MANAGEMENT ACCOUNTING IN NUMPTY MANAGEMENT

QUESTION

Question 1          Cash Flow Budget (20 marks)

This question has been designed to develop and test your capacity to design and work with Spreadsheet applications which are a critical tool in all forms of accounting practice, particularly management accounting. Marks are awarded for the simplicity and effectiveness of spreadsheet design as well as the accuracy of your answer. Each worksheet must have a data input section and a result/report section. Ideally, for ease of reading by management, these sections will be on the same worksheet. Data input sections allow budgets to be simply and easily adapted to changing business conditions.

The financial year master budget has been prepared for the Numpty Enterprises on-line store and it is budgeted to make a profit of just over $65,000 for the year. Sales for Numpty Enterprises are expected to be as follows over the coming financial year:

Numpty’s cash collections are budgeted to be 60% in the month of sale, 25% in the month following sale, and 14% in the second month after sale. It is expected that 1% of sales will not be collectable. Numpty pays for stock in the month it is sold and achieves a mark up of 50% on cost price. Numpty operates a just-in-time inventory system and has no carry forward inventory holdings. Other monthly expenses are as follows:

Numpty had cash on hand of $8,575 at the start of the financial year. Sales for the preceding May and June were $132,000 and $130,000 respectively.

(i)         Using an Excel spreadsheet prepare a cash budget for Numpty for the financial year. Ensure you use a data input section so that any changes can be made to the budget. (10 marks)

(ii)       Discuss any issues or problems that you can identify from the cash budget for Numpty management. (5 marks)

(iii)     Your accounts receivables manager advises that she can implement a credit policy which will improve cash collection to 75% in the month of sale and 24% in the month following, with 1% unrecoverable. Using the flexible budget previously prepared alter the input section to reflect these changes. What difference will the new credit policy make to Numpty’s cash flows? Explain your answer. (5 marks)

Question 2          Manufacturing Cost Flows (20 marks)

You are provided with the following data about a manufacturing firm. The company operates in Australia where the corporate tax rate is 30%.

(i)      Using Excel prepare a cost of goods manufactured schedule, cost of goods sold schedule and an income statement. Your Excel model should include a data input section and appropriate formulae. (10 marks)

(ii)    Prepare ledger accounts (T accounts) showing the movement of costs through the manufacturing cycle up to the closing off of Cost of Goods Sold to the Income Statement (10 marks)

Question 3          Manufacturing Budget (20 marks)

Zorba Inc manufactures concrete imitations of ancient Greek artefacts which are sold to garden and home decorator retail outlets. Units are produced and sold to order and the firm does not carry forward inventory of Finished Goods, Raw Materials, or Work in Process. In the 2012 financial year Zorba recorded sales of 172,680 units at $65 per unit. Zorba has achieved year on year sales growth of 8% and it increases its selling price each year in line with the projected rate of inflation. On average Zorba achieves a net profit before tax equivalent to 10% of Sales Revenue.

The Company management believes these trends will hold for the foreseeable future. The firm has a practical production capacity of 200,000 units per annum but may rent additional factory space from the commencement of the 2013 financial year for an extra $200,000 per annum which will allow it to increase its production by 50%. Inflation is forecast at 3.5% per annum over the budget period.

(i)           Using Excel develop a Sales and Profit budget for the next 5 years (commencing 2013) which incorporates the current production constraint. Your spreadsheet must include a data section which enables inputs to be simply altered and ‘what if’ analysis to be undertaken. (Excel resources are provided on your Interact site to guide students on the use of ‘IF’ formula)(10 marks)

(ii)         Using the model developed in part (i) calculate the impact on sales and profit if the option of renting extra factory space is exercised. (Submit results as a separate worksheet) (5 marks)

(iii)        Given your findings from part(i) and (ii) write a report for the CEO of Zorba Inc recommending whether to take up the option to increase production. In your report consider the strategic implications of the firm having extra productive capacity. (5 marks)

Question 4          Case Study(20 marks)

Who Publishing prints and distributes a range of educational texts for the tertiary education sector in Australia. The company has a bonus system based in part on whether reported profit exceeds budgeted profit. In 2011, for the first time in several years, the company has decided to pay a bonus to management staff. The Who Publishing CEO Pete Townshend was very pleased with the 2011 bonuses and advised the company’s finance director Roger Daltrey that bonuses should double for the 2012 financial year.

After that conversation with the CEO the firm’s finance director Daltrey felt significant pressure to maintain the bonuses by ensuring that reported profit remained at a high level in comparison to budget. Zeppelin Ltd supply most of the production material for the manufacture and printing of the Who Publishing texts and over time Daltrey had developed a close relationship with Robert Plant the lead management accountant for Zeppelin. Daltrey advised Plant that strict limitations on operational costs had been imposed by Who senior management and asked that Zeppelin invoice 50% of purchases of production materials as equipment. To maintain a good relationship with Daltrey and Who Publishing, who were major customers, Plant agreed to the request.

Daltrey posted the materials purchases as depreciable equipment purchases meaning that they would appear as assets in the Balance Sheet rather than being expensed in the current year. This had the effect of increasing Who Publishing’s profit in the current year and assuring bonuses for management.

Eric Burdon the management accountant for Who Publishing, who reports directly to Roger Daltrey, noticed the overall decreased levels of production materials being purchased and also the increased purchases of equipment from Zeppelin. He reported the discrepancies to his line manager in Daltrey who told him it was an accounting treatment that, in the long run, had no overall impact on profitability. Daltrey warned Burdon not to get involved.

(i)         If Burdon came to you as a colleague, what advice would you provide him about the ethics of Daltrey’s actions? (10 marks)

(ii)       What action would you recommend Burdon take (explain your reasoning)? (10 marks)

As a starting point to assist in answering this question please refer to the appendix of Chapter 1 of the Langfield-Smith et al text (5^th or 6^th edition) and also the APES GN 40 Ethical Conflicts in the workplace – Considerations for Members in Business PDF prepared by the Accounting Professional & Ethical Standards Board which is provided on the subject Interact site. Students are expected to also conduct their own research outside the text and Study Guide materials in order to respond to this case study.

Question 5          Process Costing (20 marks)

The following data relates to Plastic Fantastic which manufactures extruded plastic and silicon parts for use in logistic storage facilities. Plastic Fantastic operate under a process costing system in which all Direct Materials are added at the start and Conversion Costs are incurred evenly over the whole of production.

On January 1^st 2012 Plastic Fantastic has 40,000 units in Work-in-Process (WIP) which are complete as to Direct Materials ($120,000) and 40% complete for Conversion ($17,700). 375,000 units are commenced during January and units completed and transferred to Finished Goods amounted to 400,000. Units in closing WIP are 25% completed.

The following costs were incurred during January:

Direct Materials                   $1,050,000

Conversion Costs                     $167,500

Required:

Using Excel prepare spreadsheet models to answer the following questions:

(i)         Using the Weighted Average Cost Method determine the cost value of closing WIP and the cost value of goods transferred out during the period (10 marks)

(ii)       Using the FIFO method determine the cost value of closing WIP and the cost value of goods transferred out during the period (10 marks)

SOLUTION

(i)    Cash Budget for Numpty for the financial year has been prepared in the excel taking into account the following:

Cash sales for the month    60%
Cash from last month sale    25%
Cash from lasto last monh sale    14%

The cash budget that has been prepared shows the details of all the receipts and payments and the net profit.
The net profit for a particular month is the opening balance for the next month. Thus it can be said that the cumulative profit for Numpty is shown in the profit for the last month.

In doing the calculations two assumptions have been made, which are as follows:

Assumption 1: It is given that the markup cost is 50% of cost. Thus it  has been taken that sales are 1.5 times that of costs and thus the costs has been calculated and taken into the payments for preparing the cash budget.

