BU8101

ACCOUNTING: A
USER’S
PERSPECTIVE

SEMINAR 11
Group 9
Wang Zeyu
Andanari Puspadin
Lee Meng Chin
Wang Haoran
Yu Qing
Question 1
Pearl Products Limited of Shenzhen, China,
manufactures and distributes toys throughout
South East Asia. 3 cubic centimeters (cc) of
solvent H300 are required to manufacture
each unit of Supermix, one of the company’s
products. The company is now planning raw
materials needs for the third quarter, the
quarter in which peak sales of Supermix occur.
To keep production and sales moving
smoothly, the company has the following
inventory requirements:
A. The finished goods inventory on hand at the
end of each month must equal to 3,000 units
of Supermix plus 20% of the next month’s
sales. The finished goods inventory on June
30 is budgeted to be 10,000 units.0

B. The raw materials inventory on hand at the

end of each month must be equal to one-
half of the following month’s production
needs for raw materials. The raw materials
on June 30 is budgeted to be 54,000cc of
solvent H300.

C. The company maintains no work in process

inventories.
A sales budget for Supermix for the last
six months of the year are as follows:

Month Budgeted Sales in Units

July 35,000
August 40,000
September 50,000
October 30,000
November 20,000
December 10,000
1. Prepare a production budget for Supermix for the months
July, August, September, and October

July August September October

Budgeted unit sales 35,000 40,000 50,000 30,000
Desired ending 11,000 13,000 9,000 7,000
inventory
Total units needed 46,000 53,000 59,000 37,000
Less beginning 10,000 11,000 13,000 9,000
inventory
Units to produce 36,000 42,000 46,000 28,000

The finished goods inventory on hand at the end

of each month must equal to 3,000 units of
Supermix plus 20% of the next month’s sales.
2. Examine the production budget that you prepared in the
previous question. Why will the company produce more
units than it sells in July and August, and fewer units than it
sells in September and October?

July August September October

Budgeted unit sales 35,000 40,000 50,000 30,000
Desired ending 11,000 13,000 9,000 7,000
inventory
Total units needed 46,000 53,000 59,000 37,000
Less beginning 10,000 11,000 13,000 9,000
inventory
Units to produce 36,000 42,000 46,000 28,000

Because higher number of sales were budgeted in the months of

August and September led to a higher desired ending inventory
compared to the beginning inventory in the months of July and
August. The opposite is true in September and October.
Tutor’s additional comments
 During July and August, the company is
building inventory in anticipation of
stronger sales in September. Therefore
production exceeds sales during the two
months.
 In September and October, lower sales is
anticipated for the following months, thus
production is less than sales.
 3. Prepare a direct materials budget showing the quantity
of solvent H300 to be purchased for July, August and
September, and for the quarter in total.

July August September October

Units to produce 36,000 42,000 46,000 28,000
Solvent per unit 3 3 3 3
Material needs (cc) 108,000 126,000 138,000 84,000
Desired ending 63,000 69,000 42,000
inventory
Total material needs 171,000 195,000 180,000
(cc)
Less beginning 54,000 63,000 69,000
inventory
Material purchases 117,000 132,000 111,000
(cc)

Material purchases for the quarter = 117,000+132,000+111,000=360,000

Question 2
 Cash Budget – P23.4B (p.1030) Peter Corporation

Peter Corporation sells its products to a single customer. At the

beginning of the current quarter, the company reports the
following selected account balances:

Cash $ 10,000
Accounts receivable 250,000
Current payables 90,000

Peter’s management has made the following budget estimates

regarding operations for the current quarter:

Sales (estimated) $ 700,000

Total costs and expenses (estimated) 500,000
Debt service payment (estimated) 260,000
Tax liability payment (estimated) 50,000
Of Peter's total costs and expenses, $40,000 is quarterly
depreciation expense, and $18,000 represents the expiration of
prepayments. The remaining $442,000 is to be financed with
current payables. The company's ending prepayments balance
is expected to be the same as its beginning prepayments
balance. Its ending current payables balance is expected to be
$15,000 more than its beginning balance.

