Question

Tom used to run his own business, a small café. Last year, due to water damage from a flash flood, not only did he lose a substantial part of his inventory; but his café also sustained damages. In order to carry on the business, he sold the café to his friend, Bill, who invested money to replace/repair damaged shop fixtures and machines, and to purchase new inventory. The small café offers coffee and tea, and light food snacks bought from outside suppliers. The snacks are heated up in the café and served. There is only one other worker, a waiter. Tom is now the manager. Between the two of them, they make drinks, serve customers, and clean up.

When he was running his own business, Tom did not receive a salary. Now he is paid $2,500 per month. The waiter is paid $1,000 a month. They both work from 9 am to 8 pm, six days a week. Tom is also in charge of purchasing for the café. In the past, he bought inventory in bulk to get a lower price. However, as the inventory is perishable, it often spoils and at the end of each quarter about 30% is thrown away. This spoilage cost has been factored into the cost of ingredients per set. The café sells drink & snacks in a set. The average ingredient costs for each set is $2.20 and it is sold at $4 per set. Rent and utilities average $2,500 per month. The business uses the number of sets as an allocation base for its overhead costs.

The budgeted sales for the next five quarters for the café are stated below:

	No. of sets
Quarter 1 of 2018	11,200
Quarter 2 of 2018	12,400
Quarter 3 of 2018	22,600
Quarter 4 of 2018	25,800
Quarter 1 of 2019	14,400

Required:

(a) Apply normal costing and compute the product cost for a typical set (hint: fixed costs should be allocated using an appropriate predetermined overhead rate).

(b) If Tom is evaluated based on budgeted profit for the café, explain how Bill should rate Tom’s performance for the first two quarters of 2018 if the actual sales for the café are as follows (assume there are differences in the budgeted and actual costs per set of meal and selling price per set of meal).

	Actual no of sets
Quarter 1 of 2018	13,200
Quarter 2 of 2018	12,000

(c) The café pays for purchases of ingredients one quarter later. All other expenses are paid for in cash in the same quarter. Assuming the café has a cash balance of $28,400 and no outstanding ingredients payments at the beginning of 2018 from purchases in Quarter 4 of 2017, construct the cash budget for Quarter 2 and Quarter 3 of 2018.

Answer 1

Answers:

a.

$5.8

b.

Bill should measure his performance on the basis of his actual performance.

c.

Quarter 2 = $62,160

Quarter 3 = $107,280

Explanation:

a.)

Compute the product cost as follows:

Here, it has been considered that no. of sets are 5,000.

Product cost = $2.20 + [($2,500 + $1,000 + $2,500) * 3 / 5,000]

                    = $5.8

b.

Compute budgeted profit for the quarters 1 and 2 as follows:

Quarter 1 = 11,200 * ($4 - $2.20)

               = $20,160

Quarter 2 = 12,400 * ($4 - $2.20)

               = $22,320

If bill is rating Tom's performance of first two quarters then in one quarter he sold more set of ingredients than estimated and in other quarter, he sold lesser number of ingredients. However, the fact that 30% of the inventory at the quarter end has to be thrown away should be considered.

c.

Prepare the cash budget for quarter 2 and 3 of 2018 as follows:

Particulars	Quarter 1	Quarter 2	Quarter 3
opening cash	$28,400	$55,200	$62,160
Sale	$44,800 (11,200 × $4)	$49,600 (12,400 × $4)	$90,400 (22,600 × $4)
Less: cost of incredients	$0	$24,640 (11,200 × $2.20)	$27,280 (12,400 × $2.40)
Less money paid to Tom and Waiter	$10,500 =($2500+$10,000) × $3	$10,500 =($2500+$10,000) × $3	$10,500 =($2500+$10,000) × $3
Less: Rent and utilities	$7,500 = $2,500 × 3	$7,500 = $2,500 × 3	$7,500 = $2,500 × 3
Cash balance	$55,200	$62,160	$107,280