UNSW Business School

School of Accounting

ACCT1511

Topic 5
Management Accounting
Student Handout

Contents:

1. Learning Objectives
2. Readings
3. Tutorial Prep Qs/PASS Qs list
4. Topic 5, part 1, lecture slides
5. Lecture workshop questions part 1
6. Topic 5, part 2, lecture slides
7. Lecture workshop questions part 2
8. Topic 5 – Tutorial questions

Website: http://moodle.telt.unsw.edu.au

business.unsw.edu.au

Last Updated 16 January 2017 CRICOS Code 00098G

 Introduction and Learning Objectives

In Topic 5.1 lecture we focus on the allocation of overhead costs in product costing is introduced, along
with an overview of two basic costing systems: job order costing and process costing. The formal
treatment of cost flows in a firm’s accounting system under job order costing will be examined in detail
via a case study.

We will also consider some of the overhead cost allocation methods now available to management
accountants.

At the end of topic 5.1, you should be able to:

LO1 Describe how costs can be measured.

LO2 Calculate a predetermined overhead rate.
LO3 Explain why estimated, rather than actual, costs are used in “normal” costing.
LO4 Apply overheads to work-in-process.
LO5 Calculate over-applied or under-applied overheads.
LO6 Distinguish between job order and process costing.
LO7 Prepare journal entries to record costs in job order costing.
LO8 Understand the limitations associated with product costing.
Budgets are a major feature of the management accounting system for planning and control. In Topic
5.2 lecture, the ways in which budgets can be used as a planning and control tool within an organisation
will be outlined. Using a case study, we will complete several components of an operating budget, a
cash budget, and financial statement budgets. We will also compare a static and flexible budget and
discuss how to interpret a flexible budget. Behavioural implications of budgeting will be also considered.

At the end of topic 5.2, you should be able to:

LO1 Demonstrate what a budget is and why and how it is used within the organisation.
LO2 Understand the importance of behavioural considerations in budget design.
LO3 Describe a master budget and its components.
LO4 Complete a master budget that includes a sales budget, purchases and expenses budget, cash
receipts and cash payments budget, and budgeted financial statements.
LO5 Identify differences between a static and flexible budget.
LO6 Interpret a flexible budget.
This topic includes a lecture workshop question that covers costing and budgeting, we recommend that
you print out the Handout document and bring it to the lectures. We will work together to fill in the
answers during the lecture.

2
 Readings

TCG Management Accounting Supplement online M3 and M5.

Use the MAC card that came with your textbook to access these two online chapters.

If you did not get an MAC card with your textbook you can purchase the two chapters
separately from this website: http://tinyurl.com/y38z7jvr

PASS and PreQ Topic 5

PASS Question:

Topic 5.1: Semester 1, 2009 Final Exam Question 4 (posted separately on Moodle)
Topic 5.2: Semester 1, 2009 Final Exam Question 5 (posted separately on Moodle)

Prep Question:

TCG Management Accounting Supplement (for details on how to access, see Moodle):

Topic 5.1: PP A, B (in Chapter M3)

Topic 5.2: Problem M5.9 (in Chapter M5)

3
 Readings
• Trotman, Carson & Gibbins (TCG) 
• Management Accounting Supplement
• MA3
• Access to this chapter using the MAC that came with the 
textbook. These are e‐chapters.
Topic 5.1

1 2

Learning Objectives Review 1A: What is Management Accounting?
LO1 Describe how costs can be measured.  • External Users
LO2 Calculate a predetermined overhead rate. • Financial Accounting
LO3 Explain why estimated, rather than actual, costs are used in   • Internal Users
“normal” costing. • Costing (Topic 5.1)
LO4      Apply overheads to work‐in‐process. • Pricing
LO5      Calculate over‐applied or under‐applied overheads. • Decision making (Topic 5.2)
LO6 Distinguish between job order and process costing.
• Planning
LO7 Prepare journal entries to record costs in job order costing.
• Control
• Directing and Motivating
LO8 Understand the limitations associated with product costing.
• Evaluation

3 4

Quick Review on  Quick Review on ACCT 1A: Cost of Goods Sold
ACCT 1A: Cost of Goods Manufactured
*Cost of Goods Manufactured?
Cost of producing finished goods! 
Schedule of Cost of Goods Manufactured
Direct material used                            ****
Direct labour used                               ****
Overheads applied ****
Total manufacturing costs (WIP)       ****
+ Opening WIP                                     ****
‐ Closing WIP                                        ****
Cost of Goods (FG) Manufactured    ****
*Cost of Goods Sold?
Literally, cost of goods the company sold! 
Schedule of Cost of Goods Sold
Cost of Goods (FG) Manufactured   ****
+ Opening FG                                       ****
‐ Closing FG                                          ****
Cost of Goods Sold                              ****
Total available WIP
*Are selling costs (e.g., sales commission) included in COGS?
(1) Yes                                        (2) No

5 6

1
 Example – Logic underlying Process Costing Review: Cost Classification
Cost Classification
Dept A – 3 lots of ½ completed 
tails Function Behaviour

Dept B – 5 lots of ½ completed  Manufacturing Non‐manufacturing Fixed Mixed Variable

heads 不包括营业成本里的cost直接进入i／s
Direct Indirect Selling & Admin

Equivalent to (½ x 3) + (½ x 5) = 4 Materials Labour Overhead Note:

fully completed units COGM, COGS
即使有的商品只完成了一部分，也可以将其相
Income Statement
加，因为比如桌子只有两个脚，可以卖掉另外两 在1B我们只看cost of factory
个脚的零件就能fix it
7

7 8

Basic Cost Terms Direct and Indirect costs
Direct Costs Cost Assignment
Cost • Costs that can be traced to  • Direct costs are traced to a cost 
• An outflow of resources. a given cost object (e.g.  object.
Cost of object product, department, etc) 
• Indirect costs are allocated to a 
in an economically feasible 
• Any activity or item for which a separate measurement of cost is desired.
way. cost object.
Cost driver Indirect Costs Cost measurement 对于工人，可以直接看到他的工作量
• A factor which changes and ‘causes’ a change in the total cost of a related 
• Determining the dollar amounts of 
• Costs that cannot be traced  direct materials, direct labour and 
cost object. Cost drivers can be factors other than volume. 
to a given cost object in an  overhead used in production
本书只有两个cost driver economically feasible way. 
对于机器，driver是machine hours • Can be actual or estimate amounts.
对于人： direct labour hours These costs are known as 
间接费用内部生产经营单位为组织和管理生产经营活动而发生的共同
费用和不能直接计入产品成本的各项费用,如多种产品共同消耗的材料
overhead. 等,这些费用发生后应按一定标准分配计入生产经营成本。

