GAM7113

ACCOUNTING FOR MANAGERS

CASE STUDY 1 (PART 1)

Trimester 2420

Lecturer:

No. Students’ ID Students’ Name

1231401723
1. Akhy Akter

Total Marks
 CASE STUDY 1
Solutions
1) Trends in the Sales Budget
Observing Trends:
1. Sales Volume Trends:
 Standard Tents:
 Q1: 1,000 units
 Q2: 1,200 units (increase of 200 units)
 Q3: 1,500 units (increase of 300 units)
 Q4: 1,800 units (increase of 300 units)
 Premium Tents:
 Q1: 600 units
 Q2: 700 units (increase of 100 units)
 Q3: 900 units (increase of 200 units)
 Q4: 1,100 units (increase of 200 units)

Analysis: Sales volumes for both types of tents are increasing each quarter, with a larger
increase in Standard Tents in Q3 and Q4.
Revenue Calculation:
 Q1: (1,000 × RM300) + (600 × RM500) = RM 300,000 + RM 300,000 = RM 600,000
 Q2: (1,200 × RM300) + (700 × RM500) = RM 360,000 + RM 350,000 = RM 710,000
 Q3: (1,500 × RM300) + (900 × RM500) = RM 450,000 + RM 450,000 = RM 900,000
 Q4: (1,800 × RM300) + (1,100 × RM500) = RM 540,000 + RM 550,000 = RM
1,090,000

Revenue Analysis: Quarterly revenue is increasing, showing a positive trend due to

higher sales volume and higher unit prices.

2) Effect of Desired Ending Inventory on Production Budget

Desired Ending Inventory Calculation:
 Q1: 10% of Q2 sales
 Standard Tents: 10% of 1,200 = 120 units
 Premium Tents: 10% of 700 = 70 units
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 Q2: 10% of Q3 sales
 Standard Tents: 10% of 1,500 = 150 units
 Premium Tents: 10% of 900 = 90 units

 Q3: 10% of Q4 sales

 Standard Tents: 10% of 1,800 = 180 units
 Premium Tents: 10% of 1,100 = 110 units
 Q4: No further quarters, so the ending inventory is not required.

Production Calculation:
 Q1: (Sales + Desired Ending Inventory) - Beginning Inventory
 Standard Tents: (1,000 + 120) - 100 = 1,020 units
 Premium Tents: (600 + 70) - 60 = 610 units
 Q2: (Sales + Desired Ending Inventory) - Beginning Inventory
 Standard Tents: (1,200 + 150) - 120 = 1,230 units
 Premium Tents: (700 + 90) - 70 = 720 units
 Q3: (Sales + Desired Ending Inventory) - Beginning Inventory
 Standard Tents: (1,500 + 180) - 150 = 1,530 units
 Premium Tents: (900 + 110) - 90 = 920 units
 Q4: (Sales + Desired Ending Inventory) - Beginning Inventory
 Standard Tents: (1,800 + 0) - 180 = 1,620 units
 Premium Tents: (1,100 + 0) - 110 = 990 units

3) Impact of Direct Material and Labour Costs

Direct Material Costs:
 Current Costs:
 Q1: (1,000 × 4m) + (600 × 6m) = 4,000m + 3,600m = 7,600 meters
 Q2: (1,200 × 4m) + (700 × 6m) = 4,800m + 4,200m = 9,000 meters
 Q3: (1,500 × 4m) + (900 × 6m) = 6,000m + 5,400m = 11,400 meters
 Q4: (1,800 × 4m) + (1,100 × 6m) = 7,200m + 6,600m = 13,800 meters
 Increased Fabric Costs:
 Cost per meter increase by 10%: RM 15 × 1.10 = RM 16.50
 Q1 Revised Cost: 7,600 meters × RM 16.50 = RM 125,400

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  Q2 Revised Cost: 9,000 meters × RM 16.50 = RM 148,500
 Q3 Revised Cost: 11,400 meters × RM 16.50 = RM 188,100
 Q4 Revised Cost: 13,800 meters × RM 16.50 = RM 227,700

Total Revised Cost: RM 125,400 + RM 148,500 + RM 188,100 + RM227,700 = RM

689,700
Impact on Gross Profit:
 Original Cost of Goods Sold: RM 1,367,300
 Increased Cost of Goods Sold: RM 1,367,300 + (RM 689,700 – RM 568,800) =
RM 1,488,200
 Revised Gross Profit: Total Sales - Revised Cost of Goods Sold

= RM 2,598,000 – RM 1,488,200 = RM 1,109,800

4) Components of Manufacturing Overhead

Calculation:
 Variable Overhead:
 Rate: RM5 per direct labour hour
 Total Labour Hours:
 Q1: (2 × 1,000) + (3 × 600) = 2,000 + 1,800 = 3,800 hours
 Q2: (2 × 1,200) + (3 × 700) = 2,400 + 2,100 = 4,500 hours
 Q3: (2 × 1,500) + (3 × 900) = 3,000 + 2,700 = 5,700 hours
 Q4: (2 × 1,800) + (3 × 1,100) = 3,600 + 3,300 = 6,900 hours
 Variable Overhead Costs:
 Q1: 3,800 hours × RM 5 = RM 19,000
 Q2: 4,500 hours × RM 5 = RM 22,500
 Q3: 5,700 hours × RM 5 = RM 28,500
 Q4: 6,900 hours × RM 5 = RM 34,500

