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Question 1 Budgeting

ABC Ltd is a wholesaler. The management has been extremely worried about the entity’s cash position over the last few years. In January, they sought your advice and asked you to prepare a cash budget for the forthcoming month of May. The business has provided the following information to assist in this task.

· Estimated total sales for the next six months to 30 June, 2019 are as follows:

· Total sales comprise 80% credit sales and 20% cash sales.

· Cash is received immediately on cash sales.

· Analysis of past records has shown that credit sales are collected over a three-month period, with 50% being collected in the month of sales, 30% in the next month and the remaining in the following month.

· Projected expenditure during January to June are as follows:

- Purchases of goods for resale are made on credit. The entity receives one month credit on these purchases. The expected purchases for March $71,000, April $80,000, May $54,000 and June $48,000.

- An inventory check at the end of last year, a total of $45,000 of inventory, valued at cost is considered obsolete. The ABC Ltd is currently negotiating the sale of this inventory for $9,500 and expects cash payment during May.

- ABC Ltd has agree to purchases new inventory-handling equipment. The cost of $105,200 is payable in two equal payments in April and May.

- The monthly depreciation of the new inventory handling equipment will be $2,000.

- Business expected to sell the old equipment for $5,000 in May.

- Rent will be $ 5,500 per month, paid monthly and one month in advance.

- Utility expenses will be $2,000 in May but the amount will be paid in June.

- Monthly wage expense will be $ 20,500 and paid at the end of each month.

- ABC Ltd currently negotiating a marketing campaign with an advertising agency. The cost will be $6,300 in May and $7,700 in June. Payment will be made in cash.

- It is estimated that the cash balance at 1^st May will be $16,000.

Required:

1. Prepare a schedule showing receipts from credit customers for the months of April, May and June.

2. Prepare a cash budget for May only.

Question 2 Business Structure and Divisional performance evaluation

Divisional Performance Evaluation

A-Grade Tutoring Services offers educational tuition to a wide range of students. The business employs five casual tutors, and operates from a rented office in the outer suburbs. The investment required for each division reflects the room set-up and learning resources needed for the age group. Common costs include a receptionist that takes bookings, internet fees and shared advertising. Tutoring clients can be grouped into three main categories:

After analysing the above information, the owner of A-Grade Tutoring Services is considering scaling back operations and providing service to only the Intermediate and Senior client groups as they seem more profitable.  If this occurs, common costs would remain, while divisional costs for the Junior clients would be eliminated.

Required:

(a) Assume A-Grade Tutoring chooses to no longer provide tutoring to the Junior client category. Calculate the effect on overall company profitability in the extra column above.

(b) Comment on the allocation of common costs, and suggest three other allocations that may be appropriate. Choose one (1) of the alternative allocations and re-calculate the data in the table below.

(c) Calculate ROI and RI for each client category based on initial allocations of common costs, and again based on your suggested allocation. Assume a required rate of return of 50% and assume the Junior client category is still operational.

(d) Provide an analysis of your findings, including a recommendation on whether the Junior client category should be discontinued.

Question 3 CVP

Yummy Juice Ltd sells bottles of freshly squeezed juice to small convenience stores throughout Melbourne. Its latest income statement for the last 12 months is as follows:

Required

a) Calculate the contribution margin per juice bottle.

b) Calculate the number of juice bottles to break even in both units and sales dollars.

c) The company expects to sell 115 000 units in the coming year. How much profit will the business make for the year if its estimated level of activity is accurate?

d) It is predicted that the fixed occupancy and admin expenses will increase to $100,000. Direct materials per unit will also increase to $3.5 per unit. As a result, the selling price will increase to $9 per unit. How many bottles of juice Yummy Juice Ltd will have to sell to be able to achieve the same level of profit in part c. Comments on the outcome of the change.

Question 4 Costing and pricing

Better Pet Care Services is located in rural Victoria, and treats farm animals and domestic pets. Providing veterinary care to the farm animals requires travel to the individual farms in the area, while veterinary care to domestic pets is usually conducted in the surgery located in the town. One of the partners, Dr Al Sashon, recently attended a small business management course in Melbourne. He was particularly interested in the discussions on activity-based analysis, and how the technique could better identify the costs of providing different services. His partner, Dr Jack Russell, prefers to keep the accounting records simple, and would prefer to maintain the current system of allocating indirect costs based on professional labour hours. However, the partners did reach an agreement to undertake a comparison of the current indirect cost allocation and the proposed activity cost focus. The following information was collected.

*Expressed in units of measure of the driver.

#Kennel services will now be directly traced as records will be kept of pets using this service.

Direct costs are $300 000 for farm animals and $200 000 (prior to inclusion of kennel services) for domestic pets.

Required:

a. Identify the cost objects for the analysis,

b. Calculate the indirect cost allocation for farm animals and domestic pets using existing methods.

c. Determine the activity cost rates for each activity.

d. Assign the activity cost to the farm animals and the domestic pets using the activity rates calculated in c. above.

e. Calculate the full (total) cost for both farm animals and domestic pets under both the traditional approach and the activity approach. (Hint: include kennel services as a direct cost under the activity approach.)

f. Compare the results in e. — can you explain any differences?

g. What recommendations would you make to the partners in relation to the appropriate costing system for the service?