running head managerial accounting

The change to a new direct material supplier and Christ’s team-building/morale-boosting training exercises have truly brought things under control”.The vice president’s comments were bas

Group Assignment

Group 3

Trần Kim Dự Bùi Lê Châu Hà

Nguyễn Lê Hoàng Thiện Phạm Vũ Thảo Trinh Managerial Accounting

October 20th, 2012 Professor Nguyen Phong Nguyen

Task 1: CVP Analysis

Beta Corporation recently expanded its manufacturing capacity The firm will now

be able to produce up to 22,500 units of either product C or D The sales department assures management that it can sell between 13,500 and 19,500 units of either product this year Because the two products are very similar, the company will produce only one of the two products The following information was compiled by the accounting department

Product C Product D Selling price per unit………….… $132.00 $120.00

Variable costs per unit…….….… 79.20 79.20

Fixed costs will total $554,400 if product C is produced but will be only $475,200 if product D is produced Beta Corporation is subject to a 40 percent income tax rate

a Compute the contribution margin ratios for each product

 CMC per unit = Price – Variable cost per unit = $132.00 - $79.20 = $52.8

 CMRC =

=

 CMD per unit = Price – Variable cost per unit = $120.00 - $79.20 = $40.8  CMRD =

=

b If Beta Corporation desires an after-tax net income of $33,120, how many units of product D will the company have to sell?  Target income of Beta Corporation before 40% taxes =

 Number of product D sold to get $33,120 after-tax net income =

=

c How much would the variable cost per unit of product D have to change before it had the same break-even units as product C?  Break-even units of product C =



 Variable cost per unit of product D

= Price – CM’D per unit = $120.00 - $45.26 = $74.74

 Δ Variable cost per unit = $79.20 - $74.74 = $4.46

 The variable cost per unit of product D decreased by $4.46

d Suppose the variable cost per unit of product D decreases by 10 percent, and the total fixed cost of product D increases by 10 percent Compute the new break-even point

 Variable cost per unit of product D = 0.9 x $79.20 = $71.28

 CM per unit of product D = Price – Variable cost per unit

= $120.00 - $71.28 = $48.72

 Fixed cost = 1.1 x $475,200 = $522,720

 Break-even units =

 Break-even sales = Break-even units x Price = 10,729 x $120.00 = $1,287,480

e Suppose the board of management decided to produce both products If the two products are sold in equal proportions (in the number of units), and total fixed costs amounted to $514,800, what is the firm’s break-even point in units?

 The two products are sold in equal proportions

 In 1 package, there are 1 product C and 1 product D

 CM per unit = CMC per unit + CMRD per unit = $52.8 + $40.8 = $93.6

 Break-even units =

 The firm sales 5,500 products C and 5,500 products D

Task 2: Cash Budgeted and Control

The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan The purpose of the loan is to assit the

company in acquiring inventories Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked fora cash budget to help

determine whether the loan should be made The following data are available for the months May through July, during which the loan will be used:

 On May 1, the start of the loan period, the cash balance will be $24,000

Accounts receivable on May 1 will total $140,000, of which $120,000 will be collected during May and $16,000 will be collected during June The remainder will be uncollectible

 Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale The other 2% represents bad debts that are never collected Budgeted sales and expenses for the three-month period follow:

Sales ( all account) $300,000 $400,000 $250,000 Merchandise purchases $210,000 $160,000 $130,000

 Merchandise purchases are paid in full during the month following purchase Accounts payable for merchandise purchases during March, which will be paid

during May, total $140,000

 In preparing the cash budget, assume that the $30,000 loan will be made in May

and repaid in July Interest on the loan will total $1,200

a Prepare a schedule of expected cash collections for May, June, and July, and for the three months in total

