Cost and Management Accounting II

Target Group: All Accounting 2d Year students

Group Assignment
Date of Submission: Date of Final exam
The group assignment will be evaluated out of 20%
1. Jodi Horton, president of the retailer Crestline Products, has just approached the company’s bank
with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in
acquiring inventories in support of peak April sales. Since the company has had some difficulty in
paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether
the loan should be made.
The following data are available for the months April–June, during which the loan will be used
[A] On April 1, the start of the loan period, the cash balance will be $26,000. Accounts receivable on
April 1 will total $151,500, of which $141,000 will be collected during April and $7,200 will be
collected during May. The remainder will be uncollectible.
[B] Past experience shows that 20% of a month’s sales are collected in the month of sale, 75% in
the month following sale, and 4% in the second month following sale. The other 1% represents
bad debts that are never collected. Budgeted sales and expenses for the three-month period
follow:

[C] Merchandise purchases are paid in full during the month following purchase. Accounts payable
for merchandise purchases on March 31, which will be paid during April, total $108,000.
[D] In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in
June. Interest on the loan will total $1,200.
Required:
A. Prepare a schedule of expected cash collections for April, May, and June and for the three
months in total.
B. Prepare a cash budget, by month and in total, for the three-month period.
C. If the company needs a minimum cash balance of $20,000 to start each month, can the loan
be repaid as planned? Explain.
2. Crydon, Inc., manufactures an advanced swim fin for scuba divers. Management is now preparing
detailed budgets for the third quarter, July through September, and has assembled the following
information to assist in preparing the budget:
The Marketing Department has estimated sales as follows for the remainder of the year (in
pairs of swim fins): The selling price of the swim fins is $50 per pair
 a) All sales are on account. Based on past experience, sales are expected to be collected in the
following pattern:

b) The beginning accounts receivable balance (excluding uncollectible amounts) on July 1 will be
$130,000
c) The company maintains finished goods inventories equal to 10% of the following month’s sales.
The inventory of finished goods on July 1 will be 600 pairs.
d) Each pair of swim fi ns requires 2 pounds of geico compound. To prevent shortages, the
company would like the inventory of geico compound on hand at the end of each month to be
equal to 20% of the following month’s production needs. The inventory of geico compound on
hand on July 1 will be 2,440 pounds.
e) e. Geico compound costs $2.50 per pound. Crydon pays for 60% of its purchases in the month
of purchase; the remainder is paid for in the following month. The accounts payable balance for
geico compound purchases will be $11,400 on July 1.
Required:
[A] Prepare a sales budget, by month and in total, for the third quarter. (Show your budget in both
pairs of swim fi ns and 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 July through October.
[C] Prepare a direct materials budget for geico compound, by month and in total, for the third
quarter. Also prepare a schedule of expected cash disbursements for geico compound, by
month and in total, for the third quarter
3. The president of Univax, Inc., has just approached the company’s bank seeking short-term fi nancing
for the coming year, Year 2. Univax is a distributor of commercial vacuum cleaners. The bank has
stated that the loan request must be accompanied by a detailed cash budget that shows the quarters
in which financing will be needed, as well as the amounts that will be needed and the quarters in
which repayments can be made.
To provide this information for the bank, the president has directed that the following data be gathered
from which a cash budget can be prepared:
a) Budgeted sales and merchandise purchases for Year 2, as well as actual sales and purchases for
the last quarter of Year 1, are as follows:
b) The company typically collects 33% of a quarter’s sales before the quarter ends and another 65% in
the following quarter. The remainder is uncollectible. This pattern of collections is now being
experienced in the actual data for the Year 1 fourth quarter.
c) Some 20% of a quarter’s merchandise purchases are paid for within the quarter. The remainder is
paid in the following quarter.
d) Operating expenses for Year 2 are budgeted at $90,000 per quarter plus 12% of sales. Of the fixed
amount, $20,000 each quarter is depreciation.
e) The company will pay $10,000 in cash dividends each quarter.
f) Land purchases will be made as follows during the year: $80,000 in the second quarter and $48,500
in the third quarter.
g) The Cash account contained $20,000 at the end of Year 1. The company must maintain a minimum
cash balance of at least $18,000.
h) The company has an agreement with a local bank that allows the company to borrow in increments
of $10,000 at the beginning of each quarter, up to a total loan balance of $100,000. The
i) 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 the year.
j) At present, the company has no loans outstanding.
Required:
A. Prepare the following, by quarter and in total, for Year 2:
a. A schedule of expected cash collections on sales.
b. A schedule of expected cash disbursements for merchandise purchases.
B. Compute the expected cash disbursements for operating expenses, by quarter and in total,
for Year 2.
C. Prepare a cash budget by quarter and in total for Year 2
4. 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 Products
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

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 sale,
70% in the month following sale, and 20% in the second month following sale. 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 for in the month of purchase. The remaining 50% is paid in the following
month. Accounts payable for inventory purchases at June 30 total $11,700.
E. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be
sold in the following month. The merchandise inventory at June 30 is $18,000.
F. Land costing $4,500 will be purchased in July.
G. Dividends of $1,000 will be declared and paid in September.
H. The cash balance on June 30 is $8,000; 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 the company to borrow in
increments of $1,000 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 the quarter.
Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for
the quarter in total.
2. Prepare the following for merchandise inventory:
a. A merchandise purchases budget for July, August, and September.
b. A schedule of expected cash disbursements for merchandise purchases for July,
August, and September and for the quarter in total.
3. Prepare a cash budget for July, August, and September and for the quarter in total

