Answer 1. Required Part 1:. The spreadsheet extracts sh

Answer 1
Required Part 1:
The spreadsheet extracts showing budgets with expected cash receipts and cash payments for the
month of March and April is as below:
Purchase Budget
Particulars March April May
Production in Units 11,000 10,000 12,000
Add: Ending Inventory (25% of the next month
estimate)
2,500 3,000 2,000
Less: Beginning Inventory (ending inventory of
last month)
7,500 2,500 3,000
Therefore, required purchase 6,000 10,500 11,000
Per unit material cost $3.00 $3.00 $3.00
Cost of Purchase (Purchase * per unit cost) $18,000 $31,500 $33,000
Payment to be made towards purchases
(Cost-discount of 2%)
$17,640 $30,870 $32,340
Payment Schedule:
In the month of purchase (70%) $12,348 $21,609 $22,638
In the month following the purchase (30%) $4,939 $8,644
Cash Payments for purchases $12,348 $26,548 $31,282
The formula view of the same is as below:
Purchase Budget
Particulars March April May
Production in Units 11000 10000 12000
Add: Ending Inventory (25% of the next
month estimate) =+D4*25% =+E4*25% =+F4*25%
Less: Beginning Inventory (ending
inventory of last month) =22500/3 =+C5 =+D5
Therefore, required purchase =+C4+C5-C6 =+D4+D5-D6 =+E4+E5-E6
Per unit material cost 3 3 3
Cost of Purchase (Purchase * per unit cost) =+C7*C8 =+D7*D8 =+E7*E8
Payment to be made towards purchases
(Cost-discount of 2%) =+C9*98% =+D9*98% =+E9*98%
Payment Schedule:
In the month of purchase (70%) =+C10*70% =+D10*70% =+E10*70%
In the month following the purchase (30%) =+C10*28% =+D10*28%
Cash Payments for purchases =+C12+C13 =+D12+D13 =+E12+E13
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Based on above payments for purchase, the cash budget including collection and payments is as
below:
Cash Budget
Particulars March April May
Unit Sales 8,000 7,000 10,000
Per unit selling price $26 $26 $26
Sales revenue (Unit sales * per unit price) $2,08,000 $1,82,000 $2,60,000
Collection
In the month of sale (70%) $1,45,600 $1,27,400 $1,82,000
In the month following the sale (28%) $58,240 $50,960
Total Cash Collected from sales $1,45,600 $1,85,640 $2,32,960
Less: Payment for purchases $12,348 $26,548 $31,282
Less: Direct Labour (Units produced * $1.50) $16,500 $15,000 $18,000
Less: Variable Ohd (Units produced * $0.25) $2,750 $2,500 $3,000
Less: Fixed Ohd without Depreciation ($5000 -
$1000)
$4,000 $4,000 $4,000
Less: Selling & Administrative Expenses w/o
Depreciation
$2,100 $2,100 $2,100
Total Cash Payment $37,698 $50,148 $58,382
Net Cash Available $1,07,902 $1,35,492 $1,74,578
The formula view of the same is as below:
Cash Budget
Particulars March April May
Unit Sales 8000 7000 10000
Per unit selling price 26 26 26
Sales revenue (Unit sales * per unit price) =+C18*C19 =+D18*D19 =+E18*E19
Collection
In the month of sale (70%) =+C20*70% =+D20*70% =+E20*70%
In the month following the sale (28%) =+C20*28% =+D20*28%
Total Cash Collected from sales =+C22+C23 =+D22+D23 =+E22+E23
Less: Payment for purchases =+C14 =+D14 =+E14
Less: Direct Labour (Units produced * $1.50) =+C4*1.5 =+D4*1.5 =+E4*1.5
Less: Variable Ohd (Units produced * $0.25) =+C4*0.25 =+D4*0.25 =+E4*0.25
Less: Fixed Ohd without Depreciation ($5000
- $1000)
=5000-1000 =5000-1000 =5000-1000
Less: Selling & Administrative Expenses w/o
Depreciation
=2500-400 =2500-400 =2500-400
Total Cash Payment =+SUM(C25:C29) =+SUM(D25:D29) =+SUM(E25:E29)
Net Cash Available =+C24-C30 =+D24-D30 =+E24-E30
Required Part 2:
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Memorandum for Use of budget
To,
David Scott
September 26, 2019
Sub: Best use of Budgets
Dear Sir,
Budget is an important planning tool which helps the company in managing its financial
performance by setting targets or benchmarks and them track the actuals to meet those targets.
