Question One: Canberra Limited
Canberra Ltd is a small, family-based wholesaler/retailer of computer components that operates primarily from a small factory-unit/retail outlet near Fyshwick. The firm's management has traditionally competed with larger, nationally-based organisations such as Dick Smith's Electronics. Canberra Ltdhas primarily traded upon its ability to offer individual customer service and expert advice. CanberraLtd's business model has been very locally-focused with its services tailored to meet the needs of customers from around its surrounding area.
The management ofCanberra Ltd has increasingly witnessed changes in their market with many of their former clients now purchasing components via the internet rather than directly from the firm's factory-unit/retail outlet. CanberraLtd's management are willing to embrace this changing marketplace but some members of the management team are concerned about the firm's recent financial performance. Others however believe the firm is performing comparatively well.
As a result of the conflicting views held by various members of CanberraLtd's management team from the beginning of the 2015-16 financial year the firm will now produce monthly financial statements. The management ofCanberra Ltd have scheduled a meetingin early August 2015 to discuss the business's performance.CanberraLtd's bookkeeper had prepared the following post-closing trial balance as at the end of June, 2015.
Canberra Ltd
Post-closing Trial Balance
as at 30th of June, 2015
|
Account Name
|
Debit
|
Credit
|
|
$
|
$
|
Cash at Bank
|
120,000
|
|
Accounts Receivable
|
340,000
|
|
Allowance for Doubtful Debts
|
|
38,000
|
Inventory
|
444,000
|
|
Prepaid Insurance
|
14,000
|
|
Prepaid Rent
|
48,000
|
|
Non-CurrentAssets: Plant and Equipment
|
880,000
|
|
Non-CurrentAssets: Motor Vehicles
|
200,000
|
|
Non-CurrentAssets: Total Accumulated Depreciation
|
|
268,000
|
|
|
|
Accounts Payable
|
|
540,000
|
Accrued Salaries and Wages
|
|
88,000
|
AdvertisingPayable
|
|
116,000
|
Director's Loan
|
|
400,000
|
|
|
|
Share Capital
|
|
552,000
|
RetainedEarnings
|
|
44,000
|
|
2,046,000
|
2,046,000
|
During July 2015, the following events occurred:
- Canberra Ltd paid $340,000 cash to its creditors;
- The firm also paid all salaries and wages outstanding at the end of June;
- Canberra Ltd purchased $160,000 inventory on credit from its Asian suppliers;
- The firm made internet sales on credit of $453,136 during July;
- The firm made direct 'store-based' sales from the Fyshwick unit/outlet in cash totalling $90,000;
- Management conducted a 'stock-take' at the end of July and determined that Cost of Goods Sold[CoGS] for the month was $314,000;
- Canberra Ltd paid cash for its annual composite insurance premium of $168,000 (12 month policy commencing 1st ofAugust, 2015);
- The firm received in cash the sum of $560,000 from its debtors;
- Paid $30,000 owing to the 'Director's loan'. (Two of CanberraLtd's director's loaned the business $400,000 at the end of 2013. The loan is interest free);
- The management of Canberra Ltdembarked on anadvertising campaign using a variety of media in May 2015. All advertisements went to airin June 2015. The contract calls for Canberra Ltdto pay the firm's advertising liability in two equal instalments. During July the firm paid the first of these two instalments on its advertising liability;
- Paid rent for August of $48,000. (Rent is payable monthly in advance, at $48,000 per month);
- The firm paid administrative expenses, incurred during the month, of $42,000;
- The management of Canberra Ltd has received notification that Yass Ltd has gone bankrupt - this is a debtor with an outstanding balance of $26,000;
- After writing-off the balance of YassTechnology Ltd'sdebt, management decide to decrease the allowance to $36,000;
- The management of Canberra Ltd depreciates plant and equipment at a rate of 20 per cent per annum based on its historic cost (straight-line);
- The management of Canberra Ltd depreciates motor vehicles at a rate of 15 per cent per annum based on its historic cost (straight-line);
- The management ofCanberra Ltd has noted that the current book value of their plant and equipment is slightly below its current market price. As a consequence the firm's management is unsure as the whether they should revalue the plant and equipment upward by an additional $5,000;
- The firm incurred (but did not pay) salaries and wages expense of $62,000 for July;
- The firm has hired a new part-time staff member with specific expertise in the promotion of internet sales. She is expected to increase internet sales by $40,000 per month. She will commence employment with Canberra Ltd on the 1st of September 2015 and will receive $10,000 per month;
- Sales commissions for each month are determined on the last day of that month. For July commissions were $4,400. They will be paid next month;
- In late July Canberra Ltd received an order from Melbourne Ltd to sell $30,000 worth of product to be delivered in late August, 2015;
Required: Making and discussing any assumptions necessary
For the month ending 31st of July, 2015 [ignoring taxation]:
-
- Prepare journal entries;
- Post to ledger;
- Prepare a 'pre-closing' trial balance;
- Prepare any additional adjusting entries;
- Prepare closing entries;
- Prepare an Income Statement for the month of July, 2015;
- Prepare a Balance Sheet as at the 31st of July, 2015;
- Prepare a simple analysis of your results. Using the following industry data briefly comment on the performance ofCanberra Ltd for the month of July, 2015. What issues should the management of Canberra Ltd consider when interpreting such data?
Comparable Industry data
|
Ratios [based on the full-year ended 30thJune, 2015]
|
ROE (Net profit before taxation/shareholders equity)
|
24.30 per cent
|
ROA (Net profit before taxation & interest/ total assets)
|
16.31 per cent
|
Profit Margin (Net profit before taxation /sales)
|
3.51 per cent
|
Gross Margin (Gross profit/sales)
|
40.20 per cent
|
Asset Turnover (Sales/total assets)
|
4.65 times
|
Inventory Turnover (COGS/inventory)
|
16.45 times
|
Debtor Turnover (Sales/debtors)
|
33.02 times
|
Current Ratio (Current assets/current liabilities)
|
0.42 times
|
Leverage (Total assets/ shareholder equity)
|
1.49 times
|
Note: Some rounding occurs in ratios
Question 2: Melbourne Ltd
Melbourne Ltd
Cash flow Statements
|
|
2015
|
2014
|
|
|
|
Cash flows from operating activities
|
|
|
Cash receipts from operations
|
3,498,399
|
2,777,524
|
Cash payments from operations
|
(3,220,739)
|
(2,564,815)
|
Restructure costs paid
|
(19,124)
|
(7,120)
|
Interest and other costs of finance paid
|
(18,769)
|
(16,818)
|
Income taxes paid
|
(28,639)
|
(37,476)
|
Net cash inflowfrom operating activities
|
211,128
|
151,295
|
Cash flows from investing activities
|
|
|
Payment for entities and businesses
|
(143,760)
|
(63,461)
|
Payment for property, plant and equipment
|
(162,524)
|
(139,096)
|
Proceeds from sale of property, plant &equipment
|
33,550
|
26,390
|
Payment for investments
|
(6,064)
|
(32,217)
|
Payment for loan to other entities
|
(586)
|
0
|
Proceeds from repayment of loans with other entities
|
0
|
22,651
|
Net cash outflowfrom investing activities
|
(279,384)
|
(185,733)
|
Cash flows from financing activities
|
|
|
Proceeds from borrowings
|
420,884
|
215,350
|
Repayment of borrowings
|
(576,520)
|
(115,539)
|
Dividends paid
|
(45,149)
|
(26,548)
|
Proceeds from share issue
|
292,187
|
5,961
|
Net cash inflow/(outflow) from financing activities
|
91,402
|
79,224
|
Net increase/(decrease) in cash held
|
23,146
|
44,786
|
Cash at the beginning of the financial year
|
95,299
|
50,550
|
Effects of exchange rate fluctuations on the balances of cash held in foreign currencies
|
944
|
(37)
|
Cash at the end of the financial year
|
119,389
|
95,299
|
Required: Making and discussing any assumptions necessary
Briefly explain what you learn aboutMelbourne Ltdfrom reading this cash flow statement?
Question 3: Sydney Manufacturing Ltd
Sydney ManufacturingLtd is a private company that was originally started in 2005 by a group of motor-scooter enthusiasts from Sydney's inner-eastern suburbs who were unable to obtain the parts needed to repair or restore their scooters. As a result the NSW-based firm now produces sub-assemblies used in the production and repairs to small motor-scooter frames. The sub-assemblies are sold predominantly throughout Asia but the increasing use of motor scooters across Australia has begun to grow the firm's local business.
Sydney ManufacturingLtd produces a range of sub-assemblies that have been adapted to fit both European and Asian scooters. All types of sub-assembly units are of a very similar design but several models differ in size and quality based their application. While Sydney ManufacturingLtd imports a variety of components from across South-east Asia it also manufactures its own parts where management believe they can produce superior units to those available.
Given the firm evolved from the enthusiasm of a group of motor cyclists it uses only a very basic management accounting system that collects and collates aggregate/average cost data on the manufacturing processes.
