Student’s Name: Accounting Course Code: ACCT 322 Student’s ID Number: Semester: 3rd CRN: Academic Year: 1444 H
For Instructor’s Use only
Instructor’s Name: Students’ Grade: /15 Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. Assignments submitted through email will not be accepted. Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. Students must mention question number clearly in their answer. Late submission will NOT be accepted. Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
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All answers must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism. Submissions without this cover page will NOT be accepted.
Assignment Question(s): (Marks 15)
Q1. Why do corporations use variance analysis? Explain how managers compute material variance and labor variance. Corporations use variance analysis to compare actual performance to the budgeted performance, and
this helps to determine if the company is meeting its performance targets. If the variances are
unfavorable, the managers should investigate the reasons and take corrective measures.
Material variance has two components, namely material price variance and material usage variance.
Material price variance is calculated using the formula: (Actual price – standard price) * actual
quantity of materials purchased. Material usage variance is calculated using the formula: (Actual
quantity of materials used – standard quantity of materials allowed) * standard price. Materials price
variance is added to materials usage variance to get the total materials variance.
Labor variance has two components, namely labor rate variance and labor efficiency variance. Labor
rate variance is calculated using the formula: (Actual rate – standard rate) * actual hours used. Labor
efficiency variance is calculated using the formula: (Actual hours used – standard hours allowed) *
standard rate. Labor rate variance is added to labor efficiency variance to get the total labor variance.
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Q2. Assume that you are preparing a Master Budget for a reputed corporation. Bring out numerical examples on the complete master budget of the corporation. Answers: The master budget consists of all budgets of a company, for example, the sales budget, production
Budgeted sales units is 10,000 and price is $30, the sales budget will have sales dollars of 10,000 *
30 = $300,000. We can assume that 80% of the sales is collected in the same month
Each unit of production require 2kgs of materials and each kg cost $5, total budget for materials will
be 10,0000 * 2 * $5 = $100,000. We can assume all the purchase cost is paid on the same month
Assuming budgeted production is same as sales units and each unit requires 15 minutes and labor
rate is $20 per hour, budgeted labor budget will be 10,000 * (15/60) * $20 = $50,000
Overhead budget can have a variable portion and a fixed portion, for example, if variable overhead
rate is $0.50 per unit and $3,000 fixed, total overhead budget will be ($0.5 * 10,000) + 3,000 =
$8,000
Sales and administrative expenses are budgeted at $20,000.
Assume the company had a beginning cash balance of $5000
Cash budget will be as follows
Beginning cash balance $5,000
Cash receipts from sales $240,000
Total cash available $245,000
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Cash payments:
For materials $100,000
For labor 50,000
For overheads $8,000
Sales and administrative expenses $20,000
Total cash payments $178,000
Excess of cash (ending cash balance) $67,000
The ending cash balance is included in the budgeted balance sheet
The budgeted income statement will show the sales less all the expenses to get net income.
Q3. XYZ Company is considering purchasing new equipment costing SAR 250,000. The company’s management has estimated that the equipment will generate cash flows as follows (SAR):
Yea r Net Cash Flow PV @10% 1 90,000 0.9091 2 75,000 0.8264 3 85,000 0.7513 4 75,000 0.6830
The company's required rate of return is 10%. Calculate the net present value and give reasons on whether the project should be accepted or rejected.
Answer: Net Present Value (NPV) is the difference between the present value of cash inflows and the initial
outlay.
The present value of cash inflows will be calculated as follows:
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Discounted
Year Net Cash Flow PV @10% Cash flows
1 90,000 0.9091 81,819
2 75,000 0.8264 61,980
3 85,000 0.7513 63,860.50
4 75,000 0.6830 51,225
TOTAL 258,884.50
Net present value = 258,884.50 – 250,000 = SAR 8,884.50
Net present value criteria requires that NPV be positive for a project to be accepted. In this case,
NPV is positive and therefore the project should be accepted.
Q4a. Assume a company manufactures cars and currently uses only 50% of its manufacturing facility 20,000 cars). The company could utilize more of its facility by producing its own tires. It currently purchases tires at SAR 30 per set of four. If the company would incur SAR12 per set for direct materials, SAR10 for direct labor, and SAR 6 for overhead (variable) to produce the tires. Required: Compute why the company should, make or buy the tires, in any scenario give your decision why? Answer: The relevant cost of making tires will include the cost for direct materials, direct labor, and variable
overhead cost as follows: SAR 12 + 10 + 6 = SAR 28
The cost of buying the tires equals SAR 30
Since the cost of making is lower than the cost of buying, the company should make the tires in order
to increase its operating income.
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Q4b. The cost to produce one unit of the product is:
Material SAR 13.00 Labor 8.00 Variable cost 7.00 Fixed expenses 18.00 Total fixed expenses: $ 500,000 The company has received a special order for 20,000 units for a price of SAR 36 per unit from a foreign customer. Required: Advice the manufacturer on whether the order should be accepted.
Answer: The relevant cost of making each unit of the product will only include the variable costs of
manufacturing because if the company has excess capacity, it will not incur the fixed expenses on the
special order.
The total relevant costs of making each unit of the product will be:
Material SAR 13.00
Labor 8.00
Variable cost 7.00
Total 28
The customer has offered to pay a price of SAR 36 per unit. Therefore, since the selling price of 36 is
higher than the cost per unit of SAR 28, the manufacturer should accept the special order.
