T(A) – CVP Analysis

1. D2. B3. C4. C5. D6. C7. A8. B9. A10. B11. B

12.a) Break-even in units = RM 10,000/RM(100-60) = 250 units

Therefore Break-even in RM = 250*100 = RM 25,000

b) Margin safety in units = 650-250 = 400 units.

Margin safety in % = 400/650 = 61.54%

c) (10,000+19,250 )/[100-(60+15)] = 1170 units

d) 35,000/(100-30) = 500 unitsNo. Break-even was 250 units before automation and with the automation the units rise to 500 units. In short you have to sell more just to break even.

e)

Badminton racket Squash Racket TotalSales per unit 185 100 285Var. cost per unit 100 30 130Contribution 85 70 155

= 35,000/(155/285) = RM 64,814.8

f) Selling price is constant, variable cost per unit is constant, fixed costs are constant, sales mix is constant, units produced are equal to units sold.(Any of the 3)

13. i. Breakeven (units) = Fixed cost/ Contribution(unit)

Catty = RM125,000/RM16-RM6 = 12,500

Doggy = RM 80,000/RM64-RM32 = 2,500

ii. Catty Doggy

Sales(units) 200,000 50,000

Breakeven(units) 12,500 2500

Margin of safety 187500 47,500

Contribution/unit RM10 RM32

Estimated profit RM1,875,000 RM 1,520,000

Alternative answer

Catty Doggy

Sales(units) 200,000 50,000

Contribution/unit RM10 RM32

Total contribution 2,000,000 1,600,000

(-) fixed Cost (125,000) (80,000)

Estimated profit RM1,875,000 RM 1,520,000

iii. Profit at higher level of sales

Catty Doggy

Sales(units) 240,000 60,000

Breakeven(units) 12,500 2500

Margin of safety 227,500 57,500

Contribution/unit RM10 RM32

Estimated profit RM 2,275,000 1m RM 1,840,000 1m

iv. Contribution concept is useful decision making because the higher the contribution the higher will be our profit by assuming that fixed cost remains the same and only variable cost is relevantSales (-) variable cost/ContributionSales (-) fixed cost / Profit

T (A) – Budgets

1a) Production budget (units) B C

Opening stock (600) (800)Closing stock (85%) 510 680Sales 10,000 6,000

9,910 5,880

b) Raw materials purchases budgetX Ykg. kg.

Opening stock (400) (200)Production (as per (a))B (10 kg/4 kg) 99,100 39,640C (6kg/8kg) 35,280 47,040

133,980 86,480Closing stock 340 170

134,320 86,650

Cost per kg $1.50 $4.00

Purchase cost $201,480 $346,600

c) Production cost budget

Materials $Opening stock (400 kg x $1.20 + 200 kg x $3) 1.080Purchases (201,480 = 346,600) 548,080

549,160Closing stock (340kg x $1.50 = 170 kg x $4) (1,190)

547,970Skilled labor(working 1) 497,880Variable overhead(Working 2) 165,960Fixed overhead 315,900

1,527,719Working 1 B CUnits produced 9,910 5,880Hours per unit 6 4Total hours 59,460 23,520Labor hours budget = (59,460 + 23,520) = 82,980 hours x $6 = $497,880

Working 282,980 hours x $2 per hour = $165,960

2. (a) (i) Sales budget in quantity and valueJuly August September Total

Sales units 400 300 600 1300Sales value($) 100,000 75,000 150,000 325,000

(ii) production budget in unitsSales 1300Closing stock 225

1525Opening stock (200) Good output required 1325Normal loss(1325x1/9) 147Production required 1472

(iii) Raw material usage budgetProduction (units) 1472 unitsMaterial A(at 3 kg per unit) 4416 kgsMaterial B(at 2 kg per unit) 2944 kgsMaterial C(at 4 kg per unit) 5888 kgs

(iv) Raw material purchases budgetA B C Total(kgs) (kgs) (kgs)

Kgs used 4416 2944 5888Stock increase(20%) 200 800 120

Purchases in kgs 4616 3744 6008Unit cost $3.50 $5.00 $4.50Purchases cost $16156 $18720 $27036 $61912

(v) Labor requirements budgetProduction in units 1472Unit labour hours 8Total hours 11776Cost per hour $8.00Total cost $94,208

3. . (a)Cash collection schedule

Nov Dec Jan Feb Mac

sales 300 450 675selling price 250 250 250sales revenue 75,000 112,500 168,750credit sales 9,750 15,000 22,500 33,750 50,625cash sales 52,500 78,750 118,125collection of cr sales: I mth

7,500 11,250

collection of cr sales: 2 mths

4,875 7,500 11,250 16,875

Total debt recovery

90,000

Total cash collection

64,875 97,500 236,250

(b)Production Budget Jan Feb Ma

c Sales 300 450 675 + Desired ending inventory

270 405 648

Total units needed 570 855 1,323 -Beginning inventory 50 270 405 Production needed 520 585 918