All of Peter's sales are on account. Approximately 70% of its sales

are collected in the quarter in which they are made. The
remaining 30% are collected in the following quarter. Because all
of the company's sales are made to a single customer, it
experiences virtually no uncollectible accounts.

Peter's minimum cash balance requirement is $10,000. Should the

balance fall below this amount, management negotiates a short-
term loan with a local bank. The company's debt ratio (liabilities ÷
assets) is currently 90%.
a. Compute Peter’s budgeted cash receipts for the quarter.

Current quarter
Receipts from previous $ 250,000
quarter
Receipts from current 490,000
quarter
Total cash receipts 740,000
b. Compute Peter’s payments of current payables budgeted
for the quarter.

Current quarter
Beginning balance of current payables $ 90,000
Add: Total costs and expenses (estimated) 500,000
Less: Depreciation 40,000
Expiration of prepayments 18,000
Cash payments for current payables 427,000
Ending balance of current payables 105,000

(90,000+500,000) - (40,000+18,000+105,000) = 427,000

c. Compute Peter’s cash prepayments budgeted for the
quarter.

Current quarter
Beginning balance of prepayments $ x
Add: Cash payments for prepayments 18,000
Less: Expiration of prepayments 18,000
Ending balance of prepayments x

(x+18,000) - x = 18,000
d. Prepare Peter’s cash budget for the quarter.

Current quarter
Beginning cash balance $ 10,000
Cash receipts 740,000
Total cash receipts $ 750,000
Less: Current payables $ 427,000
Prepayments 18,000
Debt service payment 260,000
Tax liability payment 50,000
Total cash payments $ 755,000
Balance before financing $ (5,000)
e. Estimate Peter’s short-term borrowing requirements for the
quarter.

Current quarter
Balance before financing $ (5,000)
Borrowing 15,000
Ending cash balance $ 10,000

10,000 - (-5,000) = 15,000

f. Discuss problems Peter might encounter in obtaining short-
term financing.

 (Potentially) unprofitable. Peter Corporation’s estimated total

costs and expenses for the quarter outweigh their estimated
sales.

 High debt-ratio. Peter Corporation’s debt ratio is currently 90%

which may impose a higher risk to creditors (banks).
Question 3
A few years ago, Eastern Digital Corporation
implemented a systematic budgeting process
for profit planning and control purposes. While
the majority of departmental managers are
happy with the new process, the factory
manager has expressed his unhappiness with
the information being generated by the system.
A typical departmental cost report for a recent period follows:

Assembly Department
Cost Report
For the Month Ended 31 March, 2012

Planning Actual Variance

Budget Results
Machine Hours 40,000 35,000
Variable Cost:
Supplies $32,000 $29,700 $2,300 F
Scrap 20,000 19,500 500 F
Indirect Materials 56,000 51,800 4,200 F
Fixed Costs:
Wages and Salaries 80,000 79,200 800 F
Equipment Depreciation 60,000 60,000 -
Total Cost $248,000 $240,200 $7,800 F
After receiving a copy of this cost report, the
supervisor of the Assembly Department said, “These
reports are great. It’s really good to see how well
things are going in my department. I can’t
understand why those people up there complain so
much about the reports.”

For the last several years, the company’s sales and

marketing department has failed to meet the sales
targets stated in the company’s monthly budgets.
(a) The company’s CEO is uneasy about the cost
reports and would like you to evaluate their
usefulness to the company.

It is not useful.
The company compares cost at different
activity levels (the machine hours), which is
like comparing apples to oranges.
Tutor’s Additional Comments
 Different activity level – Variable costs are
naturally different
 The costs report only do a good job of
showing whether fixed costs were
controlled
 They do not do a good job showing
whether variable costs are controlled
 Since sales fails to meet budget,
production likely falls as well.
(b) What changes, if any, should be made in the
reports to give better insight into how well
departmental supervisors are controlling costs?

 Flex the budget to the actual level of

activity.

 Keep fixed costs constant.

