ACCTG 1 Lecture 7:
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Governmental Budgeting and Accounting
This mini-case covers a number of the major concepts that wehave covered in class this semester. Specifically, the examrequires you to perform a break-even analysis with a weightedaverage contribution margin, prepare a quarterly operating budget,and consider a capital investment using the net present valuetechnique. The answers are cumulative. You cannot skip anysection and do the next.
You may make whatever assumptions you think are necessary toanswer any question. If needed, be sure to state every assumptionexplicitly. Turn in your answers in this Word document along withthe supporting calculations in Excel spreadsheets.
All of the information that you need to answer a given questionis provided in the text that immediately precedes the question andthe answers to the questions that precede it. Read the entireproblem set before you begin. Make sure you understand thequestions before answering them!
Santa Fe Museum of Southwestern Art
The Santa Fe Museum of Southwestern Art (SFMSA) presentsrotating exhibits of the works of artists and artisans from theSouthwestern United States. Historically, the museum has derivedits support from three sources: grants, annual memberships, andvisitor revenues. For the 2017 fiscal year, SFMSA knows that itwill receive $495,000 in grants from various sources. It alsoexpects 1,375 people to be supporting members of the museum. Onaverage, supporting members give SFMSA $105.75 per year. You canthink of the support from grants and memberships as Fixed Revenues.The museum expects the following mix of visitors during 2017, eachpaying the amount shown in the right column of the schedule.
Type of Visitor | Percent of Total | Price |
Regular | 60% | $6.00 |
Group | 18% | $3.00 |
Senior Citizen | 12% | $2.00 |
Student | 10% | $1.00 |
SFMSA has $965,000 of fixed expenses each year. In addition, themuseum spends an average of $0.62 per visitor for handouts thatdescribe the exhibits on display. SFMSA estimates that it hasvariable electric costs of $0.10 per visitor. Plus, the museumoffers each visitor the option of receiving an audio recordingwhich describes the featured exhibit of the month. Visitors areallowed to keep the recording as a memento of their visit.Historically, these recordings have cost the museum $1.30 per copyto produce and replicate. On average, 25% of the people visitingthe museum have taken advantage of the free audio recordingoffer.
Problem 1. The Directorof the museum has asked you to tell her the minimum number of totalvisitors that must come to the museum each year in order for SFMSAto break even. Using the information given above, what is SFMSAâsbreak-even visitor volume? (40 points)
Because of Santa Feâs location in themountains of New Mexico, the museum tends to have a seasonalpattern to its visitor flow with proportionally more peoplevisiting SFMSA in the summer than in the winter. In addition,revenue from grants and memberships tend to flow into the museumunevenly throughout the year. The seasonal flow of visitor, grantsand membership revenues is distributed throughout the year asfollows:
P11.1021 Summer Session - Replacement Assignment Number5
Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
Visitors | 20% | 25% | 40% | 15% |
Membership Revenue | 40% | 20% | 20% | 20% |
Grant revenue | 25% | 50% | 10% | 15% |
Weighted Average Price per ticket = (Weight of Regularvisitor in total tickets sold x Price of ticket) + (Weight of Groupvisitors in total tickets sold x Price of ticket) + (Weight ofSenior Citizen visitor in total tickets sold x Price of ticket) +(Weight of Student visitor in total tickets sold x Price ofticket)
=> (0.6 x $6) + (0.18 x $3) + (0.12 x $2) + (0.10 x$1) = $4.48 per ticket
Variable cost per visitor = Cost of handouts + variableelectric costs + (Cost of audio recording x 25%)
=> $0.62 + $0.10 + ($1.30 x 25%) =$1.045
Contribution per ticket = Selling Price â Variable cost=> $4.48 - $1.045 = $3.435
Total Fixed Cost = $965,000
Fixed Revenues = Grant + Membership Revenue => $495,000 +($105.75 x 1,375) = $640,406.25
Remaining Fixed cost = $965,000 - $640,406.25 =$324,593.75
Break-even point = Fixed cost / Contribution perticket
=> $324,593.75 / $3.435 = 94,495.99 or94,496
So, total 94,496 tickets with stated percentage ofvisitor type are required to break-even.
Fixed expenses are distributed evenly throughout the year i.e.25% per quarter. The museumâs marketing director forecasts that82,000 people will visit the museum during fiscal year 2017.
SFMSAâs Director of Marketing has convinced the ExecutiveDirector that a museum shop can be operated profitably in a smallspace just off the main entrance. She agrees and the shop isscheduled to open on April 1, 2017, the first day of the secondquarter. The Marketing Director estimates that 5% of the people whovisit the museum will make purchases from the shop. Based on hisexperience, he expects the average purchase to be $50. SFMSAâsBusiness Manager estimates that the cost-of-goods-sold will be 75%of the museum-shopâs sales revenue. The shop will be staffed byvolunteers at no cost to SFMSA.