(c)

Jan Feb Mac

Production needed 520 585 918. x Required material of 3kg each 3 3 3

1,560 1,755 2,754 + Desired ending inventory(40%/50%)

624 702 1,377

Total materials needed 2,184 2,457 4,13 -Beginning inventory 252 624 702 Total materials purchase (kg) 1932

65 1,83

65 3,429

65 x purchase cost per kg Total purchase 125,580 119,145 222,885

Cash Payment Schedule Total purchase 125,580 119,145 222,885 Cash purchase (40%) 50,232 47,658 89,154 Credit purchase 1 month (60%) 27,378 75,348. 71,487 Total payment 77,610 123,006 160,641

(d)Cash budget Jan Feb Mac Beginning cash balance 55,000 15,000 15,000 + cash collection 64,875 97,500 236,250 Total cash available 119,875 112,500 251,250 -Disbursements: Raw material purchased 77,610 123,006 160,641 Manufacturing overhead 11,600 11,600 11,600 Sales commisions (5%) 3,750 5,625 8,437 Office equipment 45,200 Total disbursement 138,160 138,631 180,678 Excess/deficiency (18,285) (26,131) 70,572

Financing: Borrowings (at beginning) 33,285 41,131 Repayment of loan principal

Repayment of loan interest

Ending cash balance 15,000 15,000 70,5 72

Cumulative borrowings at end

33,285 74,416 -

5 & 6 (A) Budgeting and Budgetary Control

Q1.(a) Sales budget (RM)

(b) Production budget (units)

(c) Direct materials Usage Budget

(d) Direct Materials Purchase Budget

(e) Direct labour budget

(f) Production overhead budget

Variable production overhead cost RM4 x 23,900 = RM 95,600 Fixed production overhead cost RM 90,000 Total RM185,600

(g) Production overhead rage

= 185,600 / 23,900

= RM7.77 per hour

(h) Budgeted production overhead cost per output unit

= 185,600 / 11,950

= RM15.53 per output unit

(i) Cost per unit of finished goods

(j) Closing stock budget

(k) Cost of goods sold budget

(l) Budgeted Income Statement

(m) Budgeted Balance Sheet

Q2.

(a) Static budget- The term static refers to the budget that is set at the beginning of a budgeting period

and that is geared to only one level of activity (budgeted level of activity).

Flexible Budget. A flexible budget is geared to all levels of activity within the relevant range and is

used to plan and control spending. The flexible budget will show the cost formula for each variable cost and total cost (fixed cost) at various levels of activity.

Improve performance evaluation by providing realistic basis of comparison.

(b) The static budget is appropriate for the budget level of activity but generally is not

realistic for other levels of activity-particularly if there are significant amount of variable cost. If activity is 10% higher than budgeted, then some costs are likely to be 10% higher than budgeted as well.

It is fairly common to hold managers responsible for deviation of actual from budgeted costs. Using static budget as a benchmark would result in poor performance measurement of managers’ efforts, as the budget fails to provide a realistic basis of comparison.

Q3(a)

ZBB also known as (priority based budgeting) emerged in the late 60s as an attempt to overcome the limitations of incremental budgets.

This approach requires that all activities are justified and prioritized before

decisions are taken relating to the amount of resources allocated to each activity.

ZBB focus on activities instead of functional department based on line items which is a feature of traditional budgeting.

(b) Benefits of ZBB Traditional budgeting tends to extrapolate the past by adding a percentage increase

to the current year. ZBB avoids the deficiencies of incremental budgeting and represents a move towards the allocation of resources by need or benefit. Thus unlike traditional budgeting the level of funding is not taken for granted.

ZBB creates a questioning attitude rather than one that assumes that current practice represents value for money.

ZBB focuses attention on outputs in relation to value for money.

( c)It is preferable to introduce zero-base budgeting selectively rather than ‘across the board’. The approach should initially be applied to those activities where immediate benefits are likely. This might lead to a greater acceptance by its users. Care should be taken in selecting the activities to which zero-base budgeting is to be applied. In Chapter 15 it will have been noted that it is best suited to non-manufacturing activities and non-profit making organizations.

When the system is introduced, meetings and seminars should be arranged explaining the principles of zero-base budgeting. Because zero-base budgeting is costly and time-consuming, there are strong arguments for selective ad hoc applications which are likely to yield benefits. It is unlikely that a universal application of zero-base budgeting in an organization can be justified.

In profit-orientated organizations those costs which are of a discretionary nature such as service and support activities are appropriate candidates for zero-base budgeting. Examples of departments which fall into this category include personnel, research and development, accounts, and data processing.

