Accounting Answers Note #24

Question 1 Question 4 25 MARKS Buhle Company (Pty) Ltd has put together the following data in order to complete their operating budget for the second quarter of 2019: April May June July Sales (units) 73 200 68 900 65 400 67 300 Additional information: Company policy requires 60% of the following month’s sales (in units) be in ending inventory. This policy was met in March. It takes 2.5 hours of direct labour to produce one unit. The average wage cost is R14. Variable overhead rate is R6 per direct labour hour and fixed overhead is R15 000 per month. Required: a) Prepare a production budget for April, May and June and the quarter in total. (10) b) Prepare a direct labour budget for April, May and June and the quarter in total. (10) c) Prepare an overhead budget for April, May and June and the quarter in total. Answer Buhle Company (Pty) Ltd is preparing their operating budget for the second quarter of 2019. In order to complete their budget, they have compiled the following data: Sales (units): April: 73,200 May: 68,900 June: 65,400 July: 67,300 Additional Information: - Company policy requires that 60% of the following month's sales be in ending inventory. This policy was met in March. - It takes 2.5 hours of direct labour to produce one unit. - The average wage cost is R14 per hour. - Variable overhead rate is R6 per direct labour hour. - Fixed overhead is R15,000 per month. Required: a) Production Budget for April, May and June and the Quarter in Total The production budget is a detailed plan that shows the number of units that Buhle Company (Pty) Ltd plans to manufacture during the budget period. It is prepared by considering the forecasted sales, desired ending inventory, and beginning inventory levels. 1. April: Sales = 73,200 Desired Ending Inventory = (68,900 x 60%) = 41,340 Total units needed = (73,200 + 41,340) = 114,540 Less: Beginning Inventory = 0 Total units to be produced = 114,540 2. May: Sales = 68,900 Desired Ending Inventory = (65,400 x 60%) = 39,240 Total units needed = (68,900 + 39,240) = 108,140 Less: Beginning Inventory = 114,540 Total units to be produced = (108,140 - 114,540) = -6,400 (negative means units to be used from beginning inventory) 3. June: Sales = 65,400 Desired Ending Inventory = (67,300 x 60%) = 40,380 Total units needed = (65,400 + 40,380) = 105,780 Less: Beginning Inventory = (-6,400) Total units to be produced = (105,780 + 6,400) = 112,180 4. Quarter in Total: Sales = (73,200 + 68,900 + 65,400 + 67,300) = 274,800 Desired Ending Inventory = (41,340 + 39,240 + 40,380) = 120,960 Total units needed = (274,800 + 120,960) = 395,760 Less: Beginning Inventory = (-6,400) Total units to be produced = (395,760 + 6,400) = 402,160 b) Direct Labour Budget for April, May and June and the Quarter in Total Direct labour budget shows the total direct labour hours that are needed to produce the budgeted number of units. 1. April: Units to be produced = 114,540 Direct Labour Hours per unit = 2.5 Total Direct Labour Hours = (114,540 x 2.5) = 286,350 Labour Cost per hour = R14 Total Direct Labour Cost = (286,350 x R14) = R4,010,900 2. May: Units to be produced = -6,400 (units from beginning inventory) Direct Labour Hours per unit = 2.5 Total Direct Labour Hours = (-6,400 x 2.5) = -16,000 Labour Cost per hour = R14 Total Direct Labour Cost = (-16,000 x R14) = -R224,000 3. June: Units to be produced = 112,180 Direct Labour Hours per unit = 2.5 Total Direct Labour Hours = (112,180 x 2.5) = 280,450 Labour Cost per hour = R14 Total Direct Labour Cost = (280,450 x R14) = R3,927,300 4. Quarter in Total: Direct Labour Cost = (R4,010,900 + (-R224,000) + R3,927,300) = R7,714,200 c) Overhead Budget for April, May and June and the Quarter in Total Overhead budget shows the planned overhead costs that are anticipated to be incurred during the budget period. 1. April: Fixed Overhead = R15,000 Direct Labour Hours = 286,350 Variable Overhead Rate = R6 Total Variable Overhead Cost = (286,350 x R6) = R1,718,100 Total Overhead Cost = (R15,000 + R1,718,100) = R1,733,100 2. May: Fixed Overhead = R15,000 Direct Question 2 Assignment No. 1 Problem 1. Company is one of the leading manufacturers of Pineapple Juice in the country. 1 pineapple juice is consist of 2 pineapples, and ½ kilo of sugar. Each Pineapple juice has an allocated Php 2 direct labor cost. ABC has the following data and resources available. Sugar – 1,000 kilos @Php 60/kilo Pineapples – 5,000 @Php 15 each Rent – Php 20,000 per month Electricity- Php 120,000 per month Scenario 1: If ABC company produce and sold 2000 pineapple juice in the first month for Php 100 each. 1. How much is the total revenue? 2. How much is the total variable cost? 3. How much is the total fixed cost? 4. How much is the total direct labor cost? 5. How much is the variable cost per unit? 6. How much is the total cost? 7. How much is the value of the remaining sugar after the production? 8. How much is the value of the remaining pineapple after the production? 9. How much is the total profit in one month? Scenario 2: If ABC company wants to sell its product for Php 80 in the first month. 1. How many pineapple juice to be produce and sold in order achieve break-even? 2. How many pineapples to be consume in order to achieve break-even? 3. If ABC company wants to earn a profit of Php 150,000, how many pineapple juice must be produced and sold? 4. How many pineapple juice to be produced and sold to have a Php 50,000 loss? Scenario 3: If ABC company want to produce and sold 1500 pineapple juice in the first month. 1. What would be the selling price in order to achieve break-even? 2. What would be the selling price if the company wants to earn Php 200,000? Answer Assignment No. 1 Problem 1: The ABC Company is one of the leading manufacturers of Pineapple Juice in the country. Their Pineapple juice is made up of 2 pineapples and ½ kilo of sugar, with an allocated Php 2 direct labor cost per juice. The company has the following data and resources available: 1,000 kilos of sugar at Php 60 per kilo, 5,000 pineapples at Php 15 each, rent at Php 20,000 per month and electricity at Php 120,000 per month. Scenario 1: If the ABC company produces and sells 2000 pineapple juice in the first month for Php 100 each, the total revenue would be Php 200,000 (2000 x Php 100). The total variable cost would be Php 200,000 (2000 x 2 pineapples x Php 15 + 1,000 kilos of sugar x Php 60 + 2000 x Php 2 direct labor cost). The total fixed cost would be Php 140,000 (Php 20,000 for rent + Php 120,000 for electricity). The total direct labor cost would be Php 4,000 (2000 x Php 2). The variable cost per unit would be Php 100 (Php 200,000/ 2000). The total cost would be Php 340,000 (Php 200,000 + Php 140,000). The value of the remaining sugar after production would be Php 40,000 (1,000 kilos – 2 pineapples x 2,000 = 1,000 kilos left x Php 60). The value of the remaining pineapple after production would be Php 5,000 (5,000 – 2,000 = 3,000 pineapples left x Php 15). The total profit in one month would be Php -140,000 (Php 200,000 – Php 340,000). Scenario 2: If the ABC company wants to sell its product for Php 80 in the first month, the break-even point can be calculated as follows: Fixed cost/ (Selling price – Variable cost) = Break-even point Using the figures from the previous scenario, the break-even point would be 2,333 juices ((140,000/ (80-52)). This means that the company needs to produce and sell 2,333 juices in order to cover its costs and break even. To calculate the number of pineapples needed to be consumed to achieve break-even, we can use the following formula: Fixed cost/ (Selling price – (Cost per pineapple x Number of pineapples per juice)) = Qty of pineapples consumed In this case, it would be: 140,000/ (80- (15 x 2)) = 3,500 pineapples to be consumed If the ABC company wants to earn a profit of Php 150,000, the following calculation can be done: Fixed cost + desired profit/ (Selling price – Variable cost) = Qty of juices that need to be produced and sold Using the figures from the previous scenario, it would be: 140,000 + 150,000/ (80-52) = 7,500 juices To calculate the number of pineapples needed to be consumed to achieve a profit of Php 150,000, we can use the following formula: (Fixed cost + desired profit)/ (Selling price – (Cost per pineapple x Number of pineapples per juice)) = Qty of pineapples consumed Using the figures from the previous scenario, it would be: (140,000 + 150,000)/ (80- (15 x 2)) = 13,000 pineapples to be consumed If the ABC company wants to have a loss of Php 50,000, the following calculation can be done: Fixed cost – desired loss/ (Selling price – Variable cost) = Qty of juices that need to be produced and sold Using the figures from the previous scenario, it would be: 140,000 – 50,000/ (80- 52) = 2,500 juices Scenario 3: If the ABC company wants to produce and sell 1500 pineapple juice in the first month, the following calculations can be done: To achieve break-even: Fixed cost/ (Selling price – Variable cost) = Qty of juices that need to be produced and sold Using the figures from the previous scenario, it would be: 140,000/ (Selling price – 52) = 1500 This means that the selling price would need to be Php 134 ((140,000/ 1500) + 52). If the company wants to earn Php 200,000, the following calculation can be done: (Fixed cost + desired profit)/ (Selling price – Variable cost) = Qty of juices that Question 3 Problem 1. Company is one of the leading manufacturers of Pineapple Juice in the country. 1 pineapple juice is consist of 2 pineapples, and ½ kilo of sugar. Each Pineapple juice has an allocated Php 2 direct labor cost. ABC has the following data and resources available. Sugar – 1,000 kilos @Php 60/kilo Pineapples – 5,000 @Php 15 each Rent – Php 20,000 per month Electricity- Php 120,000 per month Scenario 1: If ABC company produce and sold 2000 pineapple juice in the first month for Php 100 each. 1. How much is the total revenue? 2. How much is the total variable cost? 3. How much is the total fixed cost? 4. How much is the total direct labor cost? 5. How much is the variable cost per unit? 6. How much is the total cost? 7. How much is the value of the remaining sugar after the production? 