Accounting for decision making - MBA assignment

Table of ContentsTask 1: CVP analysis 1Task 2: Contrasting ABC and traditional costing 5Task 3: Flexible budget and flexible budget performance report 12Task 4: Cash Budget and Control 16References 21

MASTER OF BUSINESS ADMINISTRATION

INTERNATIONAL PROGRAM

ASSIGNMENT

ACCOUNTING FOR DECISION MAKING

Submitted to: Dr Pham Thi Ngoc Bich

Table of Contents

Task 1: CVP analysis 1

Task 2: Contrasting ABC and traditional costing 5

Task 3: Flexible budget and flexible budget performance report 12

Task 4: Cash Budget and Control 16

References 21

Task 1: CVP analysis:

Summarize information:

Sales price per pair of sandals (units) $40

Variable costs per pair of sandals (units) $25

Fixed costs per year

Equipment depreciation $7,000

Total fixed costs $60,000

1) Break-even in units and sales dollars:

3) Angie now has two salespersons working in store – one full time and one part time It

will cost her an additional $8,000 per year to convert the part-time position to a time position Angie believes that the change would bring in an additional $25,000 insales each year

full Additional sales = $25,000

- Additional fixed costs = $8,000

- Additional CM = Additional sales x CM Ratio = $25,000 x 0.375 = $9,375

- Additional Net Income = Additional CM – Additional fixed costs

= $9,375 - $8,000 = $1,375 (positive)

 Therefore, she would convert the part-time position to a full-time position

4) Refer to the original data and ignore the proposition in question c During the first year,

a) Prepare the income statement in a contribution format for the Sandal Shop’s first year:

5) “CVP” analysis is a useful planning tool because it is so accurate” In my opinion,

CVP is useful but it does not base on its accurate because it depends on forecasts,assumption and estimates

For example, it is assumed that fixed costs are constant, and that both the variable cost

and the revenue curves are linear over the relevant volume of output In reality, fixedcosts may not remain constant over the entire output range considered in the analysis, thatbeing particularly true if the volume range considered is quite wide Fixed costs mayindeed be constant over a band of output, but then will increase sharply and remain

constant for another stage To retain the usefulness of CVP analysis, it is necessary tolimit the volume range to be examined so that the behavior of both fixed and variablecosts may be more accurately determined The basic assumption that CVP is a linearrelationship is realistic only over narrow ranges of output which is called the relevantrange.

However, the real usefulness of CVP is that it enriches the understanding of therelationship between costs, volume and prices as factors affecting profit, enablingmanagement to make assumptions which will help the decision-making process in theshort-run planning period Usefulness of CVP analysis is not based on its “accuracy”.The calculation is valid as long as those assumptions hold true CVP analysis can beuseful to help answer queries such as:

- How many units need to be sold or services performed to break even?

- What is the impact of a change in the mix between fixed and variable costs?

- How many units need to be sold or services performed to achieve a particular level ofprofit?

- Which products or services are contributing best to the profit performance?

Etc.,

Therefore, CVP analysis is an important tool in planning and decision making but it is not soaccurate

Task 2: Contrasting ABC and traditional costing:

Summarize information with calculation in which is appropriated:

Unit cost and revenue

Standard Briefcases

Specialty Briefcases

Total Direct materials $ 20.00 $ 17.50

Direct labor (0.5 DLH and 0.25DLH @ $12

Direct labor hours DLHs 5,625

Predetermined overhead rate $ 18

Standard Briefcases

Specialty Briefcases

a Produced in batches of units 200 units 25

b Times for inspection/month hrs 300 hrs 500

d.

Activity cost pools Activity measures

Estimated overhead costs

Material handling No of receipts 15,000

Production orders and setup Setup hours 20,250

$101,250

Expected Activity

Activity Measure Standard Briefcases

Special Briefcases Total

inspection/month) ** 300 500 800

Machine hours (=Machine time x

units produced per month) *** 5,000 5,000 10,000

(*) Setup hours = Time for setups x number of setups

Therefore, we have:

- Setup hours for Briefcase = 1 x 50 = 50 hours

- Setup hours for specialty Briefcase = 2 x 100 = 200 hours

(**) Inspection hours are equal to Time for inspection per month given in part b

(***) Machine hours = Machine time x units produced per month

 Machine hours for Briefcase = 0.5 x 10,000 = 5,000 hours

Machine hours for Briefcase = 2 x 2,500 = 5,000 hours

1) Using ABC, determine the amount of manufacturing overhead cost that could be allocated to each standard briefcase and each specialty briefcase:

- Consumption Ratio for purchasing =

= = 0.41 or 41%

Similar calculation for the rest to find out Consumption ratio for each activity cost pools

- Overhead allocated for each kind of Briefcases = Cost Driver for each kind of

Briefcases x AR (which is based on each activity pools)

