Question One: Operating budgets. (Total: 60 marks) The Otara Manufacturing Company produces and sells a very popular product. The company has been experiencing some difficulty in coordinating activities amongst its various departments, which has resulted in some shortage of the product at critical times. To overcome the shortages, the management of the company has decided to initiate a monthly budgeting system that is integrated between departments. The first budget is to be for the first half of the next year starting on 1st April 2011. The company?s financial year is from 1st April to 31st March. To assist in developing the budget, the accounting department has collected the following information. Sales. Sales units for the last three months of the current financial year are given below as ?actual? and estimated sales for the next nine months are given as ?planned?. January (actual) 16,000 July (planned) 35,000 February (actual) 15,000 August (planned) 32,000 March (actual) 14,000 September (planned) 25,000 April (planned) 20,000 October (planned) 22,000 May (planned) 25,000 November (planned) 28,000 June (planned) 30,000 December (planned) 33,000 In total, the company expects to manufacture 300,000 units in the next financial year from 1st April, 2011 to 31st March, 2012. The budgeted selling and administrative expenses consist of a variable selling expense of $2.5 per unit sold and fixed selling and administrative expenses of $1,200,000 for the whole year including $40,000 per month for depreciation of sales-related fixed assets. These selling and administrative expenses are paid when incurred. The company sells the product at cost plus 25% mark-up per unit and utilises absorption costing system. This selling price and product costing policies have been the same for the last five years. All sales are on credit and are collected 40% in the month of sales, 50% one month after sales and 10% two months after sales. This collection pattern is expected to be the same in the next year. Direct material. Two different types of materials are used in the production of the product. Data relating to the materials requirement are given below. Direct Material Direct materials per unit of product Cost per unit of direct material Inventory of direct materials 31/03/10 X 4 kilograms $ 2.5 per kilogram 46,000 kilograms Y 6 metres $ 3.00 per metre 69,000 metres Direct material X is sometimes in short supply and the company therefore requires that enough of the material be on hand at the end of each month to provide for 50% of the following month?s production needs. Material Y is easy to get, so only one-third of the following month?s production needs must be on hand at the end of each month. Direct material purchases are paid 50% in month of purchase and 50% in the month following purchases. At the end of March 2011, an amount owing for direct material purchases was $60,000. Direct Labour. The company has three departments through which the product must pass before they are completed. Information relating to direct labour in these departments is given below. Department Direct labour hours per completed unit of product Hourly rate Shaping 0.7 $12.00 Assembly 0.8 $15.00 Finishing 0.5 $ 8.00 Direct labour is paid in the month incurred. Manufacturing overhead. The company manufactured 35,000 units during the last three months of the current year. The actual variable overhead costs incurred during this three month period are shown below. Management believes that the same variable manufacturing overhead cost per unit will be at the same rate for the whole of the next year. Power $27,000 Communications $30,000 Indirect labour $31,000 Indirect materials $16,000 Others $ 8,000 Total variable overhead $112,000 The budgeted fixed manufacturing overhead costs for the next year appear below. These fixed manufacturing overhead are basically the same level as the current year. Supervision $ 870,000 Rates & taxes $ 145,000 Depreciation $1,920,000 Insurance $ 650,000 Others $1,035,000 Total fixed manufacturing overhead $4,620,000 Manufacturing overhead are paid 60% in the month incurred and 40% in the following month. At the end of March 2011, there was an amount owing for manufacturing overhead of $80,000. Finished goods inventory. The desired finished goods inventory at the end of each month is budgeted to be 25% of the next month?s estimated sales. There were 5,000 units in finished goods inventory at the end of March, 2011. Other information. The company is proposing to pay dividend of $250,000 to its shareholders in the month of April 2011 and purchase of new fixed assets will require two cash outlays of $150,000 each in the months of April and July 2011. Depreciation for these fixed assets had already been included in the depreciation budget for the year. On 31st March 2011, the company had $587,000 in their operating bank account. The bank has made available a line of credit facility for the company to the value of $500,000. The company can use this credit facility when they need to. Principal repayments can be made at end of each month if the company can afford to do so. Interest repayment will be calculated by the bank at the end of the company?s financial year when interest repayment is due. The company must have at least $500,000 in the bank at the end of each month for working capital. If the company has excess cash of over $500,000 in any one month, the excess is used to repay the credit facility and the rest to be invested in a twelve-month term deposit account for which interest is received at the end of the twelve month period. Required: For six months (April ?September) prepare the following operating budgets and schedules for the Otara Manufacturing Company. For each budget and schedule, include a column for half-yearly totals. 1. Sales budget showing total sales value. (3 marks) 2. Schedule of cash collection from sales. (4 marks) 3. Production budget in units. (4 marks) 4. Raw materials purchases budget showing total purchases value. (10 marks) 5. Schedule of cash disbursement for raw materials purchases. (4 marks) 6. Direct labour budget showing direct labour costs. (10 marks) 7. Manufacturing overhead budget. (5 marks) 8. Schedule of cash disbursement for manufacturing overhead. (3 marks) 9. Selling and administrative expenses budget. (5 marks) 10. Cash budget. (12 marks) ? Question Two: Activity-based costing. (Total: 20 marks) Manukau Manufacturing Company Limited produces and sells two models of high-pressured engines used by its motorcycle manufacturing customers. The two models are the DC8 model and the DC10 model. Data regarding the two models are as follows: Model Direct Labour Hours Annual Production Total Direct Labour Hours DC8 0.2 DLHs per unit 20,000 units 4,000 DLHs DC10 0.4 DLHs per unit 40,000 units 16,000 DLHs 20,000 DLHs Additional information: ? Model DC8 requires $35 in direct materials per unit, and Model DC10 requires $25 per unit. ? The direct labour rate is $20 per hour. ? The company has been using the traditional absorption costing method where direct labour hours was the allocation base for applying manufacturing overhead costs to products. Manufacturing overhead costs average about $1,480,000 per year. ? Model DC8 is more complex to manufacture than Model DC10 and requires the use of a special machine. ? Because of the special work required for Model DC8, the company is considering the use of activity-based costing to apply manufacturing overhead costs to products. Three activity cost pools have been identified and the first-stage allocation has been completed. Information about these activity cost pools are as follows: Estimated total activity Activity cost pool Activity measure Estimated total cost Model DC8 Model DC10 Total Machine setups Number of setups $ 180,000 150 100 250 Machining Machine hours $ 300,000 1,000 0 1,000 General factory Direct labour hours $ 1,000,000 4,000 16,000 20,000 $ 1,480,000 Required: 1. Under the traditional absorption costing system, (a) Compute the predetermined overhead rate. (1 mark) (b) Determine the unit product cost of each model. (2 marks) 2. Under activity-based costing, (a) Compute the activity rate for each activity cost pool (3 marks) (b) Compute the amount of overhead costs that would be applied to each model. (4 marks) (c) Determine the unit product cost of each model. (2 marks) 3. Explain why overhead costs shifted from the high-volume product to the low-volume product under activity-based costing. Explain your answer fully. (8 marks),Hi, Greeting. After hearing too much positive results about Course Hero, I am willing to get assistance from you and I hope this will be memorable result for me and I ll develop long term bond with you after successful result with you.
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