Cost and Management Accounting

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This assignment is from COST and Management Accounting. Budgeting chapter.

QUESTION 3 (70 marks)

Rocklea Furniture (RF) makes two types of settees/sofas – the Queen and the
Duchess. In 2014 the average monthly sales figures were:

Units Selling Price
Queen 100 $1,200
Duchess 200 $800

RF intends lowering the selling price per unit for the Queen beds due to increased
competition to $1,000 per unit. It is hoped that this will increase sales in January by
20% compared to the December 2014 level and again by a further 20% from January
to February 2015 and then remain at that level for the rest of the year. It is expected
that sales of the Duchess will remain unchanged at 200 units @ $800 per month.

80% of sales are on credit, and the remainder cash. RF offer a 2% discount for credit
customers who pay within the month and 10% of customers do so. Another 70% pay
in the month following the sale and the remaining customers pay 2 months following
the sale. RF do not have any problem with bad debts.

Each unit requires the following materials:
Queen Duchess Cost
Fabric 5 m2 4 m2 $10 per m2
Wood 10 m 8 m $2 per m
Filler 3 m2 2 m2 $3 per m2
Springs 600 500 $0.02 each

The materials used for each sofa are the same i.e. the same fabric, wood, filler and
springs are used for each, but the Queen is slightly larger.

Materials are paid for in the month after purchase. The amount of accounts payable at
31 December 2014 was $18,266.

Direct Labour required (at $15 per hour)
Queen Duchess
Labour hours 2 1.8

Labour is paid for as incurred (in the month when the work is done).

Opening materials inventories:
Fabric 100 m2
Wood 10 m
Filler 20 m2
Springs 600

The desired materials ending inventory is 50% of that required for the next month’s

Opening finished goods inventories:
Queen Duchess
Finished sofas 20 10

For 2015 the desired ending finished goods inventory is equal to the 50% of following
month’s sales in units.

Variable manufacturing overheads are expected to be $22 per unit manufactured in a month for both Queen and Duchess sofas. 

These are paid for as incurred.
Fixed manufacturing overheads are expected to be $13,000 per month (including $500
for depreciation). These are paid for as incurred.

Other expenses are estimated at $50,000 per month, also paid as incurred.
A $200,000 loan will be repaid in February. A $6,000 tax expenses will be paid in

Interest received on an investment is due to be paid into the business bank account in
January, totalling $300.

The cash at bank balance at 31st December was a credit balance (overdraft) of


a) Prepare a sales budget in units and dollars for the 3 months and the total
quarter, for the Queen and the Duchess sofas. (4 marks)

b) Prepare a production budget in units and dollars for the 3 months and the total
quarter, for the Queen and the Duchess sofas. (16 marks)

c) Prepare a materials usage budget in units for each of the four materials
(separate budgets) and calculate the dollar purchases for each, showing the 3
months and the total quarter, for the Queen and the Duchess sofas. Note that as
both products use the same materials, these materials budgets should be for the
combined usage of Queen + Duchess sofas e.g. total fabric needed for both
each month. (16 marks)

d) Calculate the total value of materials purchases each month. (1 mark)

e) Prepare a direct labour budget. (4 marks)

f) Prepare a schedule of collection of sales. (8 marks)

g) Prepare a cash budget showing each month and the quarter total. (11 marks)

h) Without regard to your calculations in a) to g) above, assume that the actual
Wood used to produce 172 Queen sofas in January was 1892m2
and this cost
$3, 594.80. Calculate the materials efficiency and price variances for the
Queen sofas in January. Suggest a possible relationship between/explanation
for these two variances. (10 marks)