Account Receivable

Total Account Receivable $120,000 $16,000 _ $136,000

Month’s Sale Collected

May $ $294,000

Total Month’s Sale Collected $90,000 $300,000 $339,000 $729,000

Total Expected Cash Collection $210,000 $316,000 $339,000 $865,000

With :

a= (300,000*0.3= 90,000)

b= (300,000*0.6= 180,000)

c= (400,000*0.3= 120,000)

d= (300,000*0.08= 24,000)

e= (400,000*0.6= 240,000)

f= ( 250,000*0.3= 75,000)

b Prepare a cash budget, by month and in total, for the three-month period

Beginning cash balance $24,000 $22,000 $26,000 $72,000

Cash sales and

collection on account 210,000 316,000 339,000 865,000

Total cash available $234,000 $338,000 $365,000 $937,000

Less: Disbursements

Payment for:

Merchanise $(140,000) $(210,000) $(160,000) $(510,000)

Advertising (60,000) (60,000) (50,000) (170,000)

Total disbursement $242,000 $312,000 $315,000 $869,000

Excess (deficiency)

of cash available overneed $(8,000) $26,000 $50,000 $68,000

Financing:

Ending cash balance: $22,000 $26,000 $18,800 $66,800

c If the company needs a minimum cash balance of $20,000 to start each month,

can the loan be repaid as planned? Explain

The loan can not be repaid as planned, because although the company needs a

minimum cash of $20,000 to start each month, the ending cash balance of July is

18,800, so the beginning cash balance of August will be smaller than $20,000

Therefore, in order to have $20,000 in the beginning of August, they must hold the loan, and repay it later

TASK 3: Standard Costing and Cost Variance Analysis

Rosa Corporation uses a standard-costing system to assist in the evaluation of operation The company has had considerable trouble in recent months with suppliers and employees, so much so that management hired a new production supervisor (Christ Rochester) The new supervisor has been on the job for five months and has seemingly brought order to an otherwise chaotic situation

The vice president of manufacturing recently commented that “… Christ has really done the trick The change to a new direct material supplier and Christ’s team-building/morale-boosting training exercises have truly brought things under control”.The vice president’s comments were based on both a plant tour, where he observed a contentedworkforce, and a review of the following data, which was extracted from the performance report:

Direct material variances (favorable)……….$9,240

Direct labor variances (favorable)……… 12,350

These variances are especially outstanding, given that the amounts are favorable and small (Rosa Corporation’s budgeted material and labor costs generally each average about $1,050,000 for similar periods) Additional data follow

 The company purchased and consumed 45,000 kilograms of direct materials at

$15.40 per kilogram, and paid $32.50 per hour for 20,900 direct labor hours of activity Total completed production amounted to 9,500 units

 A review of the firm’s standard cost records that each completed unit requires 4.2 kilograms of direct material at $17.60 per kilogramand 2.6 direct labor hours

at $28 per hour

a On the basis of the information contained in the performance report, should Rosa Corporation be concerned about its variances? Why?

On the basic of the information contained in the performance report, Rosa Corporation should not be concerned about its variances, because (1) as the vice president

commented, everything is under control after the change to new supplier and the moral training exercises, (2) those variances reported are favorable and small, compared with the $1,050,000 for each budgeted material and labor costs

b Calculate the company’s direct material variances and direct labor variances

 Direct material variances:

 Direct labor variances:

c On the basis of your answers to requirement (b), should Rosa Corporation be

AP x AQ

= $15.40 x 45,000

= $693,000

SP x AQ

= $17.60 x 45,000

= $792,000

SP x SQ

= $17.60 x (9500

x 4.2) = $702,240

Price variance

= $693,000 - $792,000

= $99,000F

Usage variance

= $792,000 - $702,240

= $89,760U

Total variance

= $99,000F + $89,760U

=$9,240F

AR x AH

= $32.50 x 20,900

= $697,250

SR x AH

= $28 x 20,900 = $585,200

SR x SH

= $28 x (9500 x 2.6) = $691,600

Rate variance

= $697,250 - $585,200

= $94,050U

Efficiency variance

= $585,200 - $691,600

= $106,400F

Total variance

= $94,050U + $106,400F

=$12,350F

concerned about its variances? Why?

