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MANAGERIAL ACCOUNTING QUESTIONS & ANSWERS

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Managerial accounting-Questions & Answers

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Page 1: Managerial accounting

MANAGERIAL ACCOUNTING

QUESTIONS & ANSWERS

Page 2: Managerial accounting

TASK 1: CVP analysis

Angie Silva recently opened The Sandal Shop, a store that specializes in fashionable sandals. Angie has just received a degree in business and she anxious to apply the principles she has learned to her business. In time, she hope to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store: Sales price per pair of sandals $40 Variable costs per pair of sandals 16

Contribution margin per pair of sandals 24 Fixed costs per year

Building rental $15,000 Equipment depreciation 7,000 Selling 20,000 Administrative 18,000

Total fixed costs $60,000 Required: 1) How many pairs of sandals must be sold each year to break even? What does this

represent in total sales dollars? 2) Angie has decided that she must earn at least $18,000 in the first year to justify her

time and effort. How many pairs of sandals must be sold to reach this target profit? 3) Angie now has two salespersons working in store - one full time and one part time.

It will cost her an additional $8,000 per year to convert the part-time position to a full-time position. Angie believes that the change would bring in an additional $25,000 in sales each year. Should she convert the position?

4) Refer to the original data and ignore the proposition in question c. During the first year, the store sold only 3,000 pairs of sandals. a) Prepare the income statement in a contribution format for the Sandal Shop’s first

year. b) What is the store’s degree of operating leverage? c) Angie is confident that with a more intense sales effort and with a more creative

advertising she can increase sales by 50% next year? What would be the expected percentage increase in net operating income?

TASK 2 - Integration of the Sales, Production and Direct Materials Budgets

Milo company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation: a) The Marketing Department has estimated sales units as follows for the reminder of the

year:

Page 3: Managerial accounting

July 30,000 August 70,000 September 50,000 October 20,000 November 10,000 December 10,000

The selling price of the beach umbrellas is $12 per unit. b) All sales are on account. Based on past experience, sales are collected in the following

pattern: 30% in the month of sale 65% in the month following sale 5% uncollectible

Sales for June totaled $300,000. c) The company maintains finished goods inventories equal to 15% of the following

month’s sales. This requirement will be met at the end of June. d) Each beach umbrellas requires 4 feet of Gilden, a material that is sometimes hard to

acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

June 30 72,000 feet September 30 ? feet

e) Gilden costs $0.80 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for Purchases of Gilden during June will be $76,000.

Required:

a. Prepare a sales budget, by month and in total, for the third quarter. (Show your budget in both units and sales dollars.) Also prepare a schedule of expected cash collections, by month and in total, for the third quarter.

b. Prepare a production budget for each of the months July, August, September, and

October. c. Prepare a direct materials budget, by month and in total, for the third quarter. Also

prepare a schedule of expected cash disbursements, by month and in total, for the third quarter.

TASK 3: Flexible budget and flexible budget performance report Tohono Company’s 2012 master budget included the following fixed budget report. It is based on an expected production and sales volume of 20,000 units.

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TOHONO COMPANY Fixed budget report

For year ended December 31, 2012 Sales $ 3,000,000 Cost of goods sold

Direct materials $1,200,000 Direct labor 260,000 Machinery repair (Variable cost)

57,000 Depreciation-Machinery 250,000 Utilities (25% is variable cost) 200,000 Plant manager salaries 140,000 2,107,000

Gross profit 893,000 Selling expenses

Packaging 80,000 Shipping 116,000 Sales salary (fixed annual amount) 160,000 356,000

General and administrative expenses Advertising 81,000 Salaries 241,000 Entertainment expenses 90,000 412,000

Net income $ 125,000 Required:

1) Prepare flexible budgets for the company at sales volumes of 18,000 and 24,000 units. [10 marks]

2) The actual income statement for 2012 follows.