9 10 例如glue，oils，是批量的，而不是每个人定好数额生产，所以是间接费用需要分配

Product and period costs Cost Terms
Product costs 外部的费用
Total Costs
• Costs that are ‘attached’ to the units produced – these are manufacturing 
costs and are capitalised onto the product. Manufacturing Non-Manufacturing
期间费用是指企业本期发生的、不能直接或间接归入营业成本，而是直接计入 Product Costs/ Period Costs / Expensed
Period costs 当期损益的各项费用。 包括销售费用、管理费用和财务费用等。 Inventoriable Costs
• Costs that must be charged against income in the period incurred and 
cannot be capitalised to the product.
Materials Commercial,Distribution and
Unit costs Prime Costs Administration
Labour
• Total cost of units divided by units produced.
Overhead Conversion Costs
factory rent／elctricity etc

Source: Trotman et al. 2016 textbook  (Direct vs Indirect)

(Fixed vs Variable)
12 (Fixed vs Variable)

11 12

2
 产品成本
Examples of Product and period costs Why is determining costs important?
Item Product cost ‐ Product cost ‐ Indirect Period cost
Direct
Wood in a new house 
Cost determine:
being built
• Sales prices for a manufacturer
车间管理职员
Salary of warehouse 
indirect labour
clerk

Printing and postage  As Sales price is typically based on product cost.
for advertising flyers
外部的费用
Fees paid for annual 
This is a cost plus mark up, for example if the product costs $40 
audit and mark up is 60%:
Glue and nails used in 
a sofa 

Wages of production  $40 cost x (1+60%) = $64
workers

13 14

Different ways of measuring costs Cost Measurement (Manufacturing)
• Three combinations of actual and predetermined rate Traced to
Direct
costs
Actual  Normal  Budgeted  Cost
Cost
object
Costing Costing Costing assignment
Indirect
Direct Actual Actual Pre‐determined costs Allocated to
(DM, DL)
Source: Horngren, Foster & Datar, 1994, p 99
Indirect 
Actual Pre‐determined Pre‐determined
(OH) • Actual rates
Adjust at YE
• DM (used) job callsheet
hybrid
由于一些overhead类似于
• DL (incurred)
rent还没进行，不能获得 • Actual rates for OH? (e.g., electricity used?)
actual时间，所以
需要estimate • Timeliness

15 16

How to Assign Costs ‐ Costing Systems Cost Assignment

Distinct,  Masses of 
identifiable  job order costing 是指顾客所
选定具有特殊要求的商品成本
similar products 
products or  1、只有少数产品，可以追踪 or services
services 每个单独的产品成本情况，
2、即使有成千上万的产品，
只要每种产品有自己的特性， 是指一般类商品，既顾客
可以identify，就可以用job 没有特殊要求的商品。not
Job‐order costing Process identifiable，无法
separate，没有特性
每个job都有自己的
costing jobcallsheet，记录每一步的成 costing 例如果汁，经历crushing－
本，trace popping－bottling，用部门
来记录每一步的成本费用

17 18

3
 Job Order Normal Costing Job Order Normal Costing
根据每个产品所实际使用的各个数量来计算cost
所有信息记录在job callsheet最后追踪 Direct materials
Direct materials
Job #1 Job #1

Actual DM and DL  Direct labour Job #2 间接费用按使用的machine hours

Direct labour Job #2
to each Job 或direct labour hours比例来计算allocation

Job #3 Job #3
Manufacturing  Manufacturing  *Applied OH 
overhead overhead to each job

e.g.) 30% of leather was used to produce LouisBag (Job 1) and  e.g.) LouisBag (Job 1) and ChannelBag (Job 2). How 

the rest was used for ChannelBag (Job 2). (actual)
do we allocate machine depreciation? (assumed)
19 20

19 20

Process costing Process costing
由于是同样的产品 Direct materials
所以根据每个步骤的部门使用的数量来计算cost Department #1 Dr WIP: Dept 2                      
Direct materials Cr WIP: Dept 1
Department #1 crashing Direct labour Department #2 Dr WIP: Dept 2
Cr Various costs
当某一步要增加东西的时候也要做分录
Direct labour Department #2 Finished goods popping Dr WIP: Dept 3                      
这里dep2-dep3中的entry就是add sugar inpopping
Cr WIP: Dept 2
inventory Manufacturing 
Department #3
overhead
Manufacturing  bottling
Department #3 In this system, unit cost is total manufacturing cost (for WIP)
overhead 最后完成果汁生产
finished goods for period divided by units produced during period
– Partly completed units are converted to equivalent units of 
production

21 22 文本

Cost Measurement (Pre‐determined overhead Rate) Normal Costing
• Actual rates:
• Calculating a pre‐determined overhead (OH) rate: • DM
• for the year it is expected that: • DL
• overhead costs will be $45,500
• 50 machine hours will be spent • OH (indirect costs) – Allocated.
• Activity base for OH allocation
• pre‐determined overhead rate: • Such as…
= $45,500 / 50 machine hours Direct Machine Hours
= $910 per machine hour “cost driver”
• Ideally, activity base should be correlated with OH use
Various cost drivers could be used. In the real  • For example, Machine Depreciation => DMH
• Think of a T‐shirt factory: what is the cost driver?
world a company which driver matches to 
actual activity.

23 24

4
 Cost Flows through a manufacturing firm  Normal Costing: Cost Flow
所有的计入成本
Materials acquisition Production Sale
在产品
Raw materials Work‐in‐process Finished goods
Cash inventory inventory inventory COGS

Other asset and Actual

liability accounts Wages
在产品
Applied

*Journal Entries for DM, DL?
Overhead
Dr WIP
Cr RM or Wages Payable
Source: Trotman et al. 2016 textbook 
每年都要将其转出，只是暂时账户，应该0余额
如果余额不为0，说明左右不平衡，有lose或overvalue
26

25 26

Overhead account Applying OH to WIP
e.g.) Pre‐determined OH rate: $910 (per DMH) 
Actual MH: 35 hours    

• Temporary
• No closing balance 
Overhead Control $910 (DMH) x 35 
hours
(must be zero)
31,850

Journal entry to apply pre‐determined overhead:
Dr WIP   31,850
Cr Overhead Control  31,850
28

27 28

Case Study: PowerPooch (See Handout) Case Study: PowerPooch (See Handout)

• PowerPooch receives a special order to make two batches of limited edition HotDogs. • Additional Information (Continued):
• What is the appropriate costing system? (3) Overhead costs are allocated on basis of machine hours
• Processing? Job order? (Batch 1 ‐> 2) • For the period, expected overheads are $45,500 and expected
machine hours are 50. 
• Additional Information (see the question): • Job #1 20 machine hours were spent. (Additional Info 4)
(1) Each dog will be sold at cost plus 60%. • Job #2 15 machine hours were spent. (Additional Info 4)
Total actual machine hours: 35 hours
(2) Raw materials of $11,000 purchased in December.
(4) Raw materials used:     ‐ Job #1 $6,750  Job? Expected overheads and expected machine hours
‐ Job #2 $3,350  Pre‐determined Overhead Rate
Direct labour costs incurred: Normal costing is used
‐ Job #1   14 hours @ $45 per hour Q) What is predetermined overhead rate in the given case?
‐ Job #2    9 hours @ $45 per hour $45,500/50 = $910