Assumption 2: In the second case it has been said that 99% of cash will recovered by the coming month whereas in original case it was that only 85% was recovered by the coming month thus this extra 14% that has been received from the sales of May have been added up in the opening balance of July month.

(ii)    Issues or problems in the cash budget for Numpty management:

As seen from the results of cash budget, the profit for the year is $ 50,533 which is less than the budgeted profit. The main reason for this is the credit that is given for the payment. The profit from sales in a month is realized in the coming two months. Thus for the sales for the month of July, the cash is realized in the month of September and October and only 60% is realized in the month of July. Thus it can be said that although the sales were completed in July it was not reflected in the cash budget. This is the major issue with the cash budget which only considers only cash flow and not the actual transaction that has taken place.

(iii)    The changes as suggested by accounts receivable manager have been done. With this new credit policy have increased the cash flow for Numpty and thus make them achieve the budgeted profit. This is more realistic as only 25% of sales or profit has been transferred to the coming month. For example the cash flow for the last month i.e. July will not show only 25% of the cash sales, which is less than that of the previous policy. Also the sales for the June month have been completely accounted in the July month which was not the case earlier. Thus this has helped in achieving the budgeted profit target.

Question 2     Manufacturing Cost Flows

(i)    The cost of goods manufactured schedule, cost of goods sold schedule and an income statement have been prepared and is shown in the excel. This gives the details of all the calculations.
The cost associated with the manufacturing included every cost head excluding tax and selling and administrative expenses.
The tax and selling and administrative expenses have been included in the income statement.
The cost of goods sold in addition to cost of manufacturing includes cost of inventory of keeping finished goods.
(ii)    Ledger accounts (T accounts) showing the movement of costs through the manufacturing cycle up to the closing off of Cost of Goods Sold to the Income Statement has been prepared and enclosed in the excel file
Various Accounts that have been created are:
    Sales Ledger Account
    Cost of Sales Ledger Account
    WIP Ledger Account
    Factory Overhead Ledger Account
    Labour & Wages Ledger Account
    Stores Ledger Account
    Finished Goods Ledger  Account
Note: Depreciation has been considered in the income statement and not in the cost of manufacturing because firstly there has been uncertainty on whether to take depreciation in cost of manufacturing schedule or Income statement. Secondly since in the accounting reports the depreciation is adjusted in the Profit and Loss Accounts so there has been no entry in the ledger accounts thus has been considered in the Income statement.
Question 3     Manufacturing Budget

(i)    Sales and Profit budget for the next 5 years (commencing 2013) has been developed. The constraint that has been incorporated is on the production capacity. Using IF Formula it has been checked whether with the increase in sales by 8% it is going past 200,000 units or not. If it is the production has been restricted to 200,000 which otherwise was exceeding it.

(ii)    The impact on sales and profit if the option of renting extra factory space is exercised has been done and shown in the separate sheet.  In this also the IF Formula has been used in order to check if the rent is applicable or not. If the production is going beyond the 200,000 units in that case  rent of $200,000 has been levied.

(iii)    It can be seen from the results of the two cases that  in the first case after 2013 i.e. 2014 the profit can increase at higher rate  only if  production capacity is increased as although the profit is increasing because of the inflation but since production has been kept constant the double impact of profit has not been seen.

Whereas if a factory is rented for increase in production it can be seen that for the first two years the profit after paying the rent is less than the profit which would have been there had the factory was not rented.  But after 2015 i.e. from 2016 onwards renting a factory would be helpful as the net profit after paying the rent is more than the profit which would have been there had the factory was not rented. In other words, the rented factory will show favourable results after some time and not from the start itself. This is because the production capacity increases gradually and the cost of rent is divided equally on per unit will have lesser impact on net profits, thereby increasing the net profit from 2016 onwards.

Question 4     Case Study

(i)    Advice on the ethics of Daltrey’s actions?