T 7, 8 & 9 (A) Standard Costing

1. 12,000 – (2,000/ 4) = 11,700 gallons.2. {(10,000 * 7.5) + 5,500} / 10,000 = $8.053. {1,050 - (500 * 2)} * 6 = $300. 4. 9,000 – (5,250/ 7) = 8,250.5. Actual price per pound = $ 304,000 / 160,000 = $ 1.90

Answer: 160,000 * (1.90 – 1.80) = $16,000 unfavorable.

6. { (19,000 * 8) – 142,500 } 1.80 = $17,100 favorable.7. (5,000 * 8) – 37,800 = $2,200 favorable.8. { (19,000 * 0.25) – 5,000 } * 8 = $2,000 unfavorable.9. 3,600. Workings: Actual labour hours * Standard rate per hour = 6,500 * 5 = 32,500

Standard hours = (32,500 + 3,500) / 5 = 7,200

Answer = 7,200 / 2 hours = 3,600

10. 3 lbs. Workings: Standard costs of materials to produce actual 3,600 units = Standard pounds of material * Standard price per pound = 65,560 – 22,360 = 43,200

Standard costs of material to produce 1 unit = 43,200 / 3,600 = $ 12 Standard material allowed (number of pounds) to produce 1 unit = $12/$4 = 3

11. $4.40 Workings: Actual pounds of materials = (65,560 – 5,960) / 4 = 14,900 Actual material cost per pound = 65,560 / 14,900 = 4.40

12. $ 5.60. Workings: Labour rate variance = $ 400 + $ 3,500 = 3,900 U Actual labour rate per hour = (3.900/ 6,500) + 5 = 5.60

13. $ 400 + $ 3,500 = $3,900 unfavorable.

14.(a)

(i) Total material cost variance The total standard material cost of 9,500 containers should have been £114,000 (that is 9,500containers x 4 kilograms @ £3 per kilogram).The actual cost was in fact £119,880, so an overall adverse direct material variance of £5,880.

(ii) Material price variance. The price actually paid was £3.24 per kilo (£119,880 / 37,000). This was £0.24 greater than the standard price. As the quantity actually used was 37,000 kilos and there was an additional cost of £0.24 per kilo the material price variance was £8,880 adverse. (37,000 x £0.24) This only accounts for part of the overall material variance.

(iii) Material usage variance 400 containers the total standard amount of material that should have been used was 38,000 kilograms (that is 9,500 x 4 kilograms). Month 1, only 37,000 kilograms were used. This saving in material at the standard material price equates with a favorable material usage of £3,000 (1,000 kilograms @ £3 per kilo). Adding the two variances together equates with the total material variance of £5,880 adverse ( £8,880 adverse price variance + £3,000 favorable usage variance).

(iv) Total direct labour variance The total standard labour cost of 9,500 containers should have been £190,000 (that is 9,500 containers x 5 hours @ £4 per hour). The actual cost was in fact £200,736, so an overall adverse direct labour variance of £10,736 arose during Month 1.

(v) Direct labour rate variance Amount paid per hour differed to the standard rate. The rate actually paid was £4.08 per hour (£200,736 / 49,200).This was £0.08 higher than the standard price. As the hours actually paid for were 49,200 hours and there was an additional cost of £0.08 per hour the labour rate variance was £3,936 adverse.

(vi) Direct labour efficiency variance The other part of the overall variance is accounted for by the labour efficiency variance and labour idle time variance. In producing 9,500 containers the total standard time that should have been taken was 47,500 hours. In fact during Month 1, the work took 49,200 hours. This meant the work took 1,700 hours longer than expected.. This additional time at standard labour rates equates with an adverse labour efficiency variance of £6,800 (1,700 hours @ £4 per hour). Summarizing the labour variances would give: The adverse rate variance of £3,936 adverse, plus the adverse efficiency variance of £6,800 = the total adverse labour variance of £10,736.

(vii) Total variable overhead cost variance The total standard variable overhead cost for 9,500 containers should have been £47,500 (that is 9,500 containers x 5 hours @ £1.00 per hour). The £1 per hour is of course the standard variable overhead absorption rate. The actual cost was in fact

£47,000, so an overall favorable variable overhead variance of £500 arose during month 1, because the actual cost was less than the standard (expected) cost. The overall variance is made up of two sub-variances — the expenditure variance and the efficiency variance.

(viii)Variable overhead expenditure variance This variance measures the difference between the actual overhead incurred (or spent) and the overhead that would have been absorbed or recovered based on the actual (productive) hours worked. 49,200 productive hours were worked. As the standard recovery rate was £1.00 per hour, £49,200 would have been recovered. Comparing this with the actual expenditure of £47,000 means that there was a favorable variable overhead expenditure variance of £2,200 in the month.

