Cost and management accounting II

Part One

Discussion Questions

1 What is the master budget and why is it useful?

- The master budget is a comprehensive financial plan that includes all the individual budgets of a
business. It serves as a roadmap for the company's financial activities throughout a specific period
(usually a fiscal year). It combines operating budgets, financial budgets, and capital budgets into one
cohesive plan. This is super helpful for aligning goals, setting expectations, and managing resources
effectively.

2 What is the operating budget and what are its components?

An operating budget outlines the company's projected revenues and expenses related to its core
operations. It typically includes sales budget, production budget, direct materials budget, direct labor
budget, and more. The components of an operating budget focus on day-to-day activities and
operational efficiencies to achieve financial goals.

An operating budget focuses on the day-to-day financial activities of a business related to its core
operations. It includes various components such as:

- Sales Budget: Projected sales revenue based on sales volume and selling price.

- Production Budget: Plans for manufacturing products based on sales forecasts and inventory levels.

- Direct Materials Budget: Estimates the cost and quantity of materials required for production.

- Direct Labor Budget: Forecasts labor costs based on production needs and wage rates.

- Operating Expenses Budget: Estimates expenses such as marketing, administrative, and research costs.

3 What are static budgets and static-budget variances?

Static budgets are fixed budgets prepared before the period starts, and they remain unchanged
regardless of actual activity levels. Static-budget variances are the differences between actual results
and the amounts specified in the static budget. They help identify where deviations occurred and what
caused these deviations.

Static budgets are fixed budgets set at the beginning of a period based on expected activity levels. They
do not change regardless of actual activity. Static-budget variances are the differences between actual
results and the amounts stated in the static budget. These variances provide insights into where
deviations occurred and why, helping management understand performance gaps and make necessary
adjustments.

4 How can managers develop a flexible budget and why is it useful to do so?

- A flexible budget adjusts the static budget based on actual levels of activity, making it more responsive
to changes in production or sales volumes. It is useful because it provides a better basis for performance
evaluation by accounting for different levels of activity

A flexible budget, unlike a static budget, adjusts based on actual activity levels. This allows for better
performance evaluation by accounting for variations in production or sales volumes. By incorporating
actual activity levels, a flexible budget provides a more accurate basis for assessing performance and
making informed decisions in dynamic business environments.

5 What is a standard cost and what are its purposes?

- Standard cost is the predetermined cost of producing a single unit of product or service. It includes
both direct and indirect costs. Standard costs serve as benchmarks for evaluating actual costs and
performance, aiding in cost control and decision-making

Standard cost represents the predetermined cost of producing a single unit of product or service. It
includes both direct and indirect costs. Standard costs provide benchmarks for evaluating actual costs
and are essential for cost control, performance evaluation, and decision-making. They help identify cost
variations, inefficiencies, and areas for improvement within an organization

6 What is benchmarking and why is it useful?

- Benchmarking involves comparing one's business processes and performance metrics to industry best
practices or competitors. It helps identify areas for improvement, set goals, and drive continuous
improvement efforts

Benchmarking involves comparing an organization's processes and performance metrics with industry
best practices or competitors. It helps identify opportunities for improvement, set performance targets,
establish goals, and drive continuous enhancement. By learning from successful practices in the
industry, organizations can enhance their operational efficiency and effectiveness.

7 What is the relationship between the sales-volume variance and the production-
volume variance?

- The sales-volume variance measures the impact of differences in actual sales volume from expected
sales volume on profit. The production-volume variance measures the impact of differences in actual
production volume from the budgeted production volume on costs.

8 How can variance analysis be used in an activity-based costing system?

- Variance analysis in activity-based costing helps identify the drivers of costs more accurately by looking
at activities that cause costs to vary. It provides insights into the reasons behind cost variations and
helps in making informed decisions to optimize processes.

In activity-based costing (ABC), variance analysis focuses on understanding the cost drivers more
accurately by examining activities that influence costs.

9 How are overhead variances useful in nonmanufacturing settings?

- Overhead variances help nonmanufacturing settings like service industries analyze and control costs
related to activities such as administration, marketing, and IT. Understanding overhead variances can aid
in cost management and performance evaluation.

10 How do managers plan variable overhead costs and fixed overhead costs?

- Managers plan variable overhead costs based on the expected level of activity or production volume,
while fixed overhead costs are planned based on the fixed capacity of the organization. Managing both
types of overhead costs effectively is crucial for budgeting and performance evaluation.

11 In August 2001, East Publishing Company's costs and quantities of paper consumed in
manufacturing its 2002 Executive Planner and Calendar were as follow:

Required:
Actual unit purchase price Br 0.16 per page
Standard quantity allowed for good production 195,800 pages
Actual quantity purchased during August 230,000 pages
Actual quantity used in August 200,000 pages
Standard unit price Br 0.15 per page
a) Calculate the total cost of purchases for August.

- Actual unit purchase price = Br 0.16 per page

- Actual quantity purchased during August = 230,000 pages
Total cost of purchases = Actual quantity purchased during August * Actual unit purchase price
Total cost of purchases = 230,000 pages * Br 0.16/page
Total cost of purchases = Br 36,800
b) Compute the material price variance on the bases of purchase

Material Price Variance = (Actual quantity purchased Actual unit purchase price) - (Actual quantity
purchased Standard unit price)
Given:
- Actual quantity purchased during August = 230,000 pages
- Actual unit purchase price = Br 0.16 per page
- Standard unit price = Br 0.15 per page
Material Price Variance = (230,000 0.16) - (230,000 0.15)
Material Price Variance = Br 36,800 - Br 34,500
Material Price Variance = Br 2,300
The material price variance based on purchase is Br 2,300.

c) Calculate the material quantity variance.

Material Quantity Variance = (Standard quantity allowed for good production Standard unit
price) - (Actual quantity used in August Standard unit price)
Given:
- Standard quantity allowed for good production = 195,800 pages
- Standard unit price = Br 0.15 per page
- Actual quantity used in August = 200,000 pages
Material Quantity Variance = (195,800 0.15) - (200,000 0.15)
Material Quantity Variance = Br 29,370 - Br 30,000
Material Quantity Variance = Br -630
The material quantity variance is Br -630.
d) TotalFBV

TFBV = Material Price Variance + Material Quantity Variance

TFBV = Br 2,300 + Br (-630)
TFBV = Br 1,670

The Total Flexible Budget Variance is Br 1,670.

12.Sagittarius Corp. has established the following standards for the prime costs of one
of its chief product, dart boards.
Standard Qty standard Price (Rate) Total Standard cost
Direct material 8.5 pounds Br.1.80/pound Br.15.30
Direct labor 0.25 hour 8.00/hour 2.00
Br.17.30
During May, Sagittarius purchased 160,000 pounds of direct material at a total cost of Br.304,
000. The total wages for May were Br.42, 000, 90% of which were for DL. Sagittarius
manufactured 19,000 dart boards during May; using 142,500 pounds of direct material & 5,000
direct labor hours.
Required: Compute the following variances for May.
a) Direct material price variances
DM Price Variance = (Actual Quantity Purchased × Actual Price) - (Actual Quantity
Purchased × Standard Price)
Given:
 - Actual quantity purchased = 160,000 pounds
- Actual cost of material purchased = Br.304,000
- Standard price = Br.1.80/pound
First, we need to calculate the actual unit price:
Actual Price = Actual Cost / Actual Quantity Purchased
Actual Price = Br.304,000 / 160,000 pounds
Actual Price = Br.1.90/pound
Now we can calculate the Direct Material Price Variance:
DM Price Variance = (160,000 pounds × Br.1.90/pound) - (160,000 pounds ×
Br.1.80/pound)
DM Price Variance = Br.304,000 - Br.288,000
DM Price Variance = Br.16,000
The Direct Material Price Variance is Br.16,000.
b) Direct material usage variance

DM Usage Variance = (Actual Quantity Used × Standard Price) - (Standard Quantity Allowed ×
Standard Price)
Given:
- Actual quantity used = 142,500 pounds
- Standard quantity allowed = 8.5 pounds per board (19,000 boards produced)
We calculate the Standard Quantity allowed for the actual production:
Standard Quantity Allowed = 19,000 boards × 8.5 pounds/board
Standard Quantity Allowed = 161,500 pounds
Then, we can compute the Direct Material Usage Variance:
DM Usage Variance = (142,500 pounds × Br.1.80/pound) - (161,500 pounds × Br.1.80/pound)
DM Usage Variance = Br.256,500 - Br.290,700
DM Usage Variance = -Br.34,200
The Direct Material Usage Variance is -Br.34,200.
c) Direct material cost variance

The Direct Material Cost Variance can be found by adding the Price Variance and Usage Variance:
DM Cost Variance = DM Price Variance + DM Usage Variance
DM Cost Variance = Br.16,000 - Br.34,200
DM Cost Variance = -Br.18,200
The Direct Material Cost Variance is -Br.18,200.

