Intermediate

Management
Accounting
Project 2

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2021-07-06
Intermediate Management Accounting Project 2

PROJECT 2 (50 MARKS)

Project 2 is due at the end of Week 5 and is out of 50 marks.

Question 1 (12 marks)

Holzmann Cleaning Services has prepared the following statement of comprehensive

income for the year ended December 31, 20X6. Sales are based on 21,335 direct
labour hours and 1,066,757 square metres cleaned or an average of 50 square metres
per hour. Sales, wage and benefit costs are affected by the total square meters
cleaned.

Holzmann Cleaning Services

Statement of comprehensive income
For the year ended December 31, 20X6

Revenue $821,651

Cost of sales:
Wages and benefits 281,624
Cleaning supplies 88,541
Transportation costs (including fuel, insurance, depreciation, and 30,281
maintenance)
Salaries of operations managers 120,000
Total cost of sales $520,446

Gross margin $301,205

Operating expenses:
Training $55,500
Billing 129,500
Depreciation (excluding transportation vehicles) 2,350
Repairs and maintenance (excluding transportation) 890
Utilities and telephone 4,620
Rent 10,320
Interest and bank charges 1,050
Business fees 4,200
Advertising and promotion 2,520
Insurance (excluding transportation) 2,730
Total operating expenses $213,680

Net income (Loss) $87,525

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Intermediate Management Accounting Project 2

Cost pools and activities for activity-based costing analysis used for
December 31, 20X6, statement of comprehensive income

Activity Cost driver Cost Total Commercial Residential

pool activity
Cleaning supplies — Square metres $70,833 640,054 640,054
commercial
Cleaning supplies — Square metres 17,708 426,703 426,703
residential
Billing Number of 129,500 3,054 1,062 1,992
invoices
Transportation Number of 30,281 53,124 15,937 37,187
kilometres
Training Number of 55,500 554 416 138
hours
Operations Number of 120,000 3 1 2
management managers
Total expenses $423,822

The industry benchmark for profit is 25% of revenue.

In preparation for the budget for 20X7, Holzmann has gathered the following
information:

20X7 expected growth data

Change in rates:
Increase in charge-out rate to both commercial and residential clients to $39 per hour
Labour wage and benefit rate per hour $13.46
Expected price increase in commercial cleaning supplies costs per
square metre (no change in the residential cleaning supplies cost
per square metre) 9%
Expected increase in transportation costs per kilometre 9%
Expected increase in advertising of the commercial service $1,000

Change in activity for ABC analysis:

Increase in square metres 7%
Increase in number of invoices
(commercial only, see option 2 below for residential) 5%
Increase total kilometres driven 8%
All other expenses will be unchanged except as noted in cost reduction options. All
costs except operations management are variable costs.

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Intermediate Management Accounting Project 2

Cost reduction options:

1. Reduce operations management staff costs by putting one residential operations
manager on half-time. This would reduce the total cost from $120,000 to $100,000.

2. Change all residential billing to monthly. This would reduce the number of residential
invoices sent out by 10% from 20X6 activity. The ABC rate per invoice would remain
the same as 20X6.

Required:

a) Prepare a complete 20X7 operating budget segmented for commercial and

residential operations, based on the details provided above, using activity-based
costing where appropriate. Revenue and all costs except those that can be
calculated using activity-based costing or have other budgeted changes should be
allocated 60% to commercial and 40% to residential. Make sure to comment on the
assumptions that were made in developing the budget. (8 marks)

Note: When calculating the budget under the activity-based costing, determine the
20X6 current rate per unit of activity first. Then apply the changes in both the rate
and level of activity where applicable to determine the new costs.

b) Provide a discussion of the results in your report. Focus on the current and predicted
profitability of the company. Also consider the profitability of the commercial and
residential departments. (2 marks) Your discussion should also include a paragraph
on the quality of the budget data, including a review of any external factors that may
affect revenues and costs as discussed in Topic 4.2-5. (2 marks)

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 Intermediate Management Accounting Project 2

Question 2 (13 marks)

Brown Boot Company

Income statement
December 31, 20X2-20X4 (20X5 budget)

20X2 20X3 20X4 20X5

budget
Volume produced (pairs) 1,275,000 1,250,000 1,250,000 1,200,000
Volume sold (pairs) 1,274,500 1,225,000 1,197,500 1,175,000
Selling price per pair $ 97.15 $ 97.15 $ 96.60 $ 96.50
(all figures in ’000s)
Total revenue $ 123,818 $ 119,009 $ 115,679 $ 113,388
Cost of goods sold
(Schedule 1) 81,829 87,443 85,929 78,216
Gross margin $ 41,989 $ 31,566 $ 29,750 $ 35,172
Variable selling and
administrative expense $ 7,429 $ 5,950 $ 8,098 $ 7,937
Fixed selling and
administrative expense $ 18,789 $ 17,685 $ 17,035 $ 17,035
Total expenses $ 26,218 $ 23,635 $ 25,133 $ 24,972
Surplus (deficit) $ 15,771 $ 7,931 $ 4,617 $ 10,200,

Brown Boot Company

Schedule of cost of goods sold
December 31, 20X2-20X4 (20X5 budget)
(in $’000s)

20X2 20X3 20X4 20X5 budget

Units Cost Units Cost Units Cost Units Cost
Beginning finished
goods inventory 20,000 1,302 20,500 1,316 45,500 3,253 98,000 7,033
Add: Manufactured
(Schedule 2) 1,275,000 81,843 1,250,000 89,380 1,250,000 89,709 1,200,000 79,312
Available for sale 1,295,000 83,145 1,270,500 90,696 1,295,500 92,962 1,298,000 86,345
Deduct: Ending
finished goods
inventory 20,500 1,316 45,500 3,253 98,000 7,033 123,000 8,129
Cost of goods sold 1,274,500 81,829 1,225,000 87,443 1,197,500 85,929 1,175,000 78,216

Note: For clarity, units are shown in full while costs are shown in ’000s.

