Question 1

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism. Select all the correct answers.

Accepted Answer

Participation in budget setting can motivate managers and reduce information asymmetry, leading to better performance. However, it can also lead to budget padding as managers may set easily achievable targets. Budgets serve as control mechanisms by comparing actual results against them.

Question 2

A company is preparing its annual budget and is estimating the number of units of Product A that it will sell in each quarter of year 2. Past experience has shown that the trend for sales of the product is represented by the following relationship: y = a + bx where y = number of sales units in the quarter a = 10,000 units b = 3,000 units x = the quarter number where 1 = quarter 1 of year 1 Actual sales of Product A in Year 1 were affected by seasonal variations and were as follows: Quarter 1:14,000 units Quarter2: 18,000 units Quarter 3: 18,000 units Quarter 4: 20,000 units Calculate the expected sales of Product A (in units) for each quarter of year 2, after adjusting for seasonal variations using the additive model.

Accepted Answer

The additive model for seasonal variations is:y = a + bx + Sxwhere Sx is the seasonal variation for quarter x.The seasonal variations for Product A are:Quarter 1: 4,000 unitsQuarter 2: 8,000 unitsQuarter 3: 8,000 unitsQuarter 4: 10,000 unitsThe expected sales for Product A in Year 2, after adjusting for seasonal variations, are:Quarter 1: 14,000 unitsQuarter 2: 18,000 unitsQuarter 3: 18,000 unitsQuarter 4: 20,000 units + 10,000 units = 32,000 units

Question 3

Assume that you have made profit calculations based on standard profit calculation methods and activity based costing methods. In which ways will this information be beneficial to the management team? Select all the true statements.

Accepted Answer

A,B,D

Question 4

JL is preparing its cash budget for the next three quarters. The following data have been extracted from the operational budgets:  Additional information is available as follows: • JL sells 20% of its goods for cash. Of the remaining sales value, 70% is received within the same quarter as sale and 30% is received in the following quarter. It is estimated that trade receivables will be $125,000 at the beginning of Quarter 1. No bad debts are anticipated. • 50% of payments for direct material purchases are made in the quarter of purchase, with the remaining 50% in the quarter following purchase. It is estimated that the amount owing for direct material purchases will be $60,000 at the beginning of Quarter 1. • JL pays labour and overhead costs when they are incurred. It has been estimated that labour and overhead costs in total will be $303,600 per quarter. This figure includes depreciation of $19,600. • JL expects to repay a loan of $100,000 in Quarter 3. • The cash balance at the beginning of Quarter 1 is estimated to be $49,400 positive. Required: Prepare a cash budget for each of the THREE quarters. What will the closing balance of cash flows in quarter THREE be?

Accepted Answer

The answer of JL is preparing its cash budget for...

Question 5

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:  * Refer to your answer in the previous question. The optimal solution to the previous question shows that the shadow prices of skilled labour and direct material A are as follows: Skilled labour $ Nil Direct Material A $11.70 Explain the relevance of these values to the management of JRL. Select ALL the true statements.

Accepted Answer

The answer of JRL manufactures two products from different combinations...

Question 6

A master budget comprises the...

Accepted Answer

A master budget includes the budgeted income statement, budgeted balance sheet, and budgeted cash flow statement, providing a comprehensive financial plan for an organization.

Question 7

A university is trying to decide whether or not to advertise a new post-graduate degree programme. The number of students starting the programme is dependent on economic conditions. If conditions are poor, it is expected that the programme will attract 40 students without advertising. There is a 60% chance that economic conditions will be poor. If economic conditions are good it is expected that the programme will attract only 20 students without advertising. There is a 40% chance that economic conditions will be good. If the programme is advertised and economic conditions are poor, there is a 65% chance that the advertising will stimulate further demand and student numbers will increase to 50. If economic conditions are good, there is a 25% chance the advertising will stimulate further demand and numbers will increase to 25 students. The profit expected, before deducting the cost of advertising, at different levels of student numbers are as follows:  The cost of advertising the programme will be $15,000. Required: Demonstrate, using a decision tree, whether the programme should be advertised.

Accepted Answer

The answer of A university is trying to decide whether...

Question 8

A marketing manager is trying to decide which of four potential selling prices to charge for a new product. The state of the economy is uncertain and may show signs of recession, growth or boom. The manager has prepared a regret matrix showing the regret for each of the possible outcomes depending on the decision made.  If the manager applies the minimax regret criterion to make decisions, which selling price would be chosen?

Accepted Answer

The answer of A marketing manager is trying to decide...

Question 9

'A zero-based budgeting system involves establishing decision packages that are then ranked in order of their relative importance in meeting the organization's objectives'.  Which of the following is true regarding he difficulties that a not-for-profit organization may experience when trying to rank decision packages. Select ALL true statements.

Accepted Answer

The answer of 'A zero-based budgeting system involves establishing decision...

Question 10

A company sells and services photocopying machines. Its sales department sells the machines and consumables, including ink and paper, and its service department provides an after sales service to its customers. The after sales service includes planned maintenance of the machine and repairs in the event of a machine breakdown. Service department customers are charged an amount per copy that differs depending on the size of the machine. The company's existing costing system uses a single overhead rate, based on total sales revenue from copy charges, to charge the cost of the Service Department's support activities to each size of machine. The Service Manager has suggested that the copy charge should more accurately reflect the costs involved. The company's accountant has decided to implement an activity-based costing system and has obtained the following information about the support activities of the service department:  Calculate the annual profit per machine for each of the three sizes of machine, using the current basis for charging the costs of support activities to machines.