5. Bryant Company’s budgeted prices for direct materials, direct manufacturing labor, and direct
marketing (distribution) labor per attaché case are $43, $6, and $13, respectively. The president is
pleased with the following performance report:

Actual Costs Static Budget Variance

Direct materials $438,000 $473,000 $35,000 F
Direct manufacturing labour 63,600 66,000 2,400 F
Direct marketing (distribution) labour 133,500 143,000 9,500 F

Required:
[A] Actual output was 10,000 attaché cases. Assume all three direct-cost items shown are
variable costs. Is the president’s pleasure justified? Prepare a revised performance report
that uses a flexible budget and a static budget.
6. Bank Management Printers, Inc., produces luxury checkbooks with three checks and stubs per page.
Each checkbook is designed for an individual customer and is ordered through the customer’s bank. The
company’s operating budget for September 2017 included these data:
Number of checkbooks 15,000
Selling price per book $ 20
 Variable cost per book $ 8
Fixed costs for the month $145,000
The actual results for September 2017 were as follows:
Number of checkbooks produced and sold 12,000
Average selling price per book $ 21
Variable cost per book $ 7
Fixed costs for the month $150,000
The executive vice president of the company observed that the operating income for September
was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-
budgeted variable cost per unit. As the company’s management accountant, you have been asked
to provide explanations for the disappointing September results.
Bank Management develops its flexible budget on the basis of budgeted per-output-unit revenue
and per-output-unit variable costs without detailed analysis of budgeted inputs.
Required:
1. Prepare a static-budget-based variance analysis of the September performance.
2. Prepare a flexible-budget-based variance analysis of the September performance.
3. Why might Bank Management find the flexible-budget-based variance analysis more
informative than the static-budget-based variance analysis? Explain your answer.
7. Harrald’s Fish Review Problem: Variance Analysis Using a Flexible Budget House is a family-owned
restaurant that specializes in Scandinavian-style seafood. Data concerning the restaurant’s monthly
revenues and costs appear below (q refers to the number of meals served):

The actual results for April appear below. Prepare a flexible budget performance report for the restaurant
for April.

 Prepare a flexible budget performance report for the restaurant for April.
8. Cascade, Inc., produces the basic fillings used in many popular frozen desserts and treats—vanilla and
chocolate ice creams, puddings, meringues, and fudge. Cascade uses standard costing and carries over
no inventory from one month to the next. The ice-cream product group’s results for June 2017 were as
follows:
Jeff Geller, the business manager for ice-cream products, is pleased that more pounds of ice cream were
sold than budgeted and that revenues were up. Unfortunately, variable manufacturing costs went up, too.
The bottom line is that contribution margin declined by $52,900, which is just over 2% of the budgeted
revenues of $2,592,600. Overall, Geller feels that the business is running fine.
Required:
a. Calculate the static-budget variance in units, revenues, variable manufacturing costs, and
contribution margin. What percentage is each static-budget variance relative to its static-budget
amount?
b. Break down each static-budget variance into a flexible-budget variance and a sales-volume variance.
c. Calculate the selling-price variance.
d. Assume the role of management accountant at Cascade. How would you present the results to Jeff
Geller? Should he be more concerned? If so, why?
9. Jackson County Senior Services is a non-profit organization devoted to providing essential services
to seniors 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 follow:
The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the
organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (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 perhaps 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:
[A] Should the housekeeping program be discontinued? Explain. Show computations to support
your answer.
[B] 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.
10. Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is
currently manufacturing all of its own component parts. An outside supplier has offered to sell a
thermostat to Climate-Control for $20 per unit. To evaluate this offer, Climate-Control, Inc., has
gathered the following information relating to its own cost of producing the thermostat internally:

Required:
a) Assuming that the company has no alternative use for the facilities now being used to produce
the thermostat, should the outside supplier’s offer be accepted? Show all computations.
b) Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed
capacity to launch a new product. The segment margin of the new product would be $65,000 per
year. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside
supplier for $20 each? Show computations.
11. Banner Company produces three products: A, B, and C. The selling price, variable costs, and
contribution margin for one unit of each product follow:
Due to a strike in the plant of one of its competitors, demand for the company’s products far exceeds its
capacity to produce. Management is trying to determine which product(s) to concentrate on next week in
filling its backlog of orders. The direct labour rate is $8 per hour, and only 3,000 hours of labour
time are available each week
Required:
1. Compute the amount of contribution margin that will be obtained per hour of labour time spent
on each product
2. Which orders would you recommend that the company work on next week—the orders for
product A, product B, or product C? Show computations.
3. By paying overtime wages, more than 3,000 hours of direct labour time can be made available
next week. Up to how much should the company be willing to pay per hour in overtime wages
as long as there is unfilled demand for the three products? Explain

12. Solex Company manufactures three products from a common input in a joint processing operation.
Joint processing costs up to the split-off point total $100,000 per year. The company allocates these
costs to the joint products on the basis of their total sales value at the split-off point. These sales
values are as follows: product X, $50,000; product Y, $90,000; and product Z, $60,000.

Each product may be sold at the split-off point or processed further. Additional processing requires
no special facilities. The additional processing costs and the sales value after further processing
for each product (on an annual basis) are shown below:

Required:
A. Which product or products should be sold at the split-off point, and which product or
products should be processed further? Show computations.