Assignment Solutions

Management Accounting

Question 2 (22.5 marks)  H2O Irrigation Continuing Case Study  H2O Irrigation has two major public-park projects to provide with comprehensive irrigation in one of its service locations this month. Job J57 and Job K52 involve 15 acres of landscaped terrain which will require special-order sprinkler heads to meet the specifications of the project. Using a job cost system to produce these parts, the following events occurred during December 2012.  Raw materials were requisitioned from the company’s inventory on December 2 for  $5,061; on December 8 for $1,059; and on December 14 for $3,459. In each instance, two thirds (2/3) of these materials were for J57 and the rest for K52.  Six time tickets were turned in for these two projects for a total amount of 18 hours of work. All the workers were paid $16.50 per hour. The time tickets were dated December 3, December 9, and December 15. On each of those days, 6 labour hours were spent on these jobs, two-thirds (2/3) for J57 and the rest for K52.  The predetermined overhead rate is based on machine hours. The expected machine hour use for the year is 2,112 hours, and the anticipated overhead costs are $840,576 for the year. The machine were used by workers on projects K52 and J57 on December 3, 9, and 15. Six machine hours were used for project K52 (2 each day), and 8.5 machine hours were used for project J57 (2.5 the first day and 3 each of the other days). Both of these special orders were completed on December 15, producing 237 sprinkler heads for J57 and 142 sprinkler heads for K52.  Additional job order activities during this period of time included:  Dec. 1 Purchased raw materials from Durbin Supply Company on account for $53,200.  Dec. 2 Issued $40,000 of direct materials to work in process for other jobs (not K52 and J57) and issued $3,000 of indirect materials.  Dec. 12 Paid H2O Irrigation’ factory salaries and wages in the amount of $65,000.  Dec. 13 Received and paid the factory’s water bill of $9,000.  Dec. 18 Transferred $50,000 of costs from other completed jobs to finished goods.  Dec. 21 Received and paid the factory’s electric bill of $12,000 for H2O Irrigation’ factory.  Dec. 31 Made adjusting entries for the factory that included accrued property taxes of $12,000, prepaid insurance of $8,800, and accumulated depreciation of $16,000.  Question 2 Requirements:  i. Journalise all activities for both jobs in the general journal. Also journalise the other costs that occurred during this period of time. Note: Provide single entries for both jobs activity for: i. Direct Materials, ii. Direct labour, and iii. Manufacturing overhead – do not make journal entries for every single activity, for example:  DR Work In process CR    Raw Materials (Job 101 $75 DM and Job 102 $25 DM)  DR Work in process CR    Factory Labour (Job 101 $45 DL and Job 102 $55 DL)   (18.5 marks)  ii. Assuming that Manufacturing Overhead has an ending debit balance of $3,600. Is it over applied or under applied? Make the adjusting entry to remove this from Manufacturing overhead.  (2 marks)  iii. Why would H2O Irrigation choose machine hours as the cost driver for the overhead rather than direct labour cost? What would H2O Irrigation be likely to choose as the cost driver for the overhead for the job of installing the irrigation system and why?  (2 marks)  Total marks question 2: 22.5 

Transfer Prices

Many organisations use transfer pricing when transferring products between different divisions of the same organisation. You are required to discuss in detail the advantages and disadvantages of each of the following four methods: 1) Market based transfer prices; 2) Full cost transfer prices; 3) Cost-plus a mark-up transfer prices; and 4) Negotiated transfer prices.

ROI Vs EVA

You are required to critically evaluate the following statement: “Both Return on Investment (ROI) and Economic Value Added (EVA), when used as performance measures in an organisation, encourage managers to be short-term in their focus and decision making”. If your critical evaluation tends to agree with the statement, briefly outline how the short term nature of such measures can be overcome.

Overheads

Write around 500 words explaining how segmenting the overheads can help in allocating overhead costs to individual jobs or services. You must support your discussion by real world examples and acknowledge the source of your information (referencing).

