Question Compilation Management Accounting

Q1. The balance sheet of a company as of 31st Chaitra last year is given below;

Liabilities Rs Assets Rs
Share Capital 600,000 Inventory
Profit and Loss Ac 60,000 Finished Goods (5,000 units @ 150,000
Sundry Creditors 120,000 Rs 30 per unit)
Outstanding Expenses 120,000 Raw Materials 55,000
(11,000 units @ Rs 5 per unit) 480,000
Sundry Debtors 21,000
Cash 100,000
Investment 94,000
Fixed Assets
Total 900,000 Total 900,000

The purchase and sales estimates are:

Months Baishak Jestha Ashad Shrawan
Sales in Units 10,000 12,000 14,000 12,000
Sales Revenue 400,000 480,000 560,000 480,000
Purchases 120,000 130,000 130,000

20% of the sales are on cash and the balance on credit. All credit sales are collected in the month following the sales. All
purchases are paid on the following month of purchase. The time lag on wages and expenses are ½ month. Non-manufacturing
overhead are payable on the month of their being due. The expenses for 3 months are as under.

Months Baishak Jestha Ashad

Wages and Expenses Rs 220,000 Rs 260,000 Rs 260,000
Non-manufacturing Overhead Rs 100,000 Rs 119,220 Rs 140,000

The company’s policy is to have enough ending inventory of finished goods each month to fill 50% of the following month’s
sales need. The company has been thinking to buy a machine in the month of Baishak at a cost of Rs 150,000. The company
keeps minimum cash balance of Rs 20,000. Cash deficiencies are made up by bank loan. All borrowings are to be assumed as
borrowed on the first day of month and all payments are to be paid on the last day of the month. The interest rate is 12% per
annum and is payable with the principle to the extent of refund of the principle.
The company issued additional share capital of Rs 100,000 in Jestha and in the same month, the company also received interest
amounting Rs 3000 from investment.

Required:
i. Production Budget for 3 months ending Ashad
ii. Cash Budget
iii. Budgeted Income Statement
iv. Budgeted Balance Sheet

Q.2 Janus Products, Inc. is a merchandising company that sells binders, paper and other school supplies. The company is planning its
cash needs for the third quarter. In the past, Janus Product has had to borrow money during the third quarter to support peak sales
of back-to-school materials, which occur during August. The following information has been assembled to assist in preparing a
cash budget for the quarter.

a. Budgeted monthly absorption costing income statements for July-October are as follows;

July August September October

Sales $40,000 $70,000 $50,000 $45,000
Cost of Goods Sold 24,000 42,000 30,000 27,000
Gross Margin 16,000 28,000 20,000 18,000
Selling and Administrative Expenses
- Selling Expenses 7,200 11,700 8,500 7,300
-Administrative Expenses* 5,600 7,200 6,100 5,900
Total Selling and Administrative Expenses 12,800 18,900 14,600 13,200
Net Operating Income 3,200 9,100 5,400 4,800

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 Question Compilation Management Accounting

b. Sales are 20% for cash and 80% on credit.

c. Credit sales are collected over a three-month period with 10% collected in the month of sales, 70% in the month following
sales, and 20% in the second month following sales. May sales totalled $30,000 and June Sales totalled $ 36,000.
d. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid in the month of
purchase. The remaining 50% is paid in the following month. Accounts payable for inventory purchases at June 30 totals
$11,700.
e. The company maintains its ending inventory levels at 75% of cost of the merchandize to be sold in the following month. The
merchandize inventory at June 30 is $18,000 (Hints: Merchandize Purchase = Cost of Goods Sold + Ending Inventory –
Beginning Inventory)
f. Land costing $4,500 will be purchased in July.
g. Dividends of $1000 will be declared and paid in September.
h. The cash balance on June 30 is $8000; the company must maintain a cash balance of at least this amount at the end of each
month.
i. The company has an agreement with a local bank that allows it to borrow in increments of $1000 at the beginning of each
month, up to a total loan balance of $40,000. The interest rate on these loans is 1% per month, and for simplicity, we will
assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at
the end of each quarter.

Required

i. Prepare a schedule of expected cash collection for July, August, and September, and for the quarter in total.
ii. Prepare the merchandize purchase budget ((Hints: Merchandize Purchase = Cost of Goods Sold + Ending Inventory –
Beginning Inventory)
iii. Prepare a cash budget for July, August, and September and for the quarter in the total.

Q.3. The following data relates to products produced in a department:

Product x Product y
Unit Selling Price Rs. 20 Rs. 30
Unit Variable Cost Rs. 16 Rs. 21
Labor Hours 3 4
Machine Hours 2 3
Additional Information

i) Available machine hours for the products are 78,000/-

ii) All other production inputs other than machine hours are not scarce.
Required:
a) Allocation of machine hours between the products to yield highest possible net income when product mix is
insignificant. Show computation for your decision.
b) Allocation of machine hours, when product mix is 7:4.
c) Allocation of machine hours, when product mix 4:7.
d) Which of these product mix should be pushed for maximum profit?

Q.4. Angie Silva has recently opened The Sandal Shop in Brisban, Australia, a store that specializes in fashionable sandals. Angie has
just received a degree in business and she is anxious to apply the principles she has learned to hear business. In time, she hopes 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 expenses per pair of sandals 16
Contribution margin per pair of sandals $24
Fixed Expenses per year
- Building rentals $15,000
- Equipment depreciation 7,000
- Selling 20,000
- Administrative 18,000
Total Fixed Expenses $60,000

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 Question Compilation Management Accounting

Required

1. How many pairs of sandals must be sold each year to break even? What does this represent in total sales dollar?
2. Prepare CVP graph for the store from a zero level of activity up to 4,000 pairs of sandals sold each year. Indicate the break-
even point on your graph.
3. Angle has decided that she must earn at least $18,000 the first year to justify her time and effort. How many pairs of sandals
must be sold to reach this target profit?
4. Angie now has two sales persons working in the 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 to an additional
$25,000 in sales each year. Should she convert the position? Use the incremental approach (Do not prepare an income
statement)

Q.5. Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $ 50 per unit. Variable
expenses are $32 per stove and fixed expenses associated with the stove total $108,000 per month.

Required

1. Compute the breakeven points in number of stove and in total sales dollars.
2. If the variable expenses per stove increase as percentage of the selling price, will it result in a higher or lower break-even
point? Why? (Assume that fixed expenses remain unchanged.)
3. At present, the company is selling 8,000 stove per month. The sales manager is convinced that a 10% reduction in the selling
price would result in a 25% increase in monthly sales of stoves. Prepare two contribution income statements, one under present
operating conditions and one as operations would appear after the proposed change. Show both total and per unit data on your
statement.
4. Refer to the data in (3) above. How many stoves would have to be sold at the new selling price to yield a minimum net
operating income of $35,000 per month?

Q.6. Due to erratic sales of its product- a high-capacity battery for laptop computers- PEM, Inc has been experiencing difficulty for
some time. The company’s contribution format income statement for the most recent month is given below;

Sales (19,500 units @ $30 per unit) $585,000

Less: Variable expenses 409,500
Contribution Margin 175,500
Less Fixed Expenses 180,000
Net Operating Income ($ 4,500)
Required

1. Compute the company’s CM ratio and its breakeven point in both units and dollars.
2. The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by sales
staff, will result in an $80,000 increase in monthly sales. If the president is right, what will be the effect on the company’s
monthly net operating income or loss? (Use the incremental approach in preparing your answers.)
3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase
of $60,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income
statement look like if these changes are adopted?
4. Refer to the original data. The marketing department thinks that a fancy new package for the laptop computer batter would
help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many
units would have to be sold each month to earn a profit of $9,750?
5. Refer to the original data. By automating, the company could reduce the variable expenses by $3 per unit. However, the fixed
expenses would increase b $72,000 each month.
a. Compute the new CM Ratio and the new break-even point both units and dollars.
b. Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one
assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as
well as in total for each alternative)
c. Would you recommend that the company automate its operations? Explain

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 Question Compilation Management Accounting

Q.7 Nepal Beverage Limited produces a single product which is sold in cases. The Normal capacity, on which the manufacturing fixed
overhead absorption is based, is 36,000 cases. Data for the year 2008 were as follows;
Production 40,000 cases
Sales 32,000 Cases
Selling Price Rs 60
Manufacturing cost per case:
Direct material Rs 14
Direct Labor Rs 12
Variable Overhead Rs 8
Fixed Overhead (Budgeted & Incurred) Rs 2,16,000
Selling & Administrative Costs
- Fixed Rs 50,000
- Variable 15% of sales
There was no opening stock of finished goods and you are required to;
a) Prepare the income statement under both variable and absorption costing methods
b) Reconcile the profit if there is any difference in profits.