These targets or benchmarks are provided by the budgets in the business.
At the beginning of the period, we prepare budgets to estimate the resource requirements at each
stage of operations in the company. The budgets helps the company assess its financial position in
terms of expected cash collection and estimated cash payments enabling company to estimate their
requirement of funds. Early information on requirement of funds helps us in sourcing the best
available fund at an optimal cost to maximize profit.
Further, budgets help us in controlling the actual costs and revenue by continuously monitoring
them against the targets set. By comparing the budgets will the actual results, we can identify the
variances and control the unfavorable variances immediately with remedial actions.
Thus, budgets help in optimal allocation of resources, timely identification of unfavorable
variances, controlling and managing the financial performance, thereby improving the profitability.
Regards.
Answer 2
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Memorandum for Zero Based Budgeting
To,
David Scott
September 26, 2019
Sub: Zero-Based Budgeting (ZBB) – Its benefits and drawbacks
Zero-Based Budgeting is a modern approach to budgeting of an organization whereby the budgets
of the company are developed from scratch and each cost item are justified before they are
permitted to be incurred
This is in contrast to traditional budgeting where the budgets of the prior period becomes the base
for the current period and based on estimated growth the budgets for the current year are developed.
In Zero-Based Budgeting no such base is available and each departments are required to forecast
their costs and justify each dollar that they estimate. This leads to fresh allocation of funds based on
requirements and not simply based on last year expenses.
The benefits of using Zero-Based Budgeting are listed as below:
 This is a more accurate form of budget as each line items are analyzed and justified thereby
eliminating wastage of resources and ensuring that only the right amount of funds based on
justified requirements are allocated
 Since the budgets are more refined and justified this improves the efficiency of the budgets
and leads to better results when compared with actual
 The requirements of explaining each line item ensures that no redundant and unjustified
costs are budgeted thereby eliminating unnecessary expenses
 Companies do not work in isolation and since all the departments must analyze their
spending they need to communicate with their departments to understand their requirements
and this it improves communication and coordination.
In spite of many benefits that it brings the Zero-Based Budgeting has inherent limitation that must
be taken care of. These limitations are as below
 The process of Zero-Based Budgeting is very time consuming as all line items must be
studied from scratch and thus involves lot of efforts, training and time.
 Managerial bureaucracy: Officers at higher hierarchy with greater powers tend to influence
the budgets of their departments by allocating more resources for their usage
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 Justifying and estimating intangible benefits from cost: Advertising cost is one such
example wheee the actual spending depends on the market response and this justifying them
at the beginning of the period might not be feasible
Apart from above benefits and limitation one must also consider the behavioral aspects involved in
budgeting from scratch. These include:
 Scope for biasness by powerful managers in estimating the requirement for their
departments thus leading to greater allocation of funds.
 Resistance to change by the managers instill fear of new ideas and challenges
 Managers tend to avoid heavy paperwork that comes with Zero-Based Budgeting
Regards,
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Answer 3
Required Part a and b:
The material variances is computed as below:
Material variances
Budgeted
Standard quantity per unit (in kg) 1
Standard price per yard of material $20.00
Total standard cost $20.00
Actual
Actual Material purchased (A) 1,200
Actual Material Used 900
Actual cost of material per kg ($25,500/1,200) $21.25
Units produced (B) 800
Actual Qty of material used per unit (A/B) 1.50
Therefore, Material Rate variance can be calculated as below
(Standard price - Actual price) x Actual quantity
($20 - $21.25)*1,200 -$1,500
Standard Quantity for actual production 800
We, know Material Quantity variance is calculated as below
(Standard Quantity - Actual Quantity) x Standard Price
(800-900)*$20 -$2,000
Answer:
1. We see that the actual rate of material is $21.25 per kg as against the standard rate of $20
per kg, thus the variance of $1,500 is unfavorable as the company spent more than budgeted.