- Overhead per unit =Total overhead costs

Number of units

Cost Driver

Consumption Ratio

Overhead Allocated

Activity

cost pools

Overhead Cost

Activity measures St B Sp B Total AR St B Sp B St B Sp B

Purchasing 12,000

No oforders 82 118 200 60 0.41 0.59 4,920 7,080Material

handling 15,000

No ofreceipts 116 184 300 50 0.39 0.61 5,800 9,200Production

orders and

setup 20,250

Setuphours 50 200 250 81 0.20 0.80 4,050 16,200Inspection 16,000

Inspectionhours 300 500 800 20 0.38 0.63 6,000 10,000Frame

assembly 8,000

Assemblyhours 800 800 1,600 5 0.50 0.50 4,000 4,000Machine

related 30,000

Machinehours 5,000 5,000 10,000 3 0.50 0.50 15,000 15,000Total

2) Determine the unit product cost of each product line from the perspective of the ABC system:

Standard Briefcases

Specialty Briefcases

Units produce each month 10,000 2,500

Direct materials:

Total Direct materials $ 20.00 $ 17.50

Direct labor (0.5 DLH and

0.25DLH @ $12 per DLH) 6.00 3.00

Manufacturing overhead* 3.98 24.59

Total cost per unit $ 29.98 $ 45.09

(*) Manufacturing overhead is taken from calculation in part 1

3) Within the limitations of the data that have been provided Evaluate the president’s concern about the profitability of the two product lines Write a brief memo to the president giving your opinion about the president’s decision on shifting the company’s

resources entirely to production of specialty briefcases and providing the arguments for your opinion.

From using ABC system to determine the unit product cost of each product line, we havethe information that costs for producing Special Briefcase is so high compare to theprevious breakdown To manufacture each Special Briefcases, it costs for $45.09 instead

of $25.00, while the standard briefcase cost $29.98, instead of $35 We estimate grossmargin for specialty briefcases and for standard briefcases as the following:

Unit cost and revenue

Standard Briefcases

Specialty Briefcases

Therefore, the view of president was wrong when he said that the company can get $15per unit on special briefcases

We can write a brief memo to the president as the following:

Respected sir,

As you can see estimating from ABC method to allocate the overhead cost to eachproduct line, I recognize that producing specialty briefcase is very costly Manufacturingoverhead cost of producing special briefcases is $45.09 which is higher than $20 compare

to $25 as given breakdown, while producing standard briefcases bring us back $6.02gross margin per unit instead of $1 Therefore, the ideal of focusing on expandingproducing specialty and decision on shifting the company’s resources entirely toproduction of specialty briefcases is inefficiency and unprofitable So, do we consider onwhether the company should continue or stop expanding producing specialty briefcase?

I am looking forward to have further discussion with you on this matter for our bestsolution

With Best Regards,

4) Sally Henrie stated that “the completion hasn’t been able to touch our price” on special business I think there may have some arguments on this statement.

If company would consider producing product line of specialty briefcases, the sellingprice must cover at least the unit product cost which is cost $45.09 Therefore, the price

of specialty briefcases must be from $45.09 (at break-even point) or above $45.09 (if addtogether with expected profits) In reality, the price depending on many indicators thatmake the company can set up their price to suit with price setting objectives Since thecompetitor charged over $50 a unit for its special items, means they may be able to touchthe company’s price and become very competitive price as well, if company set up price

to consider profits matter

The answer to question about the price needs to assess their ultimate profitability Atpresent, company overlooks the higher reaches of their pricing potential Basing releaseprices on realistic market research and cost analysis can give managers the confidence tocarry out their price In this case, we do not have enough information to make conclusion

on whether competitor can touch the company’s price or not since we do not have theactual price compare to the market price However, the statement of Sally should bereview based on their actual cost of producing and contribution margin of specialtyproduct line

Task 3: Flexible budget and flexible budget performance report:

- Utilities (25% is variable cost) 200,000

- Plant manager salaries 140,000 $ 2,107,000

Selling expenses:

- Sales salary (fixed annual amount) 160,000 $ 356,000

General and administrative expenses:

Selling price = Sale/ volume = $3,000,000/ 20,000 = $ 150

DM per unit = Total DM/ volume = $1,200,000/ 20,000 = $ 60

DL per unit = Total DL/ volume = $260,000/ 20,000 = $ 13Machinery repair per unit = Machinery repair/volume = $57,000/ 20,000 = $ 2.85

Utilities Variables = 25% x $200,000 = $ 50,000Utilities Fixed = $200,000 – $50,000 = $ 150,000Utilities variable per unit = $50,000/20,000 = $ 2.50Packaging per unit = $80,000/ 20,000 = $ 4.00Shipping per unit = $116,000/ 20,000 = $ 5.80

a) Prepare flexible budgets for the company at sales volume of 18,000 and 24,000 units:

