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Managerial Accounting Problems

Home > Study Notes > Managerial Accounting Problems
Published in: Accounting
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Relevant costing and master budgeting

Clent M / Dubai

5 years of teaching experience

Qualification: Certified Public Accountant

Teaches: Olympiad Exam Preparation, Finance, Mathematics, Accounting, CPA

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  1. Master Budget Problem 1 At January 1, 2018, Arrant, Inc. had 1,100 step stools on hand. Its policy is to maintain an ending inventory equal to 15% of units needed for the next month's sales. Arrant Co. estimates it will sell 8,000 stools during the first month of 2018 with a 5% increase in sales each subsequent month. Each stool is sold for $16. Prepare a sales budget for the March of 2018. Problem 2 Schroeder, Inc. sells placemats for $1 5 each. The company's budgeted unit sales for 4 months during 2018 appears below. February April May June 39,000 42,000 44,000 40,000 Schroeder desires to have total mats on hand at the end of each month equal to 15 percent of the following month's budgeted unit sales. Each mat requires 0.25 yards of fabric. At the end of each month, Schroeder desires to have 20 percent of production material needs required for the next month on hand. The fabric costs $2.60 per yard. Each mat produced requires 0.15 hours of direct labor. Prepare a production budget for the month of April Problem 3 Trump Inc. produces trinkets. Each trinket requires 0.4 board feet of wood and 1.25 hours of direct labor. Wood costs $1.40 per board foot. Trump pays it employees $18.00 per hour. Trump desires to have 20% of the materials needed for production during the next month on hand at the end of each month, and 15% of the number of trinkets to be sold the next month on hand at the end of each month. Scheduled production in units are: April May June 4,100 4, 700 5,300 Prepare a materials purchases budget for May in good form. Calculate budgeted raw materials inventory on the balance sheet at May 31 . Problem 4 Trevor Company was organized on March 1, 2004. operations are as follows: March April May Projected sales for each of the first three months of $480,000 590,000 505,000 The company expects to sell 10% of its merchandise for cash. Of sales on account 60% are expected to be collected in the month of sale, 30% in the month following sale and the remainder in the second month following sale. Prepare a schedule of cash collections for sales of March, April, and May.
  2. Problem 5 B2B Inc. prepared the following sales budget Month February March April May June Cash Sales $ 80,000 1 oo,ooo 90,000 120,000 110,000 Credit Sales $ 340,000 400,000 370,000 460,000 380,000 Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. The company's total budgeted collection from April to June amounts to Problem 6 The following historical pattern on its credit sales of Rainy Co. was presented: 70% collection during the month of sale. 15% in the first month after sale. 10% in the second month after sale. 4% in the third month after sale. 1% uncollectible. The sales on account of the last six months of the year were reported as follows: July August September October November December $120,000 140,000 160,000 180,000 200,000 170,000 The total cash collections during the fourth calendar quarter from sales made on account during the fourth calendar quarter would be Problem 7
  3. Appendix: The Cash Budget [EXERCISE] Information pertaining to Brenton Corporation's sales revenue is presented in the following tablew Cash sales Credit sales Total sales February $160,000 300 000 $460,000 March $150,000 400 000 APLil $120,000 280 000 Management estimates that 5% of credit sales are not collectible. Of the credit sales that are collectible, 60% are collected in the month of sale and the remainder in the month following the sale. Cost of purchases of inventory each month is 70% of the next monthfs projected total sales. All purchases of inventory are on account; 25% are paid in the month Of purchase, and the remainder is paid in the month following the purchase, Required: 1. Calculate Brenton's budgeted total cash receipts in April. 2. Calculate Brenton's budgeted total cash payments in March for inventory purchases. Problem 8 Emaar CORP. has the following budget estimates for its second year of operations: Projected sales — $3,500,000 Projected net income before tax — 12% of sales Estimated selling and administrative expenses — 25% of sales Direct labor and factory overhead are budgeted at 70% of the total manufacturing cost. Inventories are estimated as follows: Beginning Ending Raw materials $220,000 270,000 Goods in process $250,000 300,000 Finished qoods 3$50,ooo 420,000 The estimated purchases of raw materials would be Problem 9 Budgeted sales for the first six months of 2001 for Henry Corp. are listed below: UNITS: Jan 6,000 Feb 7,000 Mar 8,000 Apr 7,000 May 5,000 June 4,000
