BACHELOR OF ACCOUNTING

ACC732 – COST AND MANAGEMENT ACCOUNTING 2

REVISION QUESTIONS

CAPITAL EXPENDITURE DECISION

Question 1
Special People industries is a not for profit organisation that employs only people with
physical or intellectual disabilities. One of the organisation’s activities is to make biscuits for
it snack food store. At the end of year 1, Special People Industries purchased a biscuit-
cutting machine. This machine has now been used for three years. Management is
considering the purchase of a newer, more efficient machine. If purchased, the new
machine would be acquired at the end of year 4.
Management expects to sell 300 000 boxes of biscuits in each of the next six years. The
selling price is expected to average $1.15 per box.
Special People Industries has two options: continue to operate the old machine, or sell the
old machine and purchase the new machine. No trade-in was offered by the seller of the
new machine. The following information has been assembled to help management decide
which option is more desirable:

Old machine New machine

Original cost of machine at acquisition $80 000 $120 000
Remaining useful life (at end of year 4) 6 years 6 years
Expected annual cash operating expenses:
Variable cost per box $0.38 $0.29
Total fixed costs $21 000 $11 000
Estimated cash value of machines:
End of year 4 $40 000 $120 000
End of year 10 $7 000 $20 000

Assume that all operating revenues and expenses occur at the end of the year.
Required:
1. Use the net present value method to determine whether Special People Industries
should retain the old machine or acquire the new machine. The organisation’s required
rate of return is 12 per cent.
2. Independent of your answer to requirement 1, suppose the quantitative differences
between the two alternatives are so slight that managements is indifferent between the
two proposals.
Question 2
You are a financial analyst for Damon Electronics Company. The director of capital
budgeting has asked you to analyse two proposed capital investments, Projects X and Y.
Each project has a cost of $10,000, and the required rate of return for each project is 12%.
The projects expected net cash flows are as follows:
Expected Net Cash Flows

Year Project X Project Y

0 ($10,000) ($10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500

a) Calculate each projects payback period, net present value (NPV) and interest rate of
return (IRR)
b) Which project or projects should be accepted if they are independent?
c) Which project should be accepted if they are mutually exclusive?
d) How might a change in the required rate of return produce a conflict between the NPV
and IRR rankings of these two projects? Would this conflict exist if rate were 5%. (Hint:
Plot the NPV profiles).
e) Why does conflict exist?

QUESTION 3
Project K has a cost of $52,125, and its expected net cash inflows are $12,000 per year for 8
years.
a) What is the project’s payback period (to the closest year)
b) The required rate of return for the project is 12%. What is the project’s NPV?
c) What is the project’s IRR? (Hint: Recognise that the project is an annuity)
d) What is the project’s discounted payback period, assuming a 12% require rate of return?
BUDGETING
Carol Mosky, owner of Carol’s Fashion Designs Inc., is planning to request a line of credit
from her bank. She has estimated the following sales and forecasts for the firm for parts of
2013 and 2014:

May 2015 $180,000

June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2016 180,000

Collection estimates obtained from the credit and collection department are as follows:
Collections within the month of sale, 10%; collections in the month following the sales, 75%;
collections in the second month following the sales, 15%. Payments for labour and raw
materials are typically made during the month following the one in which these costs have
been incurred. Total labour and raw materials costs are estimated for each month as follows:

May 2015 $90,000

June 90,000
July 126,000
August 882,000
September 306,000
October 234,000
November 162,000
December 90,000

General and administrative salaries will amount to approximately $27,000 a month; lease
payments under long-term lease contract will be $9,000 a month; depreciation charges will
be $36,000 a month; miscellaneous expense will be $2,700 a month; income tax payments of
$63,000 will be due in both September and December; and a progress payment of $180,000
on a new design studio must be paid in October. Cash on hand on July 1 will amount to
$132,000, and a minimum cash balance of $90,000 will be maintained throughout the cash
budget period.

Required
a) Prepare the cash budget for the 3rd quarter of 2015.
b) Prepare an estimate of the required financing (or excess funds) – that is, the amount of
money Carol will need to borrow (or will have available to invest) – for each month
during the quarter.

STANDARD COSTING
Question 1
Following is information for July for the operations of Pink, Inc., which makes reproduction of
famous painting in various shades and hues of pink, mostly for the motel industry.

Budget Actual

Production in units 1,000 1,100

Raw materials 3 pounds per unit @ $24 per pound 4 pounds per unit @ $18
per pound
20 minutes per unit @ $17 per unit
Direct labour 15 minutes per unit @ $17
per hour

a. Calculate the flexible budget variance for raw materials.

b. Calculate the direct labour wage rate variance.
c. How much of the total flexible budget variance for materials and labour is due to the
fact that company produced more units than planned?

Question 2
Li, Lee and Levy Industries make widgets in its factory located in the Marina Shores district of
Seattle. Following is budgeted and actual information for the month.
Static Budget Information Actual Results

Widgets produced: 1,000 900

Direct materials: copper fibres 15,000 pounds for a total cost of 12,600 pounds for a total cost
$31,500 of $25,200

Direct labour 1,000 hours for a total cost of 950 hours for a total costs of
$9,000 $8,075

Variable overhead cost (allocated $18,000 $14,553

based on machine hours)

Fixed Costs
$56,000 $57,000
a. Compute the flexible budget variance for the month. Show separate line-items for
direct materials, direct labour, variable overhead and fixed overhead.
b. Calculate the direct materials price variance. Is it favourable or unfavourable?
c. Calculate the direct materials quantity variance. Is it favourable or unfavourable?
d. Calculate the direct labour wage variance. Is it favourable or unfavourable?
e. Calculate the direct labour efficiency variance. Is it favourable or unfavourable?