Based on the calculation of each components, we find out that although the Direct Material Variance is favorable, it was made of both high favorable price variance and high unfavorable usage variance That results raises the concern about usage variance Therefore, as a manager, we should take each variance into account

Similarly, the favorable Direct Labor Variance comes from noticeably high unfavorable rate variance and favorable efficiency variance and the manager should consider each

of them

d Are things going as smoothly as the vice president believes? Evaluate the company’s variances and determine whether the change to a new supplier and Christ’s team-building/morale-boosting training exercises appear to be working Explain

As shown in the calculation, there are big problem in extremely high unfavorable

material usage variance and labor rate variance Thus, things are not going as smoothly

as the Vice President expected

Firstly, the change to a new supplier brings advantage in price aspect, reducing standard price by $2.20 per unit purchased However, under the pressure of making favorable variances, the manager may allow to purchase materials of lower quality or excessive inventory purchases in order to get quantity discounts Thus, to decide whether the change has good impact or not, the manager should revise quality of products

Secondly, to evaluate the impact of training exercises, we should consider the Material usage variance , Labor rate variance as well as Labor efficiency variance Faulty workmanship may lead to more consumption in raw material, proved by high unfavorable material usage variance Deployment of more efficient and skilled workers giving rise to higher payment, then high unfavorable rate variance However, it is a good news on efficiency variance, which indicated that the training courses had induced the labor to work more effectively

e Is it possible that some of the company’s current problems lie outside Christ’s area of responsibility? Explain

There are many problems that may lie outside Christ’s area of responsibility

 Material price variance:

o Fluctuations in market price dues to government intervention

o Usually the responsibility of controlling price belongs to the purchasing agent and Christ has no work in this field (M.Moen, R.Hansen & L.Heitger, 2009)

 Material usage variance:

o Maintenance and purchase of plant and equipment

 Labor rate variance:

o Higher payment due to shortage of availability of labor

o Extra-Shift allowance to workers overtime allowance leads to higher

wages

o Change in the system of wage payment

o Higher rates during seasonal or emergency operations

Task 4: Divisional Performance Evaluation

Alpha Corporation is a multi-product company with three divisions: North Division, South Division, and West Division The company has two sources of long-term capital: debt and equity The interest rate on all Alpha Corporation’s $1,600 million debt is 9 percent, and the company’s tax rate is 30 percent The cost of Alpha Corporation’s equity capital

is 12 percent In addition, the market value of the company’s equity is $2,400 million (The book value of Alpha Corporation’s equity is $1,720 million, but that amount does not reflect the current value of the company’s assets or value of intangible assets)

The following data (in millions) pertain to Alpha Corporation’s three divisions

Operating income Current liabilities Total assets

a Compute Alpha Corporation’s weight-average cost of capital (WACC)

The aftertax cost of debt:

= Y * (1 – T) = 9% * (1 – 0.3) = 6.3%

= 12%

Percentage of debt in total assets:

*100% = 40%

Percentage of equity in total assets: 100% - 40% = 60%

The weigth average cost of capital: WACC = 6.3%*0.4 + 12%*0.6 = 9.72%

b Compute the economic value added (EVA) for each of the company’s three divisions

Current Liabilities Total assets Capital employed

EVA = After-tax operating income – (Actual percentage cost of capital x Total capital employed)

North:

 After-tax operating income: $56 million* (1 – 0.3) = $39.2 million

 EVA = $39.2 million – 0.0972*$256 million = $14.3168 million

South:

 After-tax operating income: $180 million* (1 – 0.3) = $126 million

 EVA = $126 million – 0.0972*$1,180 million = $11.304 million

West:

 After-tax operating income: $184 million* (1 – 0.3) = $128.8 million

 EVA = $128.8 million – 0.0972*$1,884 million = ($54.3248 million)

c What conclusion can you draw from the EVA analysis?

West division makes money less then the money it takes to make it

South and North divisions make money more than the money they take to make it Seemly, the company had a best performance in North division

d How does EVA differ from residual income (RI)? What are the strengths and weaknesses of EVA?

 The difference between EVA and RI

The key feature of EVA is its emphasis on after-tax operating profit and the actual cost

of capital RI, on the other hand, uses a minimum expected rate of return

 The strengths and weaknesses of EVA

Strengths

 Do not have to estimate a terminal value at some future point in time (Drake, 2003)

 Can apply in situations in which the company does not pay dividends or

generate free cash flows (Drake, 2003)