Preparation paper 7

Mensuma Company Limited (MECOL) is about to tender for a contract which requires the use of two raw materials: steel and tungsten. Five hundred (500) tons of steel and 1,000 tons tungsten will be required to complete the contract. In addition, 2,000 hours of labour will be needed. Of these, 1,200 hours are in assembly process and the remainder (800 hours) in the finishing process. Mensuma Company Limited will quote a price that allows a 50% mark-up on the relevant cost.

The current inventory levels in tons, original price and Net Realizable Value (NRV) of the materials are provided in table below:

Additional Information:

1. Steel cannot be used by Mensuma Company Limited for any other purposes, but tungsten is used in all company’s manufacturing processes.
2. All labour is paid at TZS 4,000 per hour, but to complete the contract in time, labour for the finishing process will be transferred from other work which generates contribution at the rate of TZS 3,000 per hour.
3. There is currently surplus capacity for assembly labour amounting to 1,000 hours for the duration of the contract. Owing to other agent work, any additional assembly labour will have to be hired on a temporary basis at the rate of TZS 5,000 per hour.

REQUIRED:

1. Determine the price that Mensuma Company Limited (MECOL) should quote on the tender (10 marks)
2. Discuss any four (4) practical benefits of the Information Communication Technology (ICT) in organizational performance management. (4 marks)
3. Write down the benefits of target costing process (6 marks)

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Mwanga Manufacturing Company is a famous company for manufacturing and distribution of soap products in all East African countries. The company manufactures two soap brands known as ‘Red soap’ and ‘Dark soap’.

According to the production manager, the company applies overhead on the basis of direct labour hours throughout the factory, and the company anticipates that overhead and direct time for the upcoming accounting period are TZS 3,200,000 and 50,000 hours respectively.

Information about the company’s products are as follows:

The company overhead cost of TZS 3,200,000 can be identified with three major activities: order processing (TZS 500,000), machine processing (TZS 2,400,000), and product inspection (TZS 300,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours respectively.

Data relevant to these activities are as follows:

REQUIRED:

1. Compute the overhead absorption rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system. (3 marks)
2. Assuming use of activity-based costing, compute the unit manufacturing costs of Red soap and Dark soap if the expected manufacturing volume is attained. (6 marks)
3. Compute:
   1. How much overhead costs would be applied to a unit of Red soap and Dark soap if the company would have used traditional costing and applied overhead solely on the basis of direct labour hours?
   2. Using the answers in (i) above, show which of the two products would be undercosted or overcosted by this procedure.
   (6 marks)
4. State the major limitations of activity-based costing. (5 marks)

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Tobin Designs produces gifts for the tourism industry and has been operating in Ireland for ten years. By analyzing its financial results over time to maximize profits, the company has focused production on three main items: keyrings, drinks coasters, and fridge magnets.

As a consequence of the improvement in the economy, Tobin Designs has recently received orders from new customers. While delighted with the orders, the production director is concerned about the company’s capacity to produce the items required. Details extracted from the company’s budgeted management accounts and other relevant information are shown below:

1. Product Information (per unit):

   Item	Selling Price ($)	Materials ($)	Labour ($)
   Keyrings	1.40	0.50	0.30
   Coasters	2.65	0.75	0.45
   Fridge magnets	1.20	0.40	0.15

2. Production Overheads:

   Total budgeted production overheads for the year are expected to be $ 211,250. Twenty percent (20%) of all production overheads are variable and are allocated to products on the basis of labour hours. Fixed production overheads are considered to be period costs.

3. Budgeted Annual Demand:

   • Keyrings: 132,500 units
   • Coasters: 60,400 units
   • Fridge magnets: 100,000 units

4. Labour Budget:

   The company has budgeted to pay its workers a fixed rate of $ 12 per hour and has included 6,500 labour hours for the year in its budget.

Requirement:

1. Prepare calculations to show whether Tobin Designs will have sufficient production capacity to meet budgeted demand for its products. (5 marks)
2. Compute the optimal production plan for Tobin Designs and show the annual profit expected. (15 marks)

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Attempts: 7 | Correct: 3

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HW DAC was formed five years ago in Sligo and produces a range of health products and supplements for the Irish and UK markets. The management accountant is busy preparing budgets for the period from January to March 2019 and is currently compiling pertinent information relating to one of the company’s newest products: Eyz.

Eyz is a refreshing eye spray mist based on two key organic ingredients: mineral water and green tea extract. There is a simple manufacturing process and the product is manufactured in a 250 ml size for everyday use. Details relating to this product are shown below.

1. Projected sales for the first quarter of 2019 are as follows:

   	January	February	March
   Sales in units (250ml bottles)	4,300	4,380	5,020

   The selling price of Eyz is €3.10 per bottle.

2. At 1 January 2019, the company expects to have an opening inventory of 980 bottles of Eyz.

3. The costs incurred to produce one 250ml bottle of Eyz are shown in the table below:

   	€
   Materials
   Mineral water (225ml)	0.18
   Green tea extract (25ml)	0.30
   Recycled plastic 250ml bottle	0.10
   Labour (0.06hr @ €10 per hour)	0.60
   Variable production overhead	0.40
   	1.58

   The company has arranged to purchase top quality mineral water at a cost of €0.80 per litre and green tea extract at a cost of €12.00 per litre. These prices have been fixed from 2018-2020.

4. At 1 January 2019, the company expects to have 2,000 litres of mineral water and 1,000 litres of green tea extract in inventory. It also expects to have 1,000 250ml plastic bottles in inventory.

5. Projected closing inventory levels for the finished product and raw materials are as follows:

   	End January	End February	End March
   Eyz (250ml bottles)	1,000	1,500	2,000
   Mineral water (litres)	2,108	3,010	4,108
   Green tea extract (litres)	1,000	1,000	2,000
   Recycled plastic bottles	1,000	1,500	2,000

REQUIREMENT:

(a) For the first three months of 2019:

1. Prepare a sales budget (in units and €). (2 marks)
2. Prepare a production budget in units. (4 marks)
3. Prepare a materials budget (in units and €) for each material. (9 marks)
4. Prepare a labour cost budget. (2 marks)
5. Prepare a variable production overhead cost budget. (2 marks)

(b) Prepare a budgeted income statement for the first quarter of 2019 based on your calculations in (i) to (v) above. (4 marks)

(c) Briefly outline TWO reasons why a company should prepare budgets. (2 marks)

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Greatfone Style limited commenced trading twelve months ago and as a result of a very successful year is seeking bank finance to expand. The company imports a specialized mobile phone case from an overseas supplier and currently sells it in a limited range of stores in Ireland and the UK. The case is unique in that it comprises a high quality, durable resin and can be adjusted to fit either of the two leading smartphones in the market. Additional bank funding would allow the company to extend its retailer network in the UK with the possibility of establishing outlets in other parts of Europe. However, to consider an application for finance, the bank requires Greatfone Style limited to prepare a cash budget, forecasting its receipts and payments for the next six months commencing on 1 May 2015. The company has provided the following information:

1. each case will cost €6.20 to purchase from the overseas supplier and the company has agreed to pay 50% of all purchases in cash with the remainder paid in the month after purchase.

2. Greatfone Style limited will sell the case to retail customers for €11.25 and projects the following sales (in units) for the next six months:

   May	June	July	August	September	October	November
   10,000	12,000	15,000	15,000	16,000	18,000	18,000

3. To encourage prompt payments from customers, effective from 1 May 2015, the company has decided to give a discount for cash payment. Greatfone Style limited expects that 20% of all customers will avail of this offer and will receive a discount of 5%. Of the remaining monies receivable, the company expects to receive 50% one month after the month of sale, 45% two months after the month of sale and the remainder will be bad debts.
4. To ensure that sales opportunities are not missed, the company will hold inventory at the end of each month amounting to 10% of the following month’s projected sales. At 1 May 2015, the company expects to have 1,000 cases in inventory.
5. Salary and wage costs per month are expected to be €19,000 for the first two months and to increase by €2,000 per month for each of the next four months, as the company hires new staff.
6. Administration costs are projected to be €82,200 for the year, including depreciation of €9,900.
7. The company has decided to purchase additional computer equipment to support its sales staff. laptops and printers costing €16,200 will be purchased and paid for in October.
8. At 1 May 2015, Greatfone Style limited projects that it will have the following balances: Bank overdraft € 2,960 Accounts receivable (all amounts to be received in May 2015) €30,980 Accounts payable (due in May 2015) €25,100

REQUIREMENT:

1. Prepare a cash budget for Greatfone Style limited, on a monthly basis, for the six-month period commencing 1 May 2015, clearly showing the closing cash balance at the end of each month. (19 marks)
2. Outline TWO benefits of cash budgets. (2 marks)
3. explain the following terms:
   1. flexible budget
   2. Zero based budgeting (4 marks)

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