Q.8. Balen company manufactures and sells a single product. Cost data for the product follow:

Variable Cost Per Unit

Direct Materials 8
Direct Labor 12
Variable Factory Overhead 4
Variable Selling and Administrative 6
Total Variable Costs Per Unit 30
Fixed Cost Per Month
Fixed Manufacturing OH 240,000
Fixed Selling and Administrative 180,000
Total Fixed Cost Per Month 420,000
The product sells for $50 per unit. Production and sales data for May and June, the first two months of operations are as follows;

Units Produced Units Sold

May 30,000 26,000
June 30,000 34,000
Income statements prepared by the accounting department, using absorption costing, are presented below:

May June
Sales 1,040,000 1,360,000
Cost of Goods Sold 780,000 1,020,000
Gross Margin 260,000 340,000
Selling and Administrative Expenses 258,000 282,000
Net Operating Income 2,000 58,000
Required:
i. Determine the unit product cost under
a. Absorption Costing
b. Variable Costing
ii. Prepare contribution format variable costing income statements for May and June
iii. Reconcile the variable costing and absorption costing net operating incomes.

Q.9. Jackson County Senior Services is a nonprofit organization devoted to providing essential services to senior who live in their own
homes within the Jackson County area. Three services are provided for seniors- home nursing, Meals on Wheels, and
Housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform
tests ordered by their physicians. The Meals on Wheels program delivers a hot meal once a day to each senior enrolled in the
program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for
the past year below;

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 Question Compilation Management Accounting

Total Home Nursing Meals on Wheels House-Keeping

Sales 900,000 260,000 400,000 240,000
Variable Expenses 490,000 120,000 210,000 160,000
Contribution Margin 410,000 140,000 190,000 80,000
Fixed Expenses
Depreciation 68,000 8,000 40,000 20,000
Liability Insurance 42,000 20,000 7,000 15,000
Program Administrator's Salaries 115,000 40,000 38,000 37,000
General Administrative OH* 180,000 52,000 80,000 48,000
Total Fixed Expenses 405,000 120,000 165,000 120,000
Net Operating Income (Loss) 5,000 20,000 25,000 (40,000)

* A common fixed cost that is allocated on the basis of sales dollars

The head administrator Jackson County Senior services, Judith Miyama, is concerned about the organization’s finances and
considers the net operating income of $5000 last year to be too small. (Last year’s results were very similar to the results for
previous years and are representative of what would be expected in the future). She feels that the organization should be building
its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms.
Miyama asked for more information about the financial advisability of discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If
the program were discontinued, the van would be donated to a charitable organization. Depreciation charges assume zero salvage
value. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability
insurance and the salary of the program administrator would be avoided.

Required

i. Should the housekeeping program be discontinued? Explain. Show the computations to support your answer.
ii. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of
the various services.

Q.10. Chapter Sports Equipment manufactures round, rectangular, and octagonal trampolines. Sales and expenses data for the past
month follow:
Trampoline
Total Round Rectangular Octagonal
Sales 1,000,000 140,000 500,000 360,000
Variable Expenses 410,000 60,000 200,000 150,000
Contribution Margin 590,000 80,000 300,000 210,000
Fixed Expenses
Advertising-traceable 216,000 41,000 110,000 65,000
Depreciation of special equipment 95,000 20,000 40,000 35,000
Line Supervisors' Salaries 19,000 6,000 7,000 6,000
General Factory Overhead* 200,000 28,000 100,000 72,000
Total Fixed Expenses 530,000 95,000 257,000 178,000
Net Operating Income (Loss) 60,000 (15,000) 43,000 32,000
* A common fixed cost that is allocated on the basis of sales dollars
Management is concerned about the continued losses shown by the round trampolines and wants a recommendation as to whether
or not the line should be discontinued. The special equipment used to produce the trampolines has no resale value. If the round
trampoline model is dropped, the two-line supervisors assigned to the model would be discharged.
Required:
1. Should production and sale of the round trampolines be discontinued? The company has no other use for the capacity now
being used to produce the round trampolines. Show computations to support your answers.
2. Recast the above data in a format that would be more useful to management in assessing the profitability of the various product
lines.