30

29 30

5
 Case Study: PowerPooch (See Handout) Part (a) – Journal entries
• Additional Information: (1) Purchase of raw materials on credit.
(2) Raw materials of $11,000 purchased in  Dr Raw Materials 11000
December. Total:  Cr Accounts payable 11000
(4) Raw materials used: ‐ Job #1 $6,750  $6750+$3350=$10100
‐ Job #2 $3,350  (2) Use of Raw materials for Job #1 and Job #2.
Direct labour costs incurred: Dr WIP* 10,100 
‐ Job #1  14 hrs @ $45/hr Total: $1,035 Cr Raw materials 10,100
‐ Job #2   9 hrs @ $45 /hr *where 10,100 = 6,750 (job 1) + 3,350 (job 2)
(a) Provide journal entries to record:
(1) Purchase of raw materials on credit. *Recall: J/E for DM, DL? (3) Record the DL costs incurred on Job #1 and Job #2.
(2) Use of raw materials for the 2 jobs. Dr WIP Dr WIP**  1,035
(3) Direct labour costs incurred. Cr RM or Wages Payable  Cr Wages payable 1,035
**where 1,035 = (14 + 9) x 45

31 32

31 32

Part (a) – Journal entries
Overhead – Normal costing
• Additional Information (Continued):
(3) Overhead costs are allocated on basis of machine hours Overhead Control
• For the period, expected overheads are $45,500 and expected
machine hours are 50.  Actual OH costs OH costs applied to WIP
• Job #1 20 machine hours were spent. (Additional Info 4)
• Job #2 15 machine hours were spent. (Additional Info 4)
31,850
Total actual machine hours: 35 hours

Journal entries: (4) Application of OH to Job #1 and Job #2.
Recall: Pre‐determined OH rate:  $45,500/50 = $910/machine hour
Therefore, allocated overhead control: $910 X 35 hours = $31,850 
Dr WIP*** 31,850
Cr    Overhead control 31,850
***where $31,850 = $910 x 35 machine hours

33

33 34

Part (a) – Journal entries What if Applied OH ≠ Actual OH 

(5) Record actual overheads incurred for December
See Handout, Additional Information (5)! Overhead Control
Dr Overhead Control 30,945 Actual OH costs OH costs applied to WIP
Cr   Rent payable 10,000 30945 31850
Cr   Electricity payable 220
Cr    Acc Depreciation ‐ Equipment 6,725
Cr    Wages payable 14,000
Dr  Cr
Q) Do we need to include SG & A costs when calculating  over‐applied by 905 (31850 – 30945)
cost of goods manufactured?
36

35 36

6
 What About the difference? Remember…
Materials acquisition Production Sale

Raw materials Work-in-process Finished goods

•Actual > Applied (Dr>Cr) Under‐applied Cash inventory inventory inventory COGS

•Applied > Actual (Cr>Dr) Over‐applied

Other asset and
liability accounts Wages
Actual
•The difference may be material or immaterial Applied
Overhead

38

37 38

Immaterial OH difference Material OH difference
If immaterial, adjust COGS If material, adjust WIP, FG, and COGS in a pro rata basis.
Raw materials WIP Finished goods
Dr OH Control 905 Cash inventory inventory COGS

Cr COGS 905
Overhead
Other asset and
liability accounts Wages
30945 31850
COGS  905

31850 31850
Overhead

39 40

39 40

Example of material difference (using different  Back to the PowerPooch Case

data)
Assume, at the end of the year overhead is over‐applied by $5,000.   (Question b) See Handout
WIP applied OH = $5,000  (1) Calculate the overhead variance
FG applied OH   = $15,000 Total:  Applied OH 31,850 Question (a) (4)
$50,000
COGS applied OH = $30,000 Actual OH 30,945 Question (a) (5)
Ending balance of WIP, FG and total value of COGS Over‐applied OH 905
(2) Record disposal of variance (assume immaterial).
Dr Overhead Control 5,000 ‐ Since it’s immaterial, adjust                   ?
Cr WIP (5,000/50,000 * 5,000) 500 Dr Overhead control 905
Cr FG (15,000/50,000 * 5,000) 1,500 Cr   COGS 905
Cr COGS (30,000/50,000 * 5,000) 3,000 *If material…
Material OH variance must be allocated to WIP, FG and COGS on 
Pro‐rata basis a pro rata basis
按比例
41 42

41 42

7
 PowerPooch Case (c) Schedule of Cost of Goods Manufactured
(c) (1) Provide Schedule of Cost of Goods Manufactured. PowerPooch Ltd
Information (4) Schedule of Cost of Goods Manufactured
Job #1 was completed on 21 December  For Month Ended 31 December 2009
Job #2 was still in process at 31 December Direct Materials:
Beginning RM Inventory $ 0
FG manufactured during December? Add: Purchases  (Additional info (2)) 11,000
Job #1 (Cost of FG manufactured) Materials available 11,000
c.f.) Closing FG at the end of December is assumed to be 0  Less: Closing RM Inventory (Additional info 4)900
(special order). 
11,000(purchased) ‐10,100(used) = 900
WIP at the end of December?
Job #2
Direct material used 10,100

43 44

43 44

(c) Schedule of Cost of Goods Manufactured (c) Schedule of Cost of Goods Manufactured
Direct material used (from Q(a)(2)) $10,100 Information (4)
Direct labour (from Q(a)(3)) 1,035 Job #1 was completed on 21 December 
Overheads applied:
Rent  10,000 Job #2 was still in process at 31 December
Electricity 220 FG manufactured during December? Job #1
Depreciation 6,725 WIP at the end of December? Job #2
Indirect labour 14,000
Plus: over‐applied OH 905   31,850
Total manufacturing costs     $42,985
Total manufacturing costs  $ 42,985
Add: Opening WIP 0
Total cost of WIP 42,985
Q) Total manufacturing costs – based on pre‐determined OH rate  Less: Closing WIP (Job 2 – Q(c) table) 17,405
or actual OH costs?  Cost of FG manufactured (Job 1) 25,580
(1) Pre‐determined OH                       (2) Actual OH  

45 46

45 46

(d) Journal entry to record Period Costs.
(c) (2) Cost of Goods Sold
Beginning finished goods inventory  $        0 Cost Classification
Add: Cost of goods manufactured 25,580
Goods available for sale 25,580 Function Behaviour
Less: Closing finished goods inventory 0
Cost of Goods Sold (unadjusted) 25,580 Manufacturing Non‐manufacturing Fixed Mixed Variable
Less: Overapplied overhead  905
Adjusted COGS 24,675
Direct Indirect Selling & Admin
Q) COGS – based on pre‐determined OH rate or 
actual OH costs?   Materials Labour Overhead
Note:
(1) Pre‐determined OH                       (2) Actual OH COGM, COGS
Income Statement

47 48

47 48

8
 (d) Journal entries to record Period Costs (d) Journal entries to record Period Costs

Accounting for SG&A costs
Journal entry? Advertising (85) + Sales Commission (600)

