ACCT1101 Lecture Notes - Lecture 3: Cash Flow Statement, Income Statement

1 An increase in fixed costs will cause the break-even point to decrease True False

2 Rental of equipment at $5,000 per month plus $6 for each machine hour used over 9,000 hours is a type of mixed cost. True False

3 Conversion costs are made up of direct labor and factory overhead True False

4 Which of the following would be classified as a variable cost?

Straight-line depreciation on production equipment

Copy lease payment of $500 per month plus $0.01 per copy

Fabric for use in quilts to be produced.

None of the above

5.Mixed costs:

have both the characteristics of fixed costs and variable costs.

change in relation to the passage of time.

cannot be accurately plotted on a graph.

None of the above

6 What is the correct formula to calculate the contribution margin ratio?

Fixed Costs / Unit Contribution Margin

(Sales - Variable Costs) / Sales

(Fixed Costs + Target Profit) / Unit Contribution Margin

None of the above

7 The budget process begins with which of the following?

Production budget

Sales budget

Cash Budget

Budgeted Income Statement

8 If the cost of materials purchased in the period is $200,000, and $185,000 is used in the manufacturing process, then:

the unused $15,000 is a period cost.

the unused $15,000 is part of work-in-process inventory in the period.

the unused $15,000 is classified as materials inventory

the unused $15,000 is part of finished goods inventory on the balance sheet.

9 Which statement(s) is True about the uses of managerial accounting?

Managerial accounting is used to support long-term planning decisions.

Managerial accounting helps a company evaluate the performance of company decisions.

Managerial accounting helps users run the day-to-day operations of the business.

All of the above

10 A budgeting system that requires managers to estimate sales and other operating expenses as though operations are being started for the first time is:

static budgeting.

flexible budgeting

zero based budgeting

None of the above

11

Fixed costs for Flag Stamp Co. are $250,000. The selling price per unit is $20.00, and variable costs are $15.00.

The contribution margin ratio is ? (state whole number only - no decimals).

12

Fixed costs for Flag Stamp Co. are $300,000. The selling price per unit is $20.00, and variable costs are $15.00. The break-even sales (in units) are ?

13

Assume sales are $750,000, variable costs are 70% of sales, and income from operations is $100,000. What is the contribution margin ratio and fixed cost, respectively?

14

The following costs were incurred in August:

Direct Materials $25,000

Direct Labor $20,000

Manufacturing (Factory) Overhead $25,000

Selling and Administrative Expenses $40,000

(1) What is the amount of the prime costs?

(2) What is the amount of the period costs?

(3) What is the amount of the conversion costs?

(4) What is the amount of the product costs?

15

If Ragged Edge Arts sells quilts and paintings, and it has estimated selling 50 quilts at $250 each and 42 paintings at $500 each, what are the estimated sales for next year?

Completing a comprehensive budgeting problem—manufacturingcompany

The Arthur Tire Company manufactures racing tires for bicycles.Arthur sells tires for $55 each. Arthur is

planning for the next year by developing a master budget byquarters. Arthur’s balance sheet for December

31, 2014, follows:

ARTHUR TIRE COMPANY

Balance Sheet December 31, 2014

Assets

Current Assets:

Cash $ 22,000

Accounts Receivable 22,000

Raw Materials Inventory 3,200

Finished Goods Inventory 7,250

Total Current Assets $ 54,450

Property, Plant, and Equipment:

Equipment 175,000

Less: Accumulated Depreciation (55,000)120,000

Total Assets $ 174,450

Liabilities

Current Liabilities:

Accounts Payable $ 7,500

Stockholders' Equity

Common Stock $ 135,000

Retained Earnings 31,950

Total Stockholders' Equity 166,950

Total Liabilities and Stockholders' Equity $ 174,450

Other data for Arthur Tire Company:

a. Budgeted sales are 800 tires for the first quarter andexpected to increase by 100 tires per quarter. Cash

sales are expected to be 30% of total sales, with the remaining70% sales on account.

b. Finished Goods Inventory on December 31 consists of 250 tiresat $29 each.

c. Desired ending Finished Goods Inventory is 30% of the nextquarter’s sales; first quarter sales for 2016

are expected be 1,200 tires; FIFO inventory costing method isused.

d. Direct materials cost is $16 per tire.

e. Desired ending Raw Materials Inventory is 20% of the nextquarter’s direct materials needed for

production; desired ending inventory for December 31 is $3,000;indirect materials are insignificant and not

considered for budgeting purposes.

f. Each tire requires 0.20 hours of direct labor; direct laborcosts average $20 per hour.

g. Variable manufacturing overhead is $2 per tire.

h. Fixed manufacturing overhead includes $3,000 per quarter indepreciation and $4,820 per quarter for

other costs, such as utilities, insurance, and propertytaxes.

