# StClair HRM Accounting Test #2 exam - CVP and Operating Budgets (W2021)

```HRM 422C (001) Test #2 - (Fenn)
Course: HRM Managerial Accounting
Term: Winter 2021 (Fenn)
Test #2 – 30% of the grade (on-line)
Student Name: SOMESH GOYAL_______________ (print)
Student Number: 0765460_____________________________
There are three (3) Parts to the test. There are 5 pages. The questions can be answered
in Word (preferred), Excel or Hand-written scanned. Make sure the pages print properly.
Check the page fit and formatting. Do not prepare answers in Excel that stretch over
many, many columns in one row. The answer will not be read or marked if not formatted
properly. You do not need to use this booklet for the answers. Make sure your name
and student number is included with the answers.
The answers should be emailed to the professor: gfenn@stclaircollege.ca by 9pm EST,
Thursday, April 1, 2021. The exam will be issued Wednesday, March 31, 2021 by 8pm
EST.
Marking:
Part A
Part B
Part C
Total
%
_____
_____
_____
out of 15 marks
out of 15 marks
out of 15 marks
_____
_____
out of 45 marks
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HRM 422C (001) Test #2 - (Fenn)
Part A – Cost Volume Profit (15 marks)
Forecast
Sales
Direct Material Costs
Direct Labour Cost
Costs of Goods Sold
Gross Profit
Corporate Fixed Costs
Operating Profit
Income Statement
5,000,000
(1,000,000)
(1,250,000)
(750,000)
(1,000,000)
(4,000,000)
1,000,000
(750,000)
250,000
The entity above prepared the forecasted income statement presented. The
entity expects to sell 250,000 units during the next year. The entity uses a
process costing system, and Chief Financial Officer has been asked to answer
the questions below. There is a need to update the IT system which is not in the
amounts above. Sales have over time, been 15% better or 15% worse than
forecast for this company.
Questions
1. What is the contribution margin ratio and contribution margin per unit?
Contribution Margin Ratio = [Sales – Variable Costs1] / Sales
= [5,000,000 – 3,000,000] / 5,000,000
= 2,000,000/5,000,000 = 0.4 or 40%
Step 1: Variable Costs = 1,000,000+1,250,000+750,000 = \$3,000,000
Contribution Margin Per Unit = Contribution Margin / No. of units produced
= [Sales – Variable Costs] / Units
= [5,000,000 – 3,000,000] / 250,000
= 2,000,000 / 250,000 = \$8 per unit
OR
Contribution Margin Per Unit = Selling Cost Per Unit – Variable Cost Per Unit
= 5,000,000/250,000 – 3,000,000/250,000
= 20 – 12
= \$8 per unit
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HRM 422C (001) Test #2 - (Fenn)
2. What are break-even sales dollars and units?
Break-even sales (dollars) = Fixed Costs / Contribution Margin Ratio
= 1,000,000+750,000 / 0.4
= \$4,375,000
Break-even sales (units) = Fixed Costs / Contribution Margin Per Unit
= 1,000,000+750,000 / 8
= 218,750 units
3. What is the safety margin of the forecasted sales level versus break-even sales?
Does this level of safety raise concerns, why?
Safety Margin = [Sales – Break-even sales] / Sales
= [5,000,000 – 4,375,000] / 5,000,000
= 12.5%
This level of safety margin surely does raise concern as it shows high possibility of
losses as company would go into no profit only after its sales gets to decrease by
12.5%. Lower safety margin means higher risk.
4. The entity would prefer to achieve an operating profit of \$500,000. What is the
level of required sales units and dollars?
Required Sales Units = [Fixed Cost + Desired Profit] / Unit Contribution Margin
= 1,750,000+500,000 / 8
= 2,250,000 / 8
= 281,250 units
Required Sales Dollars = [Fixed Cost + Desired Profit] / Contribution Margin Ratio
= 1,750,000+500,000 / 0.4
= 2,250,000 / 0.4
= \$5,625,000
5. If IT fixed costs go up by \$250,000 for a proposed new IT system, what is breakeven sales units for the year and dollar sales?
New Break-even sales (dollars) = New Fixed Costs / Contribution Margin Ratio
= 1,000,000+750,000+250,000 / 0.4
= \$5,000,000
New Break-even sales (units) = New Fixed Costs / Contribution Margin Per Unit
= 1,000,000+750,000+250,000 / 8
= 250,000 units
3
HRM 422C (001) Test #2 - (Fenn)
Part B – Top-Down Operating Budget (15 marks)
Prepare the operating forecasts for 2020 and 2021 using the 2019 percent of sales method.
(Fill in the blanks)
Actual 2019
1,000,000
20%
Industry
Market share
% of sales
Sales
Material
Labour
COGS
Gross Profit
Selling
Operating Profit (op)
Taxes (% of OP)
Net Income
Cash
Accounts Receivable
Inventory
Fixed assets
Total
Accounts Payable
Debt
Common Stock
Opening RE
Net Income
Total
25.00%
35.00%
20.00%
80.00%
20.00%
5.00%
10.00%
5.00%
25.00%
3.75%
% sales
5.00%
20.00%
10.00%
100.00%
10.00%
Plug to Balance
Fixed
-
-
200,000
50,000
70,000
40,000
160,000
40,000
10,000
20,000
10,000
2,500
7,500
FCT 2020
1,500,000
20%
Forecast
300,000
FCT 2021
1,750,000
20%
Forecast
350,000
-
-
105,000
122,500
10,000
40,000
20,000
200,000
270,000
20,000
120,000
120,000
2,500
7,500
270,000
120,000
10,000
120000
21,250
4
HRM 422C (001) Test #2 - (Fenn)
Questions regarding top-down budget
1. Prepare the forecasts for 2020 and 2021. Note: the 2020 actuals are not complete yet
and the CFO needs an estimate to show the CEO.
