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Stock Valuation Jones Ltd is a retail store that buys and sells one product - Leaving Cert Accounting - Question 8 - 2015
Question 8
Stock Valuation Jones Ltd is a retail store that buys and sells one product. The following information relates to the purchases and sales of the firm for the year 2... show full transcript
Worked Solution & Example Answer:Stock Valuation Jones Ltd is a retail store that buys and sells one product - Leaving Cert Accounting - Question 8 - 2015
Step 1
Outline the implications of an incorrect stock valuation.
Answer
Improper stock valuation can significantly impact financial statements and decision-making. Here are key implications:
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Financial Statements: An incorrect valuation can lead to errors in reported profits and overall financial health. Overstated stock could inflate profits in one period while understated stock could reduce profits.
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Cash Flow: Inflated profits can mislead management into thinking that cash is available for reinvestment, leading to potential liquidity issues.
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Analysis Errors: Management decisions based on inaccurate financial information can direct resources improperly, affecting operational efficiency and strategic planning.
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Stakeholder Trust: Inaccuracies can undermine investor and stakeholder confidence in the firm. Consistency and accuracy in financial reporting are crucial for maintaining credibility.
Step 2
Prepare production overheads and other overheads into fixed and variable elements.
Answer
To categorize the given production overheads:
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Direct Materials and Labor are generally variable costs and depend directly on the level of output.
- For example, if we have:
- Direct Materials: 23,100 @ 75% = €231,000
- Direct Labor: €280,900
- For example, if we have:
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Variable Costs Calculation:
- For a production level of 28,500 units, the variable cost is derived from the difference between high and low output levels.
- Thus,
- Variable Overheads = (High Costs - Low Costs) / (High Units - Low Units)
- For production overheads:
- High Output: €303,000 (95%)
- Low Output: €270,800 (70%)
- Therefore, Variable Overhead = (€303,000 - €270,800) / (28,500 - 21,000) = €3.20 per unit.
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Fixed Costs remain constant regardless of output levels and include:
- Administrative expenses: €35,000
- Therefore, the fixed overhead for the three months is calculated as follows:
- Total Fixed Costs: €12,720 (from the margin).
- Other Overheads also need to be assessed; generally assumed to be fixed unless specified otherwise.
Step 3
Prepare a Flexible Budget for 90% Activity Level using Marginal Costing principles.
Answer
Flexible Budget for 90% Activity Level:
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Sales: If total sales at 100% are €1,202.00, then at 90% it will reflect:
- Sales = 90% of €1,202 = €1,081.80
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Less: Variable Costs:
- Variable costs remain proportional to production levels.
- Direct Materials, Direct Labor and Production Overheads will be calculated as:
- Variable Costs = €1,081.80 x 90% activity = relevant percentage on each variable.
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Contribution:
- Contribution Margin = Sales - Variable Costs
- Fill in the amount according to calculations.
- Finishing the budget with a presentation of the gross and net profit.
This presents the overall financial position based on 90% activity.
Step 4
Explain, with examples, ‘controllable’ and ‘uncontrollable’ costs.
Answer
Controllable and uncontrollable costs are essential concepts for effective budgeting and management.
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Controllable Costs: These are expenses that can be influenced by a manager's decisions. For example:
- Direct Materials: A production manager can opt for different suppliers based on pricing, impacting overall materials costs.
- Labor Costs: A manager can decide on staffing levels based on production requirements.
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Uncontrollable Costs: These costs are beyond a manager's influence and may include:
- Rent or Lease Payments: These costs often remain fixed and cannot be adjusted swiftly.
- Depreciation: This expense recognizes the reduction in value of assets over time and is typically predetermined over several years.
Understanding the distinction assists in performance evaluation and effective financial management.