8. How much is the value of the remaining pineapple after the production? 9. How much is the total profit in one month? Answer Problem 1: Company ABC is a leading manufacturer of Pineapple Juice in the country. According to their production data, 1 pineapple juice is made up of 2 pineapples and ½ kilo of sugar. The company allocates a direct labor cost of Php 2 for each Pineapple juice produced. With this information, we will analyze the following scenario: Scenario 1: If ABC company produces and sells 2000 pineapple juice in the first month for Php 100 each. 1. How much is the total revenue? Total revenue is calculated by multiplying the quantity of units sold with their selling price. In this scenario, the company has sold 2000 pineapple juice for Php 100 each. Therefore, the total revenue would be: Total revenue = 2000 x Php 100 = Php 200,000 2. How much is the total variable cost? Total variable cost is calculated by adding up all the variable costs per unit multiplied by the total number of units produced. In this scenario, the variable cost per unit is composed of the cost of sugar and pineapples. Therefore, the total variable cost would be: Total variable cost = (2000 x ½ kilo) x Php 60 + (2000 x 2) x Php 15 = Php 150,000 Note: We multiplied the number of units produced (2000) by the quantity of sugar and pineapples used to produce one unit to get the total quantity used for 2000 units. Then, we multiplied it with their respective costs. 3. How much is the total fixed cost? Total fixed cost is the cost that remains constant regardless of the level of production. In this scenario, the company has a fixed cost of Php 20,000 for rent and Php 120,000 for electricity. Therefore, the total fixed cost would be: Total fixed cost = Php 20,000 + Php 120,000 = Php 140,000 4. How much is the total direct labor cost? Total direct labor cost is the amount the company spent on labor to produce the 2000 pineapple juice. In this scenario, the direct labor cost for one unit is Php 2. Therefore, the total direct labor cost would be: Total direct labor cost = 2000 units x Php 2 = Php 4,000 5. How much is the variable cost per unit? The variable cost per unit is the total variable cost divided by the number of units produced. In this scenario, the number of units produced is 2000. Therefore, the variable cost per unit would be: Variable cost per unit = Php 150,000 / 2000 units = Php 75 per unit 6. How much is the total cost? Total cost is the sum of the total variable cost and total fixed cost. In this scenario, it would be: Total cost = Php 150,000 + Php 140,000 = Php 290,000 7. How much is the value of the remaining sugar after production? The remaining sugar after production would be the initial amount of sugar (1000 kilos) minus the amount used to produce 2000 pineapple juice (2000 x ½ kilo). Therefore, the value of the remaining sugar would be: Value of remaining sugar = (1000 - (2000 x ½)) x Php 60 = Php 30,000 8. How much is the value of the remaining pineapple after production? The remaining pineapple after production would be the initial amount of pineapples (5000) minus the amount used to produce 2000 pineapple juice (2000 x 2). Therefore, the value of the remaining pineapple would be: Value of remaining pineapple = (5000 - (2000 x 2)) x Php 15 = Php 50,000 9. How much is the total profit in one month? Total profit is calculated by subtracting the total cost from the total revenue. In this scenario, the total profit would be: Total profit = Php 200,000 - Php 290,000 = - Php 90,000 Note: A negative answer indicates that the company experienced a loss in this scenario. Question 4 . Company is one of the leading manufacturers of Pineapple Juice in the country. 1 pineapple juice is consist of 2 pineapples, and ½ kilo of sugar. Each Pineapple juice has an allocated Php 2 direct labor cost. ABC has the following data and resources available. : Sugar – 1,000 kilos @Php 60/kilo Pineapples – 5,000 @Php 15 each Rent – Php 20,000 per month Electricity- Php 120,000 per month How much is the value of the remaining sugar after the production? Answer Based on the data provided, the value of the remaining sugar after the production can be calculated by first determining the total cost of the ingredients used, which are pineapples and sugar, and then factoring in the direct labor cost and overhead expenses such as rent and electricity. Firstly, we can calculate the total cost of pineapples used for production by multiplying the number of pineapples (5,000) by the cost per piece (Php 15). This will result in a total cost of Php 75,000 for pineapples. Next, we need to determine the cost of sugar used in production. From the given data, we know that 1,000 kilos of sugar were used at a cost of Php 60 per kilo. Therefore, the total cost of sugar used is Php 60,000. Adding the two costs together, we get a total cost of Php 135,000 for the ingredients used in production. To factor in the direct labor cost, we multiply