Back to the case (See Handout, Additional info 5): Dr Selling expenses  685

Dr Admin expenses  835
Advertising $  85 Cr Accounts payable 85
Sales commission 600 Cr Wages payable 1,375
Office salaries 775 Cr Acc Depreciation ‐ Office equip 60
Depreciation ‐ Office equipment      60
Total $1,520

49 50

49 50

(e) Prepare Income Statement. Limitations of Product Costing
PowerPooch Ltd
Income Statement
For Month Ended 31 December 2009 Cost plus 60%: • Traditionally overhead cost allocation based on volume measures.
25,580 (unadjusted COGS) x 1.6
E.g. Direct labour hours
• Choice of volume measure important
Sales  $ 40,928*
Less: COGS (Adjusted COGS – see (c)) 24,675 • Variety of methods now in use:
Gross profit 16,253 • Multiple allocation rates
Operating expenses (see question(d))
Selling 685 • DMH for machine, LH for labour
Administrative 835 1,520 • Activity‐based costing (ABC)
Net profit $14,733
• Target costing
Q) Why use “unadjusted COGS” for sales? Set price ‐ when?

51 52

51 52

Next Week’s Lecture is on: 
Budgeting

53 53

53

9
 Workshop Question – Topic 5.1

Case Study – PowerPooch (Job-order costing)

PowerPooch is a private company you established to make robotic dogs. Your first dog was
TechieTerror Terrior (TTT). It was envisioned that your product would meet the desire of
senior citizens and busy individuals to experience the joys of having a pet, without the
associated problems (e.g., providing adequate care).
只有两个产品，所以可以job costing
As it turned out, the TTTs were a runaway success. In fact, a corporate client is
so impressed with TTTs that it places a special order for two batches of limited
edition HotDogs for its highflying executives. These HotDogs will need to be
made separately in December when the factory was originally planned to be shut
down for maintenance.

Additional information:

1) PowerPooch has decided to charge the client cost plus 60% for the HotDogs.
2) Raw materials to the value of $11,000 are purchased at the start of December 文本
3) Expected overhead costs of $45,500 are to be allocated on the basis of machine hours
(estimated at 50 hours for the relevant period).
4) By the end of December Jobs 1 and 2 have involved the usage of the following resources:
DM
DL
Raw Materials Labour hours Machine
($) (at $45/hr) hours
Job #1 6,750 14 20
Job #2 3,350 9 15

Job #1 was completed on December 21, and Job #2 was still in process at December 31.

5) At the end of December you learn that the following costs were actually incurred:

Overhead costs $ SG&A costs $

Rent payable 10,000 Advertising 85
Electricity payable 220 Sales commission 600
Depreciation - equip. 6,725 Office salaries 775
Wages payable 14,000 Depreciation - office equip. 60
INDIRECT L

Total 30,945 Total 1,520

4
 Required:

(a) Provide journal entries to record:

(1) Purchase of raw materials on credit
(2) Use of raw materials for the 2 jobs 直接材料，资产化计入成本 DR WIP CR RM
(3) Direct labour costs incurred 计入在产品成本 dr wip cr wages payable （因为这里capitalised，所以不计exp）
(4) Application of overheads to the 2 jobs 根据machine hours
(5) Actual overheads incurred for December

(1) Dr 11,000
Cr 11,000

(2) Dr 10,100
Cr 10,100

(3) Dr 1,035
Cr 1,035

(4) Dr 31,850 OH = $45,500/50 = $910/machine predetermined

hour 先贷方预测会转出这些
Cr 31,850
$31,850 =$910 * (20 + 15)

(5) Dr oh control 计入资本（借方） 30,945

Cr Rent payable 10,000
actual间接费用实际发生了，可详细计算
Cr Electricity payable 220 借方记录实际成本
Cr Acc. Dep. – Equip. 6,725
Cr Wages payable 14,000

(b) Overhead variance

实际和预估有差额
(1) Calculate OH variance 调整差额
(2) Record its disposal

(1) Applied overhead 预估额 31,850

Actual overhead 30,945
over－applied／under－applied
___________________ Overhead $905

(2) Dr

Cr
if it is material，要三个账户都要调整
* The variance was immaterial!

5
 Total Manufacturing Costs for Each Job

Job #1 (FG) Job #2 (WIP) Total

Direct 6,750 3,350 10,100
material
Direct labour 630 405 1,035
Overheads 18,200 13,650 31,850
Total $25,580 $17,405 $42,985

(c) Provide (for December 2009)

(1) Schedule of Cost of Goods Manufactured
(2) Schedule of Cost of Goods Sold

(1) PowerPooch
Schedule of Cost of Goods Manufactured
For Month Ended 31 December 2009
$ $
Beginning raw materials inventory 0
Add: Purchases
Materials available
Less: Closing Inventory 900
Direct material used
Direct labour
Overhead applied:
Rent 10,000
Electricity 220
Depreciation 6,725
Indirect labour 14,000
Plus: over-applied OH 905 31,850
Total manufacturing costs 42,985
Add: Opening WIP
Total cost of WIP
Less: Closing WIP
Cost of FG manufactured in Dec. 25,580

6
 (2) PowerPooch
COGS Statement
For Month Ended 31 December 2009
Beginning finished goods inv 0
Add: Cost of goods manufactured 25,580
Goods available for sale 25,580
Less: Closing finished goods inv 0
Cost of goods sold (unadjusted)
Less: Over-applied OH
24,675
(d) Provide journal entries to record period costs.

Accounting for period costs:

Dr 685
Dr 835
Cr Accounts payable 85
Cr Wages payable 1,375
Cr Accumulated Depreciation - office equip 60

(e) Prepare Income Statement for the ended month December 2009.

PowerPooch
Income Statement
For Month Ended 31 December 2009

Sales $40,928 *
Less: COGS from (c)
Gross profit 16,253
Operating expenses (from
from (d) above
d):
Selling
Administrative 1,520
Net profit $14,733

* Sales revenue = Unadjusted COGS x 1.60**

=$ x 1.60
= $40,928
** 60% mark-up – cost plus 60% from additional information 1.

7
 Readings

Trotman, Carson & Gibbins (TCG) 
ACCT1511: AFM1B Management Accounting Supplement
• MA5
Budgeting Access to this chapter using the MAC that came with the 
Topic 5.2 textbook. This is an e‐chapters. See the Handout for 
details of how to access.

1 2

Learning Objectives Budgets
LO1 Demonstrate what a budget is and why and how it is used 
• Formal documents that quantify an 
within the organisation. organisation’s plan for achieving its goals
LO2 Understand the importance of behavioural considerations in 
• Expressed in either Physical or Financial terms: 
budget design.
LO3 Describe a master budget and its components.
• E.g., Number of units, $ (Dollar) terms, etc.
LO4 Complete a master budget that includes a sales budget, 
purchases and expenses budget, cash receipts and cash 
give goal towards
payments budget, and budgeted financial statements.
LO5 Identify differences between a static and flexible budget.
LO6 Interpret a flexible budget.