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Intermediate Management Accounting Project 2

Schedule 2 — Cost of goods manufactured

Brown Boot Company

Schedule of cost of goods manufactured
December 31, 20X2-20X4 (20X5 budget)
(in $’000s)
20X2 20X3 20X4 20X5
budget
Direct materials used $ 47,239 $ 50,715 $ 46,786 $ 43,992
Direct labour 22,504 25,340 28,135 22,308
Overhead applied1
Variable overhead applied $ 7,446 $ 8,200 $ 9,100 $ 7,392
Fixed overhead applied $ 4,654 $ 5,125 $ 5,688 $ 5,620
Total manufacturing
overhead costs applied $ 12,100 $ 13,325 $ 14,788 $ 13,012
Total cost of goods
manufactured2 $ 81,843 $ 89,380 $ 89,709 $ 79,312

1 BBC uses first in, first out inventory costing and a normal costing system to apply overhead to
inventory. Over- or underapplied overhead is negligible.
2 Beginning
and ending work-in-process inventory is not considered because the difference
between beginning and ending balances is negligible.

The cost of goods sold schedule shows a buildup of product that is putting a strain on
the warehouse. The operations manager has noted that word from the marketing team
is that the company needs to produce to increase the bottom line and keep unit costs
low.

Required:

a) Using the information provided, prepare a variable costing income statement that
incorporates the cost of goods sold for years 20X3 and 20X4 (in ’000s). Assume for
variable costing that the opening inventory for 20X3 is $1,241,000. (8 marks)

b) Prepare a reconciliation of the differences in absorption costing and variable costing

incomes for both years (2 marks). Explain the following: (3 marks)
• What effect will building ending inventory balances have on profit?
• What reason might the marketing manager have for increasing inventory levels?
Provide numerical data to support the reason.
• What are the ethical issues that management needs to address, if any?

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Intermediate Management Accounting Project 2

Question 3 (9 marks)

Benoit Wines uses a standard costing system and has established the following
standards for the prime costs for its Merlot by the litre:
Standard cost Standard cost
Standard quantity per unit per litre
Direct 1.75 kg of grapes $2.31/kg $4.0425
ingredients
Direct labour 0.25 direct labour hours $16.00/DLH $4.00

During August, Benoit purchased 430,000 kilograms of direct materials at a total cost of
$967,500 from a new supplier. The total factory wages for August were $1,080,000,
90% of which was for direct labour. Benoit manufactured 245,000 litres of Merlot during
August using 67,500 hours of direct labour and 428,760 kilograms of direct materials.

Required:

a) Calculate the direct materials purchase price and direct materials quantity variances
for August. (2 marks)
b) Calculate the direct labour rate and efficiency variance for August. (2 marks)
c) Comment on the above variances from the perspective of the purchasing manager
and the production manager. (5 marks)

Question 4 (16 marks)

May was Frost’s Frozen Treats first month in business. It provided the following cash
budget information:
Cash collection and disbursement activity
May June July August September October
Sales revenue $85,100 $62,900 $67,100 $49,200 $50,800 $68,200
Purchases of raw
material $7,664 $7,240 $7,500 $6,850 $6,900 $7,575
Other manufacturing
overhead costs $2,022 $1,904 $2,323 $2,377 $1,327 $1,475
Direct labour wages $30,360 $22,440 $23,958 $17,556 $18,150 $24,354
Management salaries $25,417 $25,417 $25,417 $25,417 $25,417 $25,417
General operating
expenses $2,390 $2,390 $2,390 $2,390 $2,390 $2,390

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Intermediate Management Accounting Project 2

Cash collections:
Cash sales 25%
Credit collections:
Amount collected in month of sale 50%
Amount collected in month following sale 30%
Amount collected in second month following sale 15%
Uncollectable 5%

Cash disbursements:
Conversion costs 100% Paid in month incurred
Raw materials 60% Paid in month incurred
40% Paid in month following
Direct labour 50% Paid in month incurred
50% Paid in month following
Remaining expenses 100% Paid in month incurred

Additional notes:
Depreciation included in monthly general operating expenses $ 196
Annual dividend payment to the shareholders, paid in August $8,000
Expected May 1 beginning cash balance $5,000

Frost’s Frozen Treats can borrow funds from its bank in $1,000 increments. The
company wants to maintain a minimum balance in the bank of $5,000. Interest is paid
the following month on the balance due the previous month at a rate of 1.5% per month
and any loans are paid in $1,000 increments as soon as the company is able to while
still maintaining the $5,000 minimum balance.

Required:

Prepare a cash budget for the six-month period.

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