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# Managerial accounting

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• Great article. Thanks for the info, very helpful. BTW, if anyone needs to fill out a “Bankruptcy Court Monthly Operating Report (MOR)”, I found a blank form here: "www.justice.gov" and also here "Monthly Operating"

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### Managerial accounting

1. 1. MANAGERIAL ACCOUNTING QUESTIONS & ANSWERS
2. 2. 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:
3. 3. 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. 3
4. 4. 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 4
6. 6. ・ 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?
7. 7. 1Chau Trieu Luan | tireuluan@gmail.com 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.
8. 8. 2Chau Trieu Luan | tireuluan@gmail.com 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
9. 9. 3Chau Trieu Luan | tireuluan@gmail.com 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
10. 10. 4Chau Trieu Luan | tireuluan@gmail.com 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
11. 11. 5Chau Trieu Luan | tireuluan@gmail.com 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
12. 12. 6Chau Trieu Luan | tireuluan@gmail.com 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
13. 13. 7Chau Trieu Luan | tireuluan@gmail.com 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
14. 14. 8Chau Trieu Luan | tireuluan@gmail.com 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
15. 15. 9Chau Trieu Luan | tireuluan@gmail.com 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
16. 16. 10Chau Trieu Luan | tireuluan@gmail.com 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
17. 17. 11Chau Trieu Luan | tireuluan@gmail.com 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
18. 18. 12Chau Trieu Luan | tireuluan@gmail.com 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.
19. 19. 13Chau Trieu Luan | tireuluan@gmail.com 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.
20. 20. 14Chau Trieu Luan | tireuluan@gmail.com 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.
21. 21. 15Chau Trieu Luan | tireuluan@gmail.com 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).
22. 22. 16Chau Trieu Luan | tireuluan@gmail.com 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
23. 23. 17Chau Trieu Luan | tireuluan@gmail.com 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
24. 24. 18Chau Trieu Luan | tireuluan@gmail.com 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. --- The end ---