Management Accounting

Question 4 (6 marks) ABC Ltd makes trailers. It receives a special order to produce 350 trailers for a local retail outlet. The order will take 2,100 kg of material that costs $16.10 per kg and will require 1,400 direct labour hours and 525 machine hours. The following are the expected/budgeted annual costs for ABC Ltd: Direct labour $327,600 Direct labour hours 25,795 Direct materials $193,200 Indirect costs $98,400 Machine hours 9,840 Required: 1. Calculate the overhead allocation rate: note that the process is labour-intensive 2. Calculate the total costs of the special order 3. Calculate the cost of the special order if ABC Ltd uses machine time as the basis for allocating overheads 4. Calculate the minimum price per trailer that ABC Ltd could accept. 5. Explain how segmented overhead cost pools and activity based costing can assist accurate costing for pricing purpose (200 words)

Management Accounting

Critically discuss the following statements: Word limit for Question 3 - 750 words a budget is a forecast of what is expected to happen in a business during the next year’ ‘budgets are okay but they stifle all initiative. No manager would work for a business that applies control through budgets.’ ‘any sensible person would start with the sales budget and build up the other budgets from there.’ ‘a budget trying to be realistic will not motivate best performance.’ ‘only adverse variances are worth investigating, because favourable variances, by definition, must be good.’

Overheads

There are overhead costs in virtually every type of business. What are some of the overhead costs at a company that you are familiar with? Describe some of the overhead costs and see if you can find out how the overhead is calculated, allocated, and applied…or how you think they should be calculated, allocated, and applied

Management Accounting

Bonza Handtools Ltd. manufactures a popular power drill suitable for the home renovator. Financial and other data for this product for the last twelve months are as follows : Sales 20000 units Selling price $130 per unit Variable manufacturing cost $50 per unit Fixed manufacturing costs $400000 Variable selling and administrative costs $30 per unit Fixed selling and administrative costs $300000. The directors of Bonza Ltd. want to try to increase the profitability of this product and invited senior staff to suggest how this might be done. Three suggestions have been received. • The accountant, Jan Rossi, believes that a price increase of $10 per unit is the best way to boost profits. She would spend an additional $125000 on national advertising and contends, that if this is done, sales volume would not drop appreciably from last year. • The production manager, Tom Tune, thinks that an improved quality product could increase sales volume by 25% if accompanied by an advertising campaign costing $50000 aimed at tradespeople as well as home renovators. The improved quality would add $5 per unit to the variable cost. Mr Tune believes that the price should not be increased. • The sales manager, Mary Watson, wants to undertake a promotion campaign where a $10 rebate is offered on all drills sold during the three months beginning 1 April. Normally 6000 units are sold during that period and Ms Watson believes that this could be boosted to 10000 units if an advertising campaign costing $40000 were launched late in March. You have been asked by the Bonza board to comment on each of these three proposals. Draft a report in response to this request. You are not asked to make an outright choice, but rather to analyse the potential strengths and weaknesses. The sales volumes forecast by each staff member should be treated as estimates only and your report should examine the effects of variations in actual sales from these forecasts. Give figures to support your comments and mention qualitative factors that may also be involved.

Ratio Analysis of BP

Using income statement and balance sheet of your chosen company’s Annual Report 2012: a. Analyse the financial statements to assess the financial viability of your chosen company using the following types of ratios (6.1, 6.2) Profitability Ratios Liquidity Ratios Efficiency Ratios b. Make recommendations on the strategic portfolio of your chosen company based on its financial information. (6.3)

Capital Budgeting

Your chosen company is to invest £85,000 at a cost of 15%, in any one of the two alternative Investment projects. Both projects have a FIVE years life span. The expected net cash flows from each Project is shown below: Project 1 Project 2 Year 1 £15,000 £10,000 Year 2 £25,000 £15,000 Year 3 £35,000 £35,000 Year 4 £15,000 £55,000 Year 5 £15,000 £45,000 b. Calculate a) Payback Period and b) Annual Rate of Return as financial appraisal methods for these two projects.(5.1) c. Comment which project you would recommend and why? (5.2) your discussion should cover comment on this strategic investment decision using information from post audit appraisal. (5.3)