Assignment: Managerial Accounting
Part 1: Capital Budgeting Decisions
Chee Company has gathered the following data on a proposed investment project:
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Investment required in equipment
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$240,000
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Annual cash inflows
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$50,000
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Salvage value
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$0
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Life of the investment
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8 years
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Required rate of return
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10%
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Assets will be depreciated using straight line depreciation method
Required:
Using the net present value and the internal rate of return methods, is this a good investment?
Part 2: Master Budget
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company sells many styles of earrings, but all are sold for the same price-$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
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January (actual)
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20,000
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June (budget)
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50,000
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February (actual)
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26,000
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July (budget)
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30,000
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March (actual)
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40,000
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August (budget)
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28,000
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April (budget)
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65,000
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September (budget)
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25,000
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May (budget)
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100,000
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The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
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Variable:
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Sales commissions
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4% of sales
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Fixed:
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Advertising
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$ 200,000
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Rent
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$ 18,000
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Salaries
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$ 106,000
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Utilities
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$ 7,000
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Insurance
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$ 3,000
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Depreciation
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$ 14,000
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Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below:
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Assets
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Cash
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$ 74,000
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Accounts receivable ($26,000 February sales; $320,000 March sales)
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346,000
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Inventory
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104,000
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Prepaid insurance
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21,000
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Property and equipment (net)
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950,000
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Total assets
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$ 1,495,000
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Liabilities and Stockholders' Equity
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Accounts payable
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$ 100,000
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Dividends payable
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15,000
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Common stock
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800,000
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Retained earnings
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580,000
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Total liabilities and stockholders' equity
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$ 1,495,000
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The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
Part 3: Variance Analysis for Decision Making
Bronfenbrenner Co. uses a standard cost system for its single product in which variable overhead is applied on the basis of direct labor hours. The following information is given:
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Standard costs per unit:
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Raw materials (15 grams at $16 per gram)
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$2400
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Direct labor (075 hours at $8 per hour)
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$600
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Variable overhead (075 hours at $3 per hour)
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$225
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Actual experience for current year:
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Units produced
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22,400 units
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Purchases of raw materials (21,000 grams at $17 per gram)
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$357,000
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Raw materials used
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33,400 grams
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Direct labor (16,750 hours at $8 per hour)
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$134,000
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Variable overhead cost incurred
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$48,575
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Required:
Compute the following variances for raw materials, direct labor, and variable overhead, assuming that the price variance for materials is recognized at point of purchase:
a. Direct materials price variance.
b. Direct materials quantity variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
e. Variable overhead spending variance.
f. Variable overhead efficiency variance.
g. As a manager, why is variance analysis important?
Part 4: Evaluation of Decentralized Organizations
The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%.
Required:
a. Calculate the company's return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?
c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?
d. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?
Part 5: Preparing Statement of Cash Flows
Boscia Corporation's balance sheet appears below:
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Comparative Balance Sheet
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Ending Balance
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Beginning Balance
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Assets:
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Cash and cash equivalents
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$ 44
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$ 38
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Accounts receivable
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82
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69
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Inventory
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71
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69
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Plant and equipment
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537
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500
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Accumulated depreciation
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( 240)
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( 201)
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Total assets
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$494
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$475
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Liabilities and stockholders' equity:
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Accounts payable
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$ 70
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$ 60
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Wages payable
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24
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21
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Taxes payable
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19
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22
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Bonds payable
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226
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300
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Deferred taxes
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19
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18
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Common stock
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22
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20
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Retained earnings
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114
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34
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Total liabilities and stockholders' equity
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$494
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$475
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The net income for the year was $108. Cash dividends were $28. Required:
Prepare a statement of cash flows in good form using the indirect method.
Format your assignment according to the give formatting requirements:
a. The answer must be double spaced, typed, using Times New Roman font (size 12), with one-inch margins on all sides.
b. The response also includes a cover page containing the title of the assignment, the course title, the student's name, and the date. The cover page is not included in the required page length.
c. Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.