3 4

Benefits of Budgets:

Planning: setting targets or goals
Communication and Coordination: a tangible
means for communication and coordination 
across different departments and managers
Control: evaluate performance based on a 
certain benchmark.

emplyee参与进来

Source: Trotman et al. 2016 textbook 

5 6

1
 Master Budget (manufacturing)
Master budget
• Comprehensive financial plan.

• Set of interrelated budgets. 

• Composed of operating, cash and financial 
statement budgets.

• Budget preparation:

Operating Cash Financial Statements 

Sell/Make            Cash                              F/S

7 8
7

7 8

PowerPooch Case ‐ Information

Which budgets are examinable in 1B? Q) Prepare an operating budget for the 1st quarter of 2010.
(1) Forecasted unit sales:

• You will need to learn how to construct operating  January February March April

budgets only not the Cash budgets and Financial  115 140 150 110
statement budget. Each unit will be sold for $1,100

• However, the concepts regarding the whole budgeting  (2) Closing finished (FG) inventory at the end of the month is to be equal to 

budgeted sales requirement for following month.
cycle, including cash budgets and financial statement  (3) You currently have 75 FG inventory units (no RM or WIP).
budgets are examinable.
(4) Each unit will require $368 of raw materials and 5 hours of direct labour (at 
$35 per hour).
(5) Budgeted variable overhead is $55 per unit.

9 9 10 10

9 10

Powerpooch Case ‐ Information Prepare an Operating Budget!

(6) Fixed overhead is $38,000 per month including $6,250  PowerPooch
depreciation (why is this important?). Overhead allocation  Operating  (e.g., DM, DL, OH..) Budget
based on Direct Labour Hour (DLH). For the Quarter Ended March 31, 2010
January February March Quarter
(7) Sales commission is 2% of (sales) revenue.  Fixed Sales and 
Administration (S&A) overhead is  $2500/month. 1.1为开始，3.31为end
REMEMBER: 
“Beginning” of the Quarter  = Beginning of January
(8) Policy: Ending monthly balance of Raw Materials (RM)  to be  “End” of the Quarter = End of March
$100,  Work in Process (WIP) $0.

Q) We will prepare Sales Budget first. Why? 
*Balance Sheet as at December 31, 2009
11
‐ o/b on 1 January = o/b for the first quarter 2010 11 12 12

11 12

2
 Operating Budgets (Order of Preparation)
(1) Sales Budget (see Handout)
Sales Budget
January February March Quarter

Production budget Sales & Admin Budget Sales

No of Units 115 140 150 405
Selling Price $1,100 $1,100 $1,100 $1,100
Direct materials Direct labour Manu Overhead Sales Revenue $126,500 $154,000 $165,000 $445,500

 Finished Goods (Information 1, see Handout) 
Forecasted sales

  COGS Sales budget completed!
13 14
14

13 14

Sales Budget vs. Production Budget (2) Production Budget April sales 

110
• Can Sales Budget and Production Budget be the same?
If there is no beginning/ending inventory, then yes, but
Production January February March Quarter
what would happen if begin a month with no inventory?
No.of units (sales) 115 140 150 405
Back to the case (see Handout), in January Desired end inv (info 2)140 150 ?? 110 110
• Planned sale is 115 units (Information 1) No.of units needed 255 290 260 515
• Need to have 140 units at the end of Jan (Information 2) less: begin inv 140 150
No.of units produce 255 150 110 515
• Your currently have 75 units (Information 3)
• How many units do you need to produce then?
Production = Sales + End – Beg 115+140
• January? February? March?

15 15 16 16

15 16

(2) Production Budget (3) Direct Materials Budget
Production January February March Quarter
No.of units (sales) 115 140 150 405 From Production Budget
Desired end inv 140 150 110 110 Direct materials January February March Quarter
No.of units needed 255 290 260 515 Units to Produce 180 150 110 440
less: begin inv (info 3) 75 140 150 75 Direct materials/unit (Info 4) $368 $368 $368 $368
No.of units produce 180 150 110 440 Production needs $66,240 $55,200 $40,480 $161,920
Desired end inv. (info 8) $100 $100 $100 $100
Production budget completed! Total needs $66,340 $55,300 $40,580 $162,020
Less: Beg inv. $0 $100 $100 $0
Now need to consider cost of 
DM Purchased $66,340 $55,200 $40,480 $162,020
manufacturing these units! That is,  (info 3 – No beg. RM) 
DM, DL, OH budgets!
Direct Material Budget completed!
17 17 18 18

17 18

3
 (4) Direct Labour Budget (5) Overhead Budget
From Production Budget Remember this for OH allocation
*Remember this for OH allocation (info 6)
Overhead (OH) January February March Quarter
Units to produce 180 150 110 440
Direct labour January February March Quarter Variable OH rate (info 5) $55 $55 $55 $55
Units to produce 180 150 110 440 Budget. var OH $9,900 $8,250 $6,050 $24,200
Direct labour/unit (info 4) 5 5 5 5 Budget fixed OH (info 6) $38,000 $38,000 $38,000 $114,000
Total hours needed 900 750 550 2200 Total OH $47,900 $46,250 $44,050 $138,200
Wage/hour (info 4) $35 $35 $35 $35 Fixed overhead – constant!
Total direct labour $31,500 $26,250 $19,250 $77,000 Overhead Budget completed!
Direct labour budget completed!
19 19 20 20

19 20

(6) S&A Expense Budget (Info 7) Sales commission 2%: 
Selling price per unit of TTT  
(7) Ending Inventory Budget
$1100. $1100 X 2% = $22 
Why do we need ending inventory budget?
‐For COGS budget, you need to know ending FG. Why?
FG(Beginning)+FG(Produced)‐FG(Ending)=Goods Sold!
Selling & Admin January February March Quarter Ending Inventory? (1) Unit cost    (2) No. of units x Unit cost
Planned unit sales 115 140 150 405
Variable S&A/unit $22 $22 $22 $22 Ending inventory
Total variable costs $2,530 $3,080 $3,300 $8,910
Fixed S&A ( info 7) $2,500 $2,500 $2,500 $7,500 Direct materials $368 (info 4)
Total $5,030 $5,580 $5,800 $16,410 Direct labour $175 (info 4) 5hrs x $35
OH:
Variable $55 (5)
S&A Expense Budget completed! Fixed ?
Total unit cost
21 21 22 22

21 22

(7) Ending Inventory Budget (7) Ending Inventory Budget
For the Quarter Ended March 31 2010
Ending inventory

Direct materials $368 (4) Rounded Units Unit cost Total

Direct labour $175 (4) 5hrs x $35 RM $100
(info 8) $100
OH: WIP (info 8) $0 $0
Variable $55 (5) Pre‐det. rate =  Finished Goods 110 units $857 $94,270
$114000/2200hr
Fixed $259 (Q4&5)  Total Inventory $94,370
Total unit cost $857 = $51.82/unit 
From Production Budget 
Rounded Product Units Unit cost Total
$51.82 x 5hrs
(desired ending inventory)
≈$259
RM
WIP
Finished goods:
23 23 24 24

23 24

4
 (8) COGS Budget (8) COGS Budget
Info 3
Add: Opening WIP $0
Beg. Raw Materials Inventory 0 Total cost of WIP $377,120
Info 8
Q 3 Add: Purchases $162,020 Less: Closing WIP $0
DM  Material Available $162,020 Cost of FG Manufactured $377,120
Budget
Less: Closing RM Inventory $100
Beginning finished goods B/S 65,300
Q 4
Direct materials used $161,920
DL
Direct labour used $77,000 Goods available for sale $442,420
Budget
Q 5 Overhead $138,200 Less: End finished goods Q7 $94,270
OH  Budgeted manu costs $377,120 Budgeted COGS $348,150
Budget
Add: Opening WIP $0
COGS Budget completed!
卖出数
25 25 26 26

25 26

Behavioural Aspects
Accounting Numbers –> Used to Motivate Employees
Behavioral aspects of budgeting  让员工参与到budget制定

• Goal congruence (between managers and employees)
• Clearly‐defined responsibilities and accountability
• Controllability: over items/ areas that are responsible/accountable for
• Flexibility: what if the plan changes?  give bonus based on what they can control
管理者自身管理范围中根据成果给予bonus

• Budget preparation:
• Participative
• Achievable
• Slack?
27 27

27 28

What is Myopia? 只设定短期目标 What is slack creation? budget定的太低

• Short‐termism ‐ “Managerial myopia” is a  • Where a manager deliberately underestimates budgeted 

revenue or over‐estimates budgeted expenses such that it 
tendency for publicly listed firm managers to  makes it easier to achieve the budgeted targets. 
favour short‐term profits over long‐term gains. 
• The manager may receive bonuses or performance appraisals 
• An individual, manager, employee, may favour  if they achieve the budgeted numbers – so creating slack is a 
short‐term goals over longer‐term gains. way of comfortably achieving the target.
SETS LOW/EASY EASILY MEETS
BONUS OR SHORT‐TERM BUDGET
TARGET FOCUS TARGET &
TARGET GETS BONUS/REWARD
SHORT‐TERM

将时间拉长，例如同意CEO根据五年后的share price 获得bonus，这样ceo就必须take risk 保证5未来sp

29 30

5
 What is goal congruence? 一致 Budget Analysis in 1B:
• The result of the alignment of goals to achieve an overarching mission. 
• A failure of goal congruence (or lack of goal congruence) occurs when a 
• Variance Analysis – Compare Actual vs Budget
manger is induced by a business control system to do something that is  • Flexible Budgets
not in the best interests of the company as a whole.  文本
• The individual could be a manager of a business segment or a franchise, 
their incentive is to obtain their bonus may cause them to act in a way that 
is inconsistent with the company’s goals.
Company Store
Division Manager

31 32

Variance analysis – Actual versus Budget Flexible Budget for different production levels

Source: Trotman et al. 2016 textbook 

Source: Trotman et al. 2016 textbook 

33 34

Flexible Budget Actual versus Flexible Budget at actual units
Flexible Budget compared to Actual, with Static Budget
Outside 
the scope 
of 1B

Source: Trotman et al. 2016 textbook  Source: Trotman et al. 2016 textbook 

35 36

6
 Performance reporting – whole firm using Flexible budget
Outside 
Next Week’s Lecture:
the scope 
of 1B

Source: Trotman et al. 2016 textbook 

37 38

7
 Workshop Question - Topic 5.2

Case Study: PowerPooch Operating Budget

PowerPooch has performed brilliantly up to December 31, 2009. However, you know
that without some serious planning and budgeting it may not reach the heights it is
capable of in 2010. The following information is relevant to the operating budget for
TTTs for the next quarter1:
(1) Forecasted sales:
• 115 units in January
• 140 in February
• 150 in March
• 110 in April
100% desirable inv,每一期的余额是下期的budget额，所以肯定能实现
Each TTT will be sold for $1,100.
(2) Closing inventory at the end of the month is to be equal to the budgeted sales amount
for the next month.
(3) You currently have 75 finished units in inventory (no Raw Materials or WIP). o／b＝0
(4) Assume that each TTT will require $368 of raw material and 5 hours of direct labour
dm budget dl budget
($35/hour).
overhead budget
(5) It is estimated that variable overhead will be $55 per unit.
(6) Fixed overhead is estimated at $38,000 per month. This figure includes $6,250 monthly
depreciation expense. The activity used to allocate overhead is direct labour hours. overhead allocation
(7) Sales commission is 2%, to be paid in the month following sale. Fixed selling and
从20101月才有
end 100.所以 administration expenses are expected to be $2,500 a month.
期初为0 (8) From January 2010 the policy is to have a monthly ending balance of $100 of Raw
Materials on hand, and no ending WIP.
PowerPooch's balance sheet is below:
PowerPooch
Balance Sheet
As at December 31 2009
$ $ $ $
Current Assets Current Liabilities
Bank 255,000 Trade creditors 46,000
Trade debtors 49,600 Accrued expenses 0
ending 46,000
Inventory 65,300
369,900
Non-current Assets Shareholders' equity
Machinery 300,000 Share capital 600,000
Acc. Depn (18,750) Retained profits 5,150
281,250 605,150
Total Assets 651,150 Total Liabilities & 651,150
Equity

1 To keep things simple we will ignore the impact of special December job (HotDogs) on the budget.

8
 Required:
Prepare a (1) sales budget, (2) production budget, (3) direct materials budget, (4) direct
labour budget, (5) overhead budget (6) S&A expense budget, (7) ending inventory
budget, and (8) COGS budget.

PowerPooch
(1) Sales Budget
For the Quarter Ended March 31, 2010
January February March Quarter
No. of Units 405

Selling Price X $1,100 $1,100 $1,100 $1,100

Sales Revenue $126,500 $154,000 $165,000 $445,500

PowerPooch
(2) Production Budget
For the Quarter Ended March 31, 2010
January February March Quarter
No. of Units (planned sale) 115 140 150 405
即下期budget Desired ending inventory 期末是3.31
(31st March)
No. of units needed 290 260 515

Less: beginning inventory 140 150 quater的期初是1.1

(1st Jan)
No. of Units to Produce t型账户求出180 150 110 440

PowerPooch
(3) Direct Materials Budget
For the Quarter Ended March 31, 2010
January February March Quarter
No. of Units to Produce 150 110 440
Cost of direct materials/unit $368 $368 $368
＊ Cost of production needs $66,240 $55,200 $40,480 $161,920
＋ 花了多少materia（贷方）l
Desired end inventory $100 $100 $100 $100
st
(31 March)
Total cost of direct materials $66,340 $55,300 $40,580 $162,020
needed
Less: Beginning inventory $100 $100 $0
st
(1 Jan)
Direct materials purchased 求借方 $66,340 $55,200 $40,480 $162,020
policy中说无期初raw material

