2104AFE - SWISSTECH PTY LTD Case Study - Accounting & Finance Assignment Help

Assignment Task

MASTER BUDGETS CASE STUDY
SWISSTECH PTY LTD
Swisstech Pty Ltd produces two high tech components for the computers industry, the XT1 and XT2. The components are manufactured in a three-step process and each process is treated as a separate cost centre. In the first process, manufacturing, parts of the components are manufactured. In the second process, assembly, these parts are assembled in each component. In the third process, finishing, the components are tested and packaged.
Actual sales (from October to December 2020) and projected sales (from January 2021 onwards) of components in units are the following:
Month XT1 XT2
October 5,000 3,000
November 6,000 4,000
December 7,500 5,000
January 8,000 6,000
February 9,000 7,000
March 9,000 7,000
April 8,000 6,000
May 7,500 5,000
June 9,000 7,000
July 9,500 8,000
August 10,000 9,000

The current selling price of XT1 is $100 and XT2 is $150. Swisstech is planning to increase the selling price of these components on 1st April to $110 XT1 and $180 XT2. No other changes in the selling prices are planned.
All sales are on credit. Pattern of Collection is: 50% are collected in the month following the sale, 30% in the second month following the sale and 20% in the third month following the sale.
Materials are purchased on credit. Swisstech pays 60% of purchases in the month of purchase and the remaining 40% in the following month. Data regarding direct materials used in the components are shown in the following schedules (the cost per unit has not changed in the last 12 months):
Direct material Cost per unit Units of direct materials per finished component XT1 Units of direct materials per finished component XT2
No. 101 $2.40 6 4
No. 102 $3.60 2 5
The desired monthly ending inventory for all direct materials is an amount sufficient to produce 60% of the next month’s production needs. The inventory levels at 31 December are:
Direct material No. 101: 48,000 units
Direct material No. 102: 30,960 units

The ending balance of work in process each moth is 0. Each month all the units started in work in process are completed and transferred to finished goods inventory.
The desired monthly ending finished goods inventory (inventory of completed components) XT1 and XT2 is 80% of the next month’s estimated sales. There are 6,400 units of XT1 and 4,800 units of XT2 in inventory on December 31, 2020. Assume the cost per unit of the inventory of XT1 and XT2 at 31 December 2020 is the same unit manufacturing cost for the period January – June 2021.
Labour costs are paid as they are incurred. Data regarding direct labour for each component in each department (process) are as follows (the cost per DLH has not changed in the last 12 months):
Process Cost per DLH Direct labour hours per finished component XT1 Direct labour hours per finished component XT2
Manufacturing $40 0.400 0.600
Assembly $32 1.000 1.200
Finishing $36 0.125 0.200

All overhead costs (except depreciation) are paid as they are incurred. Total fixed overhead costs are estimated to be $15,500 per month (including $7,200 depreciation per month), which is the same as the fixed costs per month in the period October – December 2020. Fixed overhead costs are allocated to products (XT1 and XT2) according to the number of units produced. Variable overhead costs are based on direct labour hours at the rate of $3.6/DLH in each process or department.
Fixed selling and administrative expenses are estimated are $12,000 per month (including $1,200 of depreciation of office equipment). Variable selling and administrative expenses (sales commissions) are 1.8% of total sales dollars of the same month. Selling and administration expenses are paid in the month incurred.
Swisstech’s management has a policy of maintaining a cash balance of $12,000 at the end of each month to cover unforeseen needs of cash. If this requirement cannot be met, Swisstech has a standby line of credit arranged with its bank to borrow the exact amount needed to achieve the desired cash balance. If Swisstech estimates a cash shortage by the end of the month, sufficient cash is borrowed at the first day of the month to cover the shortage. If Swisstech has an estimated cash balance greater than $12,000 at the end of any month and an outstanding balance in the line of credit at the beginning of the month, then the cash over $12,000 is used to repay the bank at the first day of the month. The interest rate applicable to the line of credit is 9% per annum to be paid the first day of the following month, calculated on the principal amount outstanding at the end of the month. The line of credit used (owed to the bank) at 31 December 2020 is $4,310,000.
The tax rate is 30%. Income tax will be paid on July 2021.

