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Accounting Assignment Question
- 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?
- 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 on a cash budget.
- Why might a business decide to make a product internally when it could easily acquire it at a cheaper price from an external supplier? Explain.
- 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.
- What are the essential purposes of any costing system? Explain.
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.
b) Calculate an administrative overhead allocation rate for Wonder Products.
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?
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.
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.
Accounting Assignment Solution
A budget helps to plan in a futuristic manner. Equipped with suitable planning tools, budgets are generally prepared in advance before the start of the budgeted period. But with the suitable comparison, vital information about actual results can be provided in regard to performance. Hence, budgets act as a planning tool as well as a performance evaluation tool. Flexible budgets are usually made to evaluate performances when the actual level of production varies from the planned ones. It is regarded as a performance evaluation tool in practical operations. In regard to manufacturing and selling a product, everything depends on demand and orders for the products as the demands and sales varies a lot as per the changing circumstances. Fixed budgets are useful for one time and for a planned level of production, which is not likely to be the case for a profit center, which has a continuous set of operations when manufacturing and selling products. Flexible budget inculcates any level of activity under a particular range. It facilitates the managers to control costs and make cost comparisons, which are very essential in a profit center. It provides the flexibility to adjust the parameters like costs, revenues, etc. In the practical scenario, as and when it comes. In practical application, when the scale of activity differs from the budgeted one, it is not appropriate to calculate the actual cost incurred to those posed by the fixed budget. There is an increase in variable cost with the increase in production and vice versa. (Caplan Dennis, n.d.)
The cash budget comprises of prospective sources and application of cash during a future period. It gives an idea about the liquidity position of the company from time to time so as to meet the expenses as and when they become due. In case the cash availability in the light of cash requirements are not sufficient, the cash budget brings it into the consideration of the management so that they can make necessary arranges as and when required. When the cash budget is prepared, it inculcates inputs from various other budgets as well like direct materials budget, selling and administrative expense budget, manufacturing overhead budget, direct labor budget, etc. (Accounting tools, n.d.) Some of them are evaluated hereunder:
Direct Materials Budget: – It is very necessary to get the direct materials budget made before the cash budget. A major portion of cash goes for
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