Material price variance = $1,500 unfavorable
2. For the production of 800 units, the company used a total of 900 kgs as against the standard
requirement of 800 kgs, thus the company used more material than budgeted and thus the
variance is unfavorable.
Material quantity variance = $2,000 unfavorable
Required Part c and d:
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The direct labour variances is computed as below:
Labour Variances
Budgeted
Standard Labour Hours per unit 0.25
Standard Labour Rate per Hour ($15/0.25) $60.00
Actual
Direct labour hours worked 280
Production (in units) 800
Actual Direct Labour Rate per hour $60.00
From above information, we can calculate the following:
Actual Labour Rate cost (Labour rate * labor hours) 16,800
Labour Rate variance can be calculated as below
(Standard rate - Actual rate) x Actual hours worked $0
Labour Efficiency variance can be calculated as below
Std hrs for actual production 200
(Standard hours - Actual hours) x Standard rate -$4,800
Answer:
1. We see that the actual direct labour rate is $60 per hour as against the standard rate of $60
per hr, thus there is no variance in the direct labor rate and the company paid as per the
standard and the variance is NIL.
Direct Labor price variance = NIL or 0
2. For the production of 800 units, the company used a total direct labour hour of 280 hours as
against the standard requirement of 200 hours, thus the company used more direct labor
hours than budgeted and thus the variance is unfavorable.
Direct labour efficiency variance = $4,800 unfavorable
Required Part e:
For the overhead variances, we will need the actual and standard variable overhead. The company
incurred an actual overhead cost of $4,500. The company budgeted an overhead of $3 per direct
labour hour. The standard direct labor hour is 200 hours, so the standard overhead is $3 * 200 =
$600. Since, the actual overhead is more than the standard, the variance is unfavorable.
Overhead variance = $600 - $4,500 = $3,900 unfavorable.
In the second part, we will pass the following journal entries for cost incurred towards the material,
labour and overhead.
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Particulars Debit Credit
Raw Material Inventory $22,500
To Accounts Payable $22,500
(Being raw material purchased on credit)
Work In process Inventory $16,800
To Wages Payable $16,800
(Being wages payable @60 per hour for 280 hours)
Work In process Inventory $4,500
To Manufacturing Overhead $4,500
(Being mfg. ohd. incurred)
Answer 4
Memorandum for Activity Based Costing
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To,
David Scott
September 26, 2019
Sub: Usage of Activity Based Costing
FOL currently has three categories of cost that includes direct material, direct labour and overhead
costs. While the direct material and direct labour are allocated directly to the products, overhead
costs are allocated using appropriate allocation method. With respect to allocation of overheads, I
wish to bring the following to your notice:
1. Under the traditional system of allocating overhead cost to the products of the company, the
overheads are allocated basis the total direct labour costs incurred by the company. The
company currently is allocating overhead to the product basis a fixed percentage of the total
direct labor costs incurred and then allocated evenly to all the offerings of the company.
2. In my recent seminar I got to know about the concepts of Activity Based Costing System of
the ABC system and I would like FOL to experiment with the concepts of ABC to improve
the appropriation of costs to the products of the company. ABC can be understood as a
logical and robust approach to costing system where all the overheads of the company are
divided among the various activities of the company. These activities and their total costs is
then allocated to the products based on the usage of the activities by each product
(AccountingCoach.com, 2019). After the seminar, I researched and identified three major
activities for our company and also their total costs and predicted level of activity. Based on
this information, I gave computed the per unit cost of each activity as under:
Activity Predicted
cost $
Predicted
Activity level Cost/Activity
Inward materials handling $1,500.00 5 $300.00
Research/Quality control $5,000.00 900 $5.56
Outwards materials handling $2,500.00 90 $27.78
5. The costs of the product under traditional and ABC system will be different as the allocated
overhead under both these systems are different. While one uses an even application based
on one allocation base (direct labour cost in the given case), the other uses more refined and
logical allocation based on usage of each activity by each product.
