Accounting Assignment Essay

ACCOUNTING 101
Assignment 02

QUESTION 1: PLANNING AND CONTROLLING

(a) Cost to Make:
Direct Materials $3.61
Direct Labour $2.47i
Variable Overhead $0.52ii
Fixed Overhead: Depreciation of Equipment $2.10iii
Cost per Container $8.70

i Direct labour is reduced by 35% because the new equipment is more efficient.
Direct Labour = $3.80 x 0.65 = $2.47

ii Variable overheads is reduced by 35% because the new equipment is more efficient.
Variable Overhead = $0.80 x 0.65 = $0.52

iii The new equipment is to be depreciated over a useful life of 5 years.
Depreciation = $262,500/5 = $52,500
Depreciation per Container = $52,500/25,000 = $2.10

Total Cost to Make: $8.70 x 25,000 = $217,500
Total Cost to Buy: $9.00 x 25,000 = $225,000

Cunningham Ltd should make the containers as it is cheaper.

(b) Cost to Make:
Direct Materials $3.61
Direct Labour $2.47
Variable Overhead $0.52
Fixed Overhead: Depreciation of Equipment $1.75i
Cost per Container $8.35

i The new equipment is to be depreciated over a useful life of 5 years.
Depreciation = $262,500/5 = $52,500
Depreciation per Container = $52,500/30,000 = $1.75

Total Cost to Make: $8.35 x 30,000 = $250,500
Total Cost to Buy: $8.00 x 30,000 = $240,000

Cunningham Ltd should buy the containers as it is cheaper. But cost of buying the container is not the only cost to take into consideration when making a make or buy decision. If the firm were to buy the containers from an outsider supplier, other costs would arise such as transport costs as the products would now have to be delivered to the firm and quality inspection cost as the outsider supplier is now in control of the quality of the containers.

(c) Profit from making the containers = ($49 x 30,000) – $250,500 = $1,219,500
Profit from buying the containers = ($47 x 30,000) – $240,000 = $1,170,000
If the selling price were to decrease from $49 to $47 as a result from buying the containers from an outsiders, it may be more profitable for Cunningham Ltd to make the containers themselves and retain the selling price of $49.

(d) Cost and quality are two important factors regarding the make or buy decision. If an outsider supplier can produce a better quality product than the business can produce at the same cost or cheaper, then it may consider getting the product produced by an outside supplier. A better quality product would increase the business’s profits, as cost of production may decrease as the better quality product would make the production process for efficient, or the business would be able to charge consumers a higher price as the product is of a higher quality. If the cost of buying a product was cheaper than making a product then it may be more profitable for the firm to buy the product from an outside supplier.

QUESTION 2: FINANCIAL ACCOUNTING

Part (a):

(i) Trade and Other Receivables is classified as an asset on the balance sheet. They occur when customers purchase goods on credit, and pay at a later date. If the consumers pay the business within a year it will a current asset, if not it will be classified as a non-current asset on the balance sheet.

(ii) Inventories is classifies as a current asset on the balance sheet. Inventory is the merchandise (stock of goods) which a business buys and plans to sell and convert to cash within a year.

(iii) Minority Interest is the value of the stake of another company that is not the parent company, has non-controlling ownership over a subsidiary. Minority Interest is found under Equity on the balance sheet. It acknowledges the minority partners’ ownership of the subsidiary.

Part (b):

(i) Balance Sheet:
Inventory (Note 19) is classified as a current asset and will increase by $15,000 as The Warehouse have purchased inventory.
The inventory was bought on credit therefore trade and other payables (Note 20) which is classified as a liability will increase by $15,000.

Cash Flow

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