ASSIGNMENT 2 (20 MARKS)

Question 1 Total marks for Q2. (15 marks)

3 marks
a) Fixed budget is a budget which is designed to remain unchanged regardless of
the volume of output or sales achieved. Moreover, the fixed budgets are useful
for controlling fixed cost and particular for non-production fixed cost.
However, flexible budget (flexed budget) is a budget which by recognizing
different cost behavior patterns, is designed to change as volumes of output
changes.
Flexible budget and budgetary control. Nevertheless, flexed budgets had
advantages and disadvantages when it approached:
1.The wrong approach is to compare actual results against the fixed budget.
2.The correct approach would be:Identify fixed and variable costs
Produce a flexible budget using marginal
costing techniques.

A finacial budget provides an approximate forecast with respect to the financial

results that a company looks obtains in the future. The budget can be made on a
monthly, quarterly or an annual basis. A budget, which has been calculated, is
thoroughly checked at the end of the particular period in order to understand the
various issues associated with the financial results. Consequently, when a
company adopts a satatics budget, it tried to make an assumption with respect
to the output of the business. However, the actual output would differ from the
estimated number. Hence, in the order to evaluate the performance of the profit
center, a flexible budget is used. A flexible budget helps the company to
understand all the line items in the income statement with the same number of
outputs and thereby act on relate issue.
Fixed budget and flexible budget are appropriate. When fixed budget are useful
at the planning stage, as they provide a common ground for the preparation of
all the many types of budget; a flexible budget may be needed at the planning

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 stage to complement the master budget. As a result, flexible budget assist
management control by providing more dynamic and comparable information.

Example flex budget:

b) Sale Budget:
The sale budget is used by a company to estimate of sales revenue that the
company wants to generate during a particular time period. The time period can
range from a monthly budget for an annnual budget. In order to keep up with
the chnging economic scenarios, companies normally prefer the budget to be on
a monthly or quarterly basis.
The revenue estimated from the sales budget would be put used to know the
projection of cash inflows that the company would receive during that
particular time period. The changes in the economic scenario may be favorable
or unfavorable with respect to the sales of the company. Such changes may
affect the estimation of the sales during that particular time period which would
indirectly affect the cash budget.

Production budget:

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 The production budget is made on the basis of sales budget. On the basis of the
sales revenue expected, the output quantity that needs to be produced within
that time period is understood. The production budget is estimated in the
amount of units to be produced as well as the amount of finished goods that
need to be kept in the inventory.
In this case, as the time passes on, due to certain economic changes in the
market, it may happen that the amount of inventory may be more or less.
Hence, there may be some changes that arise in the production budget, which
would eventually affect the cash budget.

Materials budget:
The materials budget is dependent on the Production budget. On the basis of
the units that need to be produced in total, the cost with respect to the direct
materials needs to be estimated. The costs associated with the production would
help the company to understand the espenses.
In this case, as the time passes on, due to certain economic changes in the
market, it may happen that the costs of materials may be more or less. Hence,
there may be some changes that arise in the materials budget, which would
eventually affect the cash budget.

c) Operating cycles and cash cycles are measures of how effective a company is at
managing its cash. When a company invests in inventory, its cash is tied up
until the items in question are sold. As a result, whatever cash is tied up is not
available for other uses. It's therefore in a company's best interest to maintain as
short an operating and cash cycle as possible, as doing so can maximize
liquidity and minimize the costs involved in storing inventory.
Operating cycle
An operating cycle represents the amount of time it takes a company to acquire
inventory, sell that inventory, and receive cash from its customers in exchange
for the inventory sold. The length of a company's operating cycle is dictated by
a number of factors, including the payment terms a company extends to its
customers and those extended to the company by its suppliers. If a company is

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 given more time to pay its suppliers for inventory, it can reduce its operating
cycle by delaying the outlay of cash. On the other hand, if a company gives its
customers more time to pay for goods received, it can extend its operating
cycle, as the company will have to wait longer to get its cash. A shorter
operating cycle indicates that a company’s cash is tided up for a shorter period
of time, which is generally more ideas from a cash flow perspective.
Cash cycle
Also known as a cash conversion cycle, a cash cycle represents the amount of
time it takes a company to convert resources to cash. The cash cycle begins
when a company pays to purchase inventory and ends when that money is
recovered by receiving payment from customers. When a company's cash is
committed to production and sales processes, it is, by default, unavailable for
other purposes, including investment and growth. A shorter cash cycle,
therefore, indicates that a company has more reliable access to cash on hand,
and more opportunities to use that cash to further the business.
Interaction of operating and cash cycle
While both cycles serve similar purposes, the operating cycle offers insight into
a company's operating efficiencies, while the cash cycle offers insight as to how
well a company is managing its cash flow. Additionally, it's often the case that
one cycle impacts the other in practice. A shorter operating cycle can lead to a
shorter cash cycle, while a longer operating cycle can result in a more lengthy
cash cycle. It's therefore important for companies to analyze these cycles
individually as well as jointly.

d) The activities carried out by the government mat not be with a view to earning
a profit. However, the activities carried out by the government affect various
stakeholders like the government officials, investors, creditors and citizens. The
activities conducted by the government are constantly monitored by these
stakeholders.
One of the biggest responsibilities of the government is to prepare a budget in
order to forecast the revenues and expenditures of the activities that it would be
conducting in the next fiscal period. The actual results would then be compared

