Explain, using examples, why it is essential to create and use flexible budgets when evaluating past performance of a profit centre which manufactures and sells a product. What might be the objective of such a performance evaluation.

Task Description

Question 1                                                      Total marks for Q2. (15 marks)

 

a)      Explain, using examples, why it is essential to create and use flexible budgets when evaluating past performance of a profit centre which manufactures and sells a product. What might be the objective of such a performance evaluation.

3 marks

 

 

b)      When preparing a cash budget for a manufacturing business for the following year, there may be many other budgets that will need to be produced before the cash budget is completed.

List three (3) other budgets that must be prepared at the same time or before the cash budget is prepared, and for each one, explain the likely timing of cash flows that will occur and how this will impact a cash budget.

3 marks

 

 

 

c)      Explain what is meant by the ‘operating cycle’ for a manufacturing business and how this differs from the ‘cash cycle’. How does understanding all of the elements of the operating and cash cycle help in managing working capital efficiently? In you answer, explain the ratios and data we use to analyse the efficiency of managing working capital.

3 marks

 

 

 

d)      Accounting isn’t as important in the government organisations as it is in private enterprises, since the government does not have to worry about earning a profit. Do you agree? Explain.

3 marks

 

e)      What is the essential purpose of any costing system? Explain.

3 marks

 

 


 

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

 

 

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

1 mark

 

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

 

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?

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

 

 

e) Why do companies use predetermined (budgeted) overhead allocation rates rather than using actual overhead costs in allocating overhead costs to units of product? Explain.

 

 

Possible Solution

Ø  Creating flexible budgets entails creating budgets for different segments of the business. Flexible budgets are more receptive to changes that happen in the business environment. They ensure that different sectors in the firm have been allocated particular expenditure threshold. This method is essential since each segment has its funds and detecting any misused of the funds at any level is easy compared to static budget. This method also reduces volume of variances within budget since standards are based on the same level of activity. For example, if production budget is set, there should be allowances of increase in prices otherwise the budgeted amount will not be enough hence variations.

Ø  The objective of past performance is knowing under what budget parameters business operates. This helps in making future budgets since there is enough information from past budget. 

Other types of budget include: –

1.      Plant utilization budget: this is prepared in terms of working hours or units of production. In this budget cash flow occurs during operation and in has an effect of increasing cash budget

2.      Manufacturing budget: this entails material, labour and factory overhead budget. Its cashflows occurs once related costs are incurred and in increases cash budget.

3.      Purchase budget: it is used for forecasting the purchases required within the trading period. Cash flows occur when purchases are made and in reduces cash budget….

Click here to request for this assignment help

Powered by WordPress | Designed by: photography charlottesville va | Thanks to ppc software, penny auction and larry goins