ACT502 - Management Accounting - Accounting Assignment Help

Assignment Task

Question One
Beckett Pumps is a manufacturer of commercial and heavy industrial Pumps. The firm’s two product lines are called Directlift and Gravity. The primary raw materials are
flexible steel sheets, and 23cm x 60cm of plastic sheets. Each Directlift pump requires a 2/3 of a meter and a Gravity pump requires a one metre of steel sheet. Allowing for normal breakage and scrap steel sheet, the company can cut either enough to make four Directlifts or two Gravity pumps from a single steel sheet. Other raw materials are costly and treated as indirect materials. Jo Smith Beckett Pump’s accountant has gathered the following information in preparation for the company’s annual budget for the next year.
• Sales in the fourth quarter of the current year are expected to be 50,000 Directlift and 40,000 Gravity pumps. The sales manager predicts that, over the next two years, sales in each product line will grow by 5000 units each quarter over the previous quarter.
• Beckett’s sales history indicates that 60 per cent of all sales are on credit, with the remainder of the sales in cash. The company’s experience shows that 80 per cent of
the credit sales are collected during the quarter in which the sales are made, while the remaining 20 per cent are collected in the following quarter. There are no bad debts.
• The Directlift sells for $10 and Gravity for $15. Prices of both products are expected to increase by 2% in the third quarter of the budget year.
• Beckett’s production manager tries to end each quarter with enough finished goods inventory in each product line to cover 20 per cent of the following quarter’s sales. In addition, an attempt is made to end each quarter with 20 per cent of the plastic sheets needed for the following quarter’s production requirement. Since steel sheets are purchased locally, Beckett buys them on a just-in-time basis, so inventory is negligible.

Required:
Prepare Beckett Pump’s annual budget for the next year by completing:

• Sales budget 
• Production budget
• Direct Material Budget 
• Direct Labour budget 
• Manufacturing Overhead budget 
• S & A Budget
• Budgeted cost of goods sold

Question Two
Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him – advertising. During the year, the company instituted an expensive advertising campaign to sell some of its slower moving products. It is still too early to tell whether the advertising campaign was successful.
There had been much internal debate as to how to report advertising costs. The vice president of finance argued that advertising costs should be reported as a cost of
production, just like direct materials and direct labour. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory cost until sold. Others disagree. Morgan believed that this cost should be reported as an expense of the current period, so as not to overstate net income. Others argue that it should be reported as prepaid advertising and reported as a current asset, to be expensed as the advertising results in increased sales. The president finally had to decide on the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardise a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.

Required
a) What are the ethical issues involved in this situation? 
b) What is the effect of treating advertising as either product cost or period cost on the company’s equity? 
c) What would you do if you were Steve Morgan?

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