Accepted Answer

The answer of A company sells and services photocopying machines....

Question 11

XY, a not-for-profit charity organization which is funded by public donations, is concerned that it is not making the best use of its available funds. It has carried out a review of its budgeting system and is considering replacing the current system with a zero-based budgeting system. Select ALL the potential advantages AND disadvantages for the charity of a zero-based budgeting system.

Accepted Answer

The answer of XY, a not-for-profit charity organization which is...

Question 12

QR uses an activity based budgeting (ABB) system to budget product costs. It manufactures two products, product Q and product R. The budget details for these two products for the forthcoming period are as follows:  The total budgeted cost of setting up the machines is $74,400. Select TWO potential benefits of using an activity based budgeting system.

Accepted Answer

The answer of QR uses an activity based budgeting (ABB)...

Question 13

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning. The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management. Select ALL the benefits for the company that could occur following the introduction of an activity based budgeting system.

Accepted Answer

The answer of A medium-sized manufacturing company, which operates in...

Question 14

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:  Identify, using graphical linear programming, the weekly production schedule for products J and L that will maximize the profits of JRL during the next four weeks.

Accepted Answer

The answer of JRL manufactures two products from different combinations...

Question 15

GH manufactures a product using skilled labour and high quality materials. The company operates a standard costing system and a just-in-time (JIT) purchasing and production system. The standard selling price and variable costs for one unit of the product are as follows:   Calculate the following variances for October, taking account of the more detailed information regarding the labour mix: (i) The total labour efficiency variance (ii) The total labour mix variance (iii) The total labour yield variance Select the correct statements.

Accepted Answer

The answer of GH manufactures a product using skilled labour...

Question 16

A company has to choose between three mutually exclusive projects. Market research has shown that customers could react to the projects in three different ways depending on their preferences. There is a 30% chance that customers will exhibit preferences 1, a 20% chance they will exhibit preferences 2 and a 50% chance they will exhibit preferences 3. The company uses expected value to make this type of decision. The net present value of each of the possible outcomes is as follows:  A market research company believes it can provide perfect information about the preferences of customers in this market. What is the maximum amount that should be paid for the information from the market research company?

Accepted Answer

The answer of A company has to choose between three...

Question 17

GH manufactures a product using skilled labour and high quality materials. The company operates a standard costing system and a just-in-time (JIT) purchasing and production system. The standard selling price and variable costs for one unit of the product are as follows:  Prepare a statement that reconciles the budgeted contribution with the actual contribution for October. Your statement should show the variances in as much detail as possible. What was the actual contribution for October?

Accepted Answer

The answer of GH manufactures a product using skilled labour...

Question 18

TP makes wedding cakes that are sold to specialist retail outlets which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:  The general market prices at the time of purchase for Ingredient A and Ingredient B were $23 per kg and $20 per kg respectively. TP operates a JIT purchasing system for ingredients and a JIT production system; therefore, there was no inventory during the period. Prepare a statement which reconciles the flexed budget material cost and the actual material cost. Your statement should include the material price planning variances, and the operational variances including material price, material mix and material yield. What was the material price planning variance for ingredient A?

Accepted Answer

The answer of TP makes wedding cakes that are sold...

Question 19

RFT, an engineering company, has been asked to provide a quotation for a contract to build a new engine. The potential customer is not a current customer of RFT, but the directors of RFT are keen to try and win the contract as they believe that this may lead to more contracts in the future. As a result, they intend pricing the contract using relevant costs. The following information has been obtained from a two-hour meeting that the Production Director of RFT had with the potential customer. The Production Director is paid an annual salary equivalent to $1,200 per 8-hour day.  110 square meters of material A will be required. This is a material that is regularly used by RFT and there are 200 square meters currently in inventory. These were bought at a cost of $12 per square meter. They have a resale value of $10.50 per square meter and their current replacement cost is $12.50 per square meter. 30 liters of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by RFT. The minimum order quantity from the supplier is 40 liters at a cost of $9 per liter. RFT does not expect to have any use for any of this material that remains after this contract is completed.  60 components will be required. These will be purchased from HY. The purchase price is $50 per component. A total of 235 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is $11 per hour. Currently RFT has 75 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of $14 per hour; or (ii) recruiting temporary staff at a cost of $12 per hour. However, if temporary staff are used they will not be as experienced as RFT's existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of $18 per hour for this work. 25 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of $600. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is $7 per hour. The company absorbs its fixed overhead costs using an absorption rate of $20 per direct labour hour. Select ALL the true statements.

Accepted Answer

The answer of RFT, an engineering company, has been asked...

Question 20

The term 'budgetary slack' refers to the:

Accepted Answer

Budgetary slack refers to the intentional overestimation of costs or underestimation of revenues in a budget to make it easier to achieve budgetary targets.

Exam 2: P1 Management Accounting

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism. Select all the correct answers.

Assume that you have made profit calculations based on standard profit calculation methods and activity based costing methods. In which ways will this information be beneficial to the management team? Select all the true statements.

A master budget comprises the...

The term 'budgetary slack' refers to the: