finishing Department?

(b) During the month of March, the job-cost record for Job 431 shows the
following:
Machining Department Finishing Department
Direct materials used 14,000 3,000
Direct manufacturing labour costs 600 1,250
Direct manufacturing labour-hours 30 50
Machine hours 130 10

Calculate the total manufacturing overhead applied to Job 431.

(c) Assuming that Job 431 consisted of 200 units of product, calculate the unit
product cost of Job 431.

MCQs Costing/Job costing

30
Items 1 and 2 are based on the following:

The Brendan Company produces two products, X and Y, in two manufacturing


departments. For the year 2005 the following data have been prepared:

Machinery Assembly
Overheads 400,000 100,000
Machine hours 100,000 100,000

The estimated machine hours to produce 1 unit of each product are:


Machinery Assembly
X 15 5
Y 5 11

Item 1
Using departmental overhead absorption rates, the amount of overhead assigned to
product X on a machine hour basis is:
a) 20
b) 50
c) 65
d) 100

Item 2
Using departmental overhead absorption rates, the amount of overhead assigned to
product Y on a machine hour basis is:
a) 31
b) 40
c) 50
d) 60

Item 3
A manufacturing company has a highly automated manufacturing plant producing
many different products. What is the most appropriate basis of applying factory
overhead costs to units of output?
a) Direct labour hours
b) Direct labour cost
c) Machine hours
d) Cost of materials used.

Item 4
Which of the following is true for a service firm? A service firm will:
a) Not absorb overheads because it does not produce tangible goods
b) Absorb overheads on the basis of labour hours/costs
c) Generally ignore overheads since they will be insignificant
d) Absorb overheads on the basis of direct machine hours.

Item 5
Overhead absorbed represents which of the following?
a) Actual activity multiplied by predetermined overhead rate
b) Estimated activity multiplied by predetermined overhead rate

31
c) Actual activity multiplied by actual overhead rate
d) Estimated activity multiplied by actual overhead rate.

Item 6
Over-applied factory overhead cost is the excess of applied overhead cost over:
a) Budgeted overhead cost
b) Actual overhead cost
c) Predicted overhead cost
d) None of the above.

Item 7
Fabricators budgeted 20,000 total direct labour hours and 110,000 of factory
overhead costs for the year 2004. However, the actual 2004 amounts were 22,000
hours and 120,000 cost, respectively. Compute the amount of under-applied or over-
applied factory overhead cost.
a) 1,000 under-applied
b) 1,000 over-applied
c) 10,000 under-applied
d) 10,000 over-applied

Item 8
Big Company budgeted its overhead at 300,000 for 2004 based on a budgeted
volume of 100,000 direct labour hours. During 2004, actual overheads exceeded the
budgeted amount by 10,000. The actual direct labour hours amounted to 105,000.
a) The over-applied overhead amounted to 5,000
b) The under-applied overhead amounted to 10,000
c) The under-applied overhead amounted to 5,000
d) The over-applied overhead amounted to 10,000.

Item 9
In March 2004, Baildon Company provided the following information:

250,000 direct labour hours worked, actual manufacturing overhead of


574,000 and manufacturing overhead over-absorbed by 16,000

Assuming that overhead is absorbed on the basis of direct labour hours, what is the
predetermined overhead rate?
a) 2.42
b) 2.36
c) 2.56
d) None of the above.

Item 10
A direct cost is one which:
a) Needs to be apportioned for cost tracing purposes
b) Changes directly in proportion to the volume of output

32
c) Can be specifically identified with the cost object.
d) Both b) and c) above.

Item 11
The following information relates to job 180 which is being carried out by Claxon Ltd
to meet a customers order:
Dept. X Dept. Y Dept. Z
Direct materials used 4,000 3,000 3,000
Direct labour hours 300 hours 200 hours 100 hours
Direct labour rate p/hour 8 10 12
Production overhead p/hour 4 4 4

Administration and other overhead 20% of full production cost


Profit margin 25% of sales price

What is the selling price to the customer for job 180?


a) 19,785
b) 27,000
c) 26,750
d) 28,800

Item 12
Service companies:
a) Do not use job order costing
b) Often use job order costing
c) Do not cost their services
d) Produce durable products.

Item 13
The following job is being carried out by Mixton Products for one of its larger
customers:

Department M Department R
Materials issued 10,000 6,000
Direct labour hours 600 hours 300 hours
Direct labour rate per hour 6 8

Departmental overheads are absorbed on a direct labour hour basis of 6 per hour. For
quotation/sales price purposes, general administration and selling costs are charged at
20% of full production cost and the profit margin is 25% of the selling price.

The selling price for the job is:


a) 41,100
b) 39,456
c) 43,840
d) None of the above.