2. The company uses a job cost system and has specialized labour for its jobs. The
Human Resources department has done a great job recruiting talent for each job but
there is a lot of competition for this labour. The forecast above is the best guess of
what it will cost to attract and retain talent. What type of cost are labour costs in the
forecast. If this cost reduces the contribution margin, what happens to break-even
sales?
Direct labour
Indirect labour
Training expenses
Recruitment expenses
Medical Insurance
Employee welfare et al
When the contribution margin is reduced, the bottom line which is Net Profit will also be
decreased. This will necessicate the increase in the volume of units sold to recover the
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HRM 422C (001) Test #2 - (Fenn)
additional loss incurred due to reduced margin. Thus, Break-even Sales will be high when
compared to earlier volume of sale
3. What are two benefits of preparing the forecasts or budgets?
Preparing budgets or forecasts is important as:
It facilitates an organization to control its expenses and keep the organization on track for
the financial goals.
Secondly, budgeting can help the organization make better financial decisions and prepare
for emergencies so that the organizations do not fall into debt and stay focused on their
long-term financial goals.
4. What is included in a master budget and who may use it?
Master Budget includes the following:
-
Sales Budget
Production Schedule
Direct Materials Budget
Labor Budget
Capital Expenditures
The management team of the organization for which the master budget has been made can
use it for a broad overview of its finances and it can also be used as a central planning tool.
5. What are two examples of why cash levels can be different than net income for a
year?
Cash levels can be different from the net income because:
Credit sales and accounts payable are the accounts which increases the net profit but are
not present in cash flow statements.
Depreciation is the another reason which reduces a net income but again the cash outflow
is zero.
Part C – Bottoms-Up Operating Budget (15 Marks)
Answer the questions below regarding the bottoms-up budget summary displayed next.
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HRM 422C (001) Test #2 - (Fenn)
Income Statement
Budget
2,700,000
Sales
Per unit Costs
Material
Labour
COGS
2.00
3.00
1.25
6.25
Gross Margin
Operating Profit
Cash
Material
Work in Process
Finished Goods
Fixed Assets
Debt
Common Stock
Retained Earnings
600,000
900,000
375,000
1,875,000
825,000
750,000
75,000
Balance Sheet
Budget
50,000
60,000
102,500
187,500
100,000
500,000
Last year
45,000
40,000
40,000
125,000
100,000
350,000
250,000
100,000
150,000
500,000
175,000
100,000
75,000
350,000
Data:


Sales in the budget are 300,000 units sold at \$9 per unit
The per unit cost of material, labour and factory overhead are indicated above
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HRM 422C (001) Test #2 - (Fenn)







Desired finished goods ending inventory is 30,000 units where beginning inventory
was 20,000 units
Material used in in production in dollars is estimated at \$620,000
Desired material ending inventory is \$60,000 where beginning inventory was \$40,000
Labour hours for production is estimated at 77,500 hours at \$12 per hour
Factory overhead is estimated at \$5 per labour hour worked
Beginning work in process inventory is \$40,000
Selling and administrative costs are \$750,000 in the Budget
Questions regarding the bottoms-up budget
1. Show the calculation of sales
Sales = Units sold x Unit price
= 300,000 x \$9
= \$2,700,000
2. Show the calculation of cost of goods sold (COGS)
Cost of Goods Sold = Per Unit Cost of Material + Labour + Factory Overhead x Units
Sold
= \$2 + \$3 + \$1.25 x 300,000
= \$6.25 x 300,000
= \$1,875,000
3. How much material is purchased in the budget
Desired Ending Material = 60,000
Estimated Material Used = 620,000
- Beginning Material = 40,000
Material Purchased = \$640,000
4. What are total labour costs in the budget
Units Produced = 300,000 + 30,000(ending inv) – 20,000(beginning inv) = 310,000
Unit Labour Cost = \$3
Total Labour Cost = 310,000 x 3 = \$930,000
OR
Total Labour Cost = 77,500(labour hours) x \$12(labour rate per hour)
= \$930,000
5. What are total factory overhead costs in the budget
Total Factory Overhead Cost = Units Produced x Unit F.O cost
= 310,000 x 1.25
= 387,500
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HRM 422C (001) Test #2 - (Fenn)
OR
Total Factory Overhead Cost = 77,500(labour hours) x \$5
= \$387,500
6. Show the development of work in process inventory in the budget
Work in process inventory = Beginning Work in process + Total manufacturing cost –
Cost of Goods sold
= 40,000 + (310,000*6.25) – (300,000*6.25)
= 40,000 + 1,937,500 – 1,875,000
= \$102,500
7. Show the development of the cost of finished goods inventory in the budget
Cost of Finished Goods Ending Inventory
Desired Finished Goods Ending Inv = 30,000u
CoGS per unit = \$6.25
Cost of Finished Goods Ending Inventory = 30000 x 6.25 = \$187,500
Cost of Finished Goods Beginning Inventory
Desired Finished Goods Beginning Inv = 20,000u
CoGS per unit = \$6.25
Cost of Finished Goods Beginning Inventory = 20000 x 6.25 = \$125,000
8. What is a major driver of cash and, thus, should be an important execution goal
coming out of the budget?
The major driver which inflows cash in the accounts of an organization must be sales.
Sales is the biggest factor which can maximize cash inflow in the organization. There
could be other factors such as accounts receivable or gross margin, but the major cash
flow could only be possible by increasing sales in the organization.
END OF EXAM
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