The following is the data available for the period October 2015 to January, 2016:
Sales data:
- The average unit selling price of the sub-assembly is $360 (and all sales are for cash);
- Projected total sales [all types of sub-assemblies] for the coming four months:
October, 2015
|
40,000
|
November, 2015
|
50,000
|
December, 2015
|
60,000
|
January, 2016
|
60,000
|
|
|
|
|
Selling and administrative costs:
- Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)
|
S&A
|
Fixed Costs
|
Variable Costs
|
|
Salaries
|
$100,000
|
-
|
|
|
Commissions
|
-
|
$4.00
|
|
|
Depreciation
|
$80,000
|
-
|
|
|
Shipping
|
-
|
$2.00
|
|
|
Other
|
$40,000
|
$1.20
|
|
|
|
|
|
|
|
Finished goods inventory:
The following data pertain to production policies and manufacturing specifications followed by Sydney ManufacturingLtd:
- The average cost of each sub-assembly is $297.42;
- Finished goods inventory on the 1st of October is 32,000 units;
- The desired ending inventory for each month is 80 percent of the next month's sales;
Materials:
- The data on materials used are as follows:
Direct Material
|
Per-Unit Usage
|
Cost per gram or Component
|
Metal-alloy
|
10 grams
|
$16
|
Components
|
6
|
$4
|
- Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50 percent of that month's estimated sales. This is exactly the amount of material on hand on the 1st of October;
- All materials are purchasedusing cash;
Labour:
- The direct labour used per unit of output is on average four (4) hours;
- In an attempt to boost local specialist manufacturers Sydney ManufacturingLtd'sindustry sector has been heavily subsidised by both state and Federal governments and as a result the average direct labour cost per hour is only $18.25;
- Direct labour expenses are paid in the month they are incurred;
Manufacturing overhead:
- Manufacturing overhead each month is estimated using a flexible budget formula. (Activity is measured,and costs allocated, usingdirect labour hours.)
Overheads
|
Fixed-Cost
|
Variable-Costs
|
Supplies
|
-
|
$2.00
|
Power
|
-
|
$1.00
|
Maintenance
|
$60,000
|
$0.80
|
Supervision
|
$32,000
|
-
|
Depreciation
|
$400,000
|
-
|
Taxes
|
$24,000
|
-
|
Other
|
$160,000
|
$3.00
|
Liquidity management:
- Ifthe firm developsa shortage of cash by the end of a month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is any interest due. (Cash borrowed at the end of the quarter is repaid at the end of the following quarter);
- The interest rate is 12 percent per annum;
- Sydney ManufacturingLtd's cash balance on the 1st of October equals $400,000. (No money is owed at the beginning of October);
Required: Making and discussing any assumptions
Prepare a monthly operating budget for the final quarter of 2015 using the following schedules as a base:
1. Sales budget;
2. Production budget;
3. Direct materials purchases budget;
4. Direct labour budget;
5. Manufacturing overhead budget;
6. Selling and administrative expenses budget;
7. Ending finished goods inventory budget;
8. Cost of goods sold budget;
9. Budgeted income statement for the quarter (ignore income taxes);
10. Cash Budget;
Schedule 1: Sales Budget
|
|
October
|
|
November
|
|
December
|
|
Total
|
Units
|
|
|
|
|
|
|
|
|
Selling Price
|
|
|
x
|
|
x
|
|
x
|
|
Sales
|
|
|
|
|
|
|
|
|
Schedule 2: Production Budget
|
|
October
|
|
November
|
|
December
|
|
Total
|
Sales
|
|
|
|
|
|
|
|
|
Desired ending inventory
|
|
|
|
|
|
|
|
|
Total needs
|
|
|
|
|
|
|
|
|
Less: Beginning inventory
|
|
|
|
|
|
|
|
|
Units to be produced
|
|
|
|
|
|
|
|
|
Schedule 3: Direct Materials Purchases Budget
|
|
October
|
|
|
|
November
|
|
|
|
|
Metal
|
|
Components
|
|
Metal
|
|
Components
|
|
Units to be produced
|
|
|
|
|
|
|
|
|
|
Direct materials
per unit (gram)
|
|
|
|
|
|
|
|
|
|
Production needs
|
|
|
|
|
|
|
|
|
|
Desired ending inventory
|
|
|
|
|
|
|
|
|
|
Total needs
|
|
|
|
|
|
|
|
|
|
Less: Beginning
Inventory
|
|
|
|
|
|
|
|
|
|
Direct materials to be purchased
be purchased
|
|
|
|
|
|
|
|
|
|
Cost per gram
|
|
|
|
|
|
|
|
|
|
Total Cost Total cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
Total
|
|
|
|
|
Metal
|
|
Components
|
|
Metal
|
|
Components
|
|
Units to be produced
|
|
|
|
|
|
|
|
|
|