Item 14
A solicitor intends to set up a private law practice. He will work a 40 hour week and
pay himself an overall salary of 50,000 per annum. His other cash expenses amount

33
to 29,872. He estimates that after providing for four weeks holidays only 80% of his
time worked will be chargeable to clients.

A job requiring 10 hours should be costed at:


a) 424
b) 487
c) 520
d) None of the above

Topic 5 ABC

Question 24

34
The Rodeo ABC Co. Ltd. produces three products. The data below is available with
respect to year ended 31 December.
Product A Product B Product C Totals
Production and sales (units) 50 000 30,000 5,000

Selling price per unit 25 30 35

Direct materials per unit 3 2 1

Direct labour per unit 6 8 4

Direct labour hours per unit 1.5 (hours) 2 (hours) 1 (hour) 140,000 (hours)

Machine hours per unit 4 (hours) 2 (hours) 6 (hours) 290,000 (hours)

No. of production runs 5 10 15 30

No. of sales orders 10 20 20 50

Factory overhead Costs (fixed):


Set up Costs 120,000
Machine Overheads 580,000
Packaging 140,000
840,000

Required:
a. Calculate the cost of each product under the traditional approach to
product costing i.e. that all production overheads are absorbed on the
basis of direct labour hours.

b. Calculate the cost of each product under Activity Based Cost (ABC),
assuming set up costs (120,000) are driven by the number of production
runs, that machine overheads (580,000) are to be absorbed on the basis
of machine hours and packaging are driven by the number of sales
orders.

35
Question 25

The following data relate to costs, output volume and cost drivers
of Laverne Supplies Ltd. for July:

Product Product Product Totals


A B C
1. Production and Sales 3,000 2,000 1,500
(Units)

2. Direct Production Costs per per per


unit unit unit
Direct materials 12 11 8 70,00
0
Direct labour 3 6 2 24,00
0
15 17 10 94,00
0

3. Labour hours per unit 0.5 1 0.33


4. Machine hours per unit 2 1 2
5. No. of production runs 8 2 10 20
6. No. of deliveries to 3 2 10 15
customers
7. No. of production 30 5 15 50
orders
8. No. of deliveries into 17 3 20 40
store

9. Production Overhead Costs


Machining 71,500
Set-Up costs 10,500
Materials handling (receiving) 35,000
Packing costs (despatch) 22,500
Engineering 25,500
165,000

Indirect production overheads that are not driven by production


volume are:

Item Cost Driver


Set-up costs Production runs
Materials handling Deliveries of materials
Packing Deliveries to customers
Engineering Production orders

Required:

a. Calculate the full production cost per unit of Product C if


overheads were absorbed on the basis of direct labour hours

36
b. Calculate the full production cost per unit of Product C using
activity-based costing and the cost drivers described above,
with overheads that are driven by production volume
allocated on a machine hour basis.

c. Comment briefly on the difference to your answers in (a) and


(b) above.

Question 26

Wong Ltd. manufactures two products, Beta and Gamma. Beta is


the companys standard product; it is produced in large batches
and in high volumes. Gamma is manufactured on a special order
basis only and in relatively low volumes.

The following data relates to the production of both products for


the year ended 31 December 200X

Beta Gamma
Production (planned and actual 50,000 5,000
units)
Direct material cost per unit 2.00 2.80
Direct labour cost per unit 1.50 4.00
Number of direct labour hours 0.375 1
per unit

The factory overhead to be charged to production is as follows:



Indirect labour 30,000
Machine re-tooling 15,000
Materials handling 27,000
Electricity 23,000
Total 95,000

In the past the company has charged overheads to production on


the basis of direct labour hours. After an in-depth study by a team
of management consultants, the company has decided to introduce
an Activity-Based Costing (ABC) system. In order to facilitate this
proposal, the cost drivers associated with the various overheads
have been identified. These cost drivers, and related data for the
year, are as follows:

No. of Occurrences During


the Year
Cost Item Cost Driver Beta Gamma Total

37
Indirect labour Production 50 100 150
runs
Machine re-tooling Production 50 100 150
runs
Materials handling Deliveries 12 48 60
Electricity Machine 7,000 4,500 11,500
hours

Required:

a. Calculate the unit product cost of Beta and Gamma using the
traditional method of direct labour hours to absorb overhead
b. Calculate the unit product cost of Beta and Gamma using
ABC
c. Draft a brief memorandum to the Managing Director of Wong
Ltd. explaining the difference in the results of the two
methods of valuation in (a) and (b) above.
d. Describe briefly two other applications of activity-based
accounting other than product costing.

MCQs Activity-Based Costing


Each of the following MCQs has four possible answers. Only one of these answers is
strictly correct. You are required to indicate the correct answer.

