substantial retirement portfolio

Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement portfolio through a range of entrepreneurial activities. He moved to Snowy Mountains to follow his dream of a peaceful mountain life. However, after a few months, Murphy became restless and opened a ski equipment store. This single store soon grew into a chain of four outlets spread from the Snowy Mountains to the Victorian Alps.  As Murphy put it, “I can’t believe how fast we have expanded. It’s basically been uncontrolled.”

Although business was profitable, the chain did have its share of problems. Sales tended to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added fishing and camping equipment to his product line. Financing inventory requirements became more onerous as new products were added. This left cash balances at very low levels, and short-term bank loans were occasionally required to cover cash shortfalls.

Part of Murphy’s business focused on skiing trips, which were arranged through local ski lodges, and included ski hire, lessons and lift passes. Reports from the company’s financial accounting system seemed to indicate that this part of the business was losing money because of increasing costs, but Murphy could not be sure. “the traditional income statement is not too useful for trying to get to the bottom of this problem”, he noted. Murphy also felt uneasy about other aspects of his business. “My gut feeling is that we are not dealing with the best suppliers in terms of quality, delivery reliability and prices.” Additional complications were caused by an increasingly competitive marketplace, with many former customers now sourcing their skiing, fishing and camping equipment through on-line retailers.

Murphy is not sure what to do. The company’s accountant is very good at keeping the books and preparing the financial statements and tax return, but she did not seem to understand the way the business really worked.

Required:

  1. Outline the main areas of concern relating to the financial health of Murphy’s business.
  2. Describe the types of information that Murphy needs to address the areas of concern you identified, in order to run the business more effectively.
  3. Murphy approaches his accountant to seek her help in gathering and analyzing this information, but she responds: “you must be joking – I am an accountant. My job is simply to look after your books!” Do you agree with this statement?

Question 2 

The following data refer to Primrose Manufacturing Ltd for the current year:

Sales revenue $2105000
Raw material inventory, 1 January 89000
Purchases of raw material 731000
Raw material inventory, 31 December 59000
Direct labor cost incurred 474000
Selling and administrative expenses 269000
Council rates 90000
Depreciation on factory building 125000
Income tax expense 25000
Indirect material used 45000
Indirect labor cost 150000
Depreciation on factory equipment 60000
Insurance on factory and equipment 40000
Electricity for factory 70000
Work in process inventory, 1 January 0
Work in process inventory, 31 December 40000
Finished goods inventory, 1 January 35000
Finished goods inventory, 31 December 40000

Required:

Prepare Primrose Manufacturing’s

  • Schedule of costs of goods manufactured
  • Schedule of cost of goods sold
  • Income statement

Question 3

B&W Limited’s mixing department had 40000 units in work in process on 1 June. There units were 38% complete with respect to conversion cost. Direct materials are added at the beginning of the production process, while conversion costs are incurred uniformly throughout the process. An additional 190000 units were started during June, and 50000 units were in work in process on 30 June. The units in work in process on 30 June were 55% complete with respect to conversion.

Costs incurred in the mixing department for June were as follows:

Work in Process 1 JuneCosts incurred during JuneTotal
Direct Material$110,500$430,000$540,500
Conversion$22,375$320,000$342,375
$132,875$750,000$882,875


Required:

  • Analysis of physical flow of units
  • Calculation of equivalent units
  • Calculation of units cost
  • Analysis of total costs

Question 4

Bairstow Consulting Ltd offers a range of IT consulting services. The company’s service costing system estimates the cost of each consulting job by accumulating costs of the professional labor that works on the job plus a charge for overhead.

The cost of professional labor is charged to jobs using the following three rates:

Cost per hourCharge out rate for billing system
IT trainee $30 per hour$130 per hour
IT graduate$75 per hour$350 per hour
IT senior consultant$225 per hour$1000 per hour

The predetermined overhead rate is based on professional labor cost, which are budgeted to be $663600 for the current year. The estimated overhead costs for the current year are budgeted to be:

Management salaries$735,000
Salaries of clerical and reception staff$285,000
Depreciation on IT hardware and software$240,000
Stationery$22,500
Telecommunications$31,500
Insurance$180,000
Depreciation on office fixtures and fittings$11,250
Rent$90,750
Electricity$39,525
Council rates$23,475

During June the company provided three services, which consumed the following quantities of professional labor (in hours):

ClientIT traineeIT graduateSenior consultant
Robinsons5010015
Smith and Son2014010
Snowman Services708020

Required:

  • Calculate the predetermined overhead rate to be used at Bairstow Consulting.
  • Calculate the cost of the three services.
  • Assume Bairstow Consulting uses a billing system with the charge out rates shown above. Calculate the client fees for each of the three services.

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