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Question 1
Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement portfolio through a range of entrepreneurial activities. He moved to Snowy Mountains to follow his dream of a peaceful mountain life. However, after a few months, Murphy became restless and opened a ski equipment store. This single store soon grew into a chain of four outlets spread from the Snowy Mountains to the Victorian Alps. As Murphy put it, “I can’t believe how fast we have expanded. It’s basically been uncontrolled.”
Although business was profitable, the chain did have its share of problems. Sales tended to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added fishing and camping equipment to his product line. Financing inventory requirements became more onerous as new products were added. This left cash balances at very low levels, and short-term bank loans were occasionally required to cover cash shortfalls.
Part of Murphy’s business focused on skiing trips, which were arranged through local ski lodges, and included ski hire, lessons and lift passes. Reports from the company’s financial accounting system seemed to indicate that this part of the business was losing money because of increasing costs, but Murphy could not be sure. “the traditional income statement is not too useful for trying to get to the bottom of this problem”, he noted. Murphy also felt uneasy about other aspects of his business. “My gut feeling is that we are not dealing with the best suppliers in terms of quality, delivery reliability and prices.” Additional complications were caused by an increasingly competitive marketplace, with many former customers now sourcing their skiing, fishing and camping equipment through on-line retailers.
Murphy is not sure what to do. The company’s accountant is very good at keeping the books and preparing the financial statements and tax return, but she did not seem to understand the way the business really worked.
Required:
- Outline the main areas of concern relating to the financial health of Murphy’s business.
- Describe the types of information that Murphy needs to address the areas of concern you identified, in order to run the business more effectively.
- Murphy approaches his accountant to seek her help in gathering and analyzing this information, but she responds: “you must be joking – I am an accountant. My job is simply to look after your books!” Do you agree with this statement?
Question 2
The following data refer to Primrose Manufacturing Ltd for the current year:
| Sales revenue |
$2105000 |
| Raw material inventory, 1 January |
89000 |
| Purchases of raw material |
731000 |
| Raw material inventory, 31 December |
59000 |
| Direct labor cost incurred |
474000 |
| Selling and administrative expenses |
269000 |
| Council rates |
90000 |
| Depreciation on factory building |
125000 |
| Income tax expense |
25000 |
| Indirect material used |
45000 |
| Indirect labor cost |
150000 |
| Depreciation on factory equipment |
60000 |
| Insurance on factory and equipment |
40000 |
| Electricity for factory |
70000 |
| Work in process inventory, 1 January |
0 |
| Work in process inventory, 31 December |
40000 |
| Finished goods inventory, 1 January |
35000 |
| Finished goods inventory, 31 December |
40000 |
Required:
Prepare Primrose Manufacturing’s
- Schedule of costs of goods manufactured
- Schedule of cost of goods sold
- Income statement
Question 3
B&W Limited’s mixing department had 40000 units in work in process on 1 June. There units were 38% complete with respect to conversion cost. Direct materials are added at the beginning of the production process, while conversion costs are incurred uniformly throughout the process. An additional 190000 units were started during June, and 50000 units were in work in process on 30 June. The units in work in process on 30 June were 55% complete with respect to conversion.
Costs incurred in the mixing department for June were as follows:
| Work in Process 1 June | Costs incurred during June | Total | |
| Direct Material | $110,500 | $430,000 | $540,500 |
| Conversion | $22,375 | $320,000 | $342,375 |
| $132,875 | $750,000 | $882,875 |
Required:
- Analysis of physical flow of units
- Calculation of equivalent units
- Calculation of units cost
- Analysis of total costs
Question 4
Bairstow Consulting Ltd offers a range of IT consulting services. The company’s service costing system estimates the cost of each consulting job by accumulating costs of the professional labor that works on the job plus a charge for overhead.
The cost of professional labor is charged to jobs using the following three rates:
| Cost per hour | Charge out rate for billing system | |
| IT trainee | $30 per hour | $130 per hour |
| IT graduate | $75 per hour | $350 per hour |
| IT senior consultant | $225 per hour | $1000 per hour |
The predetermined overhead rate is based on professional labor cost, which are budgeted to be $663600 for the current year. The estimated overhead costs for the current year are budgeted to be:
| Management salaries | $735,000 |
| Salaries of clerical and reception staff | $285,000 |
| Depreciation on IT hardware and software | $240,000 |
| Stationery | $22,500 |
| Telecommunications | $31,500 |
| Insurance | $180,000 |
| Depreciation on office fixtures and fittings | $11,250 |
| Rent | $90,750 |
| Electricity | $39,525 |
| Council rates | $23,475 |
During June the company provided three services, which consumed the following quantities of professional labor (in hours):
| Client | IT trainee | IT graduate | Senior consultant |
| Robinsons | 50 | 100 | 15 |
| Smith and Son | 20 | 140 | 10 |
| Snowman Services | 70 | 80 | 20 |
Required:
- Calculate the predetermined overhead rate to be used at Bairstow Consulting.
- Calculate the cost of the three services.
- Assume Bairstow Consulting uses a billing system with the charge out rates shown above. Calculate the client fees for each of the three services.
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