AB1101 Accounting I

Tutorial 12

Group 3
 Herbal Care Pte Ltd
1. Account Balance as at 31 Dec 2009
• Cash $400
• Accounts Receivable $750
• Accounts Payable $500

Expected to settle payables from 2009 in Q1 of 2010,

Customer expected to settle dues from 2009 in Q1 of 2010.

Company collects accounts receivable as follow:

• During the quarter of sale 80%
• In the following quarter 20%

No beginning and ending inventories. Purchases paid 80% in current

Quarter and 20% in the following quarter.

Sales and marketing + Administrative expenses paid during quarter when

they are incurred.

Administrative expenses INCLUDE annual depreciation of $400.

Quarterly Dividend of $100.
Office Computer will be sold for $100 in Q2.
Minimum Cash Balance of $300.
Line of credit, interest at 12% per annum, due on last day of quarter.
Repayment made when cash balance exceeds $300.
Q1 Borrowings/Repayments made in multiples of 10.
 Prepare the cash budgets for first 2 quarters of 2010.
Quarter 1 ($) Quarter 2 ($)
Beginning Cash Balance 400 309.60
Add: Cash Collections 750 + (1200x0.8) = (1,440 x 0.8) +
1,710 (1,200 x 0.2) + 100
= 1492
Total Cash Available 2,110 1,801.60
Less: Disbursements
Merchandise (650 x 0.8)= 520 (700 x 0.8) + (650 x
0.2) = 690
Sales & Marketing Expenses 580 202
Administrative Expenses 375 – (400 x 3/12) 375 – (400 x 3/12)
= 275 = 275
Accounts Payable 500 -
Dividends 100 100
Total Disbursements (1,975) (1,267)
Excess of cash available over 135 534.60
Q1 disbursements
 Quarter 1 ($) Quarter 2 ($)
Financing:
Borrowing 180 0
Repayment - (180)
Interests 180 x12% x (3/12) = 180 x12% x (3/12) =
(5.40) (5.40)
Total Financing 174.60 (185.40)
Ending Cash Balance 309.60 349.20

Q1
Question 2

2(a) Using the concepts of flexible budgeting

and responsibility accounting and rounding to
the nearest dollar, prepare a revised
performance report for October 2009 for the
production department.

Flexible Budgeting: Adjust certain

budgeted income statement items for
changes in volumn
2(a)
 Flexible Actual Variance
Budget

Production 7100 7100

volumn(unit)

Labour Cost($) (51,970- 68,227 10,797 U

2,050)/6,400x7,100+2,050)=
57,430

Material Cost (200,000/6,400)x7,100= 248,000 26,125 U

($) 221,875

Other (222,250/6400)x7,100= 241,000 584 F

Supplies($) 24,684

Overheads($) 62,030-20,000= 82,340-40,000= 310 U

42,030 42,340

Total($) 346,019 382,667 36,648 U

2(b) Using the performance report you have
prepared in part (a) above,
(i) Comment on the performance of the
production department for October 2009

The performance of the production

department is not as bad as what they
perceived previously. The unfavourable
variance is only $36,648, which is much less as
compared to $ 86,417 suggested in the
question.
(ii) Decide whether or not it was reasonable
for the production manager to receive all the
blame at the performance review meeting.
Give three reasons to justify your decision.

NO.
1. The sales budget is underforecasted
2. Wait for discussion
 2(c) Prepare the production budget (in units)
and the raw materials purchase budget (in kg)
for November 2009.

- Maintain inventories equal to 30% of its needs for the following month for
both direct materials and finished goods.
- In October 2009, the company ignored ending inventory policy and sold
all the units it produced
- On November 1,2009, company had 25000kg of metal in inventory.
- Each unit of final product consumes 20kg of metal

Q2
 2(c) Prepare the production budget (in units)
and the raw materials purchase budget (in kg)
for November 2009.