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 with the estimated budget. Hence, the government need to make sure it adheres
to the various accounting standards with respect to its financial report.
The financial report associated with the activities undertaken by the government
would be closely monitored by its stakeholders. Hence, the financial report
should be presented in such a way that the stakeholders understand the
information provided in the reports in order to make certain economic, political
and social decisions accordingly.
Hence, the government may not be understaking activities with a view of
making profit, but it is important to implement such stringent accounting
standards in its financial reports in order to make the cental and the state
government more accountable.
Therefore, I do not agree about the fact that accounting is not important for a
government organisation as compared to private companies.

e) Objectives of Cost Accounting

Often, the simplest and most important objective of cost accounting is to
determine selling prices. To use a basic example, the seller of sandwiches needs
to be able to track the cost of bread, lettuce, sandwich meats, mustard and other
ingredients. Otherwise, it would be difficult to know how much to charge for a
sandwich.
A second, related objective is cost control. Firms want to be able to spend less
on their inputs and charge more for their outputs. Cost accounting can be used
to identify possible inefficiencies or areas of necessary improvement to control
costs. This can take the form of budgetary controls, standard costing
or inventory management.
Cost accounting can contribute to the preparation of requisite financial
statements, an area otherwise reserved for financial accounting. The prices and
information developed and studied through cost accounting are likely to make it
easier to gather information for financial accounting purposes. For example,
raw material costs and inventory prices are shared between both accounting
methods.
Entrepreneurs and business managers rely on actionable information before
making allocation decisions. Cost accounting buoys decision making because it

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 can be tailored to the specific needs of each separate firm. This is different than
financial accounting, where GAAP and international financial reporting
standards (IFRS) regulate method and presentation.

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Question 2 Total marks for Q4. (5 marks)

Wonder Products Pty Ltd builds beautiful things to order for customers. When quoting
prices on jobs Wonder Products allocate manufacturing overheads on the
basis of estimated machine hours to complete the job. They allocate
administrative overhead costs on the basis of direct labour hours estimated
to complete the job.

Below is a budget for the current year showing budget total figures.

Budget for the year

Direct labour costs for the year $537,600
Manufacturing overheads for the year 598,080
Administrative overheads for the year 695,520

Direct labour hours for the year 14,000

Total machine hours for the year 7,000

a) Calculate a manufacturing overheads allocation rate for Wonder Products.

1 mark
Manufacturing O/H allocation rate;
Total budgeted manufacturing overheads / total budgeted machine hours
$598,080 / 7,000= $85.44 per machine hour estimated for the job.

b) Calculate an administrative overhead allocation rate for Wonder Products.

Administrative O/H allocation rate;
Total budgeted administrative overheads / total budgeted direct labour hours
$695,520 / 14000= $49.68 per direct labour hour estimated for the job.
1 mark

c) George has asked Wonder Products Pty Ltd to make an especially wonderful
creation to his specifications that will require the following inputs:

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Direct materials $19,000
Direct labour 750 hours
Machine usage 400 hours

Assuming a mark up of 40% on total costs, what price should be quoted to Bushy to
build him this especially wonderful creation?

d) Manufacturing O/H allocation rate;

Total budgeted manufacturing overheads / total budgeted machine hours
$598,080 / 7,000
= $85.44 per machine hour estimated for the job

a) Administrative O/H allocation rate;

Total budgeted administrative overheads / total budgeted direct labour hours
$695,520 / 14000
= $49.68 per direct labour hour estimated for the job

b) Quote for Kevin’s job

Direct Materials $19,000

Direct Labour 750 hours @ $38.40 $28,800
manufacturing overheads 400 hrs x $85.44 $34,176
administrative overheads 750 hrs x $49.68 $37,260
subtotal of costs $119,236
add mark up of 40% of costs $119,236 x 40% $47,694
Total quotation of costs plus mark up
1 mark

d) Why is it so important to carefully allocate overhead expenses when quoting on jobs

or when generally deciding on prices? Discuss problems that are encountered
with overhead allocation methods and alternative approaches that might be
taken.
1 mark
Overhead contribute to large piece into the cost of a project so it is wrong cost.
Problems include;

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 Accuracy of budget for year of totals
Estimating amounts for particular jobs
Knowing what cost drivers are causing costs
Systems such as ABC are more accurate but more costly and difficult
Over or under allocating (and so pricing) when activity varies from budget

 Other approaches include: industry standard pricing, what the market will bear.

e) Copanies use budgeted overhead allocation rates rather than using actual overhead
costs in allocating overhead costs to units of product because they follow three reasons:
 Pricing: companies offer a price to customers, this price already mark
up from the cost. It means they need to define the cost first(if they have
not produce); so, they need to use budgeted overhead allocation rate.
 Overhead allocation rate like as measuring stick. How does actual
overhead costs accure, they compare actual overhead costs with the
budgeted costs that the number go up or go down.
 Cost control, Efficient: after the cost is compared, they would know
what reason make this cost is worse or better. Therefore, they define the
solution for improve their process.

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