Managerial Accounting Acct 322 Semester 2 2017 Assignment 3

Managerial Accounting Acct 322semester 2 2017assignment 3

CASE STUDY You are a new manager of Fashion Alley Est., a distributor of bracelets to various retail outlets. You have to prepare Sales, expected cash collection and purchase budgets for the upcoming second quarter so that management will see the benefits that can be gain from your budget. Below is detailed information. The company sells different styles of bracelets, but the selling price each style is same $10/piece.

Actual sales of earrings for the last three months and budgeted sales for the next six months follow:

  • Jan-2017 (actual): 20,000
  • Feb-2017 (actual): 26,000
  • Mar-2017 (actual): 40,000
  • Apr-2017 (budget): 65,000
  • May-2017 (budget): 100,000
  • Jun-2017 (budget): 50,000
  • Jul-2017 (budget): 30,000
  • Aug-2017 (budget): 28,000
  • Sep-2017 (budget): 25,000

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month. Suppliers are paid $4 for a pair of bracelets. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month.

All sales are on credit, with no discount, and payable within 15 days. The company has found that only 20% of a month’s sales are collected in the month of sale, 70% in the following month, and 10% in the second month following sale. Bad debts have been negligible. Prepare the following budgets for the three-month period ending June 30:

Question 1

a. A sales budget, by month and in total.

b. A schedule of expected cash collections from sales, by month and in total.

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

Question 2

In 2016, Season International Company had sales of 8,500 units and production of 11,000 units. Other information includes:

  • Direct manufacturing labor SAR 18,750
  • Fixed administrative expenses SAR 10,000
  • Fixed manufacturing overhead SAR 20,000
  • Direct materials SAR 15,000
  • Variable selling expenses SAR 10,000
  • Variable manufacturing overhead SAR 10,000
  • There was no beginning inventory.

A. Assume the company uses absorption costing:

  • i. Compute the ending finished goods inventory.
  • ii. Compute the cost of goods sold.

B. Assume the company uses Variable costing:

  • i. Compute the ending finished goods inventory.
  • ii. Compute the cost of goods sold.

C. If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

Paper For Above instruction

Introduction

Managerial accounting is essential for effective decision-making and planning within a company. This paper addresses the requirements for budgeting, sales, cash collections, and inventory management for Fashion Alley Est., along with a comparison of absorption and variable costing methods through a case study of Season International Company. The analysis highlights the importance of accurate budgeting and cost accounting techniques in financial performance assessment.

Question 1: Budgeting and Cash Flow Analysis

Sales Budget

The sales budget is a detailed forecast of expected sales revenue on a monthly basis for the upcoming period. Given the data, the sales for each month are as follows (in units):

  • April 2017: 65,000 units
  • May 2017: 100,000 units
  • June 2017: 50,000 units

At a selling price of $10 per piece, the total sales revenue for each month is computed as:

  • April 2017: 65,000 x $10 = $650,000
  • May 2017: 100,000 x $10 = $1,000,000
  • June 2017: 50,000 x $10 = $500,000

Total sales over the three months amount to $2,150,000.

Expected Cash Collections

The cash collection schedule is based on the company's credit policy: 20% collected in the month of sale, 70% in the following month, and 10% in the second month after sale. Therefore, the collections for each month are calculated as follows:

  • From March sales (assumed): 40,000 units x $10 x 10% = $40,000
  • From April sales: 20% of $650,000 = $130,000 (month of sale), plus 70% of March's sales (not given), so focusing on available data:
  • May collections: 20% of $1,000,000 = $200,000; 70% of April sales = 70% of $650,000 = $455,000; 10% from March sales, which is not necessary for the immediate view.
  • June collections: 20% of $500,000 = $100,000; 70% of May sales = $700,000; 10% of April sales = $65,000.

Summarized, the expected cash collections in total for each month can be computed accordingly, providing insight into cash inflows related to sales.

Merchandise Purchases Budget

Based on the requirement to maintain ending inventory to supply 40% of the following month’s sales, the purchase units are calculated as follows:

  • April purchases: to cover April sales + 40% of May sales – ending inventory from March.
  • Similarly, for subsequent months, considering the target ending inventory and beginning inventory assumptions.

Cost of purchases in dollars is computed by multiplying the units purchased by $4 per pair of bracelets, considering the proportion paid in the current and subsequent months.

Question 2: Costing Methods Analysis

Absorption Costing

Ending Finished Goods Inventory

Absorption costing includes all manufacturing costs—both fixed and variable—in the cost of inventory. The per-unit cost is calculated as:

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  • Total manufacturing costs (variable + fixed) divided by units produced.

    • Using the data: direct materials ($15,000), direct labor ($18,750), variable manufacturing overhead ($10,000), fixed manufacturing overhead ($20,000). The total manufacturing costs are computed, and then divided by 11,000 units produced to find per-unit cost, which is then multiplied by ending inventory units (units produced minus units sold).

    Cost of Goods Sold (COGS)

    COGS under absorption costing is calculated by multiplying units sold (8,500 units) by the per-unit cost including fixed overhead allocations.

    Variable Costing

    Ending Finished Goods Inventory

    The variable costing method excludes fixed manufacturing overhead from inventory costing. The per-unit variable cost includes direct materials, direct labor, and variable manufacturing overhead, which is then multiplied by ending inventory units.

    Cost of Goods Sold (COGS)

    Similarly, COGS is calculated by multiplying units sold by the variable unit cost, excluding fixed overheads.

    Comparison of Methods and Net Operating Income

    If units produced equal units sold, generally, absorption costing tends to show a higher net operating income than variable costing if there is any inventory build-up because some fixed manufacturing overhead costs are deferred in inventory. This phenomenon occurs because absorption costing allocates fixed overheads to inventory, reducing the expense recognized in the current period. Conversely, variable costing expenses all fixed manufacturing overheads immediately, leading to potentially lower net income in periods with inventory buildup. Therefore, under these conditions, absorption costing typically reports higher net income.

    Conclusion

    The choice between absorption and variable costing significantly impacts financial reporting and managerial decision-making. Budgets like sales, cash collections, and purchases are vital tools for planning financial resources and ensuring operational efficiency. Understanding the nuances of costing methods enables managers to interpret financial statements accurately and make informed strategic decisions.

    References

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