9
 PowerPooch
(4) Direct Labour Budget
For the Quarter Ended March 31, 2010

January February March Quarter

No. of units to produce 150 110 440
Direct labour hours/unit 5 5 5
Total hours needed 900 750 550 2200
Wage/hour $35 $35 $35
Total direct labour cost $31,500 $26,250 $19,250 $77,000
budgeted

PowerPooch
(5) Overhead Budget
For the Quarter Ended March 31, 2010

January February March Quarter

No. of units to produce 180 150 110 440
Variable OH rate/unit $55 $55 $55
Budgeted Variable OH $9,900 $8,250 $6,050 $24,200
costs
Budgeted fixed OH costs $38,000 $38,000 $114,000
Total OH costs budgeted $47,900 $46,250 $44,050 $138,200

PowerPooch
(6) Selling and Admin Budget
For the Quarter Ended March 31, 2010

January February March Quarter

Planned no. of units (for 115 140 150 405
sale) motivation to seller
Variable S&A cost/unit X $22 $22 $22 $22
$1100 x 2%
Total variable costs $2,530 $3,080 $3,300 $8,910
Fixed S&A costs $2,500 $2,500 $7,500
Total S&A costs budgeted $5,030 $5,580 $5,800 $16,410

10
 PowerPooch
(7) Ending inventory (Unit Cost Calculations) Budget
For the Quarter Ended March 31, 2010

Direct materials $368

Direct labour $175 5hrs x $35
OH:
Variable $55
DLH Fixed
Total unit cost 求出单个unit的总成本，最后只要乘数量就可得

Product Inventory Units Unit cost Total

Raw Materials
WIP
Finished Goods
Total Inventory 将raw material和finished goods，wip都记
在inventory里
但有的公司会分开

PowerPooch
(8) Cost of Goods Sold Budget
For the Quarter Ended March 31, 2010

Beg. Raw Materials Inventory $0

Add: Purchases $162,020
Material Available $162,020
Less: Closing Raw Materials $100
Direct materials used $161,920 前面得出的用了多少dm
用的多少dl
Direct labour used $77,000
Overhead $138,200
Budgeted manufacturing costs $377,120
Add: Opening WIP $0
去除掉wip用的成本
Total cost of WIP $377,120
Less: Closing WIP $0
Cost of FG Manufactured $377,120
Beginning finished goods
Goods avail for sale $442,420
Less: End finished goods
Budgeted COGS

11
 Tutorial Questions – Topic 5

Q1: Saint Lucia Ltd builds custom luxury yachts. Each yacht is tailored to the individual
customer and can range in sales price depending on the specifications of the customers.
During the year Saint Lucia Ltd had three yachts in their production line, these were
recorded as being Job #88, Job #89 and Job #90.
Job# Direct Materials Used Direct Labour costs
(at $35 per hour)
88 $4,380 $7,000
89 $3,500 $14,000
90 $7,990 $21,000

The overhead allocation rate used by Saint Lucia Ltd is based on direct labour hours. The
direct materials is $20 per kilogram. The budgeted overhead for the period was $6,500
based on a budgeted 1,000 direct labour hours for the period. There was an opening
balance of $3,200 in the direct materials account.

The following transactions occurred during the period:

• Direct materials purchased on credit $12,870

• Advertising expense $1,500
• Depreciation expense on factory equipment $1,200
• Office supplies $760
• Factory supervisor’s salary $4,230
• Indirect materials purchased on credit $890
• Office salaries $5,000
• Insurance expense on factory $1,800
• Depreciation on office equipment $780

During the period Job #88 was finished and sold, Job #89 was finished only, Job #90 was
still in process at the end of the period. Saint Lucia Ltd uses a single work-in-process
account for all jobs and uses a normal costing system with the cost driver being direct labour
hours.

Required:

(1) Record the purchase on credit of direct materials:

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 (2) Record the direct materials used for Jobs #88, #89 and #90.

(3) Record the direct labour used for Jobs #88, #89 and #90.

(4) Record the overhead applied to Jobs #88, #89 and #90.

(5) Record the actual overheads for the period:

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 (6) Prepare the OH Control T-account and calculate the amount of OH variance for the
period.
Overhead Control

(7) Assume that for this company the OH variance is treated as being immaterial, record
the journal entry to dispose of the OH variance.

(8) Jobs #88 and #89 where finished during the period. Record the journal entry to
transfer these two jobs to finished goods.

(9) Job #88 was sold on credit during the period. Record the journal entry for this sale,
where Saint Lucia Ltd uses a 1888% mark-up on all its luxury yachts sold and round
to the nearest dollar the sales amount.

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 (10) Prepare the Schedule of Cost of Goods Manufactured for Saint Lucia Ltd for the
period ended December 31, 2026. Assume at the start of the period Beginning raw
materials was $6,000, Beginning work-in-process balance was zero, Ending work-in-
process balance contained Job #90.

(11) Prepare the Cost of Goods Sold budget for Saint Lucia Ltd for the period
ended December 31, 2026. Assume beginning finished good inventory was zero.
Ending finished goods inventory included Job #89.

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 (12) Provide the journal entry to record the period costs.

(13) Prepare the Income statement for the period ended 31 December 2026.

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 Q2: Adapted past exam question 2013, sem 1 and (M3.3 5th edition of Trotman et al.)

QClub Limited manufactures tags called ZUTIE for luggage with GPS tracking. During the
month of May, the following occurred. QClub uses a normal job costing system.
Required:

(1) Prepare the journal entries for the above events. (1 mark per journal entry).

(a) Raw materials were purchased for cash of $25,000.

(b) Raw materials totalling $10,000 were requisitioned for use in production

(c) Direct labour for the month was $8,850 with an average wage of $8.50 per hour

(d) Factory overhead is to production at the rate of $7 per machine hour and the ZUTIE
tags produced in the period took a total 1,000 actual machine hours.

(e) Actual overhead included factory rent of $4,500, factory electricity costs of $1,500
and depreciation on factory equipment $800.

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 (f) Completed units costing $22,000 were transferred to finished goods. (Note: of the tag
manufactured during the period, $3,850 worth of partially completed ZUTIE tags
remained in work-in-process).

(g) A total of 2,000 ZUTIE tags with manufacturing cost of $20,000 were sold on credit
with a mark-up of 400%. (Note: $2,000 of ZUTIE tags remained unsold).

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(2) Determine whether overhead was under- or over-applied for the period and
complete the T-account for Overhead (1 mark).
Overhead Control

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 (3) Calculate the ending balances of the following accounts: Raw Materials, Work in
progress and Finished goods (1 mark each). The following beginning balances are
provided: Raw materials $5,170, Work in progress $11,150, and Finished goods $0.

Raw Materials

Work in progress

Finished Goods

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 (4) Assume that the overhead variance was treated as material and write the journal entry
for the reconciliation of overhead costs from part (2) and COGS for this period is $20,000
(1 mark). (Hint: round to the nearest whole dollar).