  4. Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the next month's budgeted sales. If Henry Corp. plans to produce 6,000 units in June, what are budgeted sales for July? Problem 10 The Mahoney Company has prepared a sales budget of 42,000 units for a 3-month period starting from January 1. The company has an inventory of 22,000 units of finished goods on hand at December 31 and has a target finished goods inventory of 24,000 units at the end of the succeeding quarter. It takes 3 gallons of direct materials to make 1 unit of finished product. The company has an inventory of 90,000 gallons of direct materials at December 31 and has a target ending inventory of 110,000 gallons. Problem 11 1. 2. Carol's Cookies produces cookies for resale at grocery stores throughout North America. The company is currently in the process of establishing a master budget on a quarterly basis for this coming fiscal year, which ends December 31. Prior year quarterly sales were as follows (1 unit = 1 batch . First quarter 64,000 units Second quarter 76,800 units Third quarter 96,000 units Fourth quarter 83,200 units Unit sales are expected to increase 25 percent, and each unit is expected to sell for $8. The management prefers to maintain ending finished goods inventory equal to 10 percent of next quarter's sales. Assume finished goods inventory at the end of the fourth quarter budget period is estimated to be 9,000 units. Prepare a sales budget for Carol's Cookies (Hint: be sure to increase last year's unit sales by 25 percent.) Prepare a production budget for Carol's Cookies
  5. Relevant costing Problem 1 A property company has already invested El 10m in a development project on a retail estate. The buildings and facilities have only been half built and will require another El 00m to complete, and due to various external factors, the retail estate can now only be sold for El 50m. The decision to be made is whether or not the company should invest that extra El 00m? Problem 2 Walker, Inc. currently manufactures 4,000 motors for its electric scooters annually. Direct material costs are $44,000 and direct labor total $16,000 annually for the motors. Overhead totals $18 per motor of which $5 is variable. Eighty percent of the fixed overhead is unavoidable. Swingly, Inc. has offered to sell the motors to Walker for $24 each. Create an incremental analysis for the outsourcing decision. Problem 3 John Company manufactures part H for use in its production cycle. The cost per unit for 3,000 units of Part H are Direct labor Direct materials $50 $10 Fixed overhead Variable overhead $30 $20 Blue Company has offered to sell John 3,000 units of part H for PI 00 per unit. If John accepts Blue's offer, the released facilities could be used to save $70,000 in relevant costs in its manufacture of Part H. In addition, $15 per unit of fixed overhead applied to Part H would be totally eliminated. Required: Determine the cost for each alternative. Determine if buy or manufacture. Problem 4 The Blue Plate Co. is operating at 50% capacity producing 10,000 units of ceramic plates a year. With the economic boom that the country is expected to have in the coming year, the company plans to utilize 75% capacity. Part of the manufacturing process is hand-painting which has a variable cost of material at $4.50 and labor at $5.50 per plate. This painting process has variable overhead at $1.00 which is 40% of total variable factory overhead. Total factory overhead is $500 per 100 plates. No increase in fixed factory overhead is expected even with the substantial increase in production. An offer to sub-contract the incremental hand-painting job was given at $10.50 per plate but the company will have to lease an equipment at $10,000 annual rental. The plates sell for $50.00 per plate a piece at the contribution margin rate of 45%. Should Blue Plate Company sub-contract? Why? Problem 5 - Diversified Machines has four product lines, one of which reflects the following results: $220,000 Sales Variable expenses 120 000 Contribution margin 1 oo,ooo Fixed expenses 120 000 Net loss If this product line is eliminated, 40% of the fixed expenses can be eliminated and the other 60% will be allocated to other product lines.
  6. A. Create an incremental analysis to determine if this product line should be eliminated. Problem 6 Halo Inc. budgeted 8,000 bearings for production during 2006. Fixed factory overhead is allocated using ABC. Halo received an offer from a suppler to manufacture the same quality bearings at $81 each. The space currently occupied by the manufacturing facility could be leased out for $20,000 per year if the supplier provides the bearings. The following estimated costs were provided: Direct material ($50/unit) Direct labor ($1 6/hr. * 1.5 hrs./unit) Variable manufacturing overhead ($6/unit) Fixed factory overhead costs ($1 8/unit) Total Cost per unit = $98.00 $400,000 192,000 48,000 144 000 $784,000 Use the incremental approach to determine if Halo should buy its bearings from the supplier. Label appropriately. Show calculations in the space provided if needed. Problem 7 A company is producing, on average, 10,000 units of product A per month despite having 30% more capacity. Costs per unit of product A are as follows: Direct Material Direct Labor Variable Factory Overhead Variable Selling Expense Fixed Factory Overhead Fixed Office Expense $8.00 5.00 2.00 0.50 3.00 2.00 $20.50 The company received a special order of 2,000 units of product A at $17.00 per unit from a