Management accounting

Q.NoSet – 1
Marks
Total Marks
Questions
1.
Describe the primary functions and objectives of budgetary control.
Provide specific examples to illustrate each function.
10
10
2.
Company XYZ has budgeted the following production costs for the
upcoming quarter:
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10
Direct Materials: $50,000
Direct Labor: $30,000
Factory Overhead: $20,000
Calculate the total standard cost for production. If the actual production
costs turn out to be $100,000, determine the budget variance and analyze
its implications.
3.
Imagine you are a financial analyst in a manufacturing company. Develop a
detailed budget for the upcoming fiscal year, considering various factors
such as sales forecasts, production costs, and overhead expenses.
10
10
Q.No
Set – 2
Marks
Total Marks
1. A manufacturing company sets a standard labor cost of $15 per hour for
producing a product. During a particular month, the actual labor hours
worked were 2,000 hours, and the actual labor cost incurred was $30,000.
Calculate the labor rate variance and the labor efficiency variance.
Interpret the results and provide recommendations for improvement.
10
10
2. Company ABC has the following financial data:
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10
Assess the effectiveness of ratio analysis in evaluating a company’s financial 10
performance. Discuss the limitations of using ratios and suggest alternative
financial analysis tools that can complement or overcome these limitations.
10
Questions
Current Assets: $200,000
Current Liabilities: $120,000
Inventory: $80,000
Accounts Receivable: $60,000
Accounts Payable: $40,000
Calculate the company’s working capital, current ratio, and quick ratio.
Analyze these ratios and provide insights into the company’s liquidity
position.
3.
Pervious Answers
1.Company XYZ has budgeted the following production costs for the upcoming quarter:
Direct Materials: $50,000
Direct Labor: $30,000
Factory Overhead: $20,000
Calculate the total standard cost for production. If the actual production costs turn out to be
$100,000, determine the budget variance and analyze its implications.
The calculations based on the provided data are shown below:
Total standard cost = 50,000 + 30,000 + 20,000 = 100,000
Budget variance = 100,000 – 100,000 = 0
As observed, there is not any budget variance. This result implies that the company had done a good
work at forecasted costs would be. Such an accurate forecast allows the company to make more
informed decisions about whether to embark on new projects or explore new markets.
1. Imagine you are a financial analyst in a manufacturing company. Develop a detailed budget
for the upcoming fiscal year, considering various factors such as sales forecasts, production
costs, and overhead expenses.
Proposed budget:
Production output
10,000 units
Sales forecast
$80,000
Production costs
$45,000
Overhead expenses
$10,000
Total cost
$55,000
Net income
$25,000
2. A manufacturing company sets a standard labor cost of $15 per hour for producing a
product. During a particular month, the actual labor hours worked were 2,000 hours, and
the actual labor cost incurred was $30,000. Calculate the labor rate variance and the labor
efficiency variance. Interpret the results and provide recommendations for improvement.
The calculations based on the provided data are shown below:
Standard labor cost = $15/h
Labor hours worked = 2,000 h
Actual labor cost = $15/h * 2,000 h = $30,000
The actual labor rate based on these data was of $30,000 / 2000 = $15/h
Thus, the labor rate variance was:
Labor rate variance = Actual hours * (Actual rate – Standard rate) = 2,000 * (15 – 15) = 0
On the other hand, the labor efficiency variance was:
Labor efficiency variance = Standard rate * (Actual hours – Standard hours) = 15 * (2000 – 2000) = 0
As observed the company accurately estimated both the labor rate and the labor hours worked,
which resulted in both a labor rate variance and a labor efficiency variance of 0. This good result
indicates that the company is currently performing at an optimal level and there are not foreseeable
areas for urgent improvement. Nonetheless, the company should have a regular monitoring practice
that enables it to continue performing at 0 variances as failing to do so may cause the company to
incur into either labor cost overruns or efficiency losses.
3. Company ABC has the following financial data:
Current Assets: $200,000
Current Liabilities: $120,000
Inventory: $80,000
Accounts Receivable: $60,000
Accounts Payable: $40,000
Calculate the company’s working capital, current ratio, and quick ratio. Analyze these ratios and
provide insights into the company’s liquidity position.
The calculations based on the provided data are shown below:
Working capital = Current assets – current liabilities = 200,000 – 120,000 = 80,000
Current ratio = Current assets / Current liabilities = 200,000 / 120,000 = 1.67
Quick ratio = (Current assets – Inventory) / Current liabilities = (200,000 – 80,000) / 120,000 = 0
The calculated liquidity ratios provide valuable insight into the company’s current financial situation.
In this regard, both the high working capital and current ratio suggest that the company is doing an
outstanding job in using its assets to generate revenue while controlling the existing liabilities.
Nonetheless, it is noteworthy that the calculated quick ratio has a value of 1, which suggests that the
company has an excess inventory that may somehow hamper its sales revenue considering that
about 40% of its current assets are immobilized as inventory.
4. Assess the effectiveness of ratio analysis in evaluating a company’s financial performance.
Discuss the limitations of using ratios and suggest alternative financial analysis tools that
can complement or overcome these limitations.
Ratio analysis is a valuable tool for assessing the financial performance of a company. For this
analysis to be effective in such an assessment, the financial analyst should look at several ratios. As
illustrated in the previous question, the working capital and current ratio would potentially lead a
financial analyst to believe that the company was performing better than it really was when
accounting for the high inventory level.