Reference no: EM13930168

Question One: Canberra Limited

Canberra Ltd is a small, family-based wholesaler/retailer of computer components that operates primarily from a small factory-unit/retail outlet near Fyshwick. The firm's management has traditionally competed with larger, nationally-based organisations such as Dick Smith's Electronics. Canberra Ltdhas primarily traded upon its ability to offer individual customer service and expert advice. CanberraLtd's business model has been very locally-focused with its services tailored to meet the needs of customers from around its surrounding area.

The management ofCanberra Ltd has increasingly witnessed changes in their market with many of their former clients now purchasing components via the internet rather than directly from the firm's factory-unit/retail outlet. CanberraLtd's management are willing to embrace this changing marketplace but some members of the management team are concerned about the firm's recent financial performance. Others however believe the firm is performing comparatively well.

As a result of the conflicting views held by various members of CanberraLtd's management team from the beginning of the 2015-16 financial year the firm will now produce monthly financial statements. The management ofCanberra Ltd have scheduled a meetingin early August 2015 to discuss the business's performance.CanberraLtd's bookkeeper had prepared the following post-closing trial balance as at the end of June, 2015. 

Canberra Ltd Post-closing Trial Balance as at 30th of June, 2015
Account Name	Debit	Credit
	$	$
Cash at Bank	120,000
Accounts Receivable	340,000
Allowance for Doubtful Debts		38,000
Inventory	444,000
Prepaid Insurance	14,000
Prepaid Rent	48,000
Non-CurrentAssets: Plant and Equipment	880,000
Non-CurrentAssets: Motor Vehicles	200,000
Non-CurrentAssets: Total Accumulated Depreciation		268,000
Accounts Payable		540,000
Accrued Salaries and Wages		88,000
AdvertisingPayable		116,000
Director's Loan		400,000
Share Capital		552,000
RetainedEarnings		44,000
	2,046,000	2,046,000

During July 2015, the following events occurred:

1. Canberra Ltd paid $340,000 cash to its creditors;
2. The firm also paid all salaries and wages outstanding at the end of June;
3. Canberra Ltd purchased $160,000 inventory on credit from its Asian suppliers;
4. The firm made internet sales on credit of $453,136 during July;
5. The firm made direct 'store-based' sales from the Fyshwick unit/outlet in cash totalling $90,000;
6. Management conducted a 'stock-take' at the end of July and determined that Cost of Goods Sold[CoGS] for the month was $314,000;
7. Canberra Ltd paid cash for its annual composite insurance premium of $168,000 (12 month policy commencing 1st ofAugust, 2015);
8. The firm received in cash the sum of $560,000 from its debtors;
9. Paid $30,000 owing to the 'Director's loan'.  (Two of CanberraLtd's director's loaned the business $400,000 at the end of 2013. The loan is interest free);
10. The management of Canberra Ltdembarked on anadvertising campaign using a variety of media in May 2015. All advertisements went to airin June 2015. The contract calls for Canberra Ltdto pay the firm's advertising liability in two equal instalments. During July the firm paid the first of these two instalments on its advertising liability;
11. Paid rent for August of $48,000. (Rent is payable monthly in advance, at $48,000 per month);
12. The firm paid administrative expenses, incurred during the month, of $42,000;
13. The management of Canberra Ltd has received notification that Yass Ltd has gone bankrupt - this is a debtor with an outstanding balance of $26,000;
14. After writing-off the balance of YassTechnology Ltd'sdebt, management decide to decrease the allowance to $36,000;
15. The management of Canberra Ltd depreciates plant and equipment at a rate of 20 per cent per annum based on its historic cost (straight-line);
16. The management of Canberra Ltd depreciates motor vehicles at a rate of 15 per cent per annum based on its historic cost (straight-line);
17. The management ofCanberra Ltd has noted that the current book value of their plant and equipment is slightly below its current market price. As a consequence the firm's management is unsure as the whether they should revalue the plant and equipment upward by an additional $5,000;
18. The firm incurred (but did not pay) salaries and wages expense of $62,000 for July;
19. The firm has hired a new part-time staff member with specific expertise in the promotion of internet sales. She is expected to increase internet sales by $40,000 per month. She will commence employment with Canberra Ltd on the 1^st of September 2015 and will receive $10,000 per month;
20. Sales commissions for each month are determined on the last day of that month. For July commissions were $4,400. They will be paid next month;
21. In late July Canberra Ltd received an order from Melbourne Ltd to sell $30,000 worth of product to be delivered in late August, 2015;

Required: Making and discussing any assumptions necessary

For the month ending 31st of July, 2015 [ignoring taxation]:

1.  
   1. Prepare journal entries;
   2. Post to ledger;
   3. Prepare a 'pre-closing' trial balance;
   4. Prepare any additional adjusting entries;
   5. Prepare closing entries;
   6. Prepare an Income Statement for the month of July, 2015;
   7. Prepare a Balance Sheet as at the 31st of July, 2015;
   8. Prepare a simple analysis of your results. Using the following industry data briefly comment on the performance ofCanberra Ltd for the month of July, 2015. What issues should the management of Canberra Ltd consider when interpreting such data?

Comparable Industry data
Ratios [based on the full-year ended 30thJune, 2015]
ROE (Net profit before taxation/shareholders equity)	24.30 per cent
ROA (Net profit before taxation & interest/ total assets)	16.31 per cent
Profit Margin (Net profit before taxation /sales)	3.51 per cent
Gross Margin (Gross profit/sales)	40.20 per cent
Asset Turnover (Sales/total assets)	4.65 times
Inventory Turnover (COGS/inventory)	16.45 times
Debtor Turnover (Sales/debtors)	33.02 times
Current Ratio (Current assets/current liabilities)	0.42 times
Leverage (Total assets/ shareholder equity)	1.49 times

Note: Some rounding occurs in ratios

Question 2: Melbourne Ltd

Melbourne Ltd                                                                                    Cash flow Statements
	2015	2014
Cash flows from operating activities
Cash receipts from operations	3,498,399	2,777,524
Cash payments from operations	(3,220,739)	(2,564,815)
Restructure costs paid	(19,124)	(7,120)
Interest and other costs of finance paid	(18,769)	(16,818)
Income taxes paid	(28,639)	(37,476)
Net cash inflowfrom operating activities	211,128	151,295
Cash flows from investing activities
Payment for entities and businesses	(143,760)	(63,461)
Payment for property, plant and equipment	(162,524)	(139,096)
Proceeds from sale of property, plant &equipment	33,550	26,390
Payment for investments	(6,064)	(32,217)
Payment for loan to other entities	(586)	0
Proceeds from repayment of loans with other entities	0	22,651
Net cash outflowfrom investing activities	(279,384)	(185,733)
Cash flows from financing activities
Proceeds from borrowings	420,884	215,350
Repayment of borrowings	(576,520)	(115,539)
Dividends paid	(45,149)	(26,548)
Proceeds from share issue	292,187	5,961
Net cash inflow/(outflow) from financing activities	91,402	79,224
Net increase/(decrease) in cash held	23,146	44,786
Cash at the beginning of the financial year	95,299	50,550
Effects of exchange rate fluctuations on the balances of cash held in foreign currencies	944	(37)
Cash at the end of the financial year	119,389	95,299

Required: Making and discussing any assumptions necessary

Briefly explain what you learn aboutMelbourne Ltdfrom reading this cash flow statement?

Question 3: Sydney Manufacturing Ltd

Sydney ManufacturingLtd is a private company that was originally started in 2005 by a group of motor-scooter enthusiasts from Sydney's inner-eastern suburbs who were unable to obtain the parts needed to repair or restore their scooters. As a result the NSW-based firm now produces sub-assemblies used in the production and repairs to small motor-scooter frames. The sub-assemblies are sold predominantly throughout Asia but the increasing use of motor scooters across Australia has begun to grow the firm's local business.

Sydney ManufacturingLtd produces a range of sub-assemblies that have been adapted to fit both European and Asian scooters. All types of sub-assembly units are of a very similar design but several models differ in size and quality based their application. While Sydney ManufacturingLtd imports a variety of components from across South-east Asia it also manufactures its own parts where management believe they can produce superior units to those available.

Given the firm evolved from the enthusiasm of a group of motor cyclists it uses only a very basic management accounting system that collects and collates aggregate/average cost data on the manufacturing processes.

The following is the data available for the period October 2015 to January, 2016:

Sales data:

• The average unit selling price of the sub-assembly is $360 (and all sales are for cash);
• Projected total sales [all types of sub-assemblies] for the coming four months:

October,  2015	40,000
November, 2015			50,000
December,  2015		60,000
January,  2016	60,000

Selling and administrative costs:

• Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)

	S&A	Fixed Costs		Variable Costs
	Salaries	$100,000	-
	Commissions	-	$4.00
	Depreciation	$80,000	-
	Shipping	-	$2.00
	Other	$40,000	$1.20

Finished goods inventory:

The following data pertain to production policies and manufacturing specifications followed by Sydney ManufacturingLtd:

• The average cost of each sub-assembly is $297.42;
• Finished goods inventory on the 1^st of October is 32,000 units;
• The desired ending inventory for each month is 80 percent of the next month's sales;

Materials:

• The data on materials used are as follows:

Direct Material	Per-Unit Usage	Cost per gram or Component
Metal-alloy	10 grams	$16
Components	6	$4

• Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50 percent of that month's estimated sales. This is exactly the amount of material on hand on the 1^st of October;
• All materials are purchasedusing cash;

Labour:

• The direct labour used per unit of output is on average four (4) hours;
• In an attempt to boost local specialist manufacturers Sydney ManufacturingLtd'sindustry sector has been heavily subsidised by both state and Federal governments and as a result the average direct labour cost per hour is only $18.25;
• Direct labour expenses are paid in the month they are incurred;

Manufacturing overhead:

• Manufacturing overhead each month is estimated using a flexible budget formula. (Activity is measured,and costs allocated, usingdirect labour hours.)

