QUESTION 1 (Module 2) Variable and absorption costing
Froggy Ltd produces ornamental garden ponds and commenced operations in 2019.
For 2019, Froggy budgeted to produce and sell 20,000 units.
The company writes off under- or over-allocated overheads to Cost of goods sold. Fixed costs were as expected. Actual data for 2019 are given as follows:
Production cost per unit produced
Direct materials $30
Direct production labour 24
Production overhead 46
Marketing cost per unit sold 20 Fixed costs:
Production costs $1 050 000
Administrative costs $980,000
- Prepare a 2018 income statement for Froggy Ltd using variable costing.
- Prepare a 2018 income statement for Froggy using absorption costing.
- Explain the differences in operating profit obtained in requirements 1 and 2 and reconcile the two profit figures
- Froggy’s management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. Advise management on the potential effect of the bonus plan on the behaviour of supervisors and recommend modifications that Froggy management might make to improve the plan.
QUESTION 2 (Module 6) Master budget & responsibility accounting
The management accountant, with assistance from the production and sales managers, has obtained the following estimated information about George’s Fishes (a shop selling exotic pet fish and fish supplies) in order to prepare the budgeted income statement for July 2020:
i. Estimated sales for July- August:
Selling Price per unit
|Fish food (tubs)||600||600||$20|
Sales are 80% cash sales. Credit sales are collected in the month following sale.
ii. Opening inventories were:
|Units||Average cost per unit|
|Fish food (tubs)||180||$10|
Desired ending inventories are 30% of next month’s sales (in units).
In any month an estimated 10% of opening live stock dies before being sold due to the poor condition of some fish arriving from the supplier. Inventory loss is written off as part of cost of goods sold by inclusion in purchases i.e. additional purchases are necessary to replace the dead stock. Purchases are paid for the month following purchase.
iii. Operating expenses budgeted for July are:
|Wages – sales staff||$8,000|
|Rent for month||$3,000|
|Telephone & electricity||$300|
|Depreciation of fixtures||$200|
The supplies used were part of supplies purchased for cash in June 2020. All other expenses are paid as incurred.
iv. Accounts receivable as at 30th June 2020 were $9,100
v. Accounts payable as at 30th June 2020 were $40,945
vi. The cash at bank balance at 30th June 2020 was $6,000
- Prepare a sales budget for July.
- Prepare a purchases budget for July.
- Prepare a budgeted income statement for July.
- Prepare a cash budget for July.
Round all amounts to nearest whole number. Ignore GST.
QUESTION 3 (Module 5) Job Costing
JC Wood Ltd builds holiday ‘glamping’ cabins for tourist resorts. It uses a job-costing system with two direct-cost categories (direct materials and direct labour) and two indirect-cost pools (building support and logistics). Direct labour-hours is the cost driver for building-support costs and direct materials costs is the cost driver for logistics. In December 2019, JC Wood Ltd budgets 2020 building-support costs to be $8 400 000, and direct labour-hours to be 200 000. At the end of 2020, management is comparing the costs of several jobs that were started and completed in 2020:
Brigadoon cabin Bellevue cabin
Construction period Feb–June 2020 May–Oct 2020
Direct materials costs $107 550 $127 660
Direct labour costs $ 37 620 $ 38 760
Direct labour-hours 990 1 020
Direct materials and direct labour are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labour-hours are worked. The 2020 actual building-support costs were $8 460 000, the actual direct labour-hours were 180 000 and actual direct materials costs were $82 500 000. Only Building support costs need to be allocated (no logistics).
- Calculate: (a) the budgeted cost-driver rate and (b) the actual cost-driver rate. Explain the difference between them.
- Calculate the job costs of the Brigadoon cabin and the Bellevue cabin using: (a) normal costing and (b) actual costing.
- Explain why managers might prefer normal costing over actual costing.
QUESTION 4 (Module 6 & 7) Budgeting, flexible budgets & variances
Len’s Kayaks manufactures one type of fishing kayak.. The following is their static budget for the year ended 30th June 2020:
|Direct materials||$1,000,000||50kg @ $2/kg|
|Direct labour||$ 480,000||$24 per hour – each unit 2 hours|
|Variable overheads||$ 120,000||$6 per hour|
|Total variable costs||$ 1,600,000|
|Contribution margin||$ 1,900,000|
|Fixed manufacturing costs||$ 100,000|
|Operating profit||$ 1,800,000|
Len’s Kayaks actual results to 30th June 2020 were:
|Direct materials||$1,205,400||(588,000 kg used)|
|Direct labour||$ 630,000||(rate $25 per hour)|
|Variable overheads||$ 146,160||(actual $5.80 per hour)|
|Total variable costs||$ 1,981,560|
|Contribution margin||$ 2,158,440|
|Fixed manufacturing costs||$ 99,440|
|Operating profit||$ 2,059,000|
- Based on the static budget alone, what is the contribution per unit? How many units would Len’s Kayaks need to sell to break even in the year to 30th June 2020?
- Compare the Static Budget and Actual results for the year to 30th June 2020 for Len’s Kayaks and calculate all appropriate variances for the year (show all workings).
- Prepare a reconciliation of the Static-budget operating profit and the Actual profit for Len’s Kayaks for the year ended 30th June 2020. See Table 12-4 of the text 3rd edition (reproduced below) as the exemplar format to use. You will need to make changes to the format to suit the business e.g. only one category of direct material compared to Webb Ltd, two categories for variable overhead variances (spending and efficiency) and one for fixed overhead spending variance (no production volume variance as not using a fixed overhead rate) and you need to decide whether your calculated variances are favourable or unfavourable.
QUESTION 5 (Module 8) Activity Based Costing
BV Landscaping provides garden maintenance and landscaping services to commercial clients. It uses activity-based costing to bid on jobs and to evaluate profitability. BV Landscaping reports the following budgeted annual costs:
|Wages and salaries||$450,000|
|Total overhead costs||$1,190,000|
Carol Pinner, management accountant of BV Landscaping, has established four activity-cost pools and the following budgeted activity for each cost pool:
Total activity for the year
|Estimating jobs||Number of job estimates||250 estimates|
|Lawn care||Number of direct labour-hours||10 000 direct labour-hours|
|Landscape design||Number of design hours||500 design hours|
|Organisation-sustaining costs that are not allocated to jobs||Not applicable|
Pinner estimates that BV Landscaping’s costs are distributed to the activity-cost pools as follows:
|Estimating jobs||Lawn care||Landscape design||Other||Total|
Bolder Transport, a company in a nearby industrial estate, has contacted BV Landscaping to provide an estimate on landscape design and annual lawn maintenance. The job is estimated to require a single landscape design requiring 45 design hours in total and 350 direct labour-hours annually. BV Landscaping has a policy of pricing estimates at 150% of cost.
- Allocate BV Landscaping’s costs to the activity-cost pools and determine the activity cost rate for each pool.
- Estimate total cost for the Bolder Transport job. How much would BV Landscaping bid to perform the job?
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