Fixed Overhead: RM 50,000 per quarter

 Total Overhead Calculation:
 Q1: RM 19,000 + RM 50,000 = RM 69,000
 Q2: RM 22,500 + RM 50,000 = RM 72,500
 Q3: RM 28,500 + RM 50,000 = RM 78,500
 Q4: RM 34,500 + RM 50,000 = RM 84,500

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5) Cash Flow Analysis
Calculations:
 Q1: Cash Receipts - Cash Payments = Net Cash Flow

= RM 500,000 – RM 400,000 = RM 100,000

Ending Cash Balance: RM 100,000
 Q2: Cash Receipts - Cash Payments = Net Cash Flow

= RM 550,000 – RM 450,000 = RM 100,000

Ending Cash Balance: RM 200,000
 Q3: Cash Receipts - Cash Payments = Net Cash Flow

= RM 650,000 – RM 600,000 = RM 50,000

Ending Cash Balance: RM 250,000
 Q4: Cash Receipts - Cash Payments = Net Cash Flow

= RM 700,000 – RM 650,000 = RM 50,000

Ending Cash Balance: RM 300,000
Assessment: The company maintains a positive cash flow and sufficient cash reserves to
meet obligations.
Strategies:
 Improve Receivables Collection: Shorten credit terms or enhance collection
processes.
 Negotiate Payment Terms: Adjust terms with suppliers for better cash flow
management.

6) Significance of the Budgeted Income Statement for Decision-Making

Impact of a 5% Decrease in Sales Volume:
1. Recalculate Total Sales Revenue with a 5% Decrease:
Original Total Sale = RM 2,598,000
Decrease = 5% of RM 2,598,000 = 0.05 × RM 2,598,000 = RM 129,900
New Total Sales Revenue = RM 2,598,000 – RM 129,900 = RM 2,468,100
2. Recalculate Cost of Goods Sold (COGS):

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 COGS is generally proportional to sales. Assuming the same proportion as before,
calculate the revised COGS:

Original COGS = RM 1,367,300

Proportion = =  0.526
New COGS = Proportion × New Total Sales Revenue = 0.526 × RM 2,468,100  RM
1,297,730
3. Recalculate Gross Profit:
New Gross Profit = New Total Sales Revenue - New COGS
= RM 2,468,100 – RM 1,297,730 = RM 1,170,370
4. Recalculate Net Operating Income:
 Original Selling & Administrative Expenses: RM379,800
 Interest Expense: RM20,000
 Income Tax Rate: 25%

Net Operating Income = New Gross Profit - Selling & Administrative Expenses
= RM 1,170,370 – RM 379,800 = RM 790,570
Net Income Before Tax = Net Operating Income - Interest Expense
= RM 790,570 – RM 20,000 = RM 770,570
Income Tax = 25% of RM 770,570 = 0.25 × RM 770,570 = RM 192,643
New Net Income = Net Income Before Tax - Income Tax
= RM 770,570 - RM192,643 = RM577,927

Summary of Impact:
 Original Net Income: RM 623,175
 New Net Income: RM 577,927
 Decrease in Net Income: RM 623,175 – RM 577,927 = RM 45,248

A 5% decrease in sales volume reduces net income by RM 45,248.

7) Identifying Risks Related to Budget Preparation

1. Sales Forecasting Errors:
 Calculation Impact: Errors in sales projections can lead to mismatched production
levels and inventory.

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 Potential Impact: Overproduction or underproduction can affect cash flow and
profitability.

2. Cost Fluctuations:
 Calculation Impact: Variations in material or labor costs can affect cost of goods
sold and profit margins.
 Potential Impact: Increased costs can reduce gross profit and net income.

3. Inventory Mismanagement:
 Calculation Impact: Incorrect inventory levels can lead to either excess holding
costs or stockouts.
 Potential Impact: Excess inventory increases storage costs, while stockouts lead to
lost sales and customer dissatisfaction.

4. Economic Changes:
 Calculation Impact: Economic downturns can reduce consumer spending and sales.
 Potential Impact: Lower sales can reduce revenues and profits.

5. Operational Disruptions:
 Calculation Impact: Issues such as supply chain disruptions can impact production
efficiency.
 Potential Impact: Disruptions can lead to increased costs or missed sales
opportunities.

6. Financial Mismanagement:
Calculation Impact: Errors in financial planning can result in poor cash flow
management.
Potential Impact: Inaccurate budgeting can lead to liquidity issues and financial
instability.

Summary of Risks:
 Sales Forecasting Errors: Affects production and inventory decisions.
 Cost Fluctuations: Impacts profitability.
 Inventory Mismanagement: Affects costs and customer satisfaction.
 Economic Changes: Reduces revenue and profit potential.
 Operational Disruptions: Affects production and costs.

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 Financial Mismanagement: Leads to liquidity problems and financial instability.

Each of these risks can have significant effects on the company’s financial performance
and addressing them proactively can help mitigate their potential impact.
This analysis covers the major aspects of the master budget for Outdoor Adventure
Sdn Bhd and highlights potential impacts and risks associated with budgeting.