Running head: Managerial Accounting Group Assignment Group Trần Kim Dự Bùi Lê Châu Hà Nguyễn Lê Hoàng Thiện Phạm Vũ Thảo Trinh Managerial Accounting October 20th, 2012 Professor Nguyen Phong Nguyen Group Assignment – Group Task 1: CVP Analysis Beta Corporation recently expanded its manufacturing capacity The firm will now be able to produce up to 22,500 units of either product C or D The sales department assures management that it can sell between 13,500 and 19,500 units of either product this year Because the two products are very similar, the company will produce only one of the two products The following information was compiled by the accounting department Product C Product D Selling price per unit………….… $132.00 $120.00 Variable costs per unit…….….… 79.20 79.20 Fixed costs will total $554,400 if product C is produced but will be only $475,200 if product D is produced Beta Corporation is subject to a 40 percent income tax rate a Compute the contribution margin ratios for each product  CMC per unit = Price – Variable cost per unit = $132.00 - $79.20 = $52.8  CMRC =  CMD per unit = Price – Variable cost per unit = $120.00 - $79.20 = $40.8  CMRD = = = b If Beta Corporation desires an after-tax net income of $33,120, how many units of product D will the company have to sell?  Target income of Beta Corporation before 40% taxes =  Number of product D sold to get $33,120 after-tax net income = = c How much would the variable cost per unit of product D have to change before it had the same break-even units as product C?  Break-even units of product C = Group Assignment – Group 3   Variable cost per unit of product D = Price – CM’D per unit = $120.00 - $45.26 = $74.74  Δ Variable cost per unit = $79.20 - $74.74 = $4.46  The variable cost per unit of product D decreased by $4.46 d Suppose the variable cost per unit of product D decreases by 10 percent, and the total fixed cost of product D increases by 10 percent Compute the new break-even point  Variable cost per unit of product D = 0.9 x $79.20 = $71.28  CM per unit of product D = Price – Variable cost per unit = $120.00 - $71.28 = $48.72  Fixed cost = 1.1 x $475,200 = $522,720  Break-even units =  Break-even sales = Break-even units x Price = 10,729 x $120.00 = $1,287,480 e Suppose the board of management decided to produce both products If the two products are sold in equal proportions (in the number of units), and total fixed costs amounted to $514,800, what is the firm’s break-even point in units?  The two products are sold in equal proportions  In package, there are product C and product D  CM per unit = CMC per unit + CMRD per unit = $52.8 + $40.8 = $93.6  Break-even units =  The firm sales 5,500 products C and 5,500 products D Group Assignment – Group Task 2: Cash Budgeted and Control The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan The purpose of the loan is to assit the company in acquiring inventories Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked fora cash budget to help determine whether the loan should be made The following data are available for the months May through July, during which the loan will be used:  On May 1, the start of the loan period, the cash balance will be $24,000 Accounts receivable on May will total $140,000, of which $120,000 will be collected during May and $16,000 will be collected during June The remainder will be uncollectible  Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale The other 2% represents bad debts that are never collected Budgeted sales and expenses for the three-month period follow: May June July Sales ( all account) $300,000 $400,000 $250,000 Merchandise purchases $210,000 $160,000 $130,000 Payroll $20,000 $20,000 $18,000 Leases payments $22,000 $22,000 $22,000 Advertising $60,000 $60,000 $50,000 - - $65,000 $15,000 $15,000 $15,000 Equipment purchases Deprecitaion  Merchandise purchases are paid in full during the month following purchase Accounts payable for merchandise purchases during March, which will be paid during May, total $140,000  In preparing the cash budget, assume that the $30,000 loan will be made in May and repaid in July Interest on the loan will total $1,200 Group Assignment – Group a Prepare a schedule of expected cash collections for May, June, and July, and for the three months in total May June July Total May $120,000 _ _ $120,000 June _ $16,000 _ $16,000 July _ _ _ _ $120,000 $16,000 _ $136,000 Account Receivable Total Account Receivable Month’s Sale Collected May $ June July $ _ $294,000 $360,000 _ $ $75,000 Total Month’s Sale Collected $90,000 $300,000 $339,000 $729,000 Total Expected Cash Collection $210,000 $316,000 $339,000 $865,000 With : a= (300,000*0.3= 90,000) b= (300,000*0.6= 180,000) c= (400,000*0.3= 120,000) d= (300,000*0.08= 24,000) e= (400,000*0.6= 240,000) f= ( 250,000*0.3= 75,000) Group Assignment – Group b Prepare a cash budget, by month and in total, for the three-month period May June July Total $24,000 $22,000 $26,000 $72,000 collection on account 210,000 316,000 339,000 865,000 Total cash available $234,000 $338,000 $365,000 $937,000 Beginning cash balance Cash sales and Less: Disbursements Payment for: Merchanise $(140,000) $(210,000) $(160,000) $(510,000) Payroll (20,000) (20,000) (18,000) (58,000) Lease (22,000) (22,000) (22,000) (66,000) Advertising (60,000) (60,000) (50,000) (170,000) Equipment _ _ (65,000) (65,000) $242,000 $312,000 $315,000 $869,000 $(8,000) $26,000 $50,000 $68,000 Borrowings 30,000 _ _ 30,000 Repayment _ _ (30,000) (30,000) Interest _ _ (1,200) (1,200) $30,000 _ $(31,200) $(1,200) $22,000 $26,000 $18,800 $66,800 Total disbursement Excess (deficiency) of cash available overneed Financing: Total financing Ending cash balance: c If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain The loan can not be repaid as planned, because although the company needs a minimum cash of $20,000 to start each month, the ending cash balance of July is 18,800, so the beginning cash balance of August will be smaller than $20,000 Therefore, in order to have $20,000 in the beginning of August, they must hold the loan, and repay it later Group Assignment – Group TASK 3: Standard Costing and Cost Variance Analysis Rosa Corporation uses a standard-costing system to assist in the evaluation of operation The company has had considerable trouble in recent months with suppliers and employees, so much so that management hired a new production supervisor (Christ Rochester) The new supervisor has been on the job for five months and has seemingly brought order to an otherwise chaotic situation The vice president of manufacturing recently commented that “… Christ has really done the trick The change to a new direct material supplier and Christ’s teambuilding/morale-boosting training exercises have truly brought things under control”.The vice president’s comments were based on both a plant tour, where he observed a contentedworkforce, and a review of the following data, which was extracted from the performance report: Direct material variances (favorable)……………………….$9,240 Direct labor variances (favorable)………………………… 12,350 These variances are especially outstanding, given that the amounts are favorable and small (Rosa Corporation’s budgeted material and labor costs generally each average about $1,050,000 for similar periods) Additional data follow  The company purchased and consumed 45,000 kilograms of direct materials at $15.40 per kilogram, and paid $32.50 per hour for 20,900 direct labor hours of activity Total completed production amounted to 9,500 units  A review of the firm’s standard cost records that each completed unit requires 4.2 kilograms of direct material at $17.60 per kilogramand 2.6 direct labor hours at $28 per hour a On the basis of the information contained in the performance report, should Rosa Corporation be concerned about its variances? Why? On the basic of the information contained in the performance report, Rosa Corporation should not be concerned about its variances, because (1) as the vice president commented, everything is under control after the change to new supplier and the moral training exercises, (2) those variances reported are favorable and small, compared with the $1,050,000 for each budgeted material and labor costs Group Assignment – Group b Calculate the company’s direct material variances and direct labor variances  Direct material variances: AP x AQ SP x AQ = $15.40 x 45,000 = $693,000 SP x SQ = $17.60 x 45,000 = $792,000 Price variance = $17.60 x (9500 x 4.2) = $702,240 Usage variance = $693,000 - $792,000 = $99,000F = $792,000 - $702,240 = $89,760U Total variance = $99,000F + $89,760U =$9,240F  Direct labor variances: AR x AH SR x AH SR x SH = $32.50 x 20,900 = $697,250 = $28 x 20,900 = $585,200 = $28 x (9500 x 2.6) = $691,600 Rate variance Efficiency variance = $697,250 - $585,200 = $94,050U = $585,200 - $691,600 = $106,400F Total variance = $94,050U + $106,400F =$12,350F c On the basis of your answers to requirement (b), should Rosa Corporation be Group Assignment – Group concerned about its variances? Why? Based on the calculation of each components, we find out that although the Direct Material Variance is favorable, it was made of both high favorable price variance and high unfavorable usage variance That results raises the concern about usage variance Therefore, as a manager, we should take each variance into account Similarly, the favorable Direct Labor Variance comes from noticeably high unfavorable rate variance and favorable efficiency variance and the manager should consider each of them d Are things going as smoothly as the vice president believes? Evaluate the company’s variances and determine whether the change to a new supplier and Christ’s team-building/morale-boosting training exercises appear to be working Explain As shown in the calculation, there are big problem in extremely high unfavorable material usage variance and labor rate variance Thus, things are not going as smoothly as the Vice President expected Firstly, the change to a new supplier brings advantage in price aspect, reducing standard price by $2.20 per unit purchased However, under the pressure of making favorable variances, the manager may allow to purchase materials of lower quality or excessive inventory purchases in order to get quantity discounts Thus, to decide whether the change has good impact or not, the manager should revise quality of products Secondly, to evaluate the impact of training exercises, we should consider the Material usage variance , Labor rate variance as well as Labor efficiency variance Faulty workmanship may lead to more consumption in raw material, proved by high unfavorable material usage variance Deployment of more efficient and skilled workers giving rise to higher payment, then high unfavorable rate variance However, it is a good news on efficiency variance, which indicated that the training courses had induced the labor to work more effectively Group Assignment – Group 10 e Is it possible that some of the company’s current problems lie outside Christ’s area of responsibility? Explain There are many problems that may lie outside Christ’s area of responsibility  Material price variance: o Fluctuations in market price dues to government intervention o Usually the responsibility of controlling price belongs to the purchasing agent and Christ has no work in this field (M.Moen, R.Hansen & L.Heitger, 2009)  Material usage variance: o Maintenance and purchase of plant and equipment  Labor rate variance: o Higher payment due to shortage of availability of labor o Extra-Shift allowance to workers overtime allowance leads to higher wages o Change in the system of wage payment o Higher rates during seasonal or emergency operations Group Assignment – Group 11 Task 4: Divisional Performance Evaluation Alpha Corporation is a multi-product company with three divisions: North Division, South Division, and West Division The company has two sources of long-term capital: debt and equity The interest rate on all Alpha Corporation’s $1,600 million debt is percent, and the company’s tax rate is 30 percent The cost of Alpha Corporation’s equity capital is 12 percent In addition, the market value of the company’s equity is $2,400 million (The book value of Alpha Corporation’s equity is $1,720 million, but that amount does not reflect the current value of the company’s assets or value of intangible assets) The following data (in millions) pertain to Alpha Corporation’s three divisions Operating income Current liabilities Total assets North $56 $24 $280 South 180 20 1,200 West 184 36 1,920 a Compute Alpha Corporation’s weight-average cost of capital (WACC) The aftertax cost of debt: = Y * (1 – T) = 9% * (1 – 0.3) = 6.3% = 12% Percentage of debt in total assets: *100% = 40% Percentage of equity in total assets: 100% - 40% = 60% The weigth average cost of capital: WACC = 6.3%*0.4 + 12%*0.6 = 9.72% b Compute the economic value added (EVA) for each of the company’s three divisions Current Liabilities Total assets Capital employed North $24 $280 $256 South $20 $1200 $1180 West $36 $1920 $1884 Group Assignment – Group 12 EVA = After-tax operating income – (Actual percentage cost of capital x Total capital employed) North:  After-tax operating income: $56 million* (1 – 0.3) = $39.2 million  EVA = $39.2 million – 0.0972*$256 million = $14.3168 million South:  After-tax operating income: $180 million* (1 – 0.3) = $126 million  EVA = $126 million – 0.0972*$1,180 million = $11.304 million West:  After-tax operating income: $184 million* (1 – 0.3) = $128.8 million  EVA = $128.8 million – 0.0972*$1,884 million = ($54.3248 million) c What conclusion can you draw from the EVA analysis? West division makes money less then the money it takes to make it South and North divisions make money more than the money they take to make it Seemly, the company had a best performance in North division d How does EVA differ from residual income (RI)? What are the strengths and weaknesses of EVA?  The difference between EVA and RI The key feature of EVA is its emphasis on after-tax operating profit and the actual cost of capital RI, on the other hand, uses a minimum expected rate of return  The strengths and weaknesses of EVA Strengths  Do not have to estimate a terminal value at some future point in time (Drake, 2003)  Can apply in situations in which the company does not pay dividends or generate free cash flows (Drake, 2003) Group Assignment – Group 13  Consistent with economic theory and Porter’s Five Forces (Drake, 2003) Weaknesses  Relies heavily on the availability and accuracy of accounting data (Drake, 2003)  Assumes clean surplus accounting (Drake, 2003)  Assumes that the book value of equity is a reliable measure of owner’s equity in the firm (Drake, 2003)  The companies least suited for economic profit are high-growth, new-economy and hightechnology companies, for whom assets are 'off balance sheet' or intangible Group Assignment – Group 14 References M.Moen, M., R.Hansen, D., & L.Heitger, D (2009) Standard costing: A managerial control tool In Cornerstones of Managerial Accounting (3rd ed., p 429, p 433) South-Western CENGAGE Learning Drake, Pamela The analyst residual income Pg 135 Michigan, USA,: 2003 Print  ... M.Moen, M., R.Hansen, D., & L.Heitger, D (2009) Standard costing: A managerial control tool In Cornerstones of Managerial Accounting (3rd ed., p 429, p 433) South-Western CENGAGE Learning Drake,... 2003) Weaknesses  Relies heavily on the availability and accuracy of accounting data (Drake, 2003)  Assumes clean surplus accounting (Drake, 2003)  Assumes that the book value of equity is a... company will produce only one of the two products The following information was compiled by the accounting department Product C Product D Selling price per unit………….… $132.00 $120.00 Variable