TOHONO COMPANY Income Statement

For year ended December 31, 2012 Sales $ 3,648,000 Cost of goods sold

Direct materials $1,400,000 Direct labor 360,000 Machinery repair (Variable cost)

60,000 Depreciation-Machinery 250,000 Utilities (25% is variable cost) 218,000 Plant manager salaries 155,000 2,443,000

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Page 5: Managerial accounting

Gross profit 1,205,000 Selling expenses

Packaging 90,000 Shipping 124,000 Sales salary (fixed annual amount) 162,000 376,000

General and administrative expenses Advertising 104,000 Salaries 232,000 Entertainment expenses 100,000 436,000

Net income $ 393,000

a) Prepare a flexible budget performance report for 2012 b) Analyze and interpret both the sale variance and direct materials variance.

TASK 4: Analysis of special orders Windmire Company manufactures and sells to local wholesalers approximately 300,000 units per month at a sales price of $4 per unit. Monthly costs for the production and sale of this quantity follow Direct materials $ 384,000

Direct labor 96,000

Overhead 288,000

Selling expenses 120,000

Administrative expenses 80,000

Total costs and expenses $ 968,000

A new out-of-state distributor has offered to buy 50,000 units next month for $3.44 each. A study of costs of this new business reveals the following: ・ Direct material costs are 100% variable. ・ Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require one-and-a-half overtime pay to meet the distributor’s deadline. ・ 25% of the normal annual overhead costs are fixed at any production level from 250,000

to 400,000 units. The remaining 75% is variable with volume. ・ Accepting the special order could involve no additional selling expenses.

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Page 6: Managerial accounting

・ Accepting the special order could increase administrative expenses by a $4,000 fixed amount.

Required: 1) What are the relevant costs and benefits of the two alternatives (Accept or reject the

special order? 2) Should management accept the order? Explain by analyzing 2 alternatives on a unit

basis. 3) Prepare a three-column comparative income statement that shows the following: Monthly operating income without the special order (column 1) Monthly operating income received from the special order only (column 2) Combined monthly operating income from normal business and the new business (column 3). 4) What qualitative factors should Windmire Company consider? 5) Assume that the new customer wants to buy 150,000 units instead of 50,000 units - it

will only buy 150,000 units or none and will not take a partial order. Without any computations, how does this change your answer in question a?

Page 7: Managerial accounting

1 Chau Trieu Luan | [email protected]

Task 1: CVP analysis

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

represent in total sales dollars?

Break even point in units = Fixed cost/price – variable cost = 60,000/(40-16) = 2,500

pairs of sandals

Break even point in sale dollars = Break even point in units x price = 2,500 x 40 =

$100,000

2/ Angie has decided that she must earn at least $18,000 in the first year to justify

her time and effort. How many pairs of sandals must be sold to reach this target

profit?

Pairs of sandals to reach this target profit = (Fixed cost + target profits)/(price – variable

cost) = (60,000 + 18,000)/(40-16) = 3,250 pairs of sandals

3/ Angie now has two salespersons working in store – one full time and one part

time. It will cost her an additional $8,000 per year to convert the part-time position

to a full-time position. Angie believes that the change would bring in an additional

$25,000 in sales each year. Should she convert the position?

Contribution margin ratio = unit contribution margin/price = 24/40 = 0.60

Cost her $8,000 per year to convert the labor, that means the cost is added to fixed cost.

Additional operating income = 25,000 x 0.60 – 8,000 = $7,000

She should convert the part-time position to a full-time position.

Page 8: Managerial accounting

2 Chau Trieu Luan | [email protected]

4/ Refer to the original data and ignore the proposition in question 3. During the

first year, the store sold only 3,000 pairs of sandals.

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

b) What is the store’s degree of operating leverage?

c) Angie is confident that with a more intense sale effort and with a more creative

advertising she can increase sales by 50% next year? What would be the expected

percentage increase in net operating income?

a/ Income statement in a contribution format:

THE SANDAL SHOP

Income Statement

Total sales $120,000

Variable costs 48,000

Contribution margin 72,000

Fixed costs per year 60,000

Operating income $12,000

b/ Degree of operating leverage:

DOL = Total contribution margin/Operating income = 72,000/12,000 = 6 times

Page 9: Managerial accounting

3 Chau Trieu Luan | [email protected]

c/ The expected percentage increase in net operating income?

Additional operating income = Sales increase x DOL = 50% x 6 = 300%

Task 2 – Integration of the Sales, Production and Direct Materials

Budgets

a/ Prepare a sales budget, by month and in total, for the third quarter.

(Show your budget in both units and sales dollars.) Also prepare a schedule of

expected cash collections, by month and in total, for the third quarter.

With the given data, we have a sales budget as below:

MILO COMPANY Sales Budget

For Quarter 3

Jul Aug Sep Quarter 3

Sales unit 30,000 70,000 50,000 150,000

Unit price $12 $12 $12 $12

Total sales in dollar $60,000 $840,000 $600,000 $1,800,000

Page 10: Managerial accounting

4 Chau Trieu Luan | [email protected]

The schedule of expected cash collections

MILO COMPANY

Expected Cash Collection For Quarter 3

Jul Aug Sep Quarter 3

Sales in dollar $360,000 $840,000 $600,000 $1,800,000

Sales in Jun

65% 195,000 195,000

Sales in Jul

30% 108,000 108,000

65% $234,000 $234,000

Sales in Aug

30% $252,000 $252,000

65% $546,000 $546,000

Sales in Aug

30% $180,000 $180,000

Total cash collection $303,000 $486,000 $726,000 $1,515,000

Page 11: Managerial accounting

5 Chau Trieu Luan | [email protected]

b/ Prepare a production budget for each of the months July, August, September,

and October.

MILO COMPANY

Production budget From Jul to Oct

Jul Aug Sep Oct

Sales unit 30,000 70,000 50,000 20,000

Ending goods inventory 10,500 7,500 3,000 1,500

Total needed 40,500 77,500 53,000 21,500

Beginning goods inventory 4,500 10,500 7,500 3,000

Required production 36,000 67,000 45,500 18,500

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6 Chau Trieu Luan | [email protected]

c/ Prepare a direct materials budget, by month and in total, for the third quarter.

Also prepare a schedule of expected cash disbursements, by month and in total, for

the third quarter.

MILO COMPANY

Direct Material Budget For Quarter 3

Jul Aug Sep Quarter 3

Required production 36,000 67,000 45,500 148,500

Gilden per unit (feet) 4 4 4 4

Production needed 144,000 268,000 182,000 594,000

Ending inventory 134,000 91,000 37,000 37,000

Total needed 278,000 359,000 219,000 631,000

Beginning inventory 72,000 134,000 91,000 72,000

Materials needed 206,000 225,000 128,000 559,000

Cost per feet $0.80 $ 0.80 $0.80 $0.80

Total material cost $164,800 $180,000 $102,400 $447,200

Page 13: Managerial accounting

7 Chau Trieu Luan | [email protected]

MILO COMPANY

Expected Cash Disbursement For Quarter 3

Jul Aug Sep Quarter 3

Total material cost $164,800 $180,000 $102,400 $447,200

Payable (Jul 1) 76,000 76,000

Pay in Jul

50% 82,400 82,400

50% 82,400 82,400

Pay in Aug

50% 90,000 90,000

50% 90,000 90,000

Pay in Jul

50% 51,200 51,200

Total disbursement $158,400 $172,400 $141,200 $472,000

Page 14: Managerial accounting

8 Chau Trieu Luan | [email protected]

TASK 3: Flexible budget and flexible budget performance report

1/ Prepare flexible budgets for the company at sales volumes of 18,000 and 24,000

units.

TOHONO Flexible Budgets

For Year 2012

Revenue/

Cost formula Planning budget

Flexible budget

Sales units 20,000 18,000 24,000

Revenue ($150q) $3,000,000 $2,700,000 $3,600,000

COGS

Direct materials 60 1,200,000 1,080,000 1,440,000

Direct labor 13 260,000 234,000 312,000

Machinery repaired (VC) 2.85 57,000 51,300 68,400

Depreciation machinery 250,000 250,000 250,000

Utilities (2.5q+$150,000) 200,000 195,000 210,000

Plan manager salary 140,000 140,000 140,000

Total COGS 2,107,000 1,950,300 2,420,400

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9 Chau Trieu Luan | [email protected]

Gross profit 893,000 749,700 1,179,600

Selling expenses

Packaging 4 80,000 72,000 96,000

Shipping 5.8 116,000 104,400 139,200

Sales salary (fixed annual) 160,000 160,000 160,000

Total Selling expense 356,000 336,400 395,200

General & administrative expenses

Advertising 81,000 81,000 81,000

Salary 241,000 241,000 241,000

Entertainment 90,000.00 90,000 90,000

Total General & administrative expenses 412,000 412,000 412,000

Net income $125,000 $1,300 $372,400

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10 Chau Trieu Luan | [email protected]

2/ Prepare a flexible budget performance report for 2012

TOHONO

Flexible Budget Performance Report For Year 2012

Actual

results

Spending

Variances

Flexible

budget

Activity

Variances

Planning

budget

Sales units 24,000 24,000 20,000

Revenue $3,648,000 $48,000 F $3,600,000 $600,000 F $3,000,000

COGS

Direct materials 1,400,000 (40,000) F 1,440,000 240,000 U 1,200,000

Direct labor 360,000 48,000 U 312,000 52,000 U 260,000

Machinery repaired 60,000 (8,400) F 68,400 11,400 U 57,000

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

Utilities 218,000 8,000 U 210,000 10,000 U 200,000

Manager salary 155,000 15,000 U 140,000 - 140,000

Total COGS 2,443,000 22,600 U 2,420,400 313,400 U 2,107,000

Gross profit 1,205,000 25,400 F 1,179,600 286,600 F 893,000

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11 Chau Trieu Luan | [email protected]

Selling expense

Packaging 90,000 (6,000) F 96,000 16,000 U 80,000

Shipping 124,000 (15,200) F 139,200 23,200 U 116,000

Sales salary 162,000 2,000 U 160,000 - 160,000

Sub total 376,000 (19,200) F 395,200 39,200 U 356,000

General & administrative expenses

Advertising 104,000 23,000 U 81,000 - 81,000

Salary 232,000 (9,000) F 241,000 - 241,000

Entertainment 100,000 10,000 U 90,000 - 90,000

Sub total 436,000 24,000 U 412,000 - 412,000

Net income $393,000 $20,600 F $372,400 $247,400 F $125,000

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12 Chau Trieu Luan | [email protected]

Analyze and interpret both the sale variance and direct materials variance:

The sale variance:

Actual quantity

x

Actual price

(24,000 x $152)

Actual quantity

x

Standard price

(24,000 x $150)

Standard quantity

x

Standard price

(20,000 x $150)

$3,648,000 $3,600,000 $3,000,000

Price variance Quantity variance

$48,000 Favorable $600,000 Favorable

Total variance is $648,000 Favorable

Sales variance analysis can help company to explain revenues and realize problems

between actual and budget results so that company can do better in sales growths.

There are many factors can affect to sales revenues such as sales price, production

variance, product mix, promotion programs, market share, economic environment.

Price variance is $48,000 favorable with the same of quantity of 24,000 units sold, just

differentiated by the actual unit price. Quantity variance is $600,000 Favorable due to the

same as planned or standard quantity with the standard price applied.

Page 19: Managerial accounting

13 Chau Trieu Luan | [email protected]

The direct material variance:

Actual quantity

x

Actual price

(24,000 x $58.33)

Actual quantity

x

Standard price

(24,000 x $60)

Standard quantity

x

Standard price

(20,000 x $60)

$1,400,000 $1,440,000 $1,200,000

Price variance Quantity variance

$40,000 Favorable $240,000 Unfavorable

Total variance is $200,000 Unfavorable

The price variance is calculated on the entire quantity purchased. The unit actual price is

just $58.33 saving $1.7 each material. So TOHONO Company has a price variance of

$40,000 Favorable.

The quantity variance is calculated only on the quantity used. Here TOHONO company

used 24,000 units instead it should use 20,000 units, so it spent more than its standard

quantity that having a quantity variance of $240,000 Unfavorable.

The main responsibility for price variance is purchasing managers, or purchasing agents,

and here they have done a good role to make a price variance of $40,000 Favorable.

The main responsibility for quantity variance is production managers, and they are

responsible for efficiency of production.

Page 20: Managerial accounting

14 Chau Trieu Luan | [email protected]

TASK 4: Analysis of special orders

1/ What are the relevant costs and benefits of the two alternatives (Accept or reject

the special order?

