Accounting for Managers (ACC00724) S3, 2019
Assessment 2 (20 Marks)
QUESTION 1 (10 Marks)
Several potential investors have been studying the affairs Grafton Pty Ltd to decide whether to invest in the company by purchasing unsecured notes with the company was proposing to issue. The statements of financial position at 30 June 2018 and 2019 follow:
GRAFTON PTY LTD
Statement of Financial Position
As at 30 June
Cash at bank3,2642,832
Other current assets3,0943,605
Total Current Assets11,67410,990
Current maturities of long-term debt978450
Total Current liabilities11,57210,378
Accrued expenses (payroll)5,4254,730
Other non-current liabilities2,3902,055
Total Non-current Liabilities13,61510,945
TOTAL LIABILITIES AND EQUITY31,63427,266
QUESTION 2 (5 Marks)
Dunning Ltd. manufactures a popular power nail gun suitable for the home renovator. Financial and other data for this product for the last twelve months are as follows:
Selling price $130 per unit
Variable manufacturing cost$50 per unit
Fixed manufacturing costs$400,000
Variable selling and administrative costs $30 per unit
Fixed selling and administrative costs$300,000.
The directors of Dunning Ltd. want to try to increase the profitability of this product and invited senior staff to suggest how this might be done. Three suggestions have been received.
The accountant, Jim Jackson, believes that a price increase of $10 per unit is the best way to boost profits. He would spend an additional $125000 on national advertising and contends, that if this is done, sales volume would not drop appreciably from last year.
The production manager, Tim Walter, thinks that an improved quality product could increase sales volume by 25% if accompanied by an advertising campaign costing $50000 aimed at tradespeople as well as home renovators. The improved quality would add $5 per unit to the variable cost. Mr Walter believes that the price should not be increased.
The sales manager, Sandy Smith, wants to undertake a promotion campaign where a $10 rebate is offered on all nail guns sold during the three months beginning 1 April. Normally 6000 units are sold during that period and Ms Smith believes that this could be boosted to 10,000 units if an advertising campaign costing $40,000 were launched late in March.
You have been asked by the Dunning board to comment on each of these three proposals. Draft a report in response to this request. You are not asked to make an outright choice, but rather to analyse the potential strengths and weaknesses of each proposal by calculating break-even point. The sales volumes forecast by each staff member should be treated as estimates only and your report should examine the effects of variations in actual sales from these forecasts and its respective break-even point. Show your calculations to support your comments and mention qualitative factors that may also be involved.
QUESTION 3 (5 Marks)
ABC Ltd makes trailers. It receives a special order to produce 350 trailers for a local retail outlet. The order will take 2,100 kg of material that costs $16.10 per kg and will require 1,400 direct labour hours and 525 machine hours. The following are the expected/budgeted annual costs for ABC Ltd:
Direct labour hours25,795
Required: (must show your calculations/workings)
In this report, implication of the financial analysis of the company has been done. The profitability, liquidity and financial stability of the company has been assessed. Afterward, the implication of the costing method and computation of the break-even point analysis have been done. The assessment of the budget variance have also been made to assess the financial data of the company.
|Details||2019||2018||Industry average ratio|
|Current ratio||1.01 t||1.06 t||1.70 t|
|Liquidity ratio||0.78 t||0.88 t||1.00 t|
|Stability (financial stability ratio|
|Leverage ratio||4.91 t||4.59 t||2.5|
|Debt to Equity ratio||90%||70%||not given|
(Please check the excel file for the computation of the data)
The current ratio of company has been decreased by .5 times which reflects that company has decreased current assets. However, some changes in the current liabilities have also been ensured. The liquidity of the company is stable and showing to .78 times in 2019 which is .10 times lower due to the high blockage of the funds in its inventory. The debt ratio of company has also been maintained to 80% in 2019 which reflects that company has kept higher debt capital in its business. The leverage ratio has also been increased to 4.91 times in 2019 by .30 times (Mookdee, & Bellamy, 2017).The current assets of the company has decreased by 14$ which may negatively impact the business and resulted to negative outcomes. In addition to this, higher debt capital may also impact the business stability (Peter, 2016).
