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You are a trainee Certified Public Accountant in the firm of Farrelly, O’Brien & Co. Your firm has recently started advising a number of Irish start-up manufacturing companies. The partner in charge of these clients has commented that “the firms have spent time and energy developing their strategy but don’t seem to realize the importance of preparing budgets”. You have been asked to draft a clear and concise briefing note that will be circulated to the startup companies on the subject of budgeting.
REQUIRED:
Draft a briefing note that:
- Explains the main purposes of budgeting; (6 marks)
- Outlines the functional budgets that are typically prepared for a manufacturing company. (8 marks)
Outline TWO benefits and TWO limitations of using absorption costing
Briefly discuss FOUR limitations of negotiated transfer prices. (8 marks)
DW, a transport company, operates three depots. Each depot has a manager who reports directly to the Operations Director. For many years the depot managers have been asked by the Operations Director to prepare a budget for their depot as part of the company’s annual budgets process. A new depot manager has been appointed to the Southern region and he has concerns about the validity of these annual budgets. He argues that the annual budgets will soon become out of date as operational circumstances change. At a recent manager’s meeting he said, “The annual budgets are restrictive. They do not permit the depot managers to make decisions in response to operational changes, or change in working practices for next year until that year’s budget has been approved”.
REQUIRED:
- Explain the differences between the above annual budgeting system and a rolling budget system. (4 marks)
- Discuss how the Southern region depot Manager could use a rolling budget system to address his concerns. (6 marks)
State the major limitations of activity-based costing?
An Activity based costing approach refines a costing system by focusing on individual activities (events, tasks, or units of work with specified purpose) as the fundamental cost objectives. It uses the cost of these activities as the basis for assigning costs to the other cost objects such as products or services. This depends on cost hierarchy in the organization.
REQUIRED:
- List and discuss four levels of cost hierarchy.
- Explain the relative strength of ABC approach over the traditional based costing approach.
- Identify any six main assumptions on which the Cost-Volume-Profit model is based.
- Evaluate “Zero Based Budgeting” over “traditional budgeting” method.
- Discuss any four steps involved in designing an ABC System of overhead cost allocation.
- Explain which other methods are available for the purposes. (6 marks)
- Explain TWO limitations of management information in providing guidance for managerial decision-making.
- Describe the term “Target Costing” and explain four stages involved in target costing. (4 marks)
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- Briefly explain what you understand by the term ‘transfer pricing’.
- Explain how the existence of transfer pricing can distort performance appraisal within a divisionalised organization structure. (6 marks)
- Explain four methods which are used to determine transfer prices. (4 marks)
- Identify and explain briefly THREE similarities and TWO differences between activity-based costing and the traditional system of assigning overheads to products. (5 marks)
- Explain the following concepts and describe their application in responsibility accounting:
- The controllability principle (2.5 marks)
- Budgetary slacks (2.5 marks)
Mama Chuwa is a strong business woman at Mbeya City. Whenever she buys and prepare animal food some output give her a different result than what she expected. She came to you for assistance on how material mix and material variance happen.
REQUIRED:
Advise her on how material mix and material variance happen. (5 marks)
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