Daltrey has certainly done wrong by making inappropriate adjustments to the fundamental principles in place for professional accountants for personal gains. These issues account for the manipulation in accounting. These kinds of issues are difficult to handle as this may be based on the factual information and not by person themselves. There might be several reasons for this deviation and leading to ethically wrong tasks most of which might be due to pressure being put by the manager. However there may be the cases as given in the case that the issues arise out of personal needs, which if are know may even have negative impact on the account managers. The code of conduct of accounting states four standards mailnly which are competence, confidentiality, credibility and integrity.

This has been discussed in the case and need to be handled carefully. A structural approach has been setup as provided in APES 110 Code of Ethics for Professional Accountants for the members in business for assisting ethical decision making. (Accounting Professional & Ethical Standards board Limited , 2011)

These are:
1.    Firstly the fundamental principle is defined that is involved in the issue.
2.    Based on the above step it has to be figured out who are the affected parties because of the issue stated above.
3.      The next very important step is to figure what is the procedure for conflict resolution that is there in the organisation.
4.    The persons from the organisation who are eligible and thus should be involved in the process to resolve the conflict have to be identified.
5.    The issue is then discussed with these persons and the conflict that is there with the relevant parties is prescribed. This has to be in accordance with the procedures that have been prescribed.
6.    The action that have to be taken and the various solutions are considered and the consequences associated with them have to be analysed and discussed.
7.    The issue might as well be discussed with the professional independent adviser or a professional body which the member is part of.
8.    All the discussion points, alternatives, actions considered are documented along with the conclusions that have been set forth in the process
9.    Suitable course of action is decided and worked upon after complete analysis
10.    Finally the appropriate course of action is implemented to amend the issue.

(ii)    Recommended Actions:

Although the actions taken up by Daltrey are not having any impact on the organisation but the organisation is incurring losses on account paying bonuses when it was not due. Thus this situation has to be handled carefully. If the corrective actions are not taken this may lead to further losses in terms that if Daltrey is not able to meet targets even after making these adjustments. Thus such actions should be halted at the very moment they were discovered.

There are several courses of actions that can be recommended, Firstly the bonus should be considered on operating profit rather than net profit. As in net profit the advantage of the depreciation can be taken which is not the case in operating profit. Thus the bonus based on the operating profit in this case will be providing better standards to distribute the bonus as this will show the efficiency of operations. Whereas the Net profit which is calculated after deducting Interest and taking benefits of depreciation will result in the effect of finances of the company.

Another way to check this issue will be to check the cost of goods sold. This has to be increasing if the company is growing or increasing its sales. In this case the cost of goods sold will give less cost as the 50% of the amount has gone in equipments. Thus the trend of decreasing of cost of goods sold and at the same time increased profit will certainly be noticed. This practically is not possible.
Question 5     Process Costing

(i)    Using the Weighted Average Cost Method the cost value of closing WIP and the cost value of goods transferred out during the period has been calculated.
To calculate it the problem was divided in three parts:

1.    Statement of production
2.    Statement of cost for each element
3.    Statement of apportionment of costs

The Statement of Production gives details on the WIP that has been used, new products that were initiated and completed and the new WIP that have been generated.

The Statement for cost of each element is calculated based on the cost associated with Direct Material and the cost associated with the Conversion costs.

In the statement of appointment of costs give details of the total cost incurred for the month for direct material and conversion costs based on the production  calculated in Part 1 and per unit cost calculated in Part 2.

(ii)    Using the FIFO method the cost value of closing WIP and the cost value of goods transferred out during the period has been calculated

To calculate it the problem was divided in three parts:

1.    Statement of production
2.    Statement of cost for each element
3.    Statement of apportionment of costs

The Statement of Production gives details on the WIP that has been used, new products that were initiated and completed and the new WIP that have been generated.

The Statement for cost of each element is calculated based on the cost associated with Direct Material and the cost associated with the Conversion costs.

In the statement of appointment of costs give details of the total cost incurred for the month for direct material and conversion costs based on the production  calculated in Part 1 and per unit cost calculated in Part 2.

JH26

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