Name Aymen Nisa

Tutor name Mohsin sir

Roll no 540476
Assignment no 1
Course code 8508

Q.1 Athena Sudsberry owns a small restaurant in New York City. Ms. Sudsberry
provided her accountant with the following summary information regarding expectations
for the month of June. The balance in accounts receivable as of May 31 is Rs. 60,000.
Budgeted cash and credit sales for June are Rs. 150,000 and Rs. 600,000, respectively.
Credit sales are made through Visa and MasterCard and are collected rapidly. Eighty
percent of credit sales is collected in the month of sale, and the remainder is collected in the
following month. Ms. Sudsberry’s suppliers do not extend credit. Consequently, she pays
suppliers on the last day of the month. Cash payments for June are expected to be Rs.
700,000. Ms. Sudsberry has a line of credit that enables the restaurant to borrow funds on
demand; however, they must be borrowed on the last day of the month. Interest is paid in
cash also on the last day of the month. Ms. Sudsberry desires to maintain a Rs. 30,000 cash
balance before the interest payment. Her annual interest rate is 9 percent.
Required:
Accounts receivable May 31 is 60000.
Budgeted cash sales for June 150,000
Credit sales for June 600000
80% of credit sales are collected in current month, 20% collected next month
Suppliers are paid on the last day of the month
Budgeted cash payments for June 30th = 700000
Cash balance 30000
Total cash collections in June = 60000 (from previous month) + 150,000 (cash sales) + 480000
(80% of 600,000) = 690000
Payments - cash collected = 700000 - 690000 = 10000
Money borrowed on June 30 = 10000 + 30,000 (desired cash balance) = 40000
Interest expense during July = 40000 x 9% x 1/12 = 300
a. Compute the amount of funds Ms. Sudsberry needs to borrow for June.
Money borrowed on June 30 = 40000
b. Determine the amount of interest expense the restaurant will report on the June
pro forma income statement.
No money is borrowed on June 30th there is no interest expense during June.
c. What amount will the restaurant report as interest expense on the July pro
forma income statement?
Interest expense during July = 300
Q.2 Harrell Entertainment sells souvenir T-shirts at each rock concert that it sponsors.
The shirts cost Rs. 9 each. Any excess shirts can be returned to the manufacturer for a
full refund of the purchase price. The sales price is Rs.15 per shirt.
Required:
a. What are the total cost of shirts and cost per shirt if sales amount to Rs.2,000,
2,500, 3,000, 3,500, or 4,000?

Number of shirts sold 2000 2500 3000 3500 4000

Total cost of shirts 18000 22500 27000 31500 36000

Cost per shirt 9 9 9 9 9

Please note that cost of shirt is variable and variable shirt remains constant on per unit basis and
in totality they changes proportionately.
b. Is the cost of T-shirts a fixed or a variable cost?

Sales volume 2000

Variable cost per unit 15

Fixed cost 30000

 c. Draw a graph and plot total cost and cost per shirt if sales amount to Rs.2,000,
2,500, 3,000, 3,500, or 4,000.

Total Cost
40000
35000
30000
25000
20000
15000
10000
5000
0
2000 2500 3000 3500 4000