(c) Prepare a new performance report,
incorporating any changes you suggested in
question (b) above.
 Assembly Department
Cost Report
For the Month Ended of performance March, 2012
Cost formula Total fixed Flexible
per hour costs Budget Actual Results Variances

Units of activity
35,000 35,000

Variable costs
Supplies 0.8 28,000 29,700 (1,700) F
Scrap 0.5 17,500 19,500 (2,000) F
Indirect materials
1.4 49,000 51,800 (2,800) F

Total variable costs

2.7 94,500 101,000 (6,500) F

Fixed cost

Wages & salaries 80,000 80,000 80,000

Equipment depreciation
60,000 60,000 60,000

Total fixed costs 140,000 140,000

Total costs 234,500 241,000 (5,700) F
(d) How well were costs controlled in the Assembly
Department in March?
Unfavorable variance in all its variable costs,
which indicates the lack of control.

Tutor’s comments: Flexible budget

performance report provides a much
clearer picture.
The variances indicate that costs were not
controlled by the Assembly Department
All 3 variable costs have unfavourable
variances.
Question 4
1. An accountant forgot to record four adjustments
during 2010. Which one of the following omissions of
adjustments will overstate assets?

A. Unearned revenue is not reduced for the

portion that has been earned.

B. Interest on fixed deposits has not yet been

recorded.

C. Office supplies are not reduced for the

portion that has been used.

D. Income taxes owed but not yet paid are

ignored.
 A = L + OE

Common + Revenue - Expense - Dividends

Stock

Net Income

Retained Earnings
 2. In October, an inexperienced book-
keeper capitalized the cost of replacing the
car battery of a 5-year old company’s car to
an asset account. This entry

A. Overstates the total book value of plant assets on the October’s

balance sheet but has no effect on the amount of net income
reported during October.
B. Overstates the total book value of plant assets on the October’s
balance sheet and understates amount of net income reported
during October.
C. Overstates the total book value of plant assets reported on the
October’s balance sheet and the amount of net income
reported during October.
D. Has no effect on the book value of plant assets on the
October’s balance sheet or the amount of net income
reported during October.
 A = L + OE

Common + Revenue - Expense - Dividends

Stock

Net Income

Retained Earnings
3. Unison Company reported net credit sales of
&2,800,000 and cost of goods sold of &1,800,000 for 2010.
Its beginning balance of accounts receivable was
&320,000. During 2010, the accounts receivable balance
decreased by &60,000. What is Unison’s accounts
receivable turnover rate for 2010(rounded to two
decimal places)?

A. 6.21
B. 9.66
C. 8.00
D. 5.14
 Accounts Net Sales
Receivable =
Turnover Average Net Acc. Receivable

Accounts Receivable Turnover =

2,800,000
320,000+(320,000-60,000) = 9.66
2
4. Art & Co. sold goods to Party House on 28
December 2009, with shipping terms of FOB
destination point. Party House received the goods
on 3 January 2010. Which of the following is true?

A. Art & Co. should record the sales revenue on

28 December 2009.

B. Party House should pay the transportation

costs.

C. Party House should include the goods in its

inventory at 31 December 2009.

D. Party House should record a liability for the

purchase on 3 January 2010.
5. For the most recent year, DC Bank’s current ratio
was significantly lower than that for the industry.
What is the best possible explanation for this
situation?

A. The other companies in the industry were

profitable.

B. DC Bank’s liquidity has improved.

C. DC Bank has less equity than the rest of the

industry.

D. DC Bank’s liquidity is worse than the rest of

the industry.
6.Logistics Transport purchased a truck on 1 January
2008 for $40,000. The truck had an estimated life of 5
years and an estimated residual value of $5,000.
Logistics used the straight-line method to
depreciate the asset. On 1 July 2010, the truck was
sold for $7,000 cash. The journal entry to record the
sale of the truck in 2010

A. Decreases stockholder’s equity.

B. Increases total assets.
C. Decreases total expenses.
D. Increased net income.
Monthly depreciation: ( $40,000 - $5,000 ) / 60 = $5833

Residual value when selling on 1 July 2010:

$40,000 - $5833 * 30 = $22,500 > $7,000

Lost of sale of assets

A = L + OE

Lost in stockholder’s equity

7.Energy Consultants had total assets of $750,000
and total shareholders’ equity of $250,000 at the
beginning of the year. During the year, total assets
increased by $550,000 and total liabilities increased
by $200,000. The company also paid $200,000 in
dividends. No other transactions occurred except
revenues and expenses. How much is net income
for the year?

A. $950,000
B. $750,000
C. $650,000
D. $550,000
Extended accounting equation:
Assets=Liabilities+(Common Stock + Net Income
- Dividends)

Net income = change of A - change of L + change of D

= $550,000 - $200,000 + $200,000
= $550,000
8. Fong Manufacturing has current assets (mainly
cash) of $100,000, total assets of $250,000, current
liabilities of $20,000, and long-term liabilities of
$50,000. Fong wants to buy new plant assets. How
much of its existing cash can Fong use to acquire
plant assets without allowing its current ratio to
decline below 2.0 to 1?

A. $ 40,000
B. $150,000
C. $180,000
D. $ 60,000
Current ratio = current assets / current liabilities
= ( $100,000 - X ) / $20,000
=2.0 : 1

So X = $60,000
9. H & Co. Has 5,000 3% cumulative preference shares
of $5 each, outstanding and 25,000 ordinary shares of
$2 each, outstanding. No dividends have been paid
for the past two years. If H & Co. Wishes to distribute
$2 per share to the ordinary shareholders, what is the
total amount of dividends to be declared in the
current year?

A. $50,750
B. $52,250
C. $50,000
D. $2,250
Dividends in arrears: 5,000 * $5 * 3% * 2

Dividends this year: 5,000 * $5 * 3% + 25,000 * $2

Total dividends to be declared in the current year:

$52,250
 10.Which of the following will not cause a
change in the owners’ equity of a business?

A. Withdrawal of cash by the owner.

B. Profit from sale of properties.
C. Settlement of a note payable.
D. Losses from discontinued operations.
Accounting equation:
Assets = Liabilities + Owners’ Equity
MCQ
1.Which of the benefits derived from budgeting
increases management's awareness of the
company's external economic environment?

A. Enhanced management responsibility

B. Assignment of decision-making
responsibilities
C. Coordination of activities
D. Performance evaluation
2. Which of the benefits derived from budgeting
provides a yardstick with which to measure each
department's actual performance?

A. Enhanced management responsibility

B. Assignment of decision-making
responsibilities
C. Coordination of activities
D. Performance evaluation
3. You are responsible for preparing the following
budgets or schedules:
1 Sales Budget
2 Manufacturing Cost Budget
3 Cash Budget
4 Production Schedule
5 Operating Expenses Budget
6 Budgeted Balance Sheet

In which order should you prepare these budgets and

schedules?

A. 1, 3, 4, 5, 2, 6
B. 1, 4, 3, 5, 2, 6
C. 1, 4, 2, 5, 3, 6
D. 3, 6, 1, 2, 4, 5
4. With a March 1 inventory of 12,000 units, how
many units must be produced to provide an ending
inventory of 8,000 units if Acorn Supply expects
March sales to be 36,000 units at $1 per unit?

A. 20,000 units
B. 48,000 units
C. 32,000 units
D. 56,000 units

36,000 + 8,000 – 12,000 = 32,000

5. Projected Sales Forecast:
Time 1st 2nd 3rd 4th
Periods
Projected 12,000 13,000 15,000 10,000
Unit Sales
The desired ending inventory is 10% of the projected
unit sales of the subsequent period. How many units
will be produced in the second time period?
A. 13,100
B. 13,200
C. 11,900
D. 12,100

13,000 + 0.1*15,000 - 0.1*13,000 = 13,200

 6. Which of the following statement is not true
about the relationship within the master budget?

A. The production budget are based in large part on

the sales forecast.
B. In many elements of the master budget, the
amounts budgeted for the upcoming quarter are
reviewed and subdivided into monthly budget
figures.
C. The operating budgets affect the budgeted
income statement, the cash budget, and the
budgeted balance sheet.
D. The capital expenditures budget affects the direct
materials budget.
7. The portion of the master budget relating to
an individual responsibility center is called
which of the following?

A. Operating budget
B. Responsibility budget
C. Flexible budget
D. Financial budget
Lecture11
Budgeting

Lecture
Review
Budget

 A budget is a comprehensive financial plan that

specifies how resources will be acquired and
used during a specified period of time.
Provide standards Provide information that
used for performance can be used to improve
evaluation and control decision making

Budgeting

Force managers to Improve communication

plan for resource and coordination
requirements
The Budgetary Process
Vision (Strategic Goal)

Formulate strategies to achieve vision

Prepare long-term budgets

Prepare short-term budgets (Operating Budgets)

Assign decision rights

Compare actual results to budgets

Budget Periods
 Operating budgets ordinarily cover a
one--year period corresponding to a
company’s fiscal year.
 Many companies divide their annual
budget into quarterly & monthly budgets.
 Operating budgets are more operational
than strategic in nature, done by lower-
level managers.
Types of Budgets

 Sales Budget

 Selling and Administrative Budget

Direct Materials Budget
 Production Budget
Direct Labor Budget

Manufacturing Overhead Budget

 Cash Budget
The Sales Budget

Sales Budget =
Estimated Unit Sales × Estimated Unit Price
 The Production Budget

Budgeted product sales in units

+ Desired product units in ending inventory
= Total product units needed
– Product units in beginning inventory
= Product units to produce

Inventory Policy
The Production Budget
Material Purchases
Units to produce × Material needed per unit
= Material needed for units to produce
+ Desired units of material in ending inventory
= Total units of material needed
– Units of material in beginning inventory
= Units of material to purchase
The Production Budget
Direct Labor

Units to Produce × Hours per Unit

= Total Hours Required
×Wage Rate per Hour
= Direct Labor Cost
The Production Budget
Manufacturing Overhead
Units to Produce × Variable Overhead Rate
= Variable Overhead Cost
+ Fixed Overhead
= Total Manufacturing Overhead Cost
- Depreciation
= Manufacturing Overhead

High-Low Method
Selling and Administrative
Expense Budget
Budgeted Unit Sales × Variable S&A per Unit
= Variable S&A Expense
+ Fixed S&A Expense
= Total S&A Expense
- Depreciation
= S&A Expense

High-Low Method
Cash Budget
 Cash receipts section lists all cash inflows
excluding cash received from financing.
 Cash disbursements section consists of all cash
payments excluding repayments of principal
and interest.
 Cash excess or deficiency section determines if
the company will need to borrow money or if it
will be able to repay funds previously borrowed.
 Financing section details the borrowings and
repayments projected to take place during the
budget period.
The Budgeted
Income Statement
Manufacturing Overhead Cost per Unit
= Total Manufacturing Overhead
Total Labor Hours Required

(Direct Materials + Direct Labor + Mfg. Overhead)

× Quantity
= Total Unit Cost
The Budgeted
Income Statement
Sales – Cost of Goods Sold
= Gross Margin
- Selling and Administrative Expense
= Operating Income
- Interest Expense
= Net Income

Balance Sheet
Static vs. Flexible Budgets

 Static Budgets: Traditional Budgets are

prepared for a fixed activity level.

 Flexible Budgets: Flexible Budgets are

prepared for multiple activity levels
Drawbacks of Static Budgets

 Performance evaluation is difficult when

actual activity differs from the activity
originally budgeted.
Flexible Budgeting

 Show expenses that should have

occurred at the actual level of activity.
 May be prepared for any activity level in
the relevant range.
 Reveal variances due to good cost
control or lack of cost control.
 Improve performance evaluation.
Flexible Budgeting
To flex a budget for different activity levels, we
must know how costs behave with changes in
activity levels.

 Total variable costs change in direct

proportion to changes in activity.

 Total fixed costs remain unchanged within

the relevant range.
Thank you and wish you
good luck for the coming
exam!