d) Direct labor rate variance

Direct Labor Rate Variance

The Direct Labor Rate Variance is calculated as:
DL Rate Variance = (Actual Hours Worked × Actual Rate) - (Actual Hours Worked × Standard Rate)
Given:
- Actual hours worked = 5,000
- Actual wages = Br.42,000
- 90
Calculate the Actual Rate:
Actual Rate = Total Wages / Actual Hours Worked
Actual Rate = (Br.42,000 * 0.90) / 5,000
Actual Rate = Br.37,800 / 5,000
Actual Rate = Br.7.56/hour
Now we can compute the Direct Labor Rate Variance:
DL Rate Variance = (5,000 hours × Br.7.56/hour) - (5,000 hours × Br.8.00/hour)
DL Rate Variance = Br.37,800 - Br.40,000
DL Rate Variance = -Br.2,200
The Direct Labor Rate Variance is -Br.2,200.
e) Direct labor efficiency variance

Direct Labor Efficiency Variance

The Direct Labor Efficiency Variance is calculated as:
DL Efficiency Variance = (Standard Hours for Actual Production - Actual Hours Worked) × Standard Rate
Given:
- Standard hours for actual production = 19,000 boards * 0.25 hours/board = 4,750 hours
Calculate the Direct Labor Efficiency Variance:
DL Efficiency Variance = (4,750 hours - 5,000 hours) * Br.8.00/hour
DL Efficiency Variance = (-250 hours) * Br.8.00/hour
DL Efficiency Variance = -Br.2,000
The Direct Labor Efficiency Variance is -Br.2,000.
f) Direct labor cost variance
Direct Labor Cost Variance
The Direct Labor Cost Variance is the sum of the Rate Variance and Efficiency Variance:
DL Cost Variance = DL Rate Variance + DL Efficiency Variance
DL Cost Variance = -Br.2,200 - Br.2,000
DL Cost Variance = -Br.4,200
The Direct Labor Cost Variance is -Br.4,200.
 Financial management II
1. A firm's sales are Birr 450,000 Cost of good sold is Birr 240,000 and
inventory is Birr 90,000
A. Calculate its inventory turn over
The inventory turnover ratio measures how many times a company sells and
replaces its inventory within a specific period. It is calculated as the cost of goods
sold divided by the average inventory. The formula for inventory turnover is:
Inventory Turnover = (Cost of Goods Sold)/(Average Inventory)
Given:
- Cost of Goods Sold (COGS) = Birr 240,000
- Average Inventory = (Beginning Inventory + Ending Inventory) / 2
- Beginning Inventory = Birr 90,000
- Ending Inventory = Birr 90,000
Steps to Calculate Inventory Turnover:
1. Determine the Average Inventory:
Average Inventory = (90,000 + 90,000)/2 = 90,000
B. Calculate the firm's gross margin percentage

Inventory Turnover = (240,000)/(90,000) = 2.67

The inventory turnover for the firm is 2.67 times.
B. Calculate Gross Margin Percentage
The gross margin percentage represents the portion of revenue that exceeds the cost of
goods sold, expressed as a percentage of total revenue. It is calculated using the
formula:
Gross Margin Percentage = ( (Sales - Cost of Goods Sold)/(Sales)) × 100
Given:
- Sales = Birr 450,000
- Cost of Goods Sold (COGS) = Birr 240,000
Steps to Calculate Gross Margin Percentage:
a. Calculate Gross Margin:
Gross Margin = 450,000 - 240,000 = 210,000
b. Calculate Gross Margin Percentage:
 Gross Margin Percentage = ( (210,000)/(450,000)) × 100 = 46.67%
The gross margin percentage for the firm is 46.67

2. A bond has Birr 10,000 face value and 10 years to maturity. The bond
promises to pay a coupon of 1,000Br. The bond interest is paid annually.
The interest rate for similar bonds is 12%.
Required: Determine the following:
A. What is the bond's terminal value
The terminal value of the bond at maturity is equal to the face value of the bond.
Given:
- Face Value of the bond = Birr 10,000
Hence, the terminal value of the bond is Birr 10,000.
B. Determine the coupon rate
The coupon rate is the annual interest payment as a percentage of the face value
of the bond. Given:
- Annual Coupon Payment = Birr 1,000
- Face Value of the bond = Birr 10,000
The coupon rate can be calculated as:
Coupon Rate = ( (Annual Coupon Payment)/(Face Value)) × 100
Coupon Rate = ( (1,000)/(10,000)) × 100 = 10%
Therefore, the coupon rate is 10
C. What is the maturity period.
The maturity period of the bond is given as 10 years.
D. What is the yield to maturity

