Solving Practical Problems On Accounting And Budgeting

Interpretation of fundamental concepts and principles

This assessment provides the solution to the six practical problems each focusing on a specific aspect of the concept of accounting and budgeting, the first being assessment and interpretation of the fundamental concepts and principles which underpin internal operational decision within business. The second being the evaluation of the key aspects of the regulatory framework of accounting and finance, third being the assessment of the impact of the outcomes on budgets, . controls, cost behavior, profits and operation (Boghossian, 2017).The fourth being the critical appraisal of the principles and practices required at the strategic level long term decisions, fifth being analysis, assessment, interpretation and critical analysis of the financial information and viability of the capital expenditure proposals and the last being determination of the appropriate service and product costs, budget information and cost bases. The following section provides the detailed solution of each of these practical problems (Belton, 2017).

Calculation of the Cost of closing inventory cost of sales and the gross profit of the ABC Company Limited.

1. Calculation of the Value of Closing inventory using FIFO Method

No of units of Closing stock =305

Price at which to be valued = $23 per unit

Value of closing inventory = 305*$23

=$7015

Value of cost of sales using FIFO

Units                                    Value ($)

170                                         3740

500                                         11500

400                                            8400

1000                                         24000

695                                          15985

Cost of sales                                       $63625

Calculation of Gross profit using FIFO method

Gross Profit = sales –Cost of sales

                       =$105070-$63625

                       =$41445

1. Calculation of Value of Value of Closing inventory using Weighted Average method

No of units of Closing stock =305

Weighted Average price per unit =Total value of purchases and receipts in $/ Total  quantity of receipts or purchases

=3740+1500+8400+24000+23000/170+500+400+1000+695

           =$23.00977 per unit

            Value of closing inventory= 305*$23.00977

             =$7017.98

Cost of sales =2765*$23.00977

                     =$63622.02

Gross Profit= $105070-$63622.02

                      =$41447.98

The following section represents how the ABC Company Ltd. deals with the following accounting policies in accordance with the NZ Accounting framework

1. Statement of Compliance

As per NZ IAS 1 an entity presentation of financial statement, the entities whose financial statement comply with the IFRS need to make an explicit and unreserved statement of compliance in the notes and it is only to be made by profit entities as per tier-1 IFRS (Borit & Olsen, 2012).

1. Basis of Financial statement preparation

The NZ accounting standard framework use the International financial reporting standards for the profit entities for which there is statutory requirement to prepare their financial statement in accordance with the standards issued by the XRB and international public accounting standards which is the starting point for the public benefit entities for whom it is a statutory obligation to prepare their financial statement in accordance with the guidelines prescribed by the XRB (Abdullah & Said, 2017)

1. Inventories

As per the NZ framework on inventories as prescribed by the XRB it is to be valued lower of cost and Net realizable value.

 Flexible budget performance report of ABC Co. Ltd

( Figures in $)

Particulars	Budget	Actual	Variance
Revenue	18000	18950	950(F)
Variable expenses
Mobile lab operating expenses	1750	1630	80(F)
Office expenses	100	450	350(A)
Miscellaneous Expenses	150	465	315(A)
Total variable expenses	2000	2615	615(A)
Fixed expenses
Technical wages	6400	6450	50(A)
Mobile Lab operating expenses	2900	2900	Nil
Office expenses	2600	2600	Nil
Insurance	1680	1680	Nil
Miscellaneous expenses	500	Nil	500(F)
Total Fixed expenses	14080	13630	450(F)

 Calculation of the Activity, revenue and spending variances

Revenue variance

Sales Volume variance = Budget-actual

=$18000-$18950

=$950( Favorable)

Spending variance

Technical wages expenditure variance (Fixed)= Budgeted- Actual

        =$6400-$6450

        =$450(Adverse)

Advertisement Expenditure Variance = $995-$970

                                                            =$25

Mobile Lab operating expenses variance = Budgeted- Actual

                                                                  =($2900+$1700)-$4530

                                                                  =$70(F)

Office exp variance = Budgeted- Actual

                                =($2600+$100)-$3050

                                =$350(Adv)

Miscellaneous expenses variance =($500+$150)-$465

                                                      =$185(F)

Calculation of the Activity variance

Mobile operating exp Activity Variance = $2900-$4600

                                                   =$1700

Office expenses activity variance =$2700-$2600

                                                      =$100

Miscellaneous expenses activity variance =$650-$500

                                                                   =$150

1. Calculation of the cost of Debt, preferred stock, common stock and retained earnings

Before tax Cost of Debt = $80+($1000-$940)/20/$1000+.72($960-$1000)

