Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

Question 1.Obaapa Fashions Ltd has budgeted to sell 100,000 pieces of face masks for April 2020. At the end of March 2020, the company had 20,000 pieces of face mask in inventory and would like to have an inventory of 30,000 pieces of face masks at the end of April. Each piece of face mask requires 2 square meters of treated fabric, the primary raw material. Inventory of the treated fabric at the beginning of April is 5,000 square meters. It is expected that each square meter of the treated fabric will cost GHS3. Assuming the sales budget is met, and the desired ending inventory of the face mask is achieved, how many square meters of the treated fabric need to be purchased in April 2020, in order to have an ending inventory of 8,000 square meters of the treated fabric? What will be the cost of purchases for April 2020? (show all workings clearly).

Question 2.

Ewuarbena & Co Manufacturing Ltd have budgeted to sell these quantities of its products, Chocomix, for the coming months in 2020: January – 160,000 sachets; February – 240,000 sachets; March – 200,000 sachets; April – 400,000 sachets; and May – 150,000 sachets. The company expects to sell each sachet for GHS20. The company has decided that to avoid losing customers arising from production hold-ups it would like to maintain a finished goods inventory in the future equal to one-fifth of the following month's budgeted sales. At the beginning of January 2020, the company had finished goods inventory of 10,000 sachets. What is total budgeted sales and production for the 2020 1^st quarter ended (January – March 2020)? (show all workings clearly)

Below are the statements of financial position of three entities as at 30 September 2019

Papa               Mama              Daughter

$’000               $’000               $’000

Non-current assets                                       24,000             7,500               3,000

Property, plant and equipment                       14,000             7,500               3,000

Investments                                                    10,000             –                      –

Current assets                                              6,000               3,000               1,500

––––––            ––––––            ––––––

30,000             10,500             4,500

––––––            ––––––            ––––––

Equity & liabilities

Equity                                                             17,500             6,500               3,000

Share capital

(P1 ordinary shares)                                       10,000             1,000               500

Retained earnings                                          7,500               5,500               2,500

Liabilities                                                       12 500             4 000               1 500

Non-current liabilities                                  8,000               1,250               500

Current liabilities                                          4,500               2,750               1,000

––––––            ––––––            ––––––

30,000             10,500             4,500

––––––            ––––––            ––––––

Further information:

1. Papa acquired 75% of the equity share capital of Mama several years ago, paying $5 million in cash. At that time the balance on Mama's retained earnings was $3 million.
2. Papa acquired 30% of the equity share capital of Daughter on 1 October 2017, paying $750,000 in cash. On 1 October 2017 the balance on Daughter 's retained earnings was $1.5 million.
3. During the year, Papa sold goods to Daughter for $1 million at a mark-up of 25%. At the year-end, Daughter still held one-quarter of these goods in inventory.
4. As a result of this trading, Papa was owed $250,000 by Daughter at the reporting date. This agrees with the amount included in Daughter 's trade payables.
5. On 30 September 2019, it was determined that the investment in the associate was impaired by $35,000.
6. Non-controlling interests are valued using the fair value method. The fair value of the non-controlling interest in Mama at the date of acquisition was $1.6 million.

Required: Prepare Papa’s consolidated statement of financial position as at 30 September 2019.

Brewer Trading Company has a preliminary figure for earnings of $500,000, for the year ended 31 December 2017. The company also has provided the following information in relation to its annual financial information.

a. The company has a bank loan outstanding for $400,000, which has been outstanding for the entire year. The interest has not been paid or recorded for the final quarter. Interest is based on an annual rate of 4%.

b. Property tax of $24,000 was paid in September, and were for the 12-month period starting on 1 October. The amount was expensed in September.

c. The office supplies account has a balance of $1,300. A physical count indicates $500 of office supplies on hand.

d. A customer paid $60,000 on an outstanding account receivable in December. This amount was credited to sales, in error.

e. Depreciation of equipment in the amount of $32,800 has not been recorded.

f. Accounting fees paid, in the amount of $15,200, were debited to dividends instead of the Accounting Fee Expense account.

g. A customer paid $50,000 as a deposit in June. This was credited to unearned revenue, but the transaction was completed in October, and the goods delivered. Cost of goods sold was correctly recorded at that time, but the unearned revenue was not changed.

h. At the beginning of the year, there was a balance of $4,480 in the prepaid insurance account, for a policy that will expire at the end of February 2018. During the year, a second policy for different coverage came into effect on June 1.This policy cost $9,540 and covers 18 months. The payment was debited to insurance expense when it was made.

i. No income tax has been recorded, but the tax rate is 25%.

Required:

Journalize each of the above transactions (Descriptions for each journal entry are not necessary).

Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

Denise is planning to open a take-away business in Hobart, which will sell healthy hamburgers prepared with fresh, local ingredients. These will come in two sizes: regular and large, and each order will be served with hot chips and a soft drink. The business will be open 4pm-8pm, 7 days a week, with all orders being filled and served on a drive-through basis

Denise has two options: to buy an existing take-away business, or open a new one. If she goes with the first option, she envisages financing the purchase cost ($160,000) with a bank loan. The furniture and kitchen equipment will need to be replaced at 5-yearly intervals. If she goes with this first option, sales for the first quarter are expected to be:

Regular   Large   Total
Sales (unit)   18,000   16,500   34,500

The sales growth is expected to be 5% per quarter.

If Denise goes with the second option, she will buy standard furniture and fittings at a cost of $25,000. She estimates that these will need to be replaced every 10 years. She also plans to purchase kitchen equipment, at $100,000, to be financed with a bank overdraft. This equipment will also need to be replaced at 10-year intervals. With this option, Denise has been advised that sales will be 20% lower than with the first option in the first year only. The business will also need a website, and advertising space in the local newspaper.

Irrespective of the option she finally chooses, Denise anticipates that sales will increase by 10% per year. She plans to hire 4 part-time staff, so that on any given day, two will be available to cook and fill orders. These will be paid an hourly rate, while Denise, as manager, will draw a monthly wage of $3,000. She will also employ a cleaner, who will be paid $1,000 a month. The building, which will have no seating capacity, will be leased from a local real-estate company. Denise aims to make an annual profit, before tax, of not less than $50,000.

She has now approached you, a highly capable and reputable team of management and cost accountants based in Hobart. Your team was chosen because of its excellent reputation, and extensive knowledge of local council regulations. Denise asks you to research the financial viability of the proposed project.

DO ONLY QUESTION 2 & 3 (PLEASE DO IT YOURSELF, IF YOU COPY FROM SOMEWHERE WILL REPORT TO CHEGG SUPPORT). If you do well, will rate you for sure.

You are required to:

1. Develop a projected budget (sales, purchases, expenses etc) for the next three years for both options.
2. Determine, for both options, the breakeven point, in dollars and units, for the expected sales mix;
3. Calculate the Payback Period and Net Present Value for Denise’s investment options.
4. Based on the annual profit for years 1, 2 and 3 for the best option, decide which of the existing burgers should be promoted more aggressively than the others to achieve the target profit.
5. In your report, explain first whether you should use Traditional Costing System or Activity-Based Costing?
6. In your report, advise Denise, on the basis of your calculations for points 1, 2 and 3 above, whether she should buy an existing restaurant or establish a new one;
7. Advise Denise, in the written business report, whether she could maximise profitability by changing sale prices or the mix of existing sales, or both.

As an economy adjusts to a decrease in the saving rate, according to Solow model, we would expect output per worker

A to decrease at a permanently higher rate.

B to return to its original level.

C none of the other answers is correct.

D to increase at a permanently higher rate.

E to decrease at a constant rate and continue decreasing at that rate in the steady state.

For this question, assume that equilibrium output is determined in the ZZ-Y diagram. Further assume that policy makers' goals are: (1) to achieve balanced trade (i.e., NX = 0); and (2) to achieve the natural level of output, say Y_n. Now suppose that the initial level of equilibrium output is equal to Y_n (i.e., Y = Y_n) and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously?

A A decrease in taxes and increase in the real exchange rate.

B A decrease in government spending.

C Convince the country's trading partners to pursue policies that will cause an increase in foreign income.

D None of the other answers is correct.

E A decrease in the real exchange rate.

Question 3
• Time: 30 minutes
• Total: 18 marks

Orville Company’s standard and actual costs per unit are provided below for the most recent period. During this time period 1400 units were actually produced.
Standard Actual
Materials:
     Standard: 2.6 metres at $2.30 per m. $5.98
     Actual: 2.1 metres at $2.60 per m. $5.46
Direct labour:
     Standard: 2.2 hrs. at $7.90 per hr. 17.38
     Actual: 1.7 hrs. at $8.50 per hr. 14.45
Variable overhead:
     Standard: 2.2 hrs. at $4.60 per hr. 10.12
     Actual: 1.7 hrs. at $4.20 per hr. 7.14
Total unit cost $33.48 $27,05

For simplicity, assume there was no inventory of materials at the beginning or end of the period.

Required:
Given the information above, compute the following variances. Also indicate if the variances are favorable or unfavorable.

1. Materials price variance






2. Materials quantity variance

3. Direct labour rate variance


4. Direct labour efficiency variance


5. Variable overhead efficiency variance

6.        Variable overhead spending variance