(I) the Company Has the Following Balances As at 31 March 2008

Question 1 :

Phoenix Ltd produces and sells one product only. The management accountant is working on the cash budget for the second quarter of 2008 and has obtained the following information:

(i) The company has the following balances as at 31 March 2008 :

Cash 265,040

Trade receivables 440,000

Direct material inventory(600kg) 15,000

Machinery, net book value 108,000

Trade payables 200,000

The trade receivables and trade payables capture the transactions concerning sales and direct material purchases respectively.

(ii) Actual and estimated sales level:

March 2008 April 2008 May 2008 June 2008

(actual) (estimated) (estimated) (estimated)

$400,000 $576,000 $748,800 $842,400

80% of the sales are made on credit basis. 70% of the credit sales would be settled in the following month after sales and the remaining balance one month later. The selling price is maintained at $400 per unit.

For budgeting purposes, it is assumed that no inventory will be kept for finished goods and work-in-progress at the end of each month.

(iii) Each unit of the product requires 8kg of direct material at $25 per kg, and 30 minutes of direct labour at $80 per hour. Owing to a recent natural disaster which resulted in poorer quality of the direct material, 10% abnormal loss of material input is expected during the production process, with no effect on other production costs.

Phoenix Ltd has been maintaining the direct material inventory level at 600kg. The inventory level will increase by 50% to 900kg from end of May 2008 onwards.

Direct material purchases are to be settled in the following month after purchase whereas direct labour is to be paid in the month incurred.

(iv) The total monthly production overheads are fixed. At the normal production capacity of 2200 units per month in 2008, total production overheads are expected to be absorbed at the rate of $28 per unit of the product. Monthly depreciation for machinery is $5,600. Production overheads are to be paid in the month incurred.

(v) Monthly non-production expenses comprise the following:

Salaries for administrative staff $100,000

Office rent $50,000

Sales commission 10% of sales

Miscellaneous operating expenses $5,000

These expenses are to be paid in the month incurred.

(vi) Sales training costing $50,000 will be launched by a consultancy firm for some of the administrative staff in May 2008. A down payment of 60% of the training fee is to be paid in April 2008 and the remaining balance will be settled upon completion of the training. The administrative staff will take up part of the sales work and hence sales commission is expected to reduce to 5% of sales from June 2008 onwards.

(vii) Phoenix Ltd sets a minimum cash balance requirement of $70,000 at the end of each month. To make good any shortfall of the minimum, the company has entered into a short term credit arrangement with a bank to borrow the necessary amount at the end of the month. The bank will charge an interest of 12% per annum through a direct debit of the company’s bank account at the end of the following month. Repayment to the bank would be made at the end of the month when the month-end cash balance requirement is met.

Required:

(a) Prepare a statement showing the calculation of the dollar amounts of direct material purchases, in columnar form for the months of April, May and June 2008. (6marks)

(b) Prepare for Phoenix Ltd the cash budget (in columnar form for each month) for the three months ending 30 June 2008. (20marks)

Question 2 :

Dream Ltd manufactures two types of high-priced chocolates- Standard and Super. There are two production processes, A and B. Product Standard could be either sold after Process A or further processed in Process B by adding in a different raw material to form Product Super. All materials are introduced at the beginning of each process whereas conversion costs are evenly incurred in the production processes. The company adopts the weighted average method for the valuation of all types of inventory.

Dream Ltd has the following data related to March 2008 operation:

Standard Super

Work-in-progress as at 1 March 5,000 bars(40% completed) nil

Started in March 107,000 bars 30000bars

Work-in-progress as at 31 March 22,000bars(60% completed) 3000bars (70%completed)

Work-in-progress inventory costs of Standard as at 1 March 2008:

Direct material 12,500

Direct labour 2,000

Production overhead 1,000

Costs added in March 2008:

Direct material Direct labour Production overhead

$ $ $

Process A 267,500 101,200 50,600

Process B( Super) 105,000 43,650 17,460

Required:

(a) Calculate the following for each of the two production processes:

(1) Number of equivalent units(bars) for each cost element (4marks)

(2) Production cost per unit(bar) of finished goods (correct to two decimal places) (6marks)

(3) Cost of the work-in-progress at 31 march 2008 (4marks)

From April 2008 onwards, there will be only 1000 direct labour hours available for Process B. To capture a bigger market, Dream Ltd will introduce a new product, Deluxe, which also goes through Process B but uses better material and consumes more direct labour hours than Super. It is decided that 1000 direct labour hours are to be fully utilized for the production of both Super and Deluxe.

Additional information for April 2008:

(i) The selling prices of Standard, Super and Deluxe are $50, $168 and $228 per pack respectively. Each pack of Standard and Super contains 10 bars of chocolates whereas the Deluxe pack contains 8 bars only. Dream Ltd will not sell the chocolates by fraction of packs.

(ii) The estimated production costs per bar are as follows:

Cost per bar Process A Direct material Direct labour Production overhead

$ $ $ $ $

Standard 4.50 = 2.00 + 1.00 + 1.50

Super 13.50 = 4.50 + 3.50 + 4.50 + 1.00

Deluxe 18.00 = 4.50 + 5.00 + 7.50 + 1.00

(iii) The wage rate of direct labour in Process B is $30 per hour.

(iv) For both Process A and Process B, the total monthly production overheads are fixed.

(v) Variable selling overhead is required for Deluxe at $10 per pack, but nil for Super.

(vi) The maximum monthly demand for Super and Deluxe is 500 and 150 packs respectively.

Required:

(b) To maximize the total contribution in April 2008, calculate the number of packs of Super and Deluxe to be produced and their respective contributions. (Note: Correct all dollar amounts of cost and contribution per bar/labour hour to two decimal places.) (9marks)

Arial Ltd is a direct competitor of Dream Ltd. It manufactures only one product, Pop-Standard, which is essentially the same as Dream Ltd’s standard chocolates. Dream Ltd is considering the acquisition of Arial Ltd.

Dream Ltd estimates the following monthly figures of Pop-Standard:

Sales at breakeven point 500,000

Total fixed costs 200,000

Net operating income 440,000

Required:

The management of Dream Ltd is confident that after the acquisition, Arial Ltd will be able to attain a variable cost to sales ration at 55%.

Required:

(d) Calculate the new monthly breakeven sales for Arial Ltd after the acquisition. (2marks)

Question 3 :

The net profit of BQ Supermarket for the year ended 31 December 2007 amounted to $523,500. However, you have doubts regarding the accounting treatments of the following:

(i) The shop manager reported that $150,000 of yogurt was ruined due to the power failure of a freezer. BQ Supermarket is negotiating with the insurance company whether the loss was covered by the insurance. The management believed that the dispute would be resolved by end of June 2008. Neither the loss nor the insurance claim was recorded in the financial statements.

(ii) In September 2007, to boost the sales of a new brand of milk powder, BQ Supermarket started selling gift vouchers of $100 each. Each voucher has an expiry period of one year and can be presented at any time during the year in exchange for one can of milk powder. Customers entered a lucky draw for each voucher they bought and the prize was a baby pillow which cost $25 each. As at 31 December 2007, 3,000 vouchers were sold, of which 1,000 had not been redeemed. 240 baby pillows were given out. Sales revenue of $300,000 and cost of the sales of the 2000 cans of milk powder of $148,500 were recorded. No entry had been made for the purchase of the 240 baby pillows as the amount payable to the supplier was due in April 2008.

(iii) In view of the upcoming Olympic events, the shopping mall in which BQ Supermarket is located planned to organize various activities from May to August 2008 to stimulate sales. Each tenant is required to contribute $40,000 and BQ Supermarket paid the amount accordingly in December 2007. The management of BQ Supermarket believed that the campaign would help increase the 2008 sales by $300,000. The amount paid had been written off in full in 2007 as expense.

(iv) BQ Supermarket entered Into an agreement with a supplier whereby the two companies placed advertisements on each other’s website for three months from October to December 2007. BQ Supermarket and the supplier priced similar advertisements on their websites at $8,000 and $10,000 respectively. Finally they agreed at the value of $9,000 for invoicing by both parities. No accounting entries had been made in respect of this exchange of service.

Required:

(a) Discuss the accounting treatments of items (i) to (iv) above, referring to the relevant accounting principles/concepts and suggesting appropriate treatments where necessary. ( Note: You may assume that all amount concerned are material.) (16 marks)

(b) Restate the net profit of BQ Supermarket for the year ended 31 December 2007. (4marks)

Question 4 :

Sun Ltd commenced the production of Product X in March 2008. It has the following information relating to March 2008:

Budgeted at 50,000 units Budgeted at 80,000 unit Actual

$ $ $

Sales 1500,000 2,400,000 1,995,000

Raw material 400,000 640,000 534,375

Direct labour 500,000 800,000 769,950

Production overheads 380,000 518,000 492,000

Additional information:

(i) Actual sales in March were 70,000 units. Due to unforeseen competition, goods were sold at 5% lower than standard selling price.

(ii) The standard raw material quantity was 2kg per unit. The supplier offered a price cut of 6.25% below Sun Ltd’s standard purchase cost. This cost saving was not within Sun Ltd’s budget assumption.

(iii) The standard direct labour hour was 0.5 hour per unit. Hoping to achieve cost leadership, Sun Ltd recruited workers of skill level lower than originally planned. Actual labour hours were 42,775 in March 2008.

(iv) The production overheads included both fixed and variable costs. There was no variance in the variable production overhead per unit in March 2008.

(v) Sun Ltd adopts the just-in-time inventory management strategy and does not hold any inventory of raw material, work-in-progress and finished goods.

Required:

(a) Using the marginal costing approach, prepare for Sun Ltd a three-column trading account comparing the flexible budget and the actual performance for the month of March 2008 and showing the variances as appropriate. (10 marks)

(b) Prepare the variance analysis for raw material and direct labour (6 marks)

Question 5 :

Mei Wah Company has a vacant factory due to the recent closure of a business segment. The general manager is considering the following proposals:

Proposal 1: Sell the factory immediately for cash $3,000,000.

Proposal 2: Sign a tenancy agreement for three years at an annual rental of

$1,680,000, receivable in advance at the beginning of each year. Free rental for two months will allowed at the beginning of the tenancy period.

Mei Wah Company will renovate the factory before the tenant moves in, and will pay $2,100,000 immediately when the renovation work is completed. The company will have to pay other expenses, including management fee, rates, maintenance ,etc. to the amount of $360,000 per year with cash outflows assumed to occur at the end of each year. At the end of Year 3, Mei Wah Company expects to sell the factory for $3,300,000.

Proposal 3: Use the factory space for a three-year project outsourced from Summer Company. During the three-year period, 2400 units of Product Super-Y would be produced for Summer Company each year. The estimated price per unit charged on Summer Company is $600, $550 and $500 in Year 1, 2 and 3 respectively. Test run costing $ 15,000 will be paid before production starts.

The management accountant of Mei Wah Company provides the following project cost estimates:

(i) 1kg of direct material is required for each unit of Product Super-Y. The purchase cost of the material will remain at $6 per kg in the coming years.

(ii) Direct labour comprises three workers, being paid in total at $288,000 per year. Year-on-year wages increment of 5% is expected.

(iii) Fixed production overhead is $348,000 per year, including $39,000 of depreciation on existing equipment. The equipment has no disposal value.