Item 1
Which of the following statements is true in relation to traditional product costing
systems?
a) High-volume products tend to be under-costed
b) Low-volume products tend to be over-costed
c) High-volume product lines often subsidise the low-volume product lines
d) None of the above.

Item 2
Activity-based costing (ABC) has which of the following purposes?
a) Provision of more accurate product cost information
b) Identification of non-value-added activities
c) Establishing customer profitability
d) All of the above.

Item 3
Activity-based costing could be appropriate in which of the following types of
organization?
a) Airline companies
b) Hospitals

38
c) Financial institutions
d) All of the above.

Item 4
In an organization that makes furniture, which of the following is a value-added
activity?
a) Purchasing direct materials
b) Storing finished goods inventory
c) Moving work-in-process inventory around the factory
d) Waiting for incoming materials.

Item 5
Overhead costs are allocated to cost objects in an activity-based cost system in the
following manner:
a) Overhead costs are traced to departments, then costs are traced to products
b) Overhead costs are traced to activities, then costs are traced to products
c) Overhead costs are traced to activities, then costs are traced to departments
before allocating to products
d) Fixed overhead costs are traced directly to products.

Item 6
In allocating costs to products, more accurate costing is generally obtained by:
a) Allocating costs using labour hours as the allocation base
b) Having more than one cost pool
c) Always using allocation bases that are based on production volume
d) None of the above.

Item 7
Cost drivers in activity-based costing:
a) Are always related to production volume
b) Are workers who influence cost control
c) Often assign more costs to low-volume products than traditional allocation
methods
d) None of the above.
Item 8
Activity-based cost systems:
a) Always lead to improvements in cost control
b) Are less expensive to develop and maintain than traditional costing systems
c) Allow managers to see the costs of key activities
d) All of the above.

39
Item 9
Activity-based management:
a) Is the same as activity-based costing
b) Has the goal of managing activities that cause costs
c) Focuses only on product costs
d) Supports the management dictum: You can always manage what you cant
measure.

Items 10 and 11 are based on the following information:

Dalkey Products plc absorbs indirect manufacturing costs on the basis of a direct
labour rate of 50 per hour. The plant manager has recently set up three activity
areas, each with its own supervisor. The following information is provided:

Activity Area Cost Driver used as indirect Cost per unit


cost application base of application base

Material handling Number of parts 2.40


Assembly Number of machine hours 40.00
Shipping Number of dispatches 2,000

Job no. 6501, which has been recently processed at Dalkey Products plc, had the
following characteristics:
Direct labour cost 900
Direct materials cost 4,600
Number of direct labour hours 150
Number of parts per job 400
Number of machine hours per job 300
Number of job orders dispatched 1
Number of units in job 6501 20

Item 10
What is the per unit manufacturing cost of job no. 6501 under the existing cost system
(that is, absorbing manufacturing overhead on a direct labour-hour basis)?
a) 18,500
b) 13,000
c) 650
d) 405

Item 11
Assume that Dalkey Products plc adopts an activity-based accounting system. What is
the per unit manufacturing cost of job no. 6501 under the new system?
a) 748
b) 986
c) 1,023
d) 1,200

Item 12
The plant manager of Antrim Products plc has recently set up two activity areas, each
with its own supervisor. The following information is provided:

Activity Area Cost Driver used as indirect Cost per unit of

40
cost application base application base

Material handling Number of parts 6


Assembly Number of machine hours 60

Job no. 425, which has recently been processed at Antrim Products plc, had the
following characteristics:
Direct labour cost 6,000
Direct material cost 6,000
Number of parts 500
Number of machine hours 500
Number of units in job no. 425 30

Assume that Antrim Products plc adopts an activity-based accounting system. What
then is the selling price of job no. 425 if a profit of 20% of selling price is required?
a) 54,000
b) 56,250
c) 57,750
d) 58,360

Item 13
Successful activity-based costing (ABC) implementation depends upon the firm
having:
a) Top management support
b) ABC linked to its competitive strategy
c) Effective training
d) All of the above.

Item 14
ABC systems:
a) Reveal activities that can be eliminated
b) Help control non-financial items such as number of set-up hours
c) Help identify new designs to reduce costs
d) All of the above.

Item 15
Which of the following statements is true?
a) ABC systems are useful in manufacturing, but not in the merchandising or
service industries
b) Information derived from an ABC analysis might be used to eliminate non-
value-added activities
c) ABC systems always provide decision-making benefits that exceed
implementation costs
d) ABC information cannot be used to determine customer profitability analysis.

41
Topic 6 Cost Behaviour

Question 27
The following total costs (adjusted for inflation) and associated activity levels refer to
a County Councils Services Department over the last five years:

Year Activity Level Total Cost


Labour hours
2000 8,000 1,400,000
2001 11,000 1,610,000
2002 9,000 1,502,000
2003 12,000 1,600,000
2004 10,000 1,575,000

Required:

a) Using high-low analysis, calculate the estimated fixed element of total cost?

42
b) Calculate the estimated total cost for 2005 if the activity level is 10,500 labour
hours.

Question 28

Ruskin and Associates, an advertising agency, is accumulating data to be used in


preparing its annual profit plan for the coming year. The cost behaviour pattern of the
firms equipment maintenance costs must be determined. The accounting staff has
suggested the use of an equation, in the form of Y = a + bX, for maintenance costs.
Data regarding the maintenance hours and costs for last year are as follows:-

Hours of Maintenance Service Maintenance Costs



January 480 4,200
February 320 3,000

43
March 400 3,600
April 300 2,820
May 500 4,350
June 310 2,960
July 320 3,030
August 520 4,470
September 490 4,260
October 470 4,050
November 350 3,300
December 340 3,160
Total 4,800 43,200
Average 400 3,600

Required:
a) Using the high/low method of cost estimation, estimate the behaviour of
Ruskin and Associates maintenance costs. Express the cost behaviour pattern
in equation form.

b) Compute the predicted maintenance cost at 600 hours of activity.

c) Compute the variable cost per hour and the fixed cost per hour at 600 hours of
activity. Explain why the fixed cost per hour could be misleading.

Question 29

Stella Stone has been operating a fitness studio for the past three years. As her studio
has grown and she has added more services (e.g., step-aerobics classes, high and low

44
impact aerobics, cardio-fitness classes) she has become more interested in
determining her cost structure. In general, she has found that her costs for the studio
increase with client usage. Costs for the studio over the past seven months are as
follows:
Month Number of Clients Total Cost
May 320 2,600
June 200 1,500
July 230 2,150
August 240 2,250
September 720 4,700
October 560 3,700
November 470 3,300
Required:

a) Using the high-low method, develop a linear cost equation in the form
Y=A+BX.
b) Assume that 700 clients are expected to use the studio in December. Using the
equation developed in a) above, calculate the estimated cost of running the
studio for December.
c) Comment briefly on the reliability of the estimated cost in b) above.

MCQs Cost behaviour

45
Item 1
Matthew Company has observed that at an activity level of 4,000 units the cost for
maintenance is 22,000, and at 6,000 units the cost for maintenance is 28,000. Using
the high-low method, the cost formula for maintenance is:
a) 10,000 plus 3.00 per unit
b) 8,000 per 4.00 per unit
c) 4.67 per unit
d) 5.50 per unit.

Items 2 and 3 are based on the following information:

Maintenance expenses of a company were analysed for purposes of cost prediction.


Examination of past records disclosed the following costs and volume measures:
High Low
Cost per month 39,200 32,000
Machine hours 24,000 15,000

Item 2
Using the high-low method of analysis, the estimated variable cost per machine hour
is:
a) 1.25
b) 12.50
c) 0.80
d) 0.08

Item 3
Using the high-low technique, the estimated monthly fixed costs for maintenance
expenditure is:
a) 240,000
b) 20,000
c) 12,000
d) 19,200

Item 4
A disadvantage of the high-low method of cost analysis is that:
a) It results in totally inaccurate cost formulas
b) It is very time consuming to apply
c) It uses two extreme data points, which may not be representative of normal
conditions
d) All of the above.

Item 5
Cost behaviour refers to:
a) How costs react to a change in the level of activity
b) Whether a cost is incurred in a manufacturing, merchandising or service
company
c) Classifying costs as either product or period costs
d) Whether a particular expense has been ethically incurred

The following information applies to Items 6 and 7:

46
Presented below are the production data for the first six months of the year for the
mixed costs incurred by Larsen Company.

Month Cost Units


January 4,994 3,998
February 4,024 3,200
March 5,340 4,970
April 8,840 7,500
May 6,100 4,960
June 5,336 6,400

Larsen Company uses the high-low method to analyse mixed costs. Assume that fixed
costs remain constant over the six months.

Item 6
How would the cost function be stated where y = total cost?
a) y = 7,850 + 0.13x
b) y = 3,562.30 + 0.14x
c) y = 107.20 + 1.22x
d) y = 440 + 1.12x

Item 7
What is the estimated total cost at an operating level of 5,000 units?
a) 6,227.20
b) 6,040.00
c) 8,510.00
d) None of the above.