the total number of Pineapple Juice produced (which equals the number of pineapples used, as one pineapple makes one Pineapple Juice) by the allocated direct labor cost of Php 2. This results in a direct labor cost of Php 10,000. Lastly, we need to incorporate the overhead expenses into the calculation. As the rent and electricity expenses are for a monthly period, we need to determine the total production time for that month. Assuming a production time of 30 days, the rental expense per day would be Php 667 (Php 20,000 / 30 days) and the electricity expense per day would be Php 4,000 (Php 120,000 / 30 days). Multiplying the rental expense per day by the total production time (30 days) gives us a total rental expense of Php 20,000 for that month. Similarly, multiplying the electricity expense per day by the total production time gives us a total electricity expense of Php 120,000 for that month. Adding the direct labor cost, rent expense, and electricity expense together, we get a total overhead cost of Php 150,000. To determine the value of the remaining sugar, we first subtract the total cost of ingredients (Php 135,000) and the overhead cost (Php 150,000) from the total expenses incurred (Php 285,000). This results in a value of -Php 165,000, indicating that the company incurred a loss in terms of the remaining sugar after production. In-depth sources: To better understand the process of calculating the value of the remaining sugar, we can refer to the principles of cost accounting which help in determining the total cost of a product. According to the text "Cost Accounting: A Managerial Emphasis" by Horngren, Datar, and Rajan, product cost includes the costs of direct materials, direct labor, and manufacturing overhead. Direct materials are considered the primary raw materials used in production, while direct labor is the wages or salaries paid to employees directly involved in the production process. Manufacturing overhead, on the other hand, includes all indirect costs such as rent, utilities, and maintenance. By incorporating these principles, we can accurately calculate the total cost of production and determine the value of the remaining sugar after production. Question 5 Santosh and Vipin are partners' from 1Jan, 2000 without any partner- ship agreement and they bring capital of 5,000 and 3,000 respectively. On 31 July, 2000 Santosh advances 750 by way of loan to the firm without any agreement as to interest The profit and loss account for the year discloses a profit of 1350.75 but the partners cannot agree upon the question of interest and division of profit. You are required to divide the profit between them giving reason for your method. Answer According to the case given, Santosh and Vipin entered into a partnership without a written partnership agreement. They both contribute different amounts of capital to the firm and during the year, Santosh also advances a loan of 750 to the firm without any agreed upon interest rate. Now, the question arises on how to divide the profit of 1350.75 between the two partners. As a conscientious college student with high marks, I would first analyze the situation based on the principles of partnership law. According to the Indian Partnership Act of 1932, in the absence of a written agreement, the profits and losses of the partnership should be shared equally between the partners (Section 13). This is known as the principle of 'equal sharing in the absence of agreement'. In this case, since there is no written agreement between the partners, I would recommend that the profit of 1350.75 be divided equally between Santosh and Vipin, with each partner receiving 675.375. This would be in accordance with the law and the principle of equal sharing. However, there is one aspect that needs to be considered - the loan of 750 advanced by Santosh to the firm. Even though there was no agreed upon interest, it is reasonable to assume that Santosh would have expected to receive interest on the loan amount. In this case, it would be fair to deduct a reasonable interest amount from Santosh's share of the profit before dividing it equally between the partners. To determine a reasonable interest rate, we can refer to the Reserve Bank of India's guidelines on base rates for advances. Based on these guidelines, a base rate of 9.30% can be considered as a reasonable interest rate for the loan of 750. This would amount to an interest of 69.75 for the five months that the loan was outstanding (31 July, 2000 to 31 December, 2000). Hence, Santosh's share of the profit would be adjusted to 605.625 after deducting the interest of 69.75, and the remaining profit of 744.125 would be divided equally between the partners, with each receiving 372.0625. In summary, the profit of 1350.75 would be divided between Santosh and Vipin with the former receiving 605.625 and the latter receiving 744.125. This method takes into account the principle of equal sharing in the absence of a written agreement, as well as fairness towards Santosh for the loan he advanced to the firm.