TASK

Read the background information on the fictitious business, Divine Denim Pty Ltd, and then apply the knowledge you have gained in this subject to answer the various questions.

Background

Helen Croker owns Divine Denim, a growing company making made to measure, designer denim jeans and jackets. She uses organic yarn-dyed cotton denim of different weights depending on the garment that she is making. Although she prefers to take the measurements herself, she is now making denim clothes for international customers using the self-measuring system she has developed and put online. For her custom clients, she takes measurements or uses the measurements supplied through her customers’ online application. She uses these measurements to alter the pattern for the design chosen by the client. The pattern is sent to the Cutting Department and the cut material then transferred to the Machining Department.

Helen has recently expanded into a Ready to Wear (RTW) collection which is made in Australia and sold online at a cheaper price point than the made to measure clothing.

Helen designs the RTW clothes and sends the designs to a pattern maker. She previously had two machinists working for her and has just expanded to 8 machinists and a cutter in an expanded factory to manufacture the RTW clothing. One of the machinists uses the riveting and buttonhole machines. Helen has the latest computerised machines enabling her to complete a single setup for all machines from an iPad. She has an administrator who manages the payroll, orders, creditors, delivery and invoicing. An IT expert works 2.5 days a week and manages the company's website, other IT issