ACCY6101 Assessment 2

Weighting

25%

Learning outcomes

LO1 – Apply appropriate quantitative techniques and costing methods for planning and control in an organisational context.

LO2 – Prepare budgets and forecasts for management purposes in an organisational context.

Instructions

Complete and submit your assessment according to the Open Polytechnic’s Assessments webpage. This includes information on academic integrity, formatting, word limits and referencing.

• Include your name, student number and the assessment number.
• Number your pages.
• Show your workings.

Submission

• Submit your assessment in one file.
• Submit your work through your iQualify course.
• Emailed assessments will not be accepted.

Part A Variable and Absorption Costing

Task 1 Scenario

Hastings Ltd manufactures and sells a single product. As the management accountant, you are presented with the following cost data for Hastings Ltd for the financial year ended 30 June.

Additional information

Hastings Ltd reported the same cost levels for all the per-unit variable costs, annual fixed costs and selling prices over the last four years (2023–2026). Fixed manufacturing overhead is applied on a per-unit basis. You can assume that the absorption product cost in 2023 was the same as in 2024.

a. Calculate product costs under both absorption costing and variable costing in 2026.

(2 marks)

b. Prepare profit statements for all three years (2024–2026) for absorption costing and then for variable costing.

(17 marks)

c. Reconcile the variable costing profits and absorption costing profits.

(3 marks)

d. Explain the reasons reported profits under absorption costing are higher than, lower than or equal to those under variable costing in 2024, 2025 and 2026.

(3 marks)

(Word count guideline: 150 words – excluding calculations and profit statements)

[Task 1 total: 25 marks]

Part B Inventory management

Task 2 Scenario

Recently, you received a phone call from a client, Tama Green. Tama explains that they are in the process of reviewing their inventory levels and policies. Tama explains he is planning the inventory holdings of one of his raw materials. After some discussion, you ask for the estimated costs involved so you can provide some example calculations.

Tama provides you with the following information.

a. An adviser stated inventory is a wasted cost, and that it only occurs because supply problems are not addressed: “Inventory costs are not necessary if you manage your suppliers properly.” Explain whether inventory can be eliminated, and if so, what is involved.

(2 marks)

b. Identify and explain two disadvantages of using the economic order quantity (EOQ) to determine the inventory reorder point and order size.

(2 marks)

c. Explain four reasons why holding inventory can add value for a business.

(2 marks)

d. Draft an email to Tama that addresses his three questions/comments, using your own independent inquiry. Cover the following:

• Economic order quantity (EOQ) calculation
• Why safety stock is needed and how much Tama should hold
• When Tama should reorder (calculate the re-order point)
• Briefly explain what Tama should do (actions to take) regarding the EOQ result and re-order point.

(4 marks)

(Word count guideline: 300 words – excluding calculations)
[Task 2 total: 10 marks]

Part C: Cost-volume-profit analysis

Task 3 Scenario

Green Products Ltd’s CEO has asked you for assistance with cost-volume-profit (CVP) analysis of the options they are considering for product B12. You are presented with the following information.

The CEO indicates that this data is relevant for production levels ranging between 10,000 and 40,000 units. Management is currently considering two options to improve the profit of the product.

a. For each option (including the current situation as an option), calculate the following:

• contribution margin percentage (ratio as a %)
• break-even point (BEP) in sales dollars
• expected profit
• margin of safety (in units)
• volume in units needed to achieve a target profit of $1,000,000 after tax. The tax rate is 28%.

(12 marks)

b. Draw three profit–volume graphs (one for each option) showing profit against units sold. Clearly label: break-even point, profit line and loss area. Graphs may be handdrawn and scanned or generated using software.

(6 marks)

c. Recommend which option management should adopt (including the current situation as an option). Justify your recommendation by referring to the options’ contribution margins, BEPs, expected levels of profit and margins of safety.

(3 marks)

d. Identify two risks associated with your selected option.

(1 mark)

(Word count guideline: 150 words – excluding calculations)
[Task 3 total: 22 marks]

Task 4 Scenario

The manager of Hokitika Products Ltd is considering changes to its manufacturing plant to incorporate more purchased components to allow for reduced equipment, which will reduce fixed costs. The manager expects these changes to generate higher profits. You are presented with the following budgeted information.

Given the current volatility in the market, the manager expects sales figures to vary by as much as 10% (as either an increase or a decrease) from the expected level of sales. The sales manager is more certain and predicts sales will fall 5%.

e. Calculate the degree of operating leverage for the current system and the proposed system. Display your answers to two decimal places.

(1 mark)

f. Using the degree of operating leverage, show the effects on profits for both the current system and the proposed system if sales are 5% below, 10% below and 10% above the expected or budgeted level of sales. Show both the percentage change and the new profit figures in dollars, for each option, current and proposed.

(6 marks)

g. Based on your calculations, provide a recommendation for the company manager. Provide three justifications for your recommendation.

(2 marks) 

[Task 4 total: 9 marks]

Task 5 Scenario

Timber Toy Ltd manufactures and sells two products: a child’s balance bike and a ride-on fire truck. The CFO is reviewing projections for next year and is concerned the firm might miss its target profit for the year. He asks you to calculate the break-even point and sales needed to achieve a target after-tax profit using the projected costs and revenues. You are presented with the following projected information:

The common fixed selling and administrative expenses total $180,000. The products sell in a fixed sales mix. The organisation’s tax rate is 28%.

a. Calculate the number of units of balance bikes and fire trucks that Timber Toy Ltd must sell to break even.