Item 8
In March, Olympus Company has the following costs related to producing 10,000
units:
Direct materials 60,000
Direct labour 20,000
Rent 5,000
Depreciation 4,000

Estimate variable cost per unit using account analysis:


a) 8.90
b) 2.00
c) 2.90
d) 8.00

47
Item 9
Using the following production/cost data, estimate variable cost per unit using the
high-low method.
Month Production Cost
January 2,000 20,000
February 2,500 21,000
March 3,000 23,000
April 1,900 18,600
a) 4.00
b) 3.70
c) 4.20
d) 4.09

Item 10
Dylex Company employs 20 individuals. Eight employees are paid 12 per hour and
the rest are salaried employees paid 3,000 per month. How would total costs of
personnel be classified?
a) Variable
b) Mixed
c) A variable cost within a relevant range
d) A fixed cost within a relevant range.

Item 11
Which of the following statements is/are true?
a) All fixed costs are direct costs
b) All variable costs are indirect costs
c) Direct costs can be traced directly to a cost object
d) All of the above statements are true.

48
Topic 7 CVP

Question 30

The Marling Company produces consumer pharmaceuticals. One


of its products, Rutgut has the following cost data profile:

Selling price (per bottle) 6.00


Material cost (per bottle) 2.50
Other variable costs (per bottle) 0.50
Fixed overheads 90,000
Maximum production capacity 80,000

Required:

a. Calculate the break-even point in units (bottles)


b. Calculate the break-even point in sales value
c. Calculate the number of bottles to be sold to give a profit of
30,000 before tax
d. Calculate the maximum profit potential
e. Calculate the PV ratio (contribution margin ratio)

Question 31

Abbey Knitwear is choosing among three countries as the sole site


for manufacturing its new sweater Singapore, Thailand and the
United States. All sweaters are to be sold to retail outlets I the
United States at 32 per unit. These retail outlets add their own
mark-up when selling to final customers. The three countries differ
in their fixed costs and variable costs per sweater.

Variable Variable
Annual Fixed Manufacturin Marketing
Costs g Costs Per and
Sweater Distribution
Costs Per
Sweater
Singapore 6.5 million 8.00 11.00
Thailand 4.5 million 5.50 11.50
United States 12.0 million 13.00 9.00

Required:

a. Compute the break-even point of Abbey Knitwear in units for


each of the three countries considered for manufacturing the
sweaters.

b. If Abbey Knitwear sells 800,000 sweaters, what is the


budgeted operating income for each of the three countries
considered for manufacturing the sweaters?

49
c. Comment on your results to (a) and (b) above.

Question 32 FORECAST COMPANY

After reviewing its cost structure (variable costs of 7.50 per unit
and monthly fixed costs of 60,000) and its potential market, the
Forecast Company established what it considered to be a
reasonable selling price. The company expected to sell 50,000
units per month, and planned its monthly results as follows:


Sales 500,000
Variable costs 375,000
Contribution margin 125,000
Fixed costs 60,000
Profit before tax 65,000
Income tax (at 40%) 26,000
Net Profit 39,000

Required:

a. What selling price did the company establish?

b. What is the companys contribution per unit?

c. What is the companys break-even point in units?

d. If the company determined that a particular advertising


campaign had a high probability of increasing sales by 4,000
units, how much could the company pay for such a campaign
without reducing its planned profits?

e. If the company wanted to make a before-tax profit of 50,000,


how many units would it have to sell?

f. If the company wanted to make a before-tax return-on-sales


of 10%, what level of sales, in , would be needed?

g. If the company wanted to make an after-tax profit of 90,000,


how many units would it have to sell?

50
Question 33

TOYSAN

The management of Toysan Company wish to have financial


information to assist them in making marketing decisions. The
following budgeted income statement has been prepared for 200X:

Sales 1,200,000
Cost of goods sold:
Materials 500,000
Wages 300,000
Production expenses 150,000
Marketing costs 100,000 1,050,000
Net Profit 150,000

A statistical analysis of the figures shows the following variable


element in the costs:

Materials 90%
Wages 80%
Production expenses 60%
Marketing costs 70%

The following is the apportionment of the sales and the variable


elements of costs among the three products manufactured (in
percentages):

Products
A B C Total
Sales 30 15 55 100
Materials 40 20 40 100
Wages 15 25 60
100
Production costs 30 10 60 100
Marketing expenses 10 30 60
100

Required:

51
a. Prepare a budgeted income statement for 200X showing
contribution by product. Comment briefly on the value of
such information.

b. Calculate the contribution margin ratio for each product

c. Calculate the overall break-even sales level in

d. What level of sales (in ) would be required to make a profit


before tax of 90,000?

e. How much commission could be offered to an overseas agent


on an order of 50,000 of Product A and 80,000 of Product
C so that a 30% contribution on the total sales value is
obtained?