(ix) Variable overhead efficiency variance This variance measures the standard variable overhead cost for the output against the overhead that would have been recovered based on the actual productive hours. The overhead recovered (as shown above) was £49,200. The standard overhead cost for 9,500 units is 9,500 x 5 hours @ £1 per hour = £47,500. It follows therefore that there was an adverse efficiency variance of £1,700. This amount reconciles with the fact that the work was completed in more time than expected. The work should have taken 47,500 productive hours, but took 49,200 productive hours. This means that 1,700 productive hours were lost as was the opportunity to recover overheads. As the standard absorption rate is £1 per hour this equates with £1,700.Adding the two variances together, the favorable expenditure variance of £2,200 and the adverse efficiency variance of £1,700 gives the overall variance of £500 favorable.

(x) Total fixed overhead cost variance The total standard fixed overhead cost for 9,500 containers should have been £142,500 (that is 9,500 containers x 5 hours @ £3.00 per hour). The £3.00 per hour is of course the standard fixed overhead absorption rate. The actual cost was in fact £145,000, so an overall adverse fixed overhead variance of £2,500 arose during month 1.The overall variance is made up of three sub-variances — the expenditure variance, the volume (capacity) variance and the efficiency variance.

(xi) Fixed overhead expenditure variance This variance measures the difference between the actual overhead incurred (or spent) and the budgeted overhead for the period. The budgeted fixed overhead (as given) was £150,000 whereas the amount actually incurred was £145,000 — therefore the fixed overhead expenditure variance was £5,000 favorable.

(xii) Fixed overhead volume (capacity) variance This variance measures the difference between the budgeted overhead and the fixed overhead actually absorbed. The fixed overhead that would have been absorbed would have been £147,600 (49,200 hours at £3 per hour). The budgeted fixed overhead was £150,000 which at an absorption rate of £3 per hour suggests that the planned or budgeted production hours for the month were 50,000. As only 49,200

productive hours were worked there was some unused capacity during the month. This unused capacity of 800 hours at £3 per hour equates with a £2,400 adverse variance.

(xiii)Fixed overhead efficiency variance This variance measures the standard variable overhead cost for the output against the overhead that would have been recovered based on the actual productive hours. The overhead recovered (as shown above) was £147,600.The standard overhead cost for 9,500 units is 9,500 x 5 hours @ £3 per hour = £142,500. It follows therefore that the efficiency variance was £5,100 adverse. This amount reconciles with the fact that the work took more time to complete than expected. The work should have taken 47,500 hours, but took 49,200 hours. As the fixed overhead is absorbed at the rate of £3.00 per hour, this lost time at £3.00 per hour = £5,100. Adding the three variances together, the favorable expenditure variance of £5,000 and the adverse capacity variance of £2,400 and the adverse efficiency variance of £5,100 give the overall variance of £2,500 adverse.

Fixed overhead variances — another view/explanationThe company had planned to work for 50,000 hours in the month. This can be established from the fact that the budgeted fixed overhead was £150,000 and that the standard fixed overhead absorption rate was £3.00 per hour. In these hours it would have been possible to produce 10,000 containers if each one was made in exactly the standard time. What actually happened was that only 9,500 containers were made. Had these been made in exactly the standard time allowed, 47,500 hours of the 50,000 capacity available would have been used. In principle therefore the company did not usefully use all the hours available.What actually happen to these 2,500 hours?Examination of the actual information will reveal that the 9,500 containers produced exceeded the allowed time. They should have taken 47,500 hours but took 49,200 — 1,700 hours longer than planned. These 1,700 hours are represented by the adverse efficiency variance of £5,100 (1,700 hours at £3.00 per hour).Deducting the 1,700 hours from the underused capacity of 2,500 hours leaves 800 hours. These hours were simply just not used for anything and are represented by the adverse capacity variance of £2,400 (800 hours at £3.00 per hour).Adding the efficiency variance to the capacity variance gives the volume variance, that is £7,100 adverse.

(b) USEFULNESS OF VARIANCES TO MANAGEMENT Variances highlight to management that everything has not gone to plan. They highlight that problems may exist and direct management attention to them. If management are aware that there have been departures from standards (expectations) they will be in a position to take action to correct such departures. Significant adverse variances will, if left unchecked, have an adverse effect on profitability. If favorable variance arises, they too should be investigated. It is possible that a favorable variance has arisen because of some unknown factor that could in the future be used to the advantage of the business.

(c) POSSIBLE REASONS FOR DIRECT MATERIAL & DIRECT LABOUR VARIANCES

Material price: Lower or higher quality than standard quality

Change in price by supplierShortage of material

Material usage: Lower or higher quality than standard qualityTheftInexperienced operators

Labour rate: Unexpected wage increaseUsing higher or lower grade labour than normal on the work undertaken

Labour efficiency: Using higher or lower grade labour than normal on the work undertakenStandard of trainingQuality of materialQuality of equipment