Assessment Task 2

Management and Financial Accounting Teamwork

Teamwork

You are required to form a team with three (3) members. It is your responsibility to make your team. Use the Find a Group discussion board to find members and then register your names under one of the group numbers listed in MyLO (under Groups then Case Study group signup).

Your team is required to:

1. complete the Teamwork Agreement document (see learning activities under Assessment Task 2 in our content);

2. complete regular meeting minutes and summary emails (see learning activities Assessment Task 2 in our content);

3. calculate the answers to ‘Part One Management Accounting’, using Excel and present recommendations from this information to the owner; and

4. via a worksheet, Income Statement and Balance Sheet complete ‘Part Two Financial Accounting’, also using Excel.

If you have any issues with your team conforming to the Teamwork Agreement document, please notify your Unit Coordinator.

One person from your team will upload to the DropBox:

1. the Teamwork Agreement document;

2. the first and last meeting minutes and summary emails;

3. four linked worksheets for the answers and recommendations for Part One; and

4. three linked worksheets for the transaction worksheet, the Income Statement and the Balance Sheet for Part Two.

Part One

Management Accounting

Margaret enjoys leathercraft, designing and making small things such as bracelets, wallets, and handbags. She has had success selling her products at the local market and has been having trouble keeping up with the demand for products, particularly during the busy summer seasons. She is now planning to turn her hobby into a business, Craft Leather, focusing on her handbag designs.

Her sales figures of handbags for the last year are shown below.

Margaret sells the handbags at around $60 each. Her major expense making the handbags is the leather material. On average each handbag requires 0.2 metres of leather. The leather costs $120 per metre, and the fittings cost $1.00 per handbag. All the leather and fittings must be shipped into Tasmania and takes a month to arrive.

Margaret will need to have enough material on hand at the beginning of each month for the next month’s production (note: this means the material costs will occur two months before the sales).

Margaret currently sources her leather from an environmentally accredited tannery in South Australia. Margaret makes mention of this in all her advertising material. She has seen cheaper leather from overseas on the internet, $100 per metre, but up until now her level of production has not been sufficient to warrant checking out alternate suppliers.

Margaret currently makes her products at home but will need more space if she expands her production and store her products. She has found a space in a cooperative Art Centre to establish a workshop. She can lease the space for $600 per month paid three months in advance and can cancel the arrangement at any time with only one months’ notice. The cooperative Art Centre also operates a shop and will display and sell her products

on commission. She expects they will sell 40% of her handbags. They will keep 25% of the sales price. Margaret plans to establish a stand in the Salamanca Market each Saturday. She will also setup an online presence to take orders for products. She anticipates this business arrangement will enable her to double her sales from the previous year if she works in the business fulltime.

Other expenses are estimated to be as follows:

· Stall fee $100 per week

· EFTPOS $40 per month

· Advertising $50 per month

· Website administration $500 per annum

· Miscellaneous costs $30 per month

Margaret plans to commence the business 1 September 20XX. She anticipates it will take one month to get setup and source materials and another month to prepare goods for sales. She plans to start selling her handbags from 1 November 20XX.

Margaret has some funds she can contribute to the business to cover the setup costs for three months’ worth of materials and rent. Margaret also has some leatherwork tools she currently uses however she will need to purchase some equipment to be able to expand her production to the level required for the business. She will need to borrow money to finance the purchase. She estimates the equipment will cost around $40,000. The equipment has a useful life of 5 years with a residual value of $10,000. Her parents have agreed to lend her the money at a flat interest rate of 6%, interest to be paid at the end of each year. The principal to be repaid in five years’ time. If she buys the equipment, she will be able to expand her products but has no idea of future demand at this stage.

.

Your Team is required to:

1. Use management accounting tools to prepare calculations to assess Margaret’s business concept.

a. Prepare a sales, production, and materials budget for the first two years of operation.

b. Using this information, prepare budgeted income statements for both years.

c. Calculate the breakeven quantity of sales and margin of safety for both years (note the commission is a variable cost). Present this information in units and dollars.

d. Assuming the business will operate for five years. Use your calculations for the profit for year one and two and then year two as the average operating revenue and costs for years three, four and five calculate the following details.

i. Calculation of the Accounting Rate of Return (ARR),

ii. Payback Period, and

iii. Net Present Value for the equipment.

Your calculations should be prepared in an Excel workbook and you must use a separate excel worksheet for each main point above (a, b, c, and d).

Your worksheets will need to be linked where appropriate. Take care with your formatting and ensure all worksheets are clearly labelled. The workbook should be labelled Group X Part One

2. Write a 600-word informal report to advise Margaret the viability of her business proposal. Also discuss the factors Margaret should consider if, in the future, she investigates sourcing alternate suppliers for the leather.

Part Two

Financial Accounting

Margaret decided to open Craft Leather on 1 September 20XX. She contributed her leatherwork tools to the business valued at $2,000 and deposited $15 000 cash in a business bank account. The tools have a useful life of five years with no residual value.

Margaret uses a periodic inventory system.

Transactions up to 30 November 20XX are as follows:

Sept 1 Prepaid three months’ rent $1800.

6 Ordered 32 square metres of leather at $120 per square metre and $160 worth of fittings to be paid on delivery.

6 Received the loan of $40,000 from her parents.

7 Organised a website and paid annual fee $500 (note: do not treat as a prepayment).

10 Purchased the leather work equipment for $40,000 using cash.

27 Received and paid for the leather and fittings ordered 6 September.

Oct 13 Ordered another 32 metres of leather at $120 per metre and $160 worth of fittings on credit, to be paid on delivery.

15 Purchased advertising brochures for stall and Art Centre shop $220.

25 Paid EFTPOS account fee, $40.

30 Received and paid for the leather and fittings ordered 13 October.

30 During the month produced 160 handbags, using 32 metres of leather and

$160 worth of fittings. (hint: decrease the leather material and leather supplies and increase inventory).

Nov 6 First market stall day very successful - sold 35 bags for $2,100 for cash.

6 Paid market stall fee $100.

13 Ordered 32 metres of leather at $120 per metre and $160 worth of fittings.

13 Second market stall day - sold 30 bags for $1,800.

13 Paid market stall fee $100.

18 Received payment from Arts Centre shop, 10 handbags sold for $600 commission paid.

18 Received order online for one handbag.

20 Market stall day sold 44 bags for $2,640.

20 Paid market stall fees $100.

21 Completed the ordered handbag and received $80, paid $20 postage for order.

25 Paid EFTPOS account fee $40.

27 Market stall day sold 40 bags for $2,400.

27 Paid market stall fees $100.

28 Received and paid for the leather and fittings ordered 13 November.

30 During the month produced 160 handbags, using 32 metres of leather and

$160 worth of fittings.

Your Team is required to:

Margaret has requested that you prepare a worksheet, Income Statement and Balance Sheet for the first three months of operation so that she can assess the business.

She has asked that you record the depreciation expense for the equipment for the three months to the end of November. She has also asked that you calculate and record the interest on the loan accrued to date.

Margaret is using a periodic inventory for the handbags, leather supplies and fittings. At the end of each month, she records the handbags in inventory and reduces the balance of the leather and fittings accounts accordingly. Margaret has $4,000 worth of handbags on hand at the end of November.

Margaret requests that you prepare the following:

a. worksheet for the transactions for the quarter September through to November,

b. an Income Statement for the quarter September – November, and

c. Balance Sheet as at the end of November 20XX.