Managerial Accounting

MANAGERIAL
ACCOUNTING
QUESTIONS & ANSWERS

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 Shops first
year.
b) What is the stores 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:

J uly 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 J une totaled $300,000.
c) The company maintains finished goods inventories equal to 15% of the following
months sales. This requirement will be met at the end of J une.
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 months production needs. The inventory of Gilden on hand at the
beginning and end of the quarter will be:
J une 30 72,000 feet
September 30 ? feet
e) Gilden costs $0.80 per foot. One-half of a months purchases of Gilden is paid for in the
month of purchase; the remainder is paid for in the following month. The accounts payable
on J uly 1 for Purchases of Gilden during J une 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 J uly, 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 Companys 2012 master budget included the following fixed budget report. It is based
on an expected production and sales volume of 20,000 units.

3

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

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Gross profit 1,205,000
Selling expenses
Packaging 90,000
Shipping 124,000
Sales salary (fixed annual amount) 162,000 376,000
General and administrative expenses
Advertising 104,000
Salaries 232,000
Entertainment expenses 100,000 436,000
Net income $ 393,000

a) Prepare a flexible budget performance report for 2012
b) Analyze and interpret both the sale variance and direct materials variance.

TASK 4: Analysis of special orders

Windmire Company manufactures and sells to local wholesalers approximately 300,000 units
per month at a sales price of $4 per unit. Monthly costs for the production and sale of this
quantity follow

Direct materials $ 384,000

Direct labor 96,000
Overhead 288,000
Selling expenses 120,000
Administrative expenses 80,000
Total costs and expenses $ 968,000

A new out-of-state distributor has offered to buy 50,000 units next month for $3.44 each. A
study of costs of this new business reveals the following:
Direct material costs are 100% variable.
Per unit direct labor costs for the additional units would be 50% higher than normal
because their production would require one-and-a-half overtime pay to meet the
distributors deadline.
25% of the normal annual overhead costs are fixed at any production level from 250,000
to 400,000 units. The remaining 75% is variable with volume.
Accepting the special order could involve no additional selling expenses.

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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?

1
Chau 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.

2
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 Shops first year.
b) What is the stores 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

3
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

4
The schedule of expected cash collections
MILO COMPANY
Expected Cash Collection
For 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

5
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

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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
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

7
MILO COMPANY
Expected Cash Disbursement
For 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

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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

9
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

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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

11
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

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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.

13
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.

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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
Windmires 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.

15
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. Windmires 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 fromthe special order only (column 2)
Combined monthly operating income fromnormal business and the new business
(column 3).

16
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

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4/ What qualitative factors should Windmire Company consider?
Special order decisions are made only if it maximizes operating income. Like all short-
run decisions, Windmires 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 distributors 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

18
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 factorys 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 ---

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