Problem 2. Using theinformation above, prepare a properly formatted operating budgetfor SFMSA for each of the four quarters in fiscal year 2017 andsummarize the budget for the full year. (45 points)
SFMSA has just been approached by the Curator of SpecialExhibits at the Smithsonian Museum. The Smithsonian has offered tolend SFMSA a rare collection of nineteenth century Navajo crafts.The collection would remain at the museum for a five-year periodafter which it would be returned to the Navajo nation. To house theexhibit, SFMSA will have to upgrade its environmental and securitysystems at a one-time cost of $300,000. This is the only cashoutflow associated with the decision.
Since this may be the last time that this collection will beexhibited in its entirety, the Executive Director is enthusiasticabout the impact that it will have on visitor volume and thereputation of the museum. The Marketing Director forecasts that 900incremental visitors are likely to be drawn to the museum eachmonth that the exhibit is at SFMSA.
The director wants you to tell her if the exhibit is financiallyself-sufficient or if she will need to get a grant to support it.You know that SFMSAâs cost of capital is 8%. You also know themarginal contribution generated by each incremental visitor to themuseum from your work on the break-even analysis. Do not count onany gift shop purchases from the incremental visitors.
Problem 3. What do youtell her? Can SFMSA afford to show the exhibit based solely on themarginal contribution from incremental visitors? If the exhibit isnot financially self-sufficient, how large a grant will SFMSA needto get to meet the projected shortfall? Support your recommendationand present your findings in a way that the director willunderstand. (40 points)
I have answered problem 1, the answer is in bold. I need helpanswering problem 2 and 3.
Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the companyâs current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.
Table:
| Subject | U.S. GAAP | IFRSs |
|---|---|---|
| Concept/objective | realized or realizable and earned. | According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized. |
| Definition of revenue | Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations." | Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants." |
| Sale of goods or products | SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP. | Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably." |
| Rendering services | >Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date. | Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable." |
| Software arrangements | ASC 985-605 provides guidance on recognizing revenue in a software arrangement. | There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate. |
| Construction-type contracts | ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized. | IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized. |
| Milestone method | ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements. | There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements. |
| Multiple-element arrangements | ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605). | Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole." |
| Bill-and-hold arrangements | The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances. | Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same. |
| Gross versus net | ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent). | Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent. |
| Customer loyalty programs | Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model. | IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement. |
| Rebates, discounts, incentives, and other consideration | ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received. | Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers. |
| Specific industry and other guidance | Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions. | IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions. |
I'll rate do not skip any parts please if you can't dodon't do at all pass it to someone else don't waste my questionthanks ( I need all answers Cost behavior, High low, contributionmargin, Sales mix, target profit Etc)
Cover-to-Cover Company is a manufacturer of shelving forbooks. The company has compiled the following cost data, and wantsyour help in determining the cost behavior. After reviewing thedata, complete requirements (1) and (2) that follow.
| Units | Total | Total | TotalMachine |
|---|---|---|---|
| Produced | Lumber Cost | Utilities Cost | Depreciation Cost |
| 13,000 shelves | $156,000 | $15,950 | $145,000 |
| 26,000 shelves | $312,000 | $30,900 | $145,000 |
| 52,000 shelves | $624,000 | $60,800 | $145,000 |
| 65,000 shelves | $780,000 | $75,750 | $145,000 |
1. Determine whether the costs in the table are variable, fixed,mixed, or none of these.
Variable Cost | Fixed Cost | Mixed Cost | None of these | ||
|---|---|---|---|---|---|
| Lumber | |||||
| Utilities | |||||
| Depreciation |
2. For each cost, determine the fixed portion of the cost, andthe per-unit variable cost. If there is no amount or an amount iszero, enter "0". Recall that, for N= Number of Units Produced,Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Completethe following table with your answers.
| Cost | Fixed Portion of Cost | Variable Portion of Cost (per Unit) |
| Lumber | ||
| Utilities | ||
| Depreciation |
High-Low
Biblio Files Company is the chief competitor of Cover-to-CoverCompany in the bookshelf business. Biblio Files is analyzing itsmanufacturing costs, and has compiled the following data for thefirst six months of the year. After reviewing the data, answerquestions (1) through (3) that follow.
