THE UNIVERSITY OF THE WEST INDIES
Semester l
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Semester II  Supplemental/Summer School
□ /April/May /July
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Mona & WJC
Examinations of December
Originating Campus:
Cave Hill
Mode:
Course Code and Title: ACCT
On Campus
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 2019-2020
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St. Augustine
By Distance
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1003 – Introduction to Cost & Management Accounting
Date:
Time:
Duration:
Paper No: 2
Materials required:
Answer booklet:
Calculator:
Normal
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Programmable
Multiple Choice answer sheets:
numerical
Special
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Not required
Non Programmable
alphabetical
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(where applicable)
1-50
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1-100
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Auxiliary/Other material(s) – Please specify:`
Candidates are permitted to bring the following items to their desks:
INSTRUCTIONS TO CANDIDATES: This paper has 2 pages and 1 question presented in TWO (2)
Parts.
This assignment is centred on the topics “C-V-P Analysis” & “Cash Budgets”. This is an
individual assignment and you are required to apply the concepts learnt is solving the problems
given. The assignment seeks to examine the following selected course objectives:
Course Objectives:
1) Prepare a contribution margin income statement, clearly showing contribution
2) Use CVP analysis to compute breakeven point and margin of safety
3) Analyze the impact which changes in sales volume and total fixed costs on operating
income, the break-even point and margin of safety
4) Develop a cash budget for an entity, clearly showing the cash receipts and cash
payments and minimum cash balance before financing.
You are required to submit this assignment by Thursday, June 18, 2020 by 7:00 p.m.
Jamaica Time.
You are required to show ALL workings where necessary.
PART I
(40 marks)
L & P Merchandising & More is a family-owned furniture store. You are the management
accountant of the concern and have been given the task of preparing the cash budget for the
business for the quarter ending December 31, 2020. Your data collection has yielded the
following:
(i)
Extracts from the sales and purchases budgets are as follows:
Month
2020
(ii)
Cash
Sales
Sales
On
Account
Purchases
On
Account
August
September
October
November
$121,000
$95,500
$132,680
$105,900
$480,000
$600,000
$720,000
$650,000
$390,000
$360,000
$480,000
$400,000
December
$216,000
$800,000
$500,000
An analysis of the records shows that trade receivables (accounts receivable) are
settled according to the following credit pattern, in accordance with the credit terms
5/30, n90:
60% in the month of sale
30% in the first month following the sale
10% in the second month following the sale
(iii)
Accounts payable are settled as follows, in accordance with the credit terms 3/30, n60:
80% in the month in which the inventory is purchased
20% in the following month
(iv)
During November, the management of L & P Merchandising expects to sell an old
motor vehicle that cost $650,000 at a gain of $25,000. Accumulated depreciation on
this motor vehicle at that time is expected to be $475,000. The employee will be
allowed to pay a deposit equal to 40% of the selling price in November and the
balance settled in four equal amounts from December 2020 to March of 2021.
(v)
Computer Equipment, which is estimated to cost $480,000, will be purchased in
December. The manager has made arrangements with the seller to make a cash
deposit of 50% of the amount upon signing of the agreement in December, with the
balance to be settled in four equal monthly instalments, starting in January 2021.
(vi)
A long-term instrument purchased by L & P Merchandising with a face value of
$480,000 will mature on October 20, 2020. In order to meet the financial obligations of
the business, management has decided to liquidate the investment upon maturity. On
that date quarterly interest computed at a rate of 4½% per annum is also expected to
be collected.
(vii)
Fixed operating expenses which accrue evenly throughout the year, are estimated to
be $2,040,000 per annum, [including depreciation on non-current assets of $35,000
per month] and are settled monthly.
(viii) Other operating expenses are expected to be $174,000 per quarter and are settled
monthly.
(ix)
The management of L & P Merchandising has negotiated with a tenant to rent office
space to her beginning November 1. The rental is $540,000 per annum. The first
month’s rent along with one month’s safety deposit is expected to be collected on
November 1. Thereafter, monthly rental income becomes due at the beginning of each
month.
(x)
Wages and salaries are expected to be $2,940,000 per annum and will be paid
monthly.
(xi)
At the recently concluded negotiations between management and the union
representing the workers it was agreed that L & P Merchandising should make
retroactive payments in the amount of $1,520,000 to employees. The payment is being
settled in four equal tranches. The third payment becomes due and payable in October
of 2020.
(xii)
The cash balance on December 30, 2020 is expected to be an overdraft of $198,000
Required:
(a)
The business needs to have a sense of its future cash flows and therefore requires the
preparation of the following:
▪
A schedule of budgeted cash collections for trade receivables for each of the months
October to December.
(5 marks)
▪
A schedule of expected cash disbursements for accounts payable for each of the
months October to December.
(4 marks)
▪
A cash budget, with a total column, for the quarter ending December 31, 2020,
showing the expected cash receipts and payments for each month and the ending
cash balance for each of the months, given that no financing activity took place.
(25½ marks)
(b)
Another team member who is preparing the Budgeted Balance Sheet for the business
for the same quarter and has asked you to furnish him with the figures for the
expected trade receivables and payables to be included in the statement. Is that a
reasonable request? If yes, what should these amounts be?
(2 marks)
(c)
Upon receipt of the budget the team manager has now informed you that all
companies in the industry in which L & P Merchandising & More operates are required
to maintain a minimum cash balance of $125,000 each month. Based on the budget
prepared, will the business be meeting this requirement? The business is already
heavily indebted, so management does not wish to borrow any additional funds from
outside sources. Suggest three (3) internal strategies that the business may employ in
order to improve the organization’s monthly cash flow. Each strategy must be fully
explained.
(3½ marks)
PART II
Valencia Manufacturing Company manufactures and sells musical gadgets. You have just
begun your summer internship at Valencia Manufacturing. To expand sales, the business is
considering paying a commission to its sales team. You have been asked to compute 1) the
new break-even sales figure, and 2) the operating profit if sales increase by 10% under the
new sales commission plan. She is confident that you can handle the task, because you
learned CVP analysis in your accounting class.
The following data was obtained:
Selling price per unit
Variable expenses per unit:
Fixed expenses:
Production/Sales
Direct Material
Direct Labour
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Fixed Selling Costs
Fixed Administrative Costs
$200
$40
$32
$18
$190,000
$115,000
$135,000
6,000 Units
After collecting your data, you performed your analysis and submitted a memo to your
manager, who was very pleased with the work done. Your report indicated that the new sales
commission plan would result in a significant increase in operating income but only a small
increase in break-even sales.
A few days after, you realized that you made an error in the CVP analysis, as the sales
personnel’s $88,000 salaries were inadvertently left out and you therefore did not include this
fixed marketing cost in your computations. You are not sure what to do, as you are afraid that
Valencia might not offer you permanent employment after the internship.
How would your error affect breakeven sales and operating income under the proposed sales
commission plan? After considering all factors, should you inform your manager or simply
keep quiet?
(10 marks)