new customer. Should the company accept the special order, provided that the customer has agreed to pay the variable selling expenses in addition to the price of the product? Problem 8 Flowers Inc. manufactures silk roses. Bud Company has approached Flowers with a proposal to buy 2,000 silk roses for $4.00 each. Regular customers are charged $4.25 for each rose. Flowers has the necessary capacity. The following costs are associated annually with silk roses with the company's normal production and sales of 10,000 roses: Direct material Direct labor Manufacturing overhead Total $21,000 13,000 9 000 $43,000 Forty percent of the manufacturing overhead is variable. All fixed overhead is allocated equally to all products produced. In good form, prepare an incremental analysis to analyze whether Flowers should accept the order from Bud Company.
  7. Problem 9 Block Corporation currently makes the rolls that it uses for its sandwiches. It uses 50,000 rolls annually. The costs to make the rolls are given below: Materials Labor VOH FOH $0.04 $0.03 $0.02 $0.07 A potential supplier has offered to sell Block the rolls for $0.11 each. If the rolls are purchased, 20% of the fixed overhead could be avoided. If Block accepts the offer, it will be: Problem 10 In a month, ABC Company normally produces and sells 8,000 units of its product for $20. Variable manufacturing cost per unit is $10. Total fixed manufacturing costs (up to the maximum capacity of 10,000 units) are $38,000. Variable operating cost is $1 per unit and fixed operating costs total $10,000. A customer placed a special order for 1 ,500 units for $15 each. The customer is willing to shoulder the delivery costs; hence the business will not incur additional variable operating costs. Should the company accept or reject the special order? Problems Problem 1 Practice Problem 1 Plymouth Company Plymouth Company manufactures a single product, which sells for $100 each. The company's budget for the the period April through July of year 2001 is as follows: Sales in units April 30,000 May 40,000 June 35,000 July 50,000 Each unit of the product requires 6 pounds of raw material, which the company buys at $5 per pound. The company wants to have in beginning inventory each month: (a) 30 percent of a month's expected sales of finished goods and (b) 50 percent of the raw material required for production. Each unit requires two hours of direct labor, which is billed at $14 per hour. Manufacturing overhead is allocated on the basis of direct labor hours, and the allocation rate is $12 per hour. The company's selling expenses are $5 per unit and the administrative expenses are $20,000 per month. The beginning inventory has 9,000 units of finished goods and 99,000 pounds of raw materials. The company wants to have 120,000 pounds of raw material at the end of June. Prepare the following budgets: (a) sales budget, (b) production budget, (c) direct materials purchases budget, (d) direct labor budget, (e) manufacturing overhead budget, (f) selling & administrative expenses budget, (g) budgeted ending finished goods inventory and cost of goods sold, and (h) budgeted income statement.
  8. One of the following is a relevant cost to the decision to build a factory (Learning Objective 1 The cost of a survey that has already been paid for A) The government grant available B) The land owned by the company on which the factory would be built C) The cost of the existing factory on that site D) One of the following types of cost is an irrelevant cost (Learning Objective 1 Ch 9) Future costs that differ between alternatives A) Unavoidable cost B) Differential cost C) Sunk cost D) One of the following statements is true when considering replacing old equipment (Learning Objective 2 Ch 9) We must recover the written down value of an asset in the balance sheet We must ignore the greater capacity of the new machine. B) We must take into consideration the depreciation rates on the old machine C) We must take into account the useful life of the new machine D) Problem 2 - Evans Corporation currently manufactures 3,000 subassemblies annually for its main product. The costs er unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $ 3.00 8.00 4.00 7.00 $22.00 Howard Company has contacted Evans with an offer to sell it 3,000 subassemblies for $18.00 each. $5 of the fixed overhead per unit is unavoidable. In good form in the answer box below, create an incremental analysis for the make or buy decision. Problem 3 - Temple, Inc. produces several models of grandfather clocks. An outside supplier has offered to produce the economy clocks for Temple for $350 each. Temple needs 1,200 clocks annually. Temple has provided the followin unit costs for its econom model: Unit Cost
  9. Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable) $ 100 120 80 150 Usinq qood form, prepare an incremental analysis which shows the effect of the make or buy decision. Show calculations to support your answers in the space outside the answer box. Incremental analysis: Problem 4 Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs: fixed costs - $21 ,000, and variable costs - $33,000. The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

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