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(5) Given we know the actual overhead costs at the end of May, explain why do we have to
reconcile the actual OH with the expected OH costs at the end of June? (1 mark)

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 Q3: Adapted from past exam question sem 2, 2007 and M3.6 Trotman et al.

Qintex Company had the following information for the year 2019:

$
Labour:
Direct labour costs (25,000 hours) 175,000
Indirect labour 35,000
Materials:
Inventory, 1 Jan 2019 25,000
Purchases on credit 200,000
Direct materials issued 190,000
Indirect materials issued 10,000
Other factory overhead costs:
Depreciation 55,000
Maintenance of factory equipment 25,000
Miscellaneous factory expenses 15,500
Work in progress
Opening inventory 110,000
Closing inventory 80,250

Qintex Company uses a predetermined overhead rate based on direct labour hours. The
rate for 2019 was $5.20 per direct labour hour.

(a) Determine the overhead that is to be applied for 2019 and the journal entry:

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(b) Provide the T-account for Overhead and determine whether overhead was under- or
over-applied for the period.

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 (c) Prepare a statement of cost of goods manufactured.

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(d) In the cost of good manufactured statement which overhead, actual or applied, is
used and provide an explanation of why use that overhead?

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 Q4: Adapted from Past exam question, 2008, sem 2

Lulu Ltd is a manufacturer of luxury sport life-style products, including reversible yoga mats
made of rubber and treated with an antibacterial chemical called amirco. While the company
performed beyond expectations in the last financial year, Lexi Youi, the managing director of
Lulu Ltd., is worried about the ever-increasing price of raw materials and its effect on the
company’s profit margin and Lexi Youi has asked you to prepare some budgets.

On 30 June 2029, Lulu Ltd had finished goods inventory of 4,500 yoga, $10,920 worth of raw
materials (comprising $10,920 rubber, but zero balance of amirco), and Accounts Receivable
totalling $2,500,000 (net of bad debts). Gross profit for the period ending 30 June 2008 was
$14,350,000.

The company plans to increase its mark-up policy to 500% in order to cater for the expected
increase in the price of raw materials. The selling price therefore is expected to be $102 per
mat for the next quarter. The expected sales for the next 4 months are:

July 45,000 mats

August 50,000 mats
September 60,000 mats
October 65,000 mats

Lulu Ltd. has a policy of setting its finished goods inventory level at the end of each month to
equal 10% of the next month’s budgeted yoga mat sales. All yoga mats that are started in
production during the month are completed, i.e. there is a zero work-in-process balance at the
end of each month.

Each yoga mat requires 2 metres of rubber and 1 litre of amirco. Direct labour is projected to
be 0.5 hours per production of yoga mat, and a cost of $20 per hour for direct labour wages.
Rubber cost $2.50 per metre, and amicro is $1 per litre. The company ends each month with
enough rubber to cover 12% of the next month’s production requirements in case of rubber
shortages; the amirco, however, is all used up each month. Lulu Ltd’s variable OH rate is $3
per unit and budgeted fixed OH is $10,000 per month. The overhead driver is direct labour
hours.

Required:

1. Prepare a Sales budget for the quarter ended September 2029.

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 2. Prepare a Production budget for quarter ended September 2029.

3. Prepare a raw materials purchases budget for rubber for the months of July and
August (inclusive).

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 4. Prepare a direct labour budget for quarter ended September 2029.

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5. Prepare an Overhead budget for quarter ended September 2029.

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 6. Prepare an Ending Inventory Budget and include Unit Cost Calculations.

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 Q5: Behavioural dimensions of budgeting - Based on M5.18 Trotman et al. 6th edition

Rob Harrington, is the manager of the Sydney division for Angel One Ltd, this company
provides funding to technology start-ups in the form of micro-loans (which are charged at lower
rates of interest as an equity position is usually taken in the start-up) as well as renting co-
working spaces to start-ups. The Sydney division is treated as a profit centre by Angel One
Ltd. Whereby, Rob is evaluated and rewarded on the basis of budgetary performance of the
Sydney division. Rob and has an investments team at the division called the Talent-Scouts,
and three managers who each manage one co-working space, know as: Blue, Green and
Yellow. The three co-working spaces are spread across the Sydney CBD. Both the Talent-
Scouts and managers of the co-working spaces all eligible to receive a bonus if actual
divisional profits are between budgeted profits and 170 per cent of budgeted profits. The
bonuses are based on a fixed percentage of actual profits. Profits above 170 per cent of
budgeted profits earn a bonus at the 170 per cent level (in other words, there is an upper limit
of possible bonus payments). If the actual profits are less than budgeted profits, no bonuses
are awarded. Now consider the following actions taken by Rob:

(a) Rob tends to overestimate expenses and underestimate revenues. This approach
facilitates the ability of the division to attain budgeted profits. Rob believes the action
is justified because it increases the likelihood of receiving bonuses and helps to keep
the morale of the Talent-Scouts and managers high.

(b) Suppose that towards the end of the fiscal year, Rob saw that the division would not
achieve budgeted profits. Accordingly, he instructed the three managers of the co-
working spaces to defer recognising the revenue earned on the rent of the co-working
spaces to the following fiscal year. He also decided to write off some of the funding
loans that are was nearly worthless due to failed start-ups and the equity portions from
those investments as well. Deferring the rental revenues to next year and writing off
the loans and equity in a non-bonus year increases the chances of a bonus for next
year.

(c) Assume that towards the end of the year, Rob saw that actual profits would likely
exceed the 170 per cent limit. He takes actions similar to those described in (b).

Required: Considering Rob’s actions above and answer the questions below:
Discuss which of the following are being demonstrated in (a), (b) and (c): goal
congruence, slack creation, myopia (3 marks):

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 Incentive: explain why Rob might be behaving in this way (1 mark):

Dysfunction: what is the possible unintended outcome (1 mark):

Your Suggested Solution (1 mark):

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 Q6:
(1) Consider LUXE factory, it manufactures 1,000 identical hand-bags per month called
the VUX bag. Which costing system, job-costing or process-costing and provide a
reason why?

(2) You are invited by the CEO of LUXE, Sabrina Jones, on a tour of the LUXE factory.
On this tour notice that the manufacturing process in the factory is almost entirely
performaned by machines. There are only one or two humans supervising the
machines, fixing them where needed and inspecting VUX hand-bags going through
the process. Sabrina ask you which of the following activity drivers would be most
appropriate to allocate the overhead costs out of the following: direct labour hours,
direct labour dollars or machine hours? Provide a reason for your chosen cost driver.

(3) The CEO Sabrina says that she is thinking of expanding her operations because of
strong demand for the VUX hand-bag and has been approached by several retailers
to increase her company’s product offering. If she accepts the additional contract,
this will change the factory’s manufacturing to produce 6 different types of handbags.
These hand-bags would be produced in batches of 1,000 handbags each and would
have identifiably different styles, such as top handles, long strap handles and clutch.
Sabrina asks you which of the following costing systems would be most suitable for
this expanded factory: process or job costing? Provide a reason for your chosen
costing system.

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