52
QUESTION 34

HALL COMPANY

Profit & Loss Account for the year ended December, 31 20X4

Sales (90,000 units @ 4.00) 360,000


Cost of goods sold:
Direct materials 90,000
Direct labour 90,000
Factory overhead:
Variable 18,000
Fixed 80,000 98,000 278,000
Gross Margin 82,000
Selling expenses:
Variable
Sales Commissions 18,000
Shipping 3,600
21,600
Fixed
Advertising, salaries etc 40,000 61,600
Administrative expenses:
Variable 4,500
Fixed 20,400 24,900
86,500
Net Loss 4,500

Note: Commissions are based on sales value. All other variable


expenses vary in terms of units sold.

Top management is considering a number of possible ways to make


operations profitable in 20X5.

Required:

a. Recast the income statement into a contribution format.

b. Calculate the companys break-even volume.

c. Calculate the profit or loss the company would make if the


selling price were cut by 15% and the sales volume
consequently increased to 150,000 units.

d. Calculate the profit or loss the company would make if the


selling price were increased by 25%, advertising expenditure
were increased by 150,000, sales commissions increased to
10% of sales and the number of units sold increased by 50%.

e. By how much may fixed selling expenses be increased to


bring production and sales up to 130,000 units and enable
the company earn a net profit of 5% of sales without
changing the selling price of the product?

53
54
MCQs Cost-Volume-Profit (CVP) Analysis

Each of the following MCQs has four possible answers. Only one of these answers is
strictly correct. You are required to indicate the correct answer.

Item 1
Cost-volume-profit (CVP) analysis is the method used to estimate the impact on profit
of changes in:
a) Sales volume
b) Unit selling price
c) Unit variable cost
d) All of the above.

Item 2
The contribution per unit equals:
a) Selling price total cost per unit
b) Selling price fixed cost per unit
c) Selling price variable cost per unit
d) Selling price mixed cost per unit

Item 3
If total fixed costs are divided by the contribution to sales (c/s)ratio, the result is:
a) The breakeven point in euros
b) The breakeven point in units
c) Total variable costs
d) a) and c) above.

Item 4
The margin of safety is used by managers as an indication of:
a) The cyclical nature of a sales plan
b) The risk inherent in a sales plan
c) The longevity of a sales plan
d) The magnitude of a sales plan.

Item 5
The breakeven point in CVP analysis is defined as:
a) When fixed costs equal total revenues
b) Fixed costs divided by the contribution per unit
c) Revenues less variable costs equal operating income
d) When the contribution margin percentage equals total revenues divided by
variable costs.

Item 6
CVP analysis is used PRIMARILY by management:
a) As a planning tool
b) For control purposes
c) To prepare external financial statements
d) To attain accurate financial results.

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The following information relates to Items 7 to 9:
The Banjo Company sells its only product for 6 per unit. The variable cost per unit
is 3 and the annual fixed costs are 300,000.

Item 7
What is the companys breakeven point (in units)?
a) 50,000 units
b) 150,000 units
c) 125,000 units
d) 100,000 units.

Item 8
How many units of its product must Banjo sell if it is to make a profit of 90,000
before tax?
a) 120,000 units
b) 130,000 units
c) 140,000 units
d) 150,000 units

Item 9
What is the companys margin of safety percentage if the budgeted sales figure for
next year is 125,000 units?
a) 20%
b) 25%
c) 40%
d) 50%

The following information relates to Items 10 to 12:


Fairy Limited sells umbrellas for 5 each. Variable costs are 3 per umbrella, fixed
costs are 18,000. The level of sales in units which was actually achieved provided a
margin of safety of 25%.

Item 10
The number of umbrellas sold is:
a) 12,000
b) 11,250
c) 13,330
d) 9,000.

Item 11
The number of umbrellas that must be sold to make a profit of 10,000 is:
a) 14,000
b) 15,000
c) 13,000
d) 16,000

Item 12
The number of umbrellas that must be sold to make a profit of 10% of sales is:
a) 11,000
b) 11,500
c) 12,000
d) 12,500

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Item 13
The breakeven point would tend to be decreased by:
a) An increase in the variable expenses to sales ratio
b) An increase in fixed costs
c) A decrease in the contribution margin ratio
d) None of the above.

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Topic 8 Budgets

QUESTION 35

Each unit of Product Omega requires 3 kgs of raw material. Next


months production budget for product Omega is as follows:

Opening stocks:
Raw materials 15,000 kgs
Finished units of Omega 3,000 units
Budgeted sales of Omega 60,000 units

Planned closing stocks:


Raw materials 7,000 kgs
Finished units of Omega 4,000 units

Required:

Calculate the number of kilograms of raw materials that should be


purchased next month.

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QUESTION 36

The Red Indian Company manufactures and sells two products,


Arrows and Spears. In October 20X5 the companys budget
department gathered the following data in order to project sales
and budget requirements for 20X6:

20X6 Projected Sales


Product Units Price
Arrows 30,000 70
Spears 20,000 100

Stocks (Units)
Product Expected Desired
Jan 1 20X6 Dec 31 20X6
Arrows 10,000 15,000
Spears 5,000 6,000

Raw materials Amount used per unit


Raw Materials Unit Arrows Spears
A Kilos 4 5
B Kilos 2 3
C Blocks - 1

Projected data for 20X6 with respect to raw materials are as


follows:

Raw Material Anticipated Expected Stocks


Desired Stocks
Purchase Price 1 January 20X6 31 Dec 20X6
A 7.00 15,000 kilos 20,000
kilos
B 5.00 14,000 kilos 17,000
kilos
C 2.50 2,000 blocks 3,000
blocks

Direct labour projected requirements


Product Hours per Unit Rate per Hour
Arrows 2 3
Spears 3 4

Overhead is applied at the rate of 2 per direct labour hour.

Required:

Based on the above, prepare the following budgets for 20X6:


a. Sales budget (in )
b. Production budget (in units)

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c. Raw materials purchase budget (in quantities)
d. Raw materials purchase budget (in )
e. Direct labour budget (in )
f. Budgeted finished goods inventory at 31 December 20X6
(in )

QUESTION 37

Arkan Ltd. plans to set up business at the start of 2004 and to sell
a single product, Alpha. Its share capital, contributed in cash,
amounts to 200,000. On the basis of sales forecasts, it is
anticipated that 40,000 units of Alpha will be sold (all on credit) in
2004 at a selling price of 20.

At the end of the year, management require 2,000 units of Alpha to


be held in stock. 7,000 of raw material is also to be held.

The production inputs and costs are as follows:

Alpha
Raw materials 2 kgs
Cost of raw materials 1 per kg
Direct labour 3 hours
Rate per hour 1.50
Other production overheads (variable) 0.50 per unit

The following costs are anticipated during the year


Light and heat 8,000
Administration 22,000
Rent and rates 25,000
Selling expenses 70,000

Depreciation is calculated at the rate of 10% of book value of assets


in existence at the end of year.

During the year 100,000 of new fixed assets will be purchased.

Strict credit limits will be imposed on customers. It is agreed that


the average period of credit allowed to customers will be 60 days
(based on a 360-day year) and this figure is to be used in budget
calculations. Purchases will be paid for in cash.

Required:

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Prepare a Profit and Loss Account for 2004 and a Balance Sheet as
at 31 December 2004. Monthly figures are not required.

QUESTION 38

The Target Sales Co. which is a wholesale trading company had


the following sales and purchases for the first 3 months of the year:

000 Jan Feb Mar


Sales 100 200 250
Purchases 150 220 280

Sales and purchases projections for the next 6 months are as


follows:

000 Apr May Jun Jul Aug Sep


Sales 300 350 500 200 300 400
Purchases 400 450 300 400 200 300

Expenses are 40,000 per month except in July when holiday pay of
10,000 increases the total to 50,000. The expenses comprise the
following:

Wages 20
Depreciation 20
General Expenses 10
Total 40

The cash proceeds from the sale of an asset for 120,000 are
expected to be received in June.

10% of the sales are for cash and the remainder on 2 months credit

1 months credit is expected to be received in respect of purchases

At the end of March the company had an overdrawn balance of


25,000 at the bank.

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Required:

Prepare a Cash Forecast for each of the 6 months ended


September.

MCQs Budgetary Control

Item 1
When administered intelligently, budgets should:
a) Compel managers to look ahead
b) Provide a yardstick for evaluation
c) Promote communication and coordination
d) All of the above.

Item 2
Budget reports are normally broken down by department and controllability by the
manager. This represents:
a) Responsibility accounting
b) Financial accounting
c) Variance accounting
d) All of the above.

Item 3
Which of the following sequences is correct in the budgeting process?
a) Sales budget, labour budget, production budget, raw material purchases budget
b) Production budget, cash budget, raw material purchases budget, labour budget
c) Sales budget, production budget, raw material purchases budget, cash budget
d) Sales budget, raw material purchases budget, production budget, labour
budget.

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Item 4
Next Stop Ltd prepares budgets annually. Stocks of finished goods are budgeted at
half a months sales, based on budgeted sales for the following month. For 2005, the
following selected data are available:
July Aug. Sept. Oct.
Budgeted unit sales 3,000 4,000 3,000 2,000

The number of units of finished goods to be produced in July and August respectively
is:
July August
a) 3,000 4,000
b) 3,500 3,500
c) 5,000 5,500
d) None of the above.

Item 5
A retailer adds a 25% mark-up on cost to determine selling price. The opening stock is
valued at 150,000 (at cost) and he requires his closing stock to be 20% lower. If sales
are projected at 500,000 for the period, then budgeted purchases must be:
a) 400,000
b) 470,000
c) 370,000
d) 520,000

Items 6 to 8 are based on the following information:


The balance sheet of Cold Ltd at 31 December 2004 includes the following:

Stock 16,000
Debtors 38,000
Creditors 61,875

Additional information is provided:

Sales for January and February 2005 are budgeted at 110,000 and 120,000
respectively.

Sixty per cent (60%) of sales will be for cash with the balance being collected in the
month following sale.

The gross margin on sales is 25%. Purchases for each month are 75% of the cost of
the following months projected sales. Suppliers give one months credit.

Monthly expenses amount to 20,000 including depreciation of 5,000

Item 6
The budgeted cash collection for January 2005 is:
a) 66,000
b) 104,000
c) 148,000

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d) 44,000

Item 7
The projected payments to creditors during the month of January 2005 are:
a) 61,875
b) 67,500
c) 82,500
d) 90,000

Item 8
The forecast profit (loss) for January 2005 is:
a) A loss is indicated
b) Profit of 7,500
c) Profit of 12,500
d) Profit of 2,000

Item 9
Pyrex Companys budget projects the following sales for next year:
Quarter Sales units
First 45,000
Second 38,000
Third 34,000
Fourth 48,000

Each unit of the product requires 3 kgs of direct material. The companys policy is to
begin each quarter with an inventory of the product equal to 10% of that quarters
sales requirements and an inventory of direct material equal to 20% of that quarters
direct materials requirements for production.

The material purchase budget for the second quarter is:


a) 111,480 kgs
b) 122,600 kgs
c) 130,000 kgs
d) 132,750 kgs

The following information applies to Items 10 and 11:


Remtex Enterprises reports year-end information from 2004 as follows:
Sales (80,000 units) 480,000
Cost of goods sold 320,000

Gross profit 160,000


Operating expenses 130,000

Net profit 30,000

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Remtex is developing the 2005 budget. In 2005 the company would like to increase
selling prices by 8% and, as a result, expects a decrease in sales volume of 10%. All
other operating expenses are expected to remain constant. Assume that COGS is a
variable cost and that operating expenses are a fixed cost.

Item 10
What are budgeted sales for 2005?
a) 518,400
b) 533,333
c) 466,560
d) 432,000

Item 11
What is budgeted cost of goods sold for 2005?
a) 311,040
b) 288,000
c) 345,600
d) 320,000

The following information applies to Items 12 to 15:


The following information pertains to the January operating budget for Casey
Corporation:
Budgeted sales for January 100,000 and February 200,000.
Collections for sales are 60% in the month of sale and 40% the next month.
Gross margin is 30% of sales.
Administrative costs are 10,000 each month.
Beginning accounts receivable (debtors) 20,000.
Beginning inventory 14,000.
Beginning accounts payable (creditors) 60,000. (All from inventory
purchases.)
Purchases are paid in full the following month.
Desired ending inventory is 20% of next months cost of goods sold (COGS).

Item 12
For January, budgeted cash collections are:
e) 20,000
f) 60,000
g) 80,000
h) None of the above.

Item 13
At the end of January, budgeted accounts receivable are:
e) 20,000
f) 40,000
g) 60,000
h) None of the above.

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Item 14
For January, budgeted cost of goods sold is:
a) 20,000
b) 30,000
c) 40,000
d) None of the above.

Item 15
For January, budgeted net income is:
a) 20,000
b) 30,000
c) 40,000
d) None of the above.

Item 16
Budgeted production depends on:
a) The direct materials usage budget and direct material purchases budget
b) The direct manufacturing labour budget
c) Budgeted sales and expected changes in inventory levels
d) The manufacturing overhead costs budget.

Item 17
The sales forecast is influenced by:
a) Advertising and sales promotions
b) Competition
c) General economic conditions
d) All of the above.

Item 18
Budgeting provides which of the following?
a) A means to communicate the organizations short-term goals to its
members
b) Support for the management functions of planning and coordination
c) A means to anticipate problems
d) All of the above.

Item 19

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Benflex Corporation has budgeted sales of 18,000 units, target ending finished goods
inventory of 3,000 units, and beginning finished goods inventory of 900 units. How
many units should be produced next year?
a) 21,900 units
b) 20,100 units
c) 15,900 units
d) 18,000 units.

Item 20
Twilight Company has budgeted sales volume of 30,000 units and budgeted
production of 27,000 units. Five thousand (5,000) units are in beginning finished
goods inventory. How many units are targeted for ending finished goods inventory?
a) 5,000 units
b) 8,000 units
c) 3,000 units
d) 2,000 units

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