Q.11. Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to
provide the ink cartridge for the company’s zippo pen line, at a price of $0.48 per dozen cartridges. The company is interested in
this offer because its own production of cartridges is at capacity.
Bronson Company estimates that if the supplier’s offer were accepted, the direct labour and variable manufacturing overhead costs
of the Zippo pen line would be reduced by 10% and the direct material cost would be reduced by 20%.

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 Question Compilation Management Accounting

Under the present operations, Bronson Company manufactures all of its own pens from start to finish. The zippo pens are sold
through wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the zippo
pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of
producing one dozen zippo pens (one box) is given below:

Direct Materials $1.50

Direct Labour 1
Manufacturing Overhead 0.80*
Total Cost $3.30
*Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year.
Required
i. Should Bronson Company accept the outside supplier’s offer? Show computations.
ii. What is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges?
Explain
iii. What qualitative factors should Bronson Company consider in determining whether it should make or buy the link
cartridges?

Q.12. Boyle’s Home Center, a retailing company, has two departments. Bath and Kitchen. The company’s most recent monthly
contribution margin format income statement follows:
Department
Total Bath Kitchen
Sales 5,000,000 1,000,000 4,000,000
Variable Expenses 1,900,000 300,000 1,600,000
Contribution Margin 3,100,000 700,000 2,400,000
Fixed Expenses 2,700,000 900,000 1,800,000
Net Operating Income (Loss) 400,000 (200,000) 600,000
A study indicates that $370,000 of the fixed expenses being charged to the Bath Department are sunk costs or allocated costs that
will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 10%
decrease in the sales of the Kitchen Department.

Required:
If the Batch Department is dropped, what will be the effect on the net operating income of the company as a whole?

Q.13. Pietarsaari Oy, a Finnish Company produces cross-county ski poles that it sells for $32 a pair. Operating at a capacity, the
company can produce 50,000 pairs of ski poles a year. Cost associated with this level of production and sales are given below;

Direct Materials 12 600,000

Direct Labor 3 150,000
Variable Manufacturing OH 1 50,000
Fixed Manufacturing OH 5 250,000
Variable Selling Expenses 2 100,000
Fixed Selling Expenses 4 200,000
Total Cost 27 1,350,000
Required
1. The Finnish army would like to make a one-time-only purchase of 10,000 pairs of ski-poles for its mountain troops. The army
would pay a fixed fee of $4 per pair, and in addition it would reimburse the Pietarsaari Oy Company for its unit manufacturing
costs (both fixed and variable). Due to recession, the company would otherwise produce and sell only 40,000 pairs of ski poles
this year. (Total fixed manufacturing overheads cost would be the same whether 40,000 pairs or 50,000 pairs of ski poles were
produced). The company would not incur its usual variable selling expenses with this special order.
If the Pietarsaari Oy company accepts the army’s offer, by how much net operating income increase or decrease from what it
would be if only 40,000 pairs of ski poles were produced and sold during the year?

2. Assume the same situation as described in (1) above, except that the company is already operating at capacity and could sell
50,000 pairs of ski poles through regular channels. Thus, accepting the army’s offer would require giving up sales of 10,000
pairs at normal price of $32 a pair. If the army’s offer is accepted, by how much will net operating income increase or decrease
from what it would be if the 10,000 pairs were sold through regular channels?

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Q.14. Glade Company produces a single produce. The costs of producing and selling a single unit of this product at the company’s
current activity level of 8,000 units per month are:

Direct Materials $ 2.50

Direct Labor $ 3.00
Variable Manufacturing Overhead $ 0.50
Fixed Manufacturing Overhead $ 4.25
Variable Selling and Administrative Expenses $ 1.50
Fixed Selling and Administrative Expenses $ 2.00
The normal selling price is $15 per unit. The company’s capacity is 10,000 units per month. An order has been received from a
potential customer overseas for 2000 units at a price of $12 per unit. This order would not affect regular sales.
Required
1. If the order is accepted, by how much will monthly profits increase or decrease ? (The order would not change the
company’s total fixed costs)
2. Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units
must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price
for these units? Explain.

Q.15. Martina Fernandez, president of Evert Tools Co. has asked for information about the cost behavior of manufacturing support
costs. Specifically, she wants to know how much support cost is fixed and how much is variable. The following data are the only
records available.