i. Fixed selling and administrative expenses include $10,000 perquarter for salaries; $1,800 per quarter for

rent; $500 per quarter for insurance; and $600 per quarter fordepreciation.

j. Variable selling and administrative expenses include suppliesat 1% of sales.

k. Capital expenditures include $30,000 for new manufacturingequipment, to be purchased and paid in the

first quarter.

l. Cash receipts for sales on account are 50% in the quarter ofthe sale and 50% in the quarter following the

sale; December 31, 2014, Accounts Receivable is received in thefirst quarter of 2015; uncollectible

accounts are considered insignificant and not considered forbudgeting purposes.

m. Direct materials purchases are paid 75% in the quarterpurchased and 25% in the following quarter;

December 31, 2014, Accounts Payable is paid in the first quarterof 2015.

n. Direct labor, manufacturing overhead, and selling andadministrative costs are paid in the quarter

incurred.

o. Income tax expense is projected at $2,000 per quarter and ispaid in the quarter incurred.

p. Arthur desires to maintain a minimum cash balance of $30,000and borrows from the local bank as

needed in increments of $1,000 at the beginning of the quarter;principal repayments are made at the

beginning of the quarter when excess funds are available and inincrements of $1,000; interest is 12% per

year and paid at the beginning of the quarter based on theamount outstanding from the previous quarter.

Requirements

1. Prepare Arthur’s operating budget and cash budget for 2015,by quarter. Required schedules and

budgets include: sales budget, production budget, directmaterials budget, direct labor budget,

manufacturing overhead budget, cost of goods sold budget,selling and administrative expense budget,

cash receipts, cash payments, and cash budget. Manufacturingoverhead costs are allocated based on

direct labor hours.

2. Prepare Arthur’s annual financial budget for 2015, includingbudgeted income statement, budgeted

balance sheet, and budgeted statement of cash flows.

Case 3

Part 1 Master Budgets

Pizza L.L.C. operates pizza delivery and carry-out restaurants.The annual report describes its business as follows: We offer afocused menu of high-quality, value-priced pizza with three typesof crust (Hand-Tossed, Thin Crust, and Deep Dish), made from freshdough produced in our regional distribution centers. We prepareevery pizza using real cheese, pizza sauce made from freshtomatoes, and a choice of high-quality meat and vegetable toconsistently and efficiently produce the highest-quality pizza.

Over the 41 years since our founding, we have developed asimple, cost-efficient model. We offer a limited menu, our storesare designed for delivery and carry-out, and we do not generallyoffer dine-in service. As a result, our stores require relativelysmall, lower-rent locations and limited capital expenditures.

How would a master budget support planning, directing, andcontrol for Pizza LLC? Include the three major objectives ofbudgeting? Under what circumstances would a static budget beappropriate?

Briefly describe the type of human behavior problems that mightarise if budget goals are set too tightly? Too loosely? Or ifconflicting goals within the budget?

Why should the production requirements set forth in theproduction budget be carefully coordinated with the sales budgetAND Why should the timing of direct materials purchases be closelycoordinated with the production budget?

Budget performance report

The Box Company (BC) manufactures boxes for the pizza industry.The cost standards per 100 boxes are:

Cost Category Standard cost per 100 boxes

Direct labor 2.00

Direct materials 9.10

Factory overhead .55

Total 11.65

At the beginning of July, BC management planned sales andproduction of 400,000 boxes. The actual number of boxes sold andproduced for July was 406,000 boxes.

The actual production costs for July of the current year were asfollows:

Cost Category Standard cost per 100 boxes

Direct labor 7540

Direct materials 35750

Factory overhead 2680

Total 45970

Prepare the July manufacturing standard cost budget (directlabor, direct materials, and overhead) for BC, assuming plannedproduction.

Prepare a budget performance report for manufacturing costs,showing the total cost variances for direct materials, directlabor, and factory overhead for July.

Interpret the budget performance report.

Part 2 Evaluating Divisional Performance and Capital InvestmentAnalysis

The three divisions of a Foods Co. are Snacks, Morning Foods,and Frozen. The divisions are structured as investment centers. Thefollowing responsibility reports were prepared for the threedivisions for the prior year:

Snack Morning Foods Frozen

Revenues 2200000 2520000 2100000

Operating Expenses 1366600 1122000 976800

Income from Op

Before service dept 833400 1398000 1123300

Service dept charges

Promotion 300000 600000 468000

Legal 137400 243600 235200

Total Service Dept charges 437400 843600 703200

Income from Operations 396000 554400 420000

Invested Assets 2000000 1680000 1750000

Which division is making the best use of invested assets andshould be given priority for future capital investments? ConsiderROI, the acceptable and rate of return.

Assuming that the minimum acceptable rate of return on newprojects is 19%, would all investments that produce a return inexcess of 19% be accepted by the divisions?

Can you identify opportunities for improving the company'sfinancial performance?