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Accounting Assignment Question

Question 1 

1. Explain, using examples, why it is essential to create and use flexible budgets when evaluating past performance of a profit centre which manufactures and sells a product. What might be the objective of such a performance evaluation?
2. When preparing a cash budget for a manufacturing business for the following year, there may be many other budgets that will need to be produced before the cash budget is completed. 

List three (3) other budgets that must be prepared at the same time or before the cash budget is prepared, and for each one, explain the likely timing of cash flows that will occur and how this will impact on a cash budget.

1. Why might a business decide to make a product internally when it could easily acquire it at a cheaper price from an external supplier? Explain.
2. Accounting isn't as important in the government organisations as it is in private enterprises, since the government does not have to worry about earning a profit. Do you agree? Explain.
3. What are the essential purposes of any costing system? Explain.

 

Question 2

Wonder Products Pty Ltd builds beautiful things to order for customers. When quoting prices on jobs Wonder Products allocate manufacturing overheads on the basis of estimated machine hours to complete the job. They allocate administrative overhead costs on the basis of direct labour hours estimated to complete the job. 

Below is a budget for the current year showing budget total figures.

Budget for the year

Direct labour costs for the year $537,600

Manufacturing overheads for the year   598,080

Administrative overheads for the year   695,520

Direct labour hours for the year     14,000

Total machine hours for the year       7,000

1. a) Calculate a manufacturing overheads allocation rate for Wonder Products.
2. b) Calculate an administrative overhead allocation rate for Wonder Products.
3. c) Bushy George has asked Wonder Products Pty Ltd to make an especially wonderful creation to his specifications that will require the following inputs: 

Direct materials $19,000

Direct labour 750 hours

Machine usage 400 hours

Assuming a mark up of 40% on total costs, what price should be quoted to Bushy to build him this especially wonderful creation?

1. d) Why is it so important to carefully allocate overhead expenses when quoting on jobs or when generally deciding on prices? Discuss problems that are encountered with overhead allocation methods and alternative approaches that might be taken.

1. e) Why do companies use predetermined (budgeted) overhead allocation rates rather than using actual overhead costs in allocating overhead costs to units of product? Explain.

Accounting Assignment Solution

Part a:

A financial budget provides an approximate forecast with respect to the financial results that a company looks to obtain in the future. The budget can be made on a monthly, quarterly or an annual basis. A budget, which has been calculated, is thoroughly checked at the end of a particular period in order to understand the various issues associated with the financial results.

The actual results that are obtained during the operations of the company during that time period is then compared to the budget, which was forecasted, and the actions are taken accordingly with respect to the actual results obtained. As a result, the company understands the various issues within the different departments and acts accordingly. 

When a company adopts a static budget, it tries to make an assumption with respect to the output of the business. However, the actual output would differ from the number estimated. Hence, in order to evaluate the performance of the profit center, a flexible budget is used. A flexible budget helps the company to understand all the line items in the income statement with the same number of outputs and thereby act on related issues. (Caplan, 2010)

The following example with respect to the income statement of Gloria Jeans would stress the importance of a flexible budget on performance evaluation.

Gloria Jeans Income Statement:

Income	Budget amount for each unit	Static Budget	Actual Budget	Static Budget
Statement		( Output of units)	( Output of units)	Variance
		X	Y	X-Y
		10,000	16,000
Revenue	$30	$300,000	$510,000	($210,000)
Variable costs:
Materials Cost	12	$120,000	$280,000	($160,000)
Labor Cost	8	$80,000	$135,000	($55,000)
Overheads Cost	5	$50,000	$85,000	($35,000)
Total	$25	250,000	500,000	($250,000)
Contribution margin	$5	50,000	10,000	$40,000
Fixed costs:
Manufacturing Overhead Costs		100,000	103,000	-3,000.00
Marketing costs		50,000	48,000	2,000.00
		150,000	151,000	-1,000
Total-fixed costs		($100,000)	($141,000)	$41,000

 

In the above table with respect to static budget, the actual output of units is not similar. Hence, the comparison would not be adequate.

 

Income	Budget amount for each unit	Flexible Budget	Actual Budget	Flexible Budget
Statement		( Output of units)	( Output of units)	Variance
		X	Y	X – Y
		16,000	16,000
Revenue	$30	$480,000	$510,000	($30,000)
Variable costs:
Materials Cost	12	$192,000	$280,000	($88,000)
Labor Cost	8	$128,000	$135,000	($7,000)
Overheads Cost	5	$80,000	$85,000	($5,000)
Total	$25	400,000	500,000	($100,000)
Contribution margin	$5	80,000	10,000	$70,000
Fixed costs:
Manufacturing Overhead Costs		100,000	103,000	-3,000.00
Marketing costs		50,000	48,000	2,000.00
		150,000	151,000	-1,000
Total fixed costs		($70,000)	($141,000)	$71,000

 

In the above table, the actual output of units is similar and a comparison can be made. The limiting factors in this case can be observed with respect to materials in particular because of the huge difference in the estimated and the actual cost. Hence, in the future, Gloria Jeans can try to find out the reason for the big increase in the material cost and thereby take the required decisions.

Hence, the profit center can rightly be evaluated on the basis of this flexible budget.

Part b: 

The cash budget is used to understand the estimation of the sources of cash and the uses of cash. The sources of cash would be obtained from the Sales budget and the uses of Cash will be estimated from the Production budget which will also include the budget with respect to direct materials.  Hence, the three budgets which would be discussed in detail would be as follow: (David.E.Platt, 2014)

Sales Budget:

The Sales Budget is used by a company to estimate the amount of sales revenue that the company wants to generate during a particular time period. The time period can range from a monthly budget to an annual budget. In order to keep up with the changing economic scenarios, companies normally prefer the budget to be on a monthly or quarterly basis. 

The revenue estimated from the sales budget would be put used to know the projection of cash inflows that the company would receive during that particular time period. The changes in the economic scenario may be favorable or unfavorable with respect to the sales of the company. Such changes may affect the estimation of the sales during that particular time period which would indirectly affect the cash budget. 

Production budget: 

The Production budget is made on the basis of the sales budget. On the basis of the sales revenue expected, the output quantity that needs to be produced within that time period is understood. The production budget is estimated on the amount of units to be produced as well as the amount of finished goods that need to be kept in the inventory.

In this case, as the time passes on, due to certain economic changes in the market,

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