The Yield to Maturity (YTM) can be calculated using the formula for a bond with annual
coupon payments:
YTM = (C + (FV - C)/(N))/((FV + C)/2) - 1
Where:
- C = Annual Coupon Payment
- FV = Face Value
- N = Time to Maturity
Plugging in the values:
YTM = (1,000 + (10,000 - 1,000)/10)/((10,000 + 1,000)/2) - 1
 YTM = (1,000 + 900)/(5,500) - 1
YTM = (1,900)/(5,500) - 1
YTM = 0.3455 - 1
YTM ≈ -0.6545
E. Determine the value of the bond

To determine the value of the bond, we can use the formula for the present value of a
bond which is the sum of the present value of coupons and the present value of the face
value.
The present value of the annual coupon payments can be calculated using the formula
for the present value of an annuity:
PV = (C)/(r)× (1 - (1 + r)^(-n))
Where:
- PV = Present Value of the annual coupon payment
- C = Annual coupon payment
- r = Interest rate per period
- n = Number of periods
Given:
- Face Value (FV) = Birr 10,000
- Annual Coupon Payment (C) = Birr 1,000
- Interest Rate (r) = 12
- Number of Periods (n) = 10 years
Calculating the present value of the annual coupon payment:
PV = (1,000)/(0.12)× (1 - (1 + 0.12)^(-10))
PV = (1,000)/(0.12)× (1 - 1.12682503013)
PV ≈ (8,333.33)/(0.12)× (-0.12682503013)
PV ≈ 69,444.44 × (-0.12682503013)
PV ≈ -8,791.15
The present value of the annual coupon payment is approximately -8,791.15.
Next, we calculate the present value of the face value which is simply the face value
discounted to present value using the formula:
PV = (FV)/((1 + r)^n)
Plugging in the values:
PV = (10,000)/((1 + 0.12)^10)
PV = (10,000)/((1.12)^10)
PV = (10,000)/(3.06127536)
 PV ≈ 3,267.00
The present value of the face value is approximately 3,267.00.
Finally, to determine the value of the bond, we sum the present values of the annual
coupon payment and the face value:
Value of Bond = PV(Coupons) + PV(Face Value)
Value of Bond = -8,791.15 + 3,267.00
Value of Bond = -5,524.15
Therefore, the value of the bond is approximately -5,524.15 Br.
3. Determine the price of a stock under the following unrelated
cases:
i. The stock's divided just paid is 5 Br and the dividend has a zero growth
rate and the required rate of return is 10%
The price of a stock with zero growth in dividends can be calculated using the Dividend
Discount Model (DDM) formula:
Price of Stock = (Dividend)/(Rate of Return)
Given:
- Dividend just paid = Birr 5
- Required rate of return = 10
Using the formula:
Price of Stock = 5/(0.10) = Birr 50
Therefore, the price of the stock in this scenario is Birr 50
ii. The stock's dividend just paid is 6% Br and the expected growth in dividend is
6% and the required rate of return is 4%?

For a stock with growth in dividends, we use the Gordon Growth Model or the Constant
Growth Model:
Price of Stock = (Dividend × (1 + Growth Rate))/(Rate of Return - Growth Rate)
Given:
- Dividend just paid = Birr 6
- Expected growth rate in dividend = 6
- Required rate of return = 4
Using the formula:
Price of Stock = (6 × (1 + 0.06))/(0.04 - 0.06) = (6.36)/(-0.02) = -318
 The negative value indicates that the math does not match a realistic scenario. This
result is likely due to the required rate of return being less than the growth rate, which
does not align with typical valuation models.
If you meant the growth rate to be 6
Price of Stock = (6 × (1 + 0.06))/(0.04 - 0.06) = (6.36)/(-0.02) = -318
4.The financial statements of Harbin Co. are given below
Harbin Co.
Balance Sheet
Dec31,2007
Cash 130,000 2007 Account payable 120,000
Marketable securities 150,000 Notes payable 100,000
Accounts receivable 120,000 Accruals 20,000
Inventories 140,000 Long-term liabilities 100,000
Net fixed assets 300,000 Stock holder's equity 500,000
Total 840,000 Total 840,000
Harbin Co.
Income Statement
For the year ended Dec 31, 2007
Revenue (Net sales) 600,000
Cost of goods sold 300,000
Operating expense 100,000
Earning before interest and tax 200,000
Interest 50,000
Earning before tax 150,000
Tax 40,000
Net income 110,000
Using the above information, calculate the following ratios and decide whether
they are acceptable or not acceptable by comparing the results with the given
industry average
type Ratio Industry average acceptable Not acceptable
computed
Quick ratio 1.82 times 6 times (Not acceptable)
Net profit margin 18.33% 12% (Not acceptable)
Current ratio 2.45 times 4 times Acceptable
Return on equity 22% 6% (Acceptable)
Receivable : 5 times 6% (Acceptable)
turnover
Return on assets 13.10% 10% Not acceptable
DSO 73 days 20 day Not acceptable
Time interest 3 times 3 times (Acceptable)
earned
Fixed asset 2 times 5 times (Acceptable)
turnover
Inventory turnover 2.14 times 18 times (Acceptable)
Total asset 0.71 times 3 times Not acceptable
turnover
Gross profit margin 50% 15% (Acceptable)
Basic earning 23.80% 10 Not acceptable
power