                      =$83/$1000-$28.8

                       =8.55%

After tax cost of debt =8.55%(1-TC)

                                  =6.39%

Cost of preferred stock=$8/$90

                                       =8.89%

Cost of common stock= D1/P0+g

                                    =$7/$90+6%

=6.08%

b.Let the total capital of the firm before addition to capital structure be $100000

1. Calculation of the single break point= Amount of capital at which company’s cost of capital changes/weight of the component in the capital structure

=$100000/50%

=$200000

Hence New capital structure

Equity=$100000

Debt=$60000

Preference stock=$40000

1. Weighted average cost of capital associated with the new financing below the break-even point

=6.39*.3+8.89*.2+6.08*.5

=6.74%

1. Weighted average cost of capital associated with the new financing above the break-even point= 6.39*60000/300000+8.89*40000/300000+6.08*200000/300000

                 =6.52%

Let the additional fund raised be $100000

New capital strucuture

Debt-$60000

Preference=$40000

Equity=$200000

Computation of the net cash flow for the next 12 years

Year

1=6000*$35-$15*6000-$110000-$180000= ($170000)

2=12000*$35–$15*120000–$110000–$180000= ($50000)

3=15000*$35-$15*150000—$110000-$150000=$40000

4=18000*$35—-$15*18000—$110000-$120000=$130000

5=18000*$35—-$15*18000—$110000-$120000=$130000

618000*$35—-$15*18000—$110000-$120000=$130000

718000*$35—-$15*18000—$110000-$120000=$130000

818000*$35—-$15*18000—$110000-$120000=$130000

918000*$35—-$15*18000—$110000-$120000=$130000

1018000*$35—-$15*18000—$110000-$120000=$130000

1118000*$35—-$15*18000—$110000-$120000=$130000

1218000*$35—-$15*18000—$110000-$120000+$60000+$15000=$205000

1. Computation of the Net present value of the project

= Present value of cash inflows- present value of cash outflows

=($170000)/1.14+($50000)/(1.14)^2+$40000/1.14^3+$130000/1.146^4+$13000/1.14^5+$130000/1.14^6+$130000/1.14^7+$130000/1.14^8+$130000/1.14^9+$130000/1.14^10+$130000/1.14^11+$130000/1.14^12+$15000/1.14^12+$60000/1.14^12-$315000-$60000

1. Statement of the production budget for the upcoming fiscal year

Particulars	Quartet 1	Quartet 2	Quartet 3	Quartet 4
Sales	8000	7000	6000	7000
Add: Closing stock	1400	1200	1400	1700
Less: Opening inventory	1600	1400	1200	1400
Production Qty	7800	6800	6200	7300

Preparation of the Direct Material Budget

Particulars	Quartet 1	Quartet 2	Quartet 3	Quartet 4
Total Qty required	15600	13600	12400	14600
Add : Closing stock	2720	2480	2920	3140
Less : Opening inventory	3120	2720	2480	2920
Purchase to be made	15200	13360	12840	14820
Particulars	Quartet 1	Quartet 2	Quartet 3	Quartet 4
Required amount of cash disbursement ( (See below the workings)	$49305	$55280	$51880	$57300
Total	$49305	$55280	$51880	$57300

  Working:

1. First quarter requirement= $60800*75/100+$14820*25/100

=$49305

1. Second quarter requirement=$60800*25/100+$53440*75/100

=$55280

1. Third quarter requirement= $53440*25/100+$51360*75/100

=$51880

1. Fourth quarter requirement=$51360*25/100+$59280*75/100

=$57300

First quarter purchase value=15200*$4

                                                =$60800

Second quarter purchase value                              = 13360*$4

                        =$53440

Third Quarter purchase value=12840*$4

                  =$51360

   Fourth quarter  purchase value   = 14820*$4     

                                                       =$59280

Conclusion

From the above calculation it is quite evident that in accounting and in terms of budget preparation it is inevitable to have the in-depth core knowledge of the principles and practices commonly applicable for them.

References

Abdullah, W., & Said, R. (2017). Religious, Educational Background and Corporate Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, 129-149.

Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), 244-253.

Borit, M., & Olsen, P. (2012). Evaluation framework for regulatory requirements related to data recording and traceability designed to prevent illegal, unreported and unregulated fishing. Marine Policy, 36(1), 96-102.