This has revealed that the company has been facing issue in the paying of its lending with the available liquidity. The decreased liquidity ratio may result to the low cash inflows in its business operation. Therefore, on the basis of the debt capital structure and liquidity, it could be inferred that if company is having unsecured debts in the company then it would be wise not to invest in this company (Hogan, Hutson, & Drnevich, 2017). The high financial leverage, low profitability and reduction in the financial leverage are the major negative factors which may negatively impact the business growth. Therefore, investing in this company is not viable decision for the return making purpose.
Question 2 Break even sales
This is the point at which company would have no profit and no loss. This point is usually expected when a company is newly set up and new business in set up for the business.
This case has revealed that with the advertisement costing of $125000 will result to the stable sales in the process. In addition to this, advertisement costing will reduce the overall profit by $125000. The break-even point will be same and sales will increased to 25000 with the increased variable cost by $5 accompanied with the additional advertisement costing to $50000. The suggestion given by manger would result to the increased sales volume to 10,000 units and increased the costing to $740000 (Song, et al. 2017).
The break-even point in the give case would be 18500 units
|Computation of the net effect|
|Incremental profit statement||1st option||2nd option||3rd option|
|Increment in the costing|
|sales volume (units)||20000||20000||25000||24000|
|less : variable cost|
|selling and distribution cost||30||30||30||30|
|other variable cost||0||0||5||0|
|Total variable cost||80||80||80||80|
|Computation of the Break-Even sales|
|Details||Existing situation of the company||option-1||option-2||option-3|
|Fixed costing (Manufacturing||$400,000||$400,000||$400,000||$400,000|
|Fixed selling costing||$300,000||$300,000||$300,000||$300,000|
|Total fixed costing||$700,000||$825,000||$750,000||$740,000|
|Contribution per unit||$50||60||45||40|
|sales volume data||20000||20000||25000||$24,000|
|Total labor hour||25,795|
|Total overhead rate||$24.00|
|Computation of the total cost of the given special order|
|Details||Per unit||Total amount|
|2100 kg of raw material||$16.10|
|1400 hour of direct Labour||$12.70|
|525 hour of machine hour||$10.00|
|Total costing of the orders||$38.80||$13,580.00|
|Total costing of the special orders|
|Total overhead rate||$62.93|
|Total machine hour||525|
|Total cost of the project||$33,037|
|Minimum price computation data|
|Details||Total amount||Total amount|
|2100 kg of raw material||$16.10|
|1400 hour of direct Labour||$12.70||$28.80|
|Total variable cost||$10,080.00|
To understand the segmental analysis, concepts related to cost, nature of products is considered. There are many types of cost to identify the product specific cost and segment costing is the best costing method for evaluating the actual cost of the product. Organization having the complexities in the process distribute the work according to the work and operation. Activity based costing is another costing method which helpful to identify the actual cost of product in the process an operations (Peter, 2016). According to the activity based costing, it is based on the operation, or the cost distribution is depending on the correct method which offer the exact cost specifically assigned to specific job and service. For the awareness of allocated overheads and expenses factor, make expensive and non-value added operation provides more visibility for the proper absorption of the costing in the method (Mrdutt, et al. 2018).
On the other side if Business employ is follow the traditional costing approach is more simplistic and less accurate than actual based costing so that the organization not identify the actual cost and income aspects to the specific products. Under traditional costing strategy, the company charges all costs to the commodity, be it connected or not, and lose little benefit value (Lumpkin, & Ireland, 2018).
However, by using the strategy and proper costing methods company could easily absorb the costing in the different work segments. If company follows the segment costing approach then it distribute the direct and indirect cost for the particular work and operation and absorb the costing in the particular process to determine actual costing associated with the particular segment process (Lin, Liang, & Chen, 2011). The segment costing approach is used for the particular section which is helpful in determining the right cost associated with the process, and also assist in evaluating the cost of the product associated with the process. Any product that is not making profit is kept separate in the costing and cost center and product that is not profit making and cost center should then take appropriate action to make this profit center of the product. The organization uses multiple cost drivers based on the transaction-specific or product-specific for the allocation of cost to a particular products and process (Lee, 2019).
After analysis the undertaken computation in the given case study, it is inferred that the company has increased the financial leverage of the company which has negatively impacted the business sustainability. It could be concluded that the company's higher financial leverage may result in the capital's lower cost but it also negatively impacts the investment decision of the investors. The costing of the absorption is also useful in determining the correct costing associated with the operation for the better absorption of the costing in different process.