1. Quick Ratio:
Quick Ratio = (Cash + Marketable securities + Accounts receivable) / Current
Liabilities
Quick Ratio = (130,000 + 150,000 + 120,000) / (120,000 + 100,000) = 400,000 /
220,000 = 1.82 times
2. Net Profit Margin:
Net Profit Margin = (Net Income / Revenue) * 100
Net Profit Margin = (110,000 / 600,000) * 100 = 18.33%
3. Current Ratio:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = (130,000 + 150,000 + 120,000 + 140,000) / (120,000 + 100,000) =
540,000 / 220,000 = 2.45 times
4. Return on Equity:
Return on Equity = (Net Income / Stockholder's Equity) * 100
Return on Equity = (110,000 / 500,000) * 100 = 22%
5. Receivable Turnover:
Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Receivable Turnover = 600,000 / 120,000 = 5 times
6. Return on Assets:
Return on Assets = (Net Income / Total Assets) * 100
Return on Assets = (110,000 / 840,000) * 100 = 13.10%
7. DSO (Days Sales Outstanding):
DSO = (Accounts Receivable / Net Credit Sales) * Number of Days
DSO = (120,000 / 600,000) * 365 = 73 days
8. Times Interest Earned:
Times Interest Earned = Earnings Before Tax / Interest Expense
Times Interest Earned = 150,000 / 50,000 = 3 times
9. Fixed Asset Turnover:
Fixed Asset Turnover = Net Sales / Average Fixed Assets
Fixed Asset Turnover = 600,000 / 300,000 = 2 times
10. Inventory Turnover:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = 300,000 / 140,000 = 2.14 times
11. Total Asset Turnover:
Total Asset Turnover = Net Sales / Total Assets
Total Asset Turnover = 600,000 / 840,000 = 0.71 times
12. Gross Profit Margin:
Gross Profit Margin = (Net Sales - Cost of Goods Sold) / Net Sales * 100
Gross Profit Margin = (300,000 / 600,000) * 100 = 50%
13. Basic Earning Power:
Basic Earning Power = Earnings Before Interest and Taxes / Total Assets
Basic Earning Power = 200,000 / 840,000 = 23.80%
 - Quick Ratio: 1.82 times (Not acceptable)
- Net Profit Margin: 18.33% (Not acceptable)
- Current Ratio: 2.45 times (Acceptable)
- Return on Equity: 22% (Acceptable)
- Receivable Turnover: 5 times (Acceptable)
- Return on Assets: 13.10% (Not acceptable)
- DSO: 73 days (Not acceptable)
- Time Interest Earned: 3 times (Acceptable)
- Fixed Asset Turnover: 2 times (Acceptable)
- Inventory Turnover: 2.14 times (Acceptable)
- Total Asset Turnover: 0.71 times (Not acceptable)
- Gross Profit Margin: 50% (Acceptable)
- Basic Earning Power: 23.80% (Not acceptable)
 Intermidate financial accounting II
1. Using the information provided by john DOC ,we can compute the
value of closing inventory ,based on the three inventory valuation
method discussed.

2.basic problem-journal entries P/L appropriation A/C and partner Capital

A/C partner A and B
3. The received side of the Stores Ledger Account shows the following
particulars:
Jan. 1 Opening Balance: 500 units @ Br.4
Jan. 5 Received from vendor: 200 units @ Br. 4.25
Jan. 12 Received from vendor : 150 units @ Br.4.10
Jan.20 Received from vendor : 300 units @ Br.4.50
Jan.25 Received from vendor: 400 units @ Br. 4
Issues of material were as follows:
Jan. 4-200 units;
Jan. 10-400 units;
Jan. 15-100 units;
Jan 19-100 units;
Jan.26-200 units;
Jan. 30-250 units.
Issues are to be priced on the principle of "first in first out". Write the Stores Ledger
Account in respect of the materials for the month of January
Required A. Prepare Stores Account on Last in First Out method assuming the same
particulars
Stores Ledger Account - First In First Out (FIFO) method:

Stores Ledger Account - Last In First Out (LIFO) method: