St Mary’s University

School of Graduate Studies, MBA

Group Assignment (30%)

Course: Accounting and Finance for Managers

Group Assignment 2

1. The following data belong to a company for a period.

 Materials used $10,000 ( 80% for DM)
 Labor used 50,000 (70% for DL)
 FOH cost (others) 5,000 (Heat, Light, Power)
Instruction: Compute:

A. Prime cost
B. Total FOH cost
C. Conversion cost
D. Production cost (mfg)
E. Direct cost
F. Indirect cost

2. Anderso construction assembles residential houses. It uses a job costing system with two direct cost
categories (direct materials and direct labor) and one indirect cost pool (assembly support). A direct labour
hours is the allocation base for assembly support costs. In December 2003, Anderson budgets 2004
assembly support costs to be $8,000,000 and 2004 direct labor hours to be 160,000. At the end of 2004,
Anderson is comparing the cost of several jobs that were started and completed in 2004.
Laguna Model Mission Model
Construction period Feb – June 2004 May – Oct 2004

Direct materials $106,450 $127,604

Direct labor $36,276 $41,410

Direct labor hours 900 1,010

Direct material and direct labor are paid for on a contract basis. The costs of each are known when direct
materials are used or direct labor hours are worked. The 2004 actual assembly – support costs were $6,888,000,
and actual direct labor hours were 164,000.

Required:

i) Compute the (a) budgeted cost rates.

ii) What is the job cost of the Laguna Model and the Mission Model

3. Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The
company has made the regular model for years; the deluxe model was introduced several years ago to tap
a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily
declined. Sales of the deluxe model have been increasing rapidly.
Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current
year, management estimated that $3,080,000 in overhead costs would be incurred and the company would
produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model
requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor
costs per unit are given below:

Deluxe Regular

Direct materials cost per unit $50.00 $30.00

Direct labor cost per unit $30.00 $15.00

Required
a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating
overhead costs to products. Compute the unit product cost for one unit of each model.An intern
suggested that the company use activity-based costing to cost its products. A team was formed to
investigate this idea. . It came back with the recommendation that four activity cost pools be used.
These cost pools and their associated activities are listed below:
Activity Cost Pool and Activity Measure Estimated Activity
Overhead cost Deluxe Regular Total
Purchase orders (number of orders) $ 60,000 500 1,000 1,500

Rework requests (number of requests) 280,000 800 2,000 2,800

240,000 7,000 3,000 10,000
Product testing (number of tests)
Machine-related (machine-hours) 2,500,000 4,500 8,000 12,500

$3,080,000
Required:

b. Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools.
c. Assume that actual activity is as expected for the year. Using activity-based costing, do the following:
I. Determine the total amount of overhead that would be applied to each model for the year.
II. Compute the unit product cost for one unit of each model.
d. Can you identify a possible explanation for the company’s declining profits? If so, what is it?

4. Great Company manufactures 60, 000 units of part XL-40 each year for use on its production line. The
following are the costs of making part XL-40:
Total Costs Cost per

60, 000 units unit

Direct material Br. 480, 000 Br.8

Direct labor 360, 000 6

Variable factory overhead (FOH) 180, 000 3

Fixed FOH 360, 000 6

Total manufacturing costs Br. 1, 380, 000 Br.23

Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed overhead
consists of depreciation, property taxes, insurance, and supervisory salaries. The entire fixed
overhead would continue if the Great Company bought the component except that the cost of Br.
120, 000 pertaining to some supervisory and custodial personnel could be avoided.

Instructions:

a) Should the parts be made or bought? Assume that the capacity now used to make parts internally will
become idle if the pats are purchased?
b) Assume that the capacity now used to make parts will be either (i) be rented to nearby manufacturer
for Br. 60, 000 for the year or (ii) be used to make another product that will yield a profit
contribution of Br. 250,000 per year. Should the company purchase them from the outside supplier?
5. XYZ Company produces a product called product Z using a single direct material called raw
material R. The company prepares its master budget for a year divided into four quarters. The
following data is provided to assist you in the preparation of the master budget for the year 2005
ending on December 31.

a) The company plans to sell 100,000 units of Product Z during the year 2005, which is broken
down as follows:
Quarter 1st 2nd 3rd 4th Total

Budgeted sales of product Z (units) 10,000 30,000 40,000 20,000 100,000

The budgeted sales in units of product Z for the first and second quarters of the year 2006 are
15,000 units each.