Overheads	Fixed-Cost	Variable-Costs
Supplies	-	$2.00
Power	-	$1.00
Maintenance	$60,000	$0.80
Supervision	$32,000	-
Depreciation	$400,000	-
Taxes	$24,000	-
Other	$160,000	$3.00

Liquidity management:

• Ifthe firm developsa shortage of cash by the end of a month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is any interest due. (Cash borrowed at the end of the quarter is repaid at the end of the following quarter);
• The interest rate is 12 percent per annum;
• Sydney ManufacturingLtd's cash balance on the 1^st of October equals $400,000. (No money is owed at the beginning of October);

Required: Making and discussing any assumptions

Prepare a monthly operating budget for the final quarter of 2015 using the following schedules as a base:

1. Sales budget;

2. Production budget;

3. Direct materials purchases budget;

4. Direct labour budget;

5. Manufacturing overhead budget;

6. Selling and administrative expenses budget;

7. Ending finished goods inventory budget;

8. Cost of goods sold budget;

9. Budgeted income statement  for the quarter (ignore income taxes);

10. Cash Budget;

Schedule 1: Sales Budget

		October		November		December		Total
Units
Selling Price			x		x		x
Sales

Schedule 2: Production Budget

		October		November		December		Total
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced

Schedule 3: Direct Materials Purchases Budget

October

November

Metal

Components

Metal

Components

Units to be produced

Direct materials per unit (gram)

Production needs

Desired ending inventory

Total needs

Less: Beginning                                                                  Inventory

Direct materials to be purchased                                                           be purchased

Cost per gram

Total Cost                                                Total cost

December

Total

Metal

Components

Metal

Components

Units to be produced

Direct materials per unit (gram)

Production needs

Desired ending inventory

Total needs

Less: Beginning Inventory

Direct materials to be purchased

Cost per gram

Total cost

Schedule 4: Direct Labour Budget

October

November

December

Total

Units to be produced

Direct labour time per unit (hours)

Total hours needed

Cost per hour

Total cost

Schedule 5: Manufacturing Overhead Budget

		October		November		December		Total
Budgeted direct labour hours
Variable overhead rate
Budgeted variable overhead
Budgeted fixed overhead
Total overhead

Schedule 6: Selling and Administrative Expenses Budget

		October		November		December		Total
Planned sales
Variable selling and administrative      expenses per unit
Total variable expense
Fixed selling and administrative expenses:   Salaries
Depreciation
Other
Total fixed expenses
Total selling and administrative            expenses

Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation:

Direct materials:
+
Direct labour
+ Manufacturing overhead
	= Total unit cost

Finished goods inventory =

 

Schedule 8: Cost of Goods Sold Budget

Units produced

Add: Beginning finished goods
Goods available for sale
Less: Ending finished goods
Budgeted cost of goods sold

Schedule 9: Cash Budget

October

November

December

Total

Beg. Balance

Cash receipts

Cash available

Less:

Disbursements:

Purchases

Direct labour

Overhead

Selling & admin.

Total

Ending balance

Borrowed/(repaid)

Interest paid

Ending balance

Schedule 10: Budgeted Income Statement

Sales
Less: Cost of goods sold
Gross margin
Less: Selling and admin. Expenses Interest expenses
Income before income taxes

Question 4: SydneyManufacturingLtd

Competition has intensified for SydneyManufacturingLtd with a number of Japanese and Korean firms now offering to supply Australian repairers with similar sub-assembly units that [now for the first time] comply with Australian standards.

As a consequence a number of SydneyManufacturingLtd'scustomershave begun to directly import sub-assembly units from South-East Asia. The sales team at SydneyManufacturingLtd have noted that not all types of sub-assembly are being directly imported by these repairers and that for some product lines the firm seems to have maintained its advantage. The senior management have hired an external analyst who has noted some inconsistency in the profitability between some models of the firm's sub-assembly units.  As a result management have become concerned that their budgetary data is too general to truly assist in their decision making and therefore needs to be more 'refined'.

After meeting the management of a number of its component suppliers in South-East Asia the senior management of SydneyManufacturingLtd would like to investigate the possibilities of establishing an 'activity cost based' budgeting and costing system. Many of the management team had read about activity based costing in a number of journals. These journals had often suggested that Australian firms lagged behind the rest of the world in terms of adopting innovative business practises. SydneyManufacturingLtd's management team saw this as an opportunity to adopt the 'world's best practice'.

Required: Making and discussing any assumptions

Having completed the budget for the final quarter of 2015 comment on the issues the management of SydneyManufacturing Ltd need to consider before adopting an 'activity based' budgeting and costing system.