Sales $2,700,000 $ 3,000,000 $ 3,600,000 Cost of goods

b) b1- Prepare a flexible budget performance report for 2012 [@ Selling Price is $150]:

Budget @ 20,000 units

Budget @ 24,320 units Actual Variances

b2- Analyze and interpret the direct materials variance and direct labor variance:

As can be seen from Flexible budget performance report in Part b1, the company has used

less direct materials in actual production process compare to budget about $59,200 whilethey did spent more on direct labor which is higher than budget around $43,840 However,the differences between saving and overused is $15,360 (=$59,200 - $43,840) The companystill has saved of $15,360 in limited comparison of two factors direct materials and directlabor This means that company has adjusted the direct input factor from the direct materials,

in which they totally can manage well their production costs from direct input factor and it is

in their hand capacity

Furthermore, direct labor cost account for a proportion of 57.31% (=$1,400,000/$2,443,000)while direct hour labor occupy about 14.74% (=360,000//$2,443,000) in total costs of goodssold Therefore, percentage of variance in direct materials has more effect to total cost ofgoods sold compare to percentage change in direct labor cost So, the production managerhas most responsibility on how well of using direct materials and direct labor

Task 4: Cash Budget and Control:

- 40% of credit sales is collected in the month of sale

- 35% is collected after the sale

- 23% is collected in the second month after the sale

- 2% is uncollectable

a) Prepare a schedule of cash collection:

January February March April May

Total Cash 396,000 495,000 418,000 412,500 462,000

Credit sales 396,000 495,000 418,000 412,500 462,000Cash collection from:

Cash collection in January = 40% x $396,000 = $158,000

Cash collection in February = 35% x $396,000 + 40% x $495,000

= $138,600 + $198,000 = $336,000

Cash collection in March = 23% x $396,000 + 35% x $495,000 + 40% x $418,000

= $91,080 + $173,250 + $167,200 = $431,530Cash collection in April = 23% x $495,000 + 35% x $418,000 + 40% x $412,500

= $113,850 + $146,300 + $165,000 = $425,150Cash collection in May = 23% x $418,000 + 35% x $412,500 + $ 40% x $462,000

= $96,140 + $144,375 + $184,800 = $425,315

b) Prepare a merchandise purchases budget for February, March and April Report

calculations on units and then show the dollar amount of purchases of each month

- Ending monthly inventory = 20% next month's unit sales + 100 units safety stock

For example:

 February’s desired ending inventory = 20% x 19,000 + 100 = 3,900 units

 February’s beginning inventory = January’s ending inventory

Similar calculation for March and April’s ending inventory and the beginninginventory of this month is equal to ending inventory of previous month

- 31 January and 28 February: actual inventory are consistent

Merchandise purchases budget for February, March and April:

January February March April

Products needs 18,000 22,500 19,000 18,750Desired ending inventory 4,600 3,900 3,850 4,300

Total needs 22,600 26,400 22,850 23,050Less beginning inventory 4,600 3,900 3,850Products need to purchase 21,800 18,950 19,200

Total purchase costs $ 261,600 $ 227,400 $ 230,400

c) Prepare a schedule of cash payments on product purchases for March and April.

- 30% of purchase made in the month is paid in that month;

- 70% other is paid in paid in the next month

Therefore, Cash payment for:

Schedule of cash payment on products purchases for March and April:

February March April May

Total purchase costs $ 261,600 $ 227,400 $ 230,400

Cash payment for:

- February 78,480 183,120

Total cash payment $ 78,480 $ 251,340 $ 228,300

d) Prepare cash budget for March and April, including any loan activity and interest

expense Compute the loan balance at the end of each month

Based on the following given information to prepare the cash budget for March andApril:

- Minimum cash balance for the month-end is $50,000, is maintained by borrowingcash from the bank

- If the balance is exceeded $50,000, repay the loan as much as it can without goingbelow the balance the minimum, interest rate annually is 12%

- At Feb 28th, the balance loan is $12,000, cash balance is $50,000

Cash budget for March and April:

March April

1 Beginning cash balance $ 50,000 $ 58,070

2 Cash receipt from:

- Selling and Admin Expenses (=$1.920.000/12 months) 160,000 160,000

5 Different between cash available and cash payment = (3) - (4) $ 70,190 $ 94,920

6 Financing

-(12% interest rate annual/12 months x $12,000) 120

-7 Ending cash balance $ 58,070 $ 94,920

e) Refer to the results in part d, since we get the balance exceeds $50,000 ($58,070) the

company may not need to borrow money from the bank if not necessary It met tworequirements of the firm

- Firstly, the firm’s minimum cash balance for the month-end is $50,000 andmaintained in the following month

- Secondly, the company has repaid the loan and interest which carries 12%/ month butstill firm got the end balance was $58,070

Therefore, if it would not necessary then the firm no need to borrow additional funds atthe end of March