b) The selling price per unit of product Z is Birr 20. Cash collections from sales are as follows:
70% collected in the quarter of sale, and the remaining 30% collected in the following quarter.
c) Management believes that, at the end of each quarter, an ending inventory of product Z equals
to 20% of the next quarter’s sales in units of product Z.
d) The company’s end of year balance sheet for the year 2004 appears as follows:
 XY Company
Balance Sheet
December 31, 2004
Assets
Current assets:
Cash 42,500
Account receivable 90,000
Raw materials inventory(21,000 pounds of R) 4,200
Finished goods Inventory(2,000 units of Z) 26,000
Total Current Assets 162,700
Plant and Equipment:
Land 80,000
Building and Equipment 700,000
Accumulated Depreciation (292,000)
Plant and Equipment net 488,000
Total Assets 650,700
Liabilities and Stockholder’s Equity:
Current liabilities:
Account Payable (Raw material) 25,800
Stockholder’s Equity:
Common Stock, no par 175,000
Retained earnings 449,900
Total stockholder’s Equity 624,900
Total liabilities and Stockholder’s equity 650,700

e) 15 pounds of raw material R are needed per unit of product Z. management believes that an
ending inventory of raw material R equals to 10% of the next quarter’s production needs
stated in pounds of raw material R be maintained for each quarter. The cost of raw material R
per pound is Birr 0.2.
 f) Cash payments for purchase of raw materials Z are as follows: 50% paid for in the quarter of
purchases, and the remaining 50% paid for in the following quarter.
g) 0.8 0 hours of direct labor time is required per unit of Product Z. The direct labor cost rate is
Br 7.50 per hour. Assume that the direct labor force will be adjusted as the work requirements
change from quarter to quarter.
h) Variable overhead rate is Birr 2 per direct labor hour, and the fixed manufacturing overhead is
Birr 60,600 per quarter. The fixed overhead contains Birr 15,000 depreciation on factory per
quarter. The manufacturing overhead (both variable and fixed) is applied to units of product Z
on the basis of direct labor hours. The company pays all overhead costs
involving cash disbursements in the quarter incurred.

i) The company’s selling and administrative expenses include variable selling and administrative
expenses of Birr 1.80 per unit of product Z budgeted to be sold in each quarter. These variable
expenses include commission, clerical, and shipping. The budgeted fixed selling and
administrative expenses are given as follows:
Quarter

1st 2nd 3rd 4th

Advertising 20,000 20,000 20,000 20,000

Executive salaries 55,000 55,000 55,000 55,000

Insurance - 1,900 37,750 -

Property Taxes - - - 18,150

Depreciation 10,000 10,000 10,000 10,000

The company pays all selling and administrative expenses involving cash disbursements in the
quarter incurred.

j) The Company plans to make cash payments as follows:

Quarter

1st 2nd 3rd 4th

 Equipment purchases 50,000 40,000 20,000 20,000

Dividends 8,000 8,000 8,000 8,000

k) The company requires a minimum cash balance of Birr 40,000 each quarter. An open line of
credit available at a local bank for any borrowing that may be needed during the year. All
borrowing is done at the beginning of a quarter, and all repayments are made at the end of a
quarter. All borrowings and repayments of the principal must be in multiples of Birr 1,000.
Interest is paid only at the time of payment of principal, and the interest payment relate to only
to the principal being repaid at the time it is repaid. The annual interest rate is 10%.

Required: Based on the information given in the above data for XY Company,

1. Prepare the operating budget for the year 2005 consisting of the following:
a) Sales budget
b) Schedule of expected cash collection
c) Production budget
d) Direct materials purchase budget
e) Direct materials usage budget (in pounds and Birr)
f) Schedule of expected cash disbursements for materials
g) Direct labor budget
h) Manufacturing overhead budget
i) Ending finished goods inventory
j) Cost of goods sold budget
k) Selling and administrative expense budget
l) Budgeted income statement for the year ended Dec. 31, 2005
2. Based on the data given and the supporting budgets and schedules from the operating budget,
prepare the financial budget for the year 2005 consisting on the following :
a) Cash budget including details of borrowing, repayments, and interest for each quarter.
b)
c) Budgeted balance sheet as of Dec.31,2005
Submission Date: December 1, 2016