The following balance sheet at 31 December 2020 has been prepared from the accounting records of Swisstech Ltd:
Balance Sheet
Swisstech Ltd
As at 31 December 2020
Cash $12,000 Accounts payable $152,000
Accounts receivable 2,290,000 Interest payable 32,325
Materials inventory 226,656 Loan payable (line of credit) 4,310,000
Finished goods inventory 1,021,905 Shareholders’ equity 2,656,236
Plant and equipment (net) 6,000,000 Retained earnings 2,400,000
Total Assets 9,550,561 Total liabilities and equity 9,550,561
Master Budget (24 marks according to marking guidelines)
You have been appointed to the position of management accountant at Swisstech Ltd on January 2021. You are required to prepare a master budget for the next 6 months (January, February, March, April, May, and June 2021). The master budget is to consist of the following budgets (the budgets should show the figures for each month and a total for the six-months period, ending on 30 June 2021, where appropriate and round calculations to the nearest dollar):
Sales budget (dollars)
Production budget
Direct materials purchases budget (units and dollars)
Direct labour budget (dollars)
Manufacturing Overhead budget
Selling and administrative expenses budget (separated into fixed and variable expenses)
Ending finished goods inventory budget at 30 June 2021.
Cost of goods sold from 1 Jan to 30 Jun 2021
Cash budget (including schedule of collections)
Budgeted income statement for the period 1 Jan to 30 Jun 2021
Budgeted balance sheet at 30 June 2021
The budget documents are to be prepared using the Excel spreadsheet template you downloaded from the budgeting assignment of the course L@G. This spreadsheet consists of two sections: a Data section to identify yourself and a template to add all the relevant data which will be used to prepare the set of budgets in the Master Budget section; and the Master Budget section, which includes the templates to prepare the set of budgets required. You will add three sections with the “What if” scenarios following the instructions in this document.
It is important to note that the figures in the What if Budgets section, the same as the Master Budget section, should be derived from FORMULA ONLY that relates to the information in the Data section. That is the budgets should be constructed in such a manner that will enable sensitivity “What if” analyses to be performed.
The following instructions must be followed for constructing the master budget:
Round completed units of components down to the nearest unit (if applicable) using the ROUNDOWN function. No fraction number in the units.
Other measures and dollar amount in the budgets (except the data input section and the manufacturing cost per unit), to be displayed to the nearest whole number or dollar using the format with 0 decimals function. The manufacturing cost per unit to be rounded to two decimals in the budget but the formulas that use them should work with all decimals.
Monthly budgets columns and the total for the six-months period column are required.
Only formulas are to be used in the budgets, you must keep the data section separate in the “Data Section” spreadsheet. Create links between the data section and the budgets and between budgets.
 

Questions

The directors of Swisstech Ltd aim to increase the level of profitability of the company and to reduce the debt of the line of credit with the bank. They have discussed alternatives for improving the profits of the company in a meeting with the general manager, sales manager, production manager and purchases manager of the company. The following alternatives which may have an impact on the company’s profitability and an improvement of cash flows, to avoid the need to borrow or reduce the level of debt, have been suggested.

As the management accountant, you have been asked to conduct a sensitivity analysis (“What if” analysis) to determine the effect of each of the possible alternatives currently being considered by the directors. Please note all the alternatives would be effective from 1st of February 2021 except stated otherwise.

Independent Alternatives:

1) Offer customers a sales discount of 3% from February sales onwards if payment is made in the month of sale. It is anticipated that this would increase the percentage of customers paying in the month of sale to 50%, and those paying in the first, second and third month after the sale would reduce to 10%, 20% and 20% respectively. Sales revenue and sales commissions will not be affected by the discount. The sales discount should be added as an expense in one additional row in the variable S&A expenses budget.

Hint: You will have to add one row in the schedule of collections and in the S&A expenses budget.

2) Negotiate with suppliers to extend the existing credit arrangements so that 100% of purchases are paid in the month following the purchase. It is estimated suppliers would agree with these credit arrangements if Swisstech increase the purchases to have the desired monthly ending inventory for all direct materials to an amount sufficient to produce 80% of the next month’s production needs.

3) The directors of Swisstech Ltd wants to increase the sales of XT1 and XT2 by 5%. They are very confident an aggressive marketing campaign in the next 5 months starting in February 2021 will achieve this objective. However, the cost estimated for this campaign would be $60,000 per month from February to June 2021, which are paid in the following month.

Hint: add one row to the Fixed S&A expenses for “Fixed marketing expenses”

You are required to conduct a what if analysis for each of the above alternatives to assess the effect of EACH alternative on the level of profitability and cash flows for Swisstech Ltd for the six-months period ending on 30 June 2021, and answer for EACH alternative (and sub-alternatives of alternative 3) the following questions. Related to the Master Budget:

· In the six-month period profit increase/(decreases) by $..................

· At the end of June 2021, the Loan increased/(decreased) by $..................

· What is your decision regarding this alternative? …………………

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