Production budget (in units):

November 2009 December 2009

Sales in units 7,000 5,000

Add: Desired Ending (0.3 X 5,000) = 1,500 (0.3 X 8,000) = 2,400

inventory
Total needed 8,500 7,400

Less: Beginning 0 1,500

inventory
Units to be produced 8,500 5,900

Q2
 Raw Materials purchase budget:
November 2009 December 2009
Production in units 8,500 5,900
Materials per unit 20 20
Production needs (kg) 8,500 x 20 = 170,000 5,900 x 20 = 118,000
Add: Desired ending 0.3 x 118,000 = 354,00
inventory (kg)
Total needed (kg) 205,400
Less: Beginning 25,000
inventory (kg)
Materials to be 180,400
purchased (kg)

Q2
 2(d) Identify the behaviours that Tom Selling and Jim Buyer
will have when they prepare their budgets. Explain the
reason for their behaviour.

Tom Selling and Jim Buyer may be budget padding.

- Tom Selling will intentionally under forecast Sales Budget.
- Tom’s performance bonus is tied to meeting the annual sales target
and is responsible for preparing the sales budget.
- Tom will tend to lower sales target so that it can be easily met and thus
getting the performance bonus.

- Jim Buyer will over forecast purchasing budget (overestimate costs).

- Jim is responsible for all procurement related activities and prepares
the raw materials purchase budget
- Over estimating purchasing budget will allow him to meet the
purchase budget more easily and obtain performance bonus

Q2
 2(e) List the performance measurement
related problems (other than those identified
in part (d)) that you can identify in this
company and provide one suggestion to
solve each problem identified.

1) Mike tightening the budget may lead to budget ratcheting. The

employees may temper the better-than-budgeted performance, such
as bringing forward expenditure to the current year.

Suggested solution: based salary on actual sales

2) Tom Selling may lower the sales price so as to increase sales revenue
and hence being able to meet the annual sales target and obtain his
performance bonus.

Suggested solution: Other measures such as giving out bonuses based on

the annual profits made can be used instead.
Q2
 Question 3
 Sales Budget (in dollars)
 Production Budget (in units)
 Raw material purchases budget (in qty)
 Raw material purchases budget (in $)
 Direct labour budget (in $)
 Manufacturing overhead budget (in $)

Q3
 Sales Budget
Light Coil Heavy Coil
Units Shipped 60 000 40 000
Price per coil $130 $190
Revenue $7 800 000 $7 600 000

Data extracted from the sales forecast

Total Sales budget = $15 400 000

Q3
 Production Budget
Light Coil Heavy Coil
Ending Inventory 25 000 9000
Sales Forecast 60 000 40 000
Less beginning inventory (20 000) (8000)
Units to be produced 65 000 41 000

Source: Sales forecast & Finished goods inventory

Q3
 Raw materials Purchase Budget
Sheet Metal Copper Wire Platform
Ending inventory 36 000 32 000 7000
Amount of Raw 4 x 65 000 + 5 x 2 x 65 000 + 3 x 0 + 41 000 x 1 =
Materials for 41 000 = 465 000 41 000 = 253 000 41 000
production
Less beginning 32 000 29 000 6000
inventory
Raw materials to 469 000 256 000 42 000
be purchased in
quantities (c)
Cost per unit $16 $10 $6
Raw materials to $7 504 000 $2 560 000 $252 000
be purchased ($)
(d)
Source: Production budget (a), raw material prices and inventory levels and use
Q3 of raw material
 Direct labour budget ($)
Light Coil Heavy Coil
Units to be produced 65 000 41 000
No. of hours required 4 6
Rate per hour $15 $20
Total Direct Labour 65 000 x 4 x $15 = 41 000 x 6 x $20 =
Cost $3 900 000 $4 920 000

Source: Production budget (a), Direct labour requirements and rates

Q3
 Manufacturing Overhead Budget ($)
Purchasing & Sheet Metal – 469 $0.50 x (469 000 +
Material Handling 000 lb 256 000) = $362 500
(per specific raw Copper Wire – 256
materials purchased) 000 lb
Depreciation, utilities & Light Coil – 65 000 $8 x (65 000 + 41 000)
Inspection (per coil Heavy Coil – 41 000 = $848 000
produced)
Shipping (per coil Light Coil – 60 000 $2 x (60 000 + 40 000)
shipped) Heavy Coil – 40 000 = $200 000
General manufacturing Light Coil – 65 000 x 4 $6 x (65 000 x 4 + 41
overhead (per direct Heavy Coil – 41 000 x 6 000 x 6) = $3 036 000
labour hour)
Total $4,446,500

Q3
Thank You!