(2 marks)

b. Calculate the number of units of balance bikes and fire trucks that Timber Toy Ltd must sell to achieve an after-tax target profit of $160,000.

(2 marks)  

[Task 5 total: 4 marks]
[Part C total: 35 marks]

Part D: Budgeting

You work as a budget consultant assisting organisations with financial planning and budgeting. You have received the following requests from two of your clients.

Task 6 Scenario

The CEO of Māhoe Ltd, a client of yours, has approached you for recommendations on improving their budgeting systems and processes. The CEO notes:

Every year, managers from different departments decide on the production and sales levels that they plan to achieve for the budget period. This creates different production and sales levels that the CFO needs to reconcile. The CFO takes the different levels into account and sets a planned production and sales level for the year. Department heads are then requested to redraft their budgets using the production and sales levels set by the CFO. The CFO has noted a trend in the original departmental budgets to understate revenues and overstate costs.

Managers are offered a 10% bonus if all departments achieve their budgets. However, the results have been inconsistent; some managers work to achieve the targets, while others seem to ignore the budget targets.

Your task is to prepare notes for a meeting with Māhoe Ltd’s CEO on the behavioural aspects of budgeting. You may use your own inquiry to prepare the notes. Ensure your notes:

a. identify two possible reasons why managers may be responding as they do

(2 marks)

b. explain why considering the behavioural aspects of budgeting is important

(2 marks)

c. suggest ways to improve the managers’ commitment to meeting their budget.

(2 marks)

(Word count guideline: 250 words)
[Task 6 total: 6 marks]

Task 7 Scenario

Rimu Ltd manufactures and distributes coffee tables. The CFO has asked for the entity’s budget to be redrafted due to revisions in assumptions and plans made by the management team in response to economic changes. The CFO has instructed you to prepare Rimu Ltd’s quarterly sales, production and direct material purchases budgets for the reporting period ending 31 December 2026. Ensure that all numbers are rounded to whole figures. The following information has been provided.

Sales budget

In 2026, the selling price is expected to be $240 per unit for Quarters 3 to 4, with a permanent $10 price increase at the start of Quarter 1, 2027.

Production budget

The management team has decided that for the rest of 2026 and the first half of 2027, they wish to hold 25% of the following quarter’s sales units in ending inventory. Beginning inventory on 1 July 2026 is 1,500 units.

Direct material purchase budget

Each unit uses one metre of direct material. Rimu Ltd has set the desired ending inventory of its direct material at 30% of the following quarter’s manufacturing needs. For Quarter 4 2026 and Quarter 1 2027, the ending inventory of materials is increased by an additional 10% of the next quarter’s manufacturing needs to allow for seasonal supply disruption. The material inventory on 1 July 2026 is expected to be 2,500 metres, valued at $10 per metre. Rimu Ltd has a long-term supply agreement with its material supplier, which sets the cost at $10 per metre for the next two years.

Complete the following budgets:

a. Sales budget

(2 marks)

b. Production budget

(3 marks)

c. Direct material purchases budget.

(5 marks)

[Task 7 total: 10 marks]

Task 8  Scenario

Kauri Ltd has decided to update its budget due to economic development. The CFO presents you with the following information for the year 2026/2027 and asks you to prepare a quarterly cash budget for the year ending 30 June 2027, including a column for the total of the four quarters.

Budgeted material purchases

85% of the budgeted material purchases are paid for in the quarter they are purchased, and 15% in the following quarter. The planned total purchases for each quarter are as follows:

Budgeted direct labour

Direct labour is planned to be paid at a rate of $35 per hour. Labour is paid in the quarter incurred. The hours required in each quarter are as follows:

Budgeted expenses

The following expenses are expected to be paid each quarter: administration expenses include $4,000 depreciation per quarter, and manufacturing overhead costs include $15,000 depreciation per quarter.

Other information

• Kauri Ltd plans to purchase a new manufacturing machine at the start of Quarter 4 2026. The machine will cost $120,000. The machine will be paid for in full at the start of Quarter 4 2026 and will add $22,000 in depreciation to manufacturing overheads each quarter. These additional depreciation expenses have not been included in the total quarterly manufacturing overhead figures you have been given above.
• Kauri Ltd will pay dividends of $60,000 in Quarter 1 2027.
• Kauri Ltd expects to receive a dividend from Wood Systems Ltd, an entity in which it has a 25% shareholding. The dividend receipt expected is $24,000 in Quarter 2 2027.
• Kauri Ltd has a cash balance of $250,000 at the start of Quarter 3 and would like to maintain a minimum end-of-quarter cash balance of $100,000.
• Short-term finance is available in multiples of $10,000 at a 6% per annum interest rate. Borrowings take place at the beginning of the quarter, while all repayments take place at the end of the quarter. Interest payments are made for the amount of the principal being repaid in a quarter. Repayments can be made in multiples of $10,000.

Prepare a revised quarterly cash budget for 1 July 2026 to 30 June 2027, including a column for the total period. Use whole numbers when rounding.

(14 marks)

[Part D total: 30 marks]