Direct materials
per unit (gram)
|
|
|
|
|
|
|
|
|
|
Production needs
|
|
|
|
|
|
|
|
|
|
Desired ending inventory
|
|
|
|
|
|
|
|
|
|
Total needs
|
|
|
|
|
|
|
|
|
|
Less: Beginning
Inventory
|
|
|
|
|
|
|
|
|
|
Direct materials to
be purchased
|
|
|
|
|
|
|
|
|
|
Cost per gram
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule 4: Direct Labour Budget
|
|
October
|
|
November
|
|
December
|
|
Total
|
|
Units to be produced
|
|
|
|
|
|
|
|
|
Direct labour time
per unit (hours)
|
|
|
|
|
|
|
|
|
Total hours needed
|
|
|
|
|
|
|
|
|
Cost per hour
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule 5: Manufacturing Overhead Budget
|
|
October
|
|
November
|
|
December
|
|
Total
|
Budgeted direct labour
hours
|
|
|
|
|
|
|
|
|
Variable overhead rate
|
|
|
|
|
|
|
|
|
Budgeted variable overhead
|
|
|
|
|
|
|
|
|
Budgeted fixed overhead
|
|
|
|
|
|
|
|
|
Total overhead
|
|
|
|
|
|
|
|
|
Schedule 6: Selling and Administrative Expenses Budget
|
|
October
|
|
November
|
|
December
|
|
Total
|
Planned sales
|
|
|
|
|
|
|
|
|
Variable selling and administrative
expenses per unit
|
|
|
|
|
|
|
|
|
Total variable expense
|
|
|
|
|
|
|
|
|
Fixed selling and administrative expenses:
Salaries
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total fixed expenses
|
|
|
|
|
|
|
|
|
Total selling and administrative
expenses
|
|
|
|
|
|
|
|
|
Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials:
|
|
|
|
+
|
|
|
|
Direct labour
|
|
|
|
+
Manufacturing overhead
|
|
|
|
|
|
|
|
|
|
|
|
|
= Total unit cost
|
|
|
Finished goods inventory =
|
|
|
Schedule 8: Cost of Goods Sold Budget
Units produced
Add: Beginning finished goods
|
|
|
Goods available for sale
|
|
|
Less: Ending finished goods
|
|
|
Budgeted cost of goods sold
|
|
|
Schedule 9: Cash Budget
|
|
October
|
|
November
|
|
December
|
|
Total
|
|
Beg. Balance
|
|
|
|
|
|
|
|
|
Cash receipts
|
|
|
|
|
|
|
|
|
Cash available
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Disbursements:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
Direct labour
|
|
|
|
|
|
|
|
|
Overhead
|
|
|
|
|
|
|
|
|
Selling & admin.
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
Borrowed/(repaid)
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule 10: Budgeted Income Statement
Sales
|
|
Less: Cost of goods sold
|
|
Gross margin
|
|
Less: Selling and admin. Expenses
Interest expenses
|
|
Income before income taxes
|
|
Question 4: SydneyManufacturingLtd
Competition has intensified for SydneyManufacturingLtd with a number of Japanese and Korean firms now offering to supply Australian repairers with similar sub-assembly units that [now for the first time] comply with Australian standards.
As a consequence a number of SydneyManufacturingLtd'scustomershave begun to directly import sub-assembly units from South-East Asia. The sales team at SydneyManufacturingLtd have noted that not all types of sub-assembly are being directly imported by these repairers and that for some product lines the firm seems to have maintained its advantage. The senior management have hired an external analyst who has noted some inconsistency in the profitability between some models of the firm's sub-assembly units. As a result management have become concerned that their budgetary data is too general to truly assist in their decision making and therefore needs to be more 'refined'.
After meeting the management of a number of its component suppliers in South-East Asia the senior management of SydneyManufacturingLtd would like to investigate the possibilities of establishing an 'activity cost based' budgeting and costing system. Many of the management team had read about activity based costing in a number of journals. These journals had often suggested that Australian firms lagged behind the rest of the world in terms of adopting innovative business practises. SydneyManufacturingLtd's management team saw this as an opportunity to adopt the 'world's best practice'.
Required: Making and discussing any assumptions
Having completed the budget for the final quarter of 2015 comment on the issues the management of SydneyManufacturing Ltd need to consider before adopting an 'activity based' budgeting and costing system.