The relevant costs:

If accepting the order, Windmire will have relevant costs as below.

- Direct material costs

- Direct labor costs; it will be increased by 50% more than normal due to over

time payment

- Overhead costs 75%; the overhead cost is divided by two parts: 25% fixed and

75% variable

- Administrative expenses; increase fixed amount of $4,000 for the special order

Windmire’s benefits of the two alternatives as below:

Accept Reject Differentiated

Sales $172,000 $0 $172,000

Direct materials (64,000) 0 (64,000)

Direct labor (24,000) 0 (24,000)

Overhead 75% (36,000) 0 (36,000)

Administrative expenses (4,000) 0 (4,000)

Income increase $44,000 $0 $44,000

As calculation, if the special order is accepted, the sales will be increased $44,000. In

conclusion, Windmire should accept the special order.

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15 Chau Trieu Luan | [email protected]

2/ Should management accept the order? Explain by analyzing 2 alternatives on a

unit basis.

Unit cost table:

Accept Reject Differentiated

Sales $3.44 $0 $3.44

Direct materials (1.28) 0 (1.28)

Direct labor (0.48) 0 (0.48)

Overhead 75% (0.72) 0 (0.72)

Administrative expenses (0.08) 0 (0.08)

Income increase $0.88 $0 $0.88

Differentiated unit cost is $0.88, and the special order of 50,000 units, so Windmire will

increase income of 50,000 x 0.88 = $44,000. Windmire’s management should accept the

order.

3/ Prepare a three-column comparative income statement that shows the following:

Monthly operating income without the special order (column 1)

Monthly operating income received from the special order only (column 2)

Combined monthly operating income from normal business and the new business

(column 3).

Page 22: Managerial accounting

16 Chau Trieu Luan | [email protected]

WINDMIRE COMPANY

Monthly Income Statement

Normal Special order Normal & Special order

Sales revenue $1,200,000 $172,000 $1,372,000

Variable cost

Direct materials 384,000 64,000 448,000

Direct labor 96,000 24,000 120,000

Overhead (Variable 75%) 216,000 36,000 252,000

Total variable expense 696,000 124,000 820,000

Contribution margin 504,000 48,000 552,000

Fixed cost

Selling expenses 120,000 120,000

Administrative expenses 80,000 4,000 84,000

Overhead (Fixed 25%) 72,000 72,000

Total fixed expense 272,000 4,000 276,000

Net income $232,000 $44,000 $276,000

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17 Chau Trieu Luan | [email protected]

4/ What qualitative factors should Windmire Company consider?

Special order decisions are made only if it maximizes operating income. Like all short-

run decisions, Windmire’s special order decision should conform with its strategic plan

and tactical objectives.

- Net income must be positive and reasonable to win the special order and makes

stakeholders satisfied.

- Windmire should check if the order is believable.

- Windmire should consider the special order as a good opportunity to expand the

business and the distributor has ability to maintain the order in long term.

- Capacity of resources that Windmire can meet the special order on time and the

assured quality of products.

- The period of the special order is in peak or low seasons.

- Consider if the special order can affect sales revenue in terms of marketing-mix,

promotional program, price strategy, distribution, etc.

- Attitude and morality of the manpower is also considered as producing more

products for the special order.

- Have a closed look at competitors on the distributor’s special order.

5/ Assume that the new customer wants to buy 150,000 units instead of 50,000 units

– it will only buy 150,000 units or none and will not take a partial order.

Without any computations, how does this change your answer in question 1?

If the customer wants to buy 150,000 units that means total produced units needed is

450,000 units, the management board needs to consider its capacity and fixed cost range

Page 24: Managerial accounting

18 Chau Trieu Luan | [email protected]

because usually they just produce and sell 300,000 units, but now one time order needed

450,000 may be over its capacity and exceeds the fixed cost range. So the answers are:

1/ Their factory’s capacity is not able to produce 450,000 units, so they should refuse the

order;

2/ And if the capacity can cover the unit amount, so they need to re-calculate cost and

profits because they will face a new fixed cost range, and if the still get profits at a certain

level, they can accept the order. Otherwise they have to refuse the order.

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