| Month | Number of Units Produced | TotalCost |
|---|---|---|
| January | 4,360 | $65,600 |
| February | 250 | $6,250 |
| March | 1,000 | $15,000 |
| April | 5,250 | $56,250 |
| May | 1,750 | $32,500 |
| June | 3,015 | $48,000 |
1. From the data previously provided, help Biblio Files Companyestimate the fixed and variable portions of its total costs usingthe High-Low Method. Recall that Total Costs = (Variable Cost PerUnit x Units Produced) + Fixed Cost. Complete the followingtable.
| Total FixedCost | Variable Cost perUnit |
2. With your Total Fixed Cost and Variable Cost per Unit fromthe High-Low Method, compute the total cost for the followingvalues of N (Number of Units Produced).
| Number of UnitsProduced | TotalCosts |
| 3,500 | |
| 4,360 | |
| 5,250 |
3. Why does the total cost computed for 4,360 units not matchthe data for January in the table at the top of this panel?
The High-Low method gives accurate data only for levels ofproduction outside the relevant range.
The High-Low method gives a formula for the estimated total costand may not match levels of production other than the highest andlowest.
The High-Low method is accurate only for months in whichproduction is at full capacity.
The High-Low method only gives accurate data when fixed costsare zero.
Contribution Margin
Review the contribution margin income statements forCover-to-Cover Company and Biblio Files Company on their respectiveIncome Statements panels. Complete the following table from thedata provided in the income statements. Each company sold 84,800units during the year.
| Cover-to-Cover Company | Biblio Files Company | |
| Contribution margin ratio (percent) | ||
| Unit contribution margin | ||
| Break-even sales (units) | ||
| Break-even sales (dollars) |
Income Statement - Cover-to-Cover
Cover-to-Cover Company |
Contribution Margin Income Statement |
For the Year Ended December 31 |
1 | Sales | $424,000.00 | ||
2 | Variable costs: | |||
3 | Manufacturing | $212,000.00 | ||
4 | Selling | 21,200.00 | ||
5 | Administrative | 63,600.00 | 296,800.00 | |
6 | Contribution margin | 127,200.00 | ||
7 | Fixed Costs: | |||
8 | Manufacturing | $5,000.00 | ||
9 | Selling | 4,000.00 | ||
10 | Administrative | 54,600.00 | 63,600.00 | |
11 | Income from operations | $63,600.00 |
Income Statement - Biblio Files
Biblio Files Company |
Contribution Margin Income Statement |
For the Year Ended December 31 |
1 | Sales | $424,000.00 | ||
2 | Variable costs: | |||
3 | Manufacturing | $169,600.00 | ||
4 | Selling | 16,960.00 | ||
5 | Administrative | 33,920.00 | 220,480.00 | |
6 | Contribution margin | 203,520.00 | ||
7 | Fixed Costs: | |||
8 | Manufacturing | $121,920.00 | ||
9 | Selling | 8,000.00 | ||
10 | Administrative | 10,000.00 | 139,920.00 | |
11 | Income from operations | $63,600.00 |
Sales Mix
Biblio Files Company is making plans for its next fiscalyear, and decides to sell two new types of bookshelves, Basic andDeluxe. The company has compiled the following estimates for thenew product offerings.
| Type ofBookshelf | SalesPrice per Unit | Variable Cost per Unit |
|---|---|---|
| Basic | $5.00 | $1.75 |
| Deluxe | $9.00 | $8.10 |
The company is interested in determining how many of each typeof bookshelf would have to be sold in order to break even. If wethink of the Basic and Deluxe products as components of one overallenterprise product called âCombined,â the unit contribution marginfor the Combined product would be $2.31. Fixed costs for theupcoming year are estimated at $346,962. Recall that the totals ofall the sales mix percents must be 100%. Determine the amounts tocomplete the following table.
| Type of Bookshelf | Percent of Sales Mix | Break-Even Sales in Units | Break-Even Sales in Dollars |
| Basic | |||
| Deluxe |
Target Profit
Refer again to the income statements for Cover-to-CoverCompany and Biblio Files Company on their respective IncomeStatement panels. Note that both companies have the same sales andnet income. Answer questions (1) - (3) that follow, assuming thatall data for the coming year is the same as the current year,except for the amount of sales. If required, round answers to thenearest dollar.
1. If Cover-to-Cover Company wants to increase its profit by$40,000 in the coming year, what must their amount of sales be?
2. If Biblio Files Company wants to increase its profit by$40,000 in the coming year, what must their amount of sales be?
3. What would explain the difference between your answers for(1) and (2)?
Cover-to-Cover Companyâs contribution margin ratio is lower,meaning that itâs more efficient in its operations.
Biblio Files Company has a higher contribution margin ratio, andso more of each sales dollar is available to cover fixed costs andprovide income from operations.
The companies have goals that are not in the relevant range.
The answers are not different; each company has the samerequired sales amount for the coming year to achieve the desiredtarget profit.