12/11/2015
Solution
Trial exam 2015 V3
Task 1
a) Break-even units = 600,000/14* = 42,857
Break-even sales = 42,857 42 = $1,800,000
Margin of safety (units) = 58,000 - 42,857=
15,143 units
*812,000/58,000 = 14
** 2,436,000/58,000 = 42
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Task 1
b) Sales................................................................................ 2,436,000
Variable cost (45% 2,436,000).......................................... 1,096,200
Contribution margin............................................................ 1,339,800
Fixed costs........................................................................... 1,100,000
Operating income.............................................................. 239,800
Break-even in units = 1,100,000/23.10* = 47,619
Break-even in sales dollars = 550,000/55%** = $1,000,000
*1,339,800/58,000 = $23.10
**1,339,800/RM2,436,000 = 55%
Margin of safety = 58,000- 47,619= 10,381 units .
Task 1
b) The changes have affected the companys
operating income, break-even point units and
the margin of safety. The new investment
increases the companys break-even units from
42,857 units to 47,619 units. The margin of
safety has also narrowed, making the new
investment more vulnerable to risk. The increase
in operating income is only $27,800.
12/11/2015
Task 2
Cash Budget for December
Beginning cash balance...................................... 8,300
Collections:
Cash sales........................................................ 150,000
Credit sales:
Current month (RM500,000 50%)................. 250,000
May credit sales (RM350000 30%).............. 105,000
April credit sales*.......................................
37,875
Total cash available.......................................... 551,175
Task 2
Cash Budget for December (continued)
Less disbursements:
Inventory purchases:
Current month (650,000 75% 20%).... .
Prior month (500,000 75% 80%).........
Salaries and wages.........................................
Rent..................................................................
Taxes................................................................
Total cash payments........................................
Excess of cash available over needs................
97,500
300,000
87,000
13,400
55,000
552,900
(1,715)
*250,000 15% = 37,500; RM37500 1% = 375; 37,500 + 375 =
RM37,875
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Task 2
b) Yes, the business does show a negative
cash balance for the month of June. A
negative budgeted cash balance is
unacceptable. The easiest way to deal with
it would be for the owner to consider
taking less cash salary.
Task 3
a) MPV = 7,800 (F);
MQV = 4,500 (F);
b) LRV = 6,300 (F);
LEV = 4,800 (U)
12/11/2015
Task 3
c) Direct material variances
An unfavorable direct-material price variance means that a
higher price was paid for the material than was expected
when the standard was set. A favorable variance has the
opposite interpretation. The manager in the best position to
influence the direct-material price variance is the purchasing
manager.
An unfavorable direct-material quantity variance means that a
larger amount of material was used in the production process
than should have been used in accordance with the standard.
A favorable variance has the opposite interpretation.
The manager in the best position to influence the directmaterial quantity variance usually is the production manager.
Task 3
c) Direct labour variances
An unfavorable direct-labor rate variance means that a higher labor rate was
paid than was anticipated when the standard was set. One possible cause is
that labor rate raises granted were above those anticipated in setting the
standards. Another possible cause is that more highly skilled workers were used
to perform tasks than were required or were anticipated at the time the
standards were set. A favorable variance has the opposite interpretation.
In some cases, the manager in the best position to influence the direct-labor
rate variance is the production manager. In other cases, the personnel manager
or union negotiator would have greater influence.
The interpretation of an unfavorable direct-labor efficiency variance is that
more labor was used to accomplish a given task than was required in
accordance with the standards. A favorable variance has the opposite
interpretation.
The manager in the best position to influence the direct-labor efficiency
variance usually is the production manager.
12/11/2015
Task 4
a) (45 4,000) + (90 8,000) = $900,000
b) contribution per kg
Lego
Hego
Contribution margin
45
90
Pounds of material
4
10
Contribution margin/kg
$11.25
$9
Felix should make as much of Lego as can be sold and then
make Lego.
* Students can easily find this optimal mix of products:
4,000 Lego and 1,600 Hego.
Task 5
a) A static budget is for a particular level of activity. A
flexible budget is one that can be established for any level
of activity. The static budget can be used to compare
actual costs with the budgeted costs for the budgeted
level of activity.
However, for performance reporting, it is necessary to
compare the actual costs for the actual level of activity
with the budgeted costs for the actual level of activity. A
flexible budget provides the means to compute the
budgeted costs for the actual level of activity
12/11/2015
Task 5 (a)
Price/variable
cost per unit
Range of production
24.0
20,000 units
480,000
19,200 units
460,800
Direct materials
6.0
120,000
115,200
Direct labor
4.4
88,000
84,480
Variable manufacturing overhead
3.6
72,000
69,120
Variable selling overhead
1.2
24,000
23,040
Contribution margin
8.8
Revenue
Less: Variable costs
176,000
168,960
Fixed manufacturing overhead
90,000
90,000
Fixed G&A cost
30,000
30,000
Operating income
56,000
48,960
Task 5
b) The existing report (comparison between
actual performance and static budget) has at
least two weaknesses: (1) It does not provide a
meaningful comparison as the actual costs and
expected costs are not compared at the same
level of activity, (2) It may invite potential abuse
by managers by manipulating the performance
report by deliberately producing less than the
planned output to create a favourable
performance outcome.
12/11/2015
Task 5 (c)
Actual (19,200
units)
(1)
118,400
Flexible budget
(19,200 units)
(2)
115,200
Direct labor
82,560
84,480
Variable manufacturing overhead
72,320
69,120
3,200 U
Variable selling overhead
26,480
23,040
3,440 U
Fixed manufacturing overhead
90,000
90,000
Fixed G&A cost
25,000
30,000
(5,000) F
Direct materials
Variance
(1) (2)
3,200 U
(1,920) F