6. I recommend using ABC system of costing, as ABC is a more refined, logical and a
robust system of allocating overhead. ABC involves better allocation of costs, thus
leading to better product costs. An appropriate product costs enables company price their
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products better, negotiate better with the customers and control their profitability
margin.
Answer 5
Required Part 1:
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We wish to expand our operations for the pesticide, Microside given the developments in the
horticulture industry. We need to fulfill a annual demand of 2,00,000 liters and we can either make
or buy them from an external supplier. The relevant cost for choosing between the alternative of
making and buying is presented as below:
Particulars Make Buy
Total Per unit Total Per unit
Demand in litres 2,00,000 2,00,000
Cost of Direct Material $12,00,000 $6.00 $13,20,000 $6.60
Cost of Direct Labour $1,90,000 $0.95 $1,90,000 $0.95
Variable Factory Ohd $25,000 $0.13 $25,000 $0.13
Fixed Factory Ohd $3,00,000 $1.50 $1,05,000 $0.53
Total Costs $17,15,000 $8.58 $16,40,000 $8.20
Less: Sales value of Surplus Factor X $1,35,000 $0.68
Net total Costs $15,80,000 $7.90 $16,40,000 $8.20
This, we see that our cost of making the product is $7.90 per unit as opposed to buying them $8.20
per unit, indicating that we should choose to make the product as that would save costs for the
company and improve our profitability.
Required Part 2:
Memorandum for Non-Routine Decisions
To,
David Scott
September 26, 2019
Sub: Qualitative factors affecting non-routine decisions
Organizations worldwide need to make decisions at all time be it operational decisions, tactical or
strategical decisions for the smooth running of the business. These decisions are regular or
repetitive in nature and companies generally tend to create a specific procedure for these decisions
indicating the hierarchy at which approvals must be sought.
Companies also needs to make various non-routine or non-regular decisions which are different
from its core operating decisions but they still affect the financial performance and profitability of
the business. Companies should make efficient and effective non-routine business decisions as they
might not affect the business directly in terms of its core operation but affects the bottom line of the
business.
These non-routine decisions are non-repetitive and involve tactics (Bragg, 2019). They do not fall
under the normal decision-making procedure and thus should be directly routed to the manager for
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decision-making and resolution. To understand more about this, we can refer the examples of such
decisions as below:
1. Make or buy decisions: These are decisions where the firm needs to assess whether they
should make or buy the required materials directly from the market. They are non-repetitive
but affect the profitability as cost of buying vis-à-vis the cost of making is considered.
2. Accepting or rejecting a special order needs a separate analysis from the cost point of view.
The special order will need modifications in the production line and thus managers should
take decision based on overall cost of the opportunity.
3. Extending special credit to customers who need financial assistance.
4. Decisions pertaining to fulfillment of rush order that needs alteration to the production
scheulde.
Given the above examples, we can clearly see that standardization of these decision are not possible
and thus they must be dealt separately at all times as and when they occur. The only approach to
resolve such situation is by using Cost Benefit Analysis that reveals the incremental income vis-à-
vis the incremental cost.
The qualitative factors that you must consider while reviewing any non-routine decisions (Making
or buying) are:
 Goodwill of the external supplier: In a make or buy decisions, if buying option is more
profitable given its lower cost, we must consider the reputation and credibility of the
supplier to ensure that we will receive a regular supply of quality material as per our
requirement. The supplier should not be known for late deliveries, bad quality and behavior,
as that would ultimately impact our production schedule and quality.
 Terms & Conditions: the supplier should extend favorable credit terms; delivery terms and
payment options to us enabling us plan our working capital structure.
 Quality: This is by far the most important qualitative factor where we should never
compromise on the quality of the material for reducing the costs.
References
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AccountingCoach.com. (2019). Activity Based Costing | Explanation | AccountingCoach. Retrieved
from https://www.accountingcoach.com/activity-based-costing/explanation on 25 Sep. 2019
Bragg, S. (2019). Nonroutine decision — AccountingTools. Retrieved 25 September 2019, from
https://www.accountingtools.com/articles/2017/5/12/nonroutine-decision
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