Month Machine Hour Support Costs

May 850 9,000
June 1,300 12,500
July 1,000 7,900
August 1,250 11,400
September 1,750 13,500
a) Find monthly fixed support cost and the variable support cost per machine-hour by the high-low method.
b) Explain how your analysis for requirement 1 would change if new October data were received and machine-hours were
1,700 and support costs were $15,800.
c) A Least-square regression analysis gave the following output:
Regression equation: Y=$3,355+$6.10 X.What recommendation would you give the president based on these analyses?

Q.16. Nova Company’s total overhead cost at various levels of activity is presented below;

Machine- Total Overhead

Month
Hours Costs
April 70,000 198,000
May 60,000 174,000
June 80,000 222,000
July 90,000 246,000

Assume that the total overhead costs above consist of utilities, supervisory salaries, and maintenance. The breakdown of these costs
at 60,000 machine hour level of activity is:
Utilities (variable) $48,000
Supervisory Salary (Fixed) 21,000
Maintenance (Mixed) 105,000
Total Overhead costs $ 174,000
Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.
Required
1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost (Hint: To do this, it may be helpful to first
determine how much of the $246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and
fixed cost)
2. Using the high-low method, estimate a cost formula for maintenance
3. Express the company’s total overhead costs in the linear equation from Y=a+bx
4. What total overhead costs would you expect to be incurred at an operating level of 75,000 machine-hours?

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Q.17. Following are the particulars in respect of a product where two types of material A and B are used
Material Standard Actual
Tons Rate Tons Rate
A 120 10 140 9.5
B 80 7.5 60 9.5
Total Input 200 200
Less: Loss 20 18
Net Production 180 182
Required:
i. Calculate all possible variances possible from the above data. [5]
ii. “Planning and controlling is an iterative process whereby standard costing is used as a tool for controlling purpose”, with
aforementioned context explain the relevance of standard costing to you as in the capacity of management accountant. [5]

Q.18. In a manufacturing process, the following standards apply

Standard Price: Raw Material A @ $1 per lbs

Raw Material B @ $5 per lbs
Standard Mix: 75:25 of the proportion of lbs used per unit of finished goods
Standard yield (weight of product as percentage of weight of raw materials): 90%
In a period, the actual costs, usage and output were as follows;
Used: 4,400 lbs of A Costing $8,800
1,600 lbs of B Costing $4,800
Actual Output: 5670 lbs
Required: Calculate all the possible material variances.

Q.19 John Branch is the managing partner of a business that has just finished building a 60-room motel. Branch anticipates that he will
rent these rooms for 16,000 nights next year (or 16,000 room-nights). All room are similar and will rent for the same price.
Branch estimates the following operating cost for next year.

Variable Operating Costs $ 4 per room-night

Fixed Costs
- Salaries and Wages $170,000
- Maintenance of Building and Pool 48,000
- Other Operating and Administrative Costs 122,000
Total Fixed Cost $340,000
The capital invested in the motel is $1000,000. The partnership’s target return on investment is 20%. Branch expects demand for
rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a mark-up on full cost to earn the target
return on investment.

a. What price should Branch Change for a room-night? What is the mark-up as a percentage of the full cost of a room-night?
b. Branch’s market research indicates that if the price of room-night determined in requirement 1 is reduced by 10%, the
expected number of room-nights Branch could rent would increase by 10%. Should Branch reduce price by 10%. Show your
calculations.

Q 20. Tin Roof Inc. manufactures and sells a do-it-yourself storage kit. In 2016, it reported the following;

Units produced and sold 3,200

Investment $2400,000
Mark Up percentage on full cost 8%
Rate of Return on Investment 12%
Variable Cost per Unit $500
a. What was TinRoof’s operating income in 2016? What was the full cost per unit? What was the selling price? What was the
percentage mark up on variable cost?
b. TinRoof is considering increasing the annual spending on advertising by $175,000. The managers believe that the
investment will translate into a 10% increase in unit sales. Should the company make the investment? Show your
calculations.
c. Refer back tot the original data. In 2017, TinRoof believes that it will only be able to sell 2,900 units at the price calculated
in requirement 1. Management has identified $125,000 in fixed cost that can be eliminated. If TinRoof wants to maintain an
8% mark-up on full cost, what is the target variable cost per unit?

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