Total Cost

d. Comment on Harrell’s likelihood of incurring a loss due to its operating

activities.
Breakeven is a situation where company is neither earning profit nor incurring any loss. In the
table we can see that situation where profitability is 0 at a point where sales volume is 2000,
variable cost is 15 per unit and fixed cost is 30000.
Q.3 Miljo-Sape AS produces two joint products, cooking oil and soap oil, from a single
vegetable oil refining process. In July 2014, the joint costs of this process were Rs.
24,000,000. Separable processing costs beyond the split-off point were cooking oil, Rs.
30,000,000; and soap oil, Rs. 7,500,000. Cooking oil sells for Rs. 50 per drum. Soap oil
sells for Rs. 25 per drum. Miljo-Sape produced and sold 1,000,000 drums of cooking
oil and 500,000 drums of soap oil. There are no beginning or ending stocks of cooking
oil or soap oil.
Required: Allocate the Rs. 24,000,000 joint costs using the estimated NRV method.
Joint cost = 24,000,000
Separable Processing Costs (Cooking Oil) = 30,000,000
Separable Processing Costs (Soap Oil) = 75, 00,000
Cooking Oil Sells = 50
Soap Oil Sells = 25
Produced and Sold (Cooking Oil) = 1,000,000
Produced and Sold (Soap Oil) = 5, 00,000
No beginning and ending stock
NRV = 6, 25, 00,000 – (30,000,000+75, 00,000) = 25,000,000
Q.4 Wykle Company produces commercial gardening equipment. Since production is highly
automated, the company allocates its overhead costs to product lines using activity-based
costing. The costs and cost drivers associated with the four overhead activity cost pools follow.

ACTIVITIES
Cost Unit Level Batch Level Product Level Facility
Dost Rs.50,000 Rs.20,000 Rs.10,000 Level
driver 2,000 labor 40 setups Percentage of Rs.120,000
hrs. use 12,000 units
Production of 800 sets of cutting shears, one of the company’s 20 products, took 200
labor hours and 6 setups and consumed 15 percent of the product-sustaining
activities.
Required:
a. Had the company used labor hours as a companywide allocation base, how much
overhead
would it have allocated to the cutting shears?
Using labor hour as allocation base
Total overhead = 50000+20000+10000+120000 = 2, 00,000
Total labor hour = 2000 labor hours
Overhead per labor hour = 200000/2000 = 100
Overhead allocated to cutting shears = 100*200 = 20000
b. How much overhead is allocated to the cutting shears using activity-based
costing?
Overhead (a) Activity Cost (b) Quantity of cost Activity Rate
driver (c) (d=b/c)
Unit Level 50000 2000 25 per labor hour
Batch Level 20000 40 500 per setup
Product Level 10000
Facility Level 120000 12000 10 per unit
200000
c. Compute the overhead cost per unit for cutting shears using first activity-based
costing and then using direct labor hours for allocation if 800 units are
produced. If direct product costs are Rs.100 and the product is priced at 30
 percent above cost (rounded to the nearest whole dollar), for what price would
the product sell under each allocation system?
Overhead allocation Cutting Share
Unit Level 25*100 = 2500
Batch Level 500 * 6 = 3000
Product Level 10000*30 = 3000
Facility Level 800 * 10 = 8000
Total 16500
Total Units 800
Overhead cost per unit 20.63
d. Assuming that activity-based costing provides a more accurate estimate of cost,
indicate whether the cutting shears would be over- or underpriced if direct labor
hours are used as an allocation base. Explain how over- or under-costing can
affect Wykle’s profitability.
ABC Labor Hours
Allocated Overhead 20.63 23.67
Direct Cost 100 100
Total Cost Per Unit 120.63 123.67
e. Comment on the validity of using the allocated facility-level cost in the pricing
decision. Should other costs be considered in a cost-plus pricing decision? If so,
which ones? What costs would you include if you were trying to decide whether
to accept a special order?
In activity-based costing (or ABC) the overhead costs incurred are allocated to the units
produced using activity cost pools and different cost allocation drivers and rates for each cost
pool.
Q.5 i. ‘All future costs are relevant.’ Do you agree? Why?
Relevant costs are those costs that will make a difference in a decision. Future costs are relevant
in decision making if’ the decision will affect their amounts. Relevant costing attempts to
determine the objective cost of a business decision. An objective measure of the cost of a
business decision is the extent of cash outflows that shall result from its implementation.
Relevant costing focuses on just that and ignores other costs which do not affect the future cash
flows. Relevant information is the predicted future costs and revenues that will differ among the
alternatives. It focuses on just that and ignores other costs which do not affect the future cash
flows. Relevant costs are future costs that will differ among alternatives.
The underlying principles of relevant costing are fairly simple and you can probably relate them
to your personal experiences involving financial decisions. Relevant costing is just a refined
application of such basic principles to business decisions. The key to relevant costing is the
ability to filter what is and isn’t relevant to a business decision.
There are many costs in the future that are relevant to incremental Cost, opportunity Costs, etc.
There are costs also incurred in future but not relevant in decision making such as sunk cost,
committed costs, non-cash expenses, general overheads, etc. So finally we can say that all future
costs are not always a relevant cost. You might use the past costs to help you forecast those
future costs, but the past costs are otherwise unrelated to the decision.
ii. Steve Denmark owns his own taxi, for which he bought an Rs.18,000 permit to
operate two years ago. Mr. Denmark earns Rs.36,000 a year operating as an
independent but has the opportunity to sell the taxi and permit for Rs.73,000
and take a position as dispatcher for Sartino Taxi Co. The dispatcher position
pays Rs.31,000 a year for a 40-hour week. Driving his own taxi, Mr. Denmark
works approximately 55 hours per week. If he sells his business, he will invest
the Rs.73,000 and can earn a 10 percent return.
Required:
Bought = 18000
Earn per year = 36000
Sell = 73000
Pays = 31000
Per week = 55 hours
Invest = 73000
Profit = 10%
a. Determine the opportunity cost of owning and operating the independent business.
Opportunity cost is often used by investors to compare investments, but the concept can be
applied to many different scenarios. If your friend chooses to quit work for a whole year to go
back to school, for example, the opportunity cost of this decision is the years’ worth of lost
wages. Your friend will compare the opportunity cost of lost wages with the benefits of receiving
a higher education degree.
Opportunity Cost = 73000
b. Based solely on financial considerations, should Mr. Denmark sell the taxi and accept
the position as dispatcher?
Operating as independent= 36000
Working as dispatcher= (31000+10% of 73000)
=31000+7300
=38300
c. Discuss the qualitative as well as quantitative factors that Mr. Denmark should
consider.
I think Mr. Steve should sell the taxi and accept the position of dispatcher as he is getting more
as compare to working as dispatcher.
Q.6 a) Distinguish management accounting from financial accounting and explain how
management accounting supports the management process.
The difference between financial and managerial accounting is that financial accounting is the
collection of accounting data to create financial statements, while managerial accounting is the
internal processing used to account for business transactions.
The certification for each of these types of accounting is different as well. People who have been
trained in financial accounting have a Certified Public Accountant designation, while those with
a Certified Management Accountant designation are trained in managerial accounting.
The perception that more training is required for financial accounting might be reflected in the
higher pay rates of financial accountants over managerial accountants.
The following categories also show the differences between financial and managerial accounting.
SYSTEMS
Financial accounting only cares about generating a profit and not the overall system of how the
company works. Conversely, managerial accounting looks for bottleneck operations and
examines various ways to enhance profits by eliminating bottleneck issues.
REPORTING FOCUS
Financial accounting is focused on creating financial statements to be shared internal and
external stakeholders and the public. Managerial accounting focuses on operational reporting to
be shared within a company.
AGGREGATION
Financial accounting looks at the entire business while managerial accounting reports at a more
detailed level. Managerial accounting focuses on detailed reports like profits by product, product
line, customer and geographic region.
EFFICIENCY
A business’ profitability and efficiency are reported through financial accounting. Managerial
accounting reports on what is causing a problem and how to fix that problem.
TIMING
Financial statements are due at the end of an accounting period, while managerial reports may be
issued more frequently, to provide managers with relevant information they can act on
immediately.
PROVEN INFORMATION
Considerable precision is needed to prove that financial records are correct. Financial accounting
relies on this accurate data for reporting, while managerial accounting frequently deals with
estimates opposed to proven facts.
STANDARDS
When managerial accounting is made for internal consumption there is no set of standards to
compile that information. On the other hand, financial accounting must follow various
accounting standards.
TIME PERIOD
Financial accounting looks to the past to examine financial results that have already been
achieved, so it is historically focused. Managerial accounting looks to the future with forecasting.
VALUATION
Financial accounting is concerned with knowing the proper value of a company’s assets and
liabilities. Managerial accounting is only concerned with the value these items have on a
company’s productivity.
Management accounting presents your financial information in a way that will be useful for
making operational decisions about your company. Keeping your financial records up to date
will help you perform the following managerial accounting tasks that will add value to your
company.
MARGIN ANALYSIS
Managerial accounting analyzes the incremental benefit of increased production – this is called
margin analysis. This flows into the breakeven analysis, which involves calculating the
contribution margin on the sales mix to determine the unit volume at which the business’ gross
sales equal total expenditures. A managerial accountant will use this information to determine
the price point for products and services.
2) CONSTRAINT ANALYSIS
Constraint analysis indicates the limitations within a sales process or production line. Managerial
accountants find out where the constraints occur and calculate the impact on cash flow, profit
and revenue.
3) CAPITAL BUDGETING
Managerial accountants help a business decide when, where and how much money to spend
based on financial data. Using standard capital budgeting metrics, such as net present value and
internal rate of return, to help decision makers decide whether to embark on costly projects or
purchases.
The process involves reviewing proposals, deciding if there is a demand for products or services,
and finding the appropriate way to pay for the purchase. It also outlines payback periods, so
management is able to anticipate future costs and benefits.
4) TREND ANALYSIS/FORECASTING
Reviewing the trendline for certain costs and investigating unusual variances or deviations is an
important part of managerial accounting. Decisions are made by using previous information like
historical pricing, sales volumes, geographical location, customer trends and financial data to
calculate and project future financial situations.
5) PRODUCT COSTING/VALUATION
Determining the actual costs of products and services is another element of managerial
accounting. Overhead charges are calculated and allocated to come up with the actual cost
related to the production of a product. These overhead expenses may include the number of
goods produced or other drivers related to the production, such as the square foot of the facility.
Along with overhead costs, managerial accountants use direct costs to assess the cost of goods
sold and inventory that may be in different stages of production.
b) What does the value-added principle mean as it applies to managerial accounting
information? Give an example of value added information that may be included in
managerial accounting reports but is not shown in publicly reported financial statements.
Financial accounting focuses on providing historical financial information to external users.
External users are those outside the company, including owners (e.g., shareholders) and creditors
(e.g., banks or bondholders). Financial accountants reporting to external users are required to
follow U.S. Generally Accepted Accounting Principles (U.S. GAAP), a set of accounting rules
that requires consistency in recording and reporting financial information. This information
typically summarizes overall company results and does not provide detailed information.
Managerial accounting focuses on internal users—executives, product managers, sales managers,
and any other personnel within the organization who use accounting information to make
important decisions. Managerial accounting information need not conform with U.S. GAAP. In
fact, conformance with U.S. GAAP may be a deterrent to getting useful information for internal
decision-making purposes. For example, when establishing an inventory cost for one or more
units of product (each jersey or hat produced at Sportswear Company), U.S. GAAP requires that
production overhead costs, such as factory rent and factory utility costs, be included. However,
for internal decision-making purposes, it might make more sense to include nonproduction costs
that are directly linked to the product, such as sales commissions or administrative costs. 
Managerial accounting often focuses on making future projections for segments of a company.
Suppose Sportswear Company is considering introducing a new line of coffee mugs with team
logos on each mug. Management would certainly need detailed financial projections for sales,
costs, and the resulting profits (or losses). Although historical financial accounting data from
other product lines would be useful, preparing projections for the new line of mugs would be a
managerial accounting function.
Another characteristic of managerial accounting data is its high level of detail. As noted in the
opening dialogue between the president and accountant at Sportswear Company, the financial
information in the annual report provides a general overview of the company’s financial results
but does not provide any detailed information about each product. Information, such as product
profitability, would come from the managerial accounting function.
Finally, managerial accounting information often takes the form of nonfinancial measures. For
example, Sportswear Company might measure the percentage of defective products produced or
the percentage of on-time deliveries to customers. This kind of nonfinancial information comes
from the managerial accounting function.
The two important functions that enable management to continually plan for the future and
assess implementation are called planning and control. Planning is the process of establishing
goals and communicating these goals to employees of the organization. The control function is
the process of evaluating whether the organization’s plans were implemented effectively.
Planning
Organizations formalize their plans by creating a budget, which is a series of reports used to
quantify an organization’s plans for the future. For example, Ernst & Young, an international
accounting firm, plans for the future by establishing a budget indicating the labor hours required
to perform specific services for each client. The process of creating a budget for each client
enables the firm to plan for future staffing needs and communicate these needs to employees of
the company. Rather than simply hoping it all works out in the end, Ernst & Young projects the
labor hours required in the future, hires accounting staff based on these projections, and
schedules the staff required for each client.
A budget can take a variety of forms. A budgeted income statement indicates a profit plan for the
future. A capital budget shows the long-term investments planned for the future. A cash flow
budget outlines cash inflows and outflows for the future. We provide more information about
how budgets can be used for planning purposes in later chapters.
Control
The control function evaluates whether an organization’s plans were implemented effectively
and often leads to recommendations for the future. Many organizations compare actual results
with the initial plan (or budget) to evaluate performance of employees, departments, or the entire
organization.
For example, assume Ernst & Young creates a budget indicating the labor hours needed to
perform tax services for a particular client (this is the planning function). After the work is
performed, actual labor hours used to complete the work are compared to budgeted labor hours.
This analysis is then used to evaluate whether employees were able to complete the work within
the budgeted time and often results in recommendations for the future. Recommendations might
include the need for adding more labor hours to the budget or obtaining better support documents
from the client.
Unlike managerial accounting, financial accounting is governed by rules set out by the Financial
Accounting Standards Board (FASB), an independent board made up of accounting professionals
who determine and publicize the standards of financial accounting and reporting in the United
States. Larger, publicly traded companies are also governed by the US Securities and Exchange
Commission (SEC), in the form of the generally accepted accounting principles (GAAP), the
common set of rules, standards, and procedures that publicly traded companies must follow
when they are composing their financial statements.
Financial accounting provides information to enable stockholders, creditors, and other
stakeholders to make informed decisions. This information can be used to evaluate and make
decisions for an individual company or to compare two or more companies. However, the
information provided by financial accounting is primarily historical and therefore is not
sufficient and is often synthesized too late to be overly useful to management. Managerial
accounting has a more specific focus, and the information is more detailed and timelier.
Managerial accounting is not governed by GAAP, so there is unending flexibility in the types of
reports and information gathered. Managerial accountants regularly calculate and manage “what-
if” scenarios to help managers make decisions and plan for future business needs. Thus,
managerial accounting focuses more on the future, while financial accounting focuses on
reporting what has already happened. In addition, managerial accounting uses nonfinancial data,
whereas financial accounting relies solely on financial data.
For example, Daryn’s Dairy makes many different organic dairy products. Daryn’s managers
need to track their costs for certain jobs. One of the company’s top-selling ice creams is their
seasonal variety; a new flavor is introduced every three months and sold for only a six-month
period. The cost of these specialty ice creams is different from the cost of the standard flavors for
reasons such as the unique or expensive ingredients and the specialty packaging. Daryn wants to
compare the costs involved in making the specialty ice cream and those involved in making the
standard flavors of ice cream. This analysis will require that Daryn track not only the cost of
materials that go into the product, but also the labor hours and cost of the labor, plus other costs,
known as overhead costs (rent, electricity, insurance, etc.), that are incurred in producing the
various ice creams. Once the total costs for both the specialty ice cream and the standard
flavored ice cream are known, the cost per unit can be determined for each type. These types of
analyses help a company evaluate how to set pricing, evaluate the need for new or substitute
ingredients, manage product additions and deletions, and make many other decisions. A
materials cost analysis by Daryn’s Dairy used to compare the materials cost for producing 500
gallons of their best-selling standard flavor—vanilla—with one of their specialty ice creams—
Very Berry Biscotti.