MBA Accounting Skills Question and Answers

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Question 1. (20 marks)

1. Fort Road Foxtrot’s adjusted trial balance for December 2018 is given. Prepare Income Statement and Balance sheet. (15 marks)

 Inventory \$ 6,500 Common stock 45,000 Cash 16,550 Operating expenses 1,350 Notes payable 600 Interest expense 900 Depreciation expense 1,200 Net sales 12,800 Accounts receivable 9,600 Accounts payable 4,800 Long-term debt 55,000 Cost of goods sold 5,750 Buildings and equipment 122,000 Accumulated depreciation 34,000 Taxes 1,440 Retained earnings 15,250

2. “Window dressing “in accounting is evil. Explain the statement and advise measures to counter this. (5 marks, 300 words)

QUESTION 2 (20 marks)

a) COST – VOLUME – PROFIT ANALYSIS (12 marks)

Protest Industries produces only one product. The following revenues and cost have been estimated for the forthcoming month:

Selling price, \$ 117 per unit (SP) Variable cost, \$ 78 per unit (VC) Fixed Cost, \$ 78,000

The managers of the firm wish to know the following:

1. Calculate contribution margin per unit
2. Calculate contribution margin ratio.
3. BEP in units and Dollars
4. Calculate margin of safety if actual sales are 6,000 units
5. Prepare a Break-even chart using above information
6. Calculate how many units must be sold to get a profit of \$156,000.

QUESTION 2 (b)

Make or buy Decision (4 marks)

Consider the following scenarios for Decision Making:

1. Sparks Ltd produces three products: A, B and C. The following is an estimate of costs and revenue for the forthcoming year:

 A B C \$ \$ \$ Sales                                   41,000   Total Cost                             48,000   Net Profit (loss)                    (7,000) 75,000   67,000   8,000 48,000   42,000   6,000

The total cost of each product comprises one – third fixed costs and two – third variable costs. Fixed costs are constant whatever the volume of sales. The managing director argues that because product A makes a loss, production of it should be discontinued.

Comment on the managing director’s argument.

2. Thunder company has been producing 15000 units of part 3741 for its products. The unit cost for the part is as follows: (4 marks)

 \$ Direct materials Direct Labour Variable manufacturing overhead Fixed manufacturing overhead Total 7 13 9 10 39

Thunder can purchase 15000 units of part 3741 for \$ 34 each. If the part is purchased, Thunder can make another product and provide a contribution margin of \$15000. If the part is purchased, 75% of the fixed manufacturing overhead costs will still be incurred.

Required

Should Thunder make or buy the part?

QUESTION 3 (20 marks)

A. The balance sheet and income statement for the J. P. Robard Mfg. Company are as follows: (12 marks)

 Balance Sheet (\$000) Cash \$ 500 Accounts receivable 2,000 Inventories 1,000 Current assets 3,500 Net fixed assets 4,500 Total assets \$8,000 Accounts payable \$1,100 Accrued expenses 600 Short-term notes payable 300 Current liabilities \$2,000 Long-term debt 2,000 Owners’ equity 4,000 Total liabilities and owners’ equity \$8,000

 Income Statement (\$000) Net sales (all credit) \$8,000 Cost of goods sold (3,300) Gross profit 4,700 Operating expenses (includes \$500 depreciation) (3,000) Operating income 1,700 Interest expense (367) Earnings before taxes \$1,333 Income taxes (40%) (533) Net income \$ 800

 INDUSTRY NORMS Current ratio 1.5: 1 Inventory turnover 3 x Total asset turnover 1 x Operating profit margin 18% Operating income return on investment 18% Debt ratio 60% Average collection period 100 days Fixed asset turnover 1.5 :1 Return on equity 15%

B. The company is applying for Bank Loan. Write a report to Gulf Bank PLC whether you recommend the bank for sanction of Loan. (4 marks,250 words)

C. Would you recommend investment in this company? Similar companies pay 12% return. Calculate any other ratio you think appropriate. Write a report. (4 marks,250 words)

QUESTION 4 (20 marks)

A. Prepare the cash budget of ABACUS Inc. for the quarter October to December, based upon the following data and additional information. (14 marks)

 Month Sales (\$) Purchase (\$) Wages (\$) Selling Overheads (\$) Production Overheads (\$) July 90,000 30,000 9,000 7,850 5,580 August 93,500 23,000 9,400 9,300 8,820 September 86,000 48,900 9,900 3,610 9,470 October 78,000 34,560 7,000 3,510 6,880 November 78,500 35,980 18,600 3,400 7,000 December 88,600 37,400 8,000 3,250 7,680

• The Cash balance at 1 October is \$ 850000
• Purchases are 50% in cash and balance are paid the month
• Sales are 50% Cash, 40% Received month following and Balance 10% in the month following the second
• A plot of land will be purchased and to be paid in October \$
• Wages are paid one month in arrear and all overheads are paid two months in arrear
• ABC Ltd is due to repay a loan of \$ 8000 in
• A dividend of \$ 80,000 is expected to be paid in November

B. What are the Benefits and Limitations of Budgeting? (6 marks,350 words)

QUESTION 5 (20 marks)

1. XY Inc. provides the following data for June 2019 when 13,000 Units are manufactured:

Standard Material Cost (Per Unit)

6.20 kg @ \$ 10.25/kg

Actual Material Cost (Per Unit)

6.85 kg @ \$ 13.8/kg

Standard Labor cost (Per Unit)

5.5 hrs @ \$ 14/hr

Actual Labor cost (Per Unit)

5.30 hrs @ \$ 15.2 /hr

a) Calculate: (9 marks)

Direct Material Price Variance

Direct Material Quantity/Usage Variance Total Material Cost Variance

Direct Labor Rate Variance Direct Labor Efficiency Variance Total Labor Cost Variance

(b) Calculate Variable Overhead Spending Variance if actual labor hours used are 360, standard variable overhead rate is \$11.40 per direct labor hour and actual variable overhead rate is

\$10.30 per direct labor hour. Also specify whether the variance is favorable or unfavorable. (3 marks)

(c) Calculate the variable overhead efficiency variance using the following figures: (3 marks)

 Number of Units Produced 720 Standard Direct Labor Hours Per Unit 1.2 Actual Direct Labor Hours Used 360 Standard Variable Overhead Rate \$11.40

(d)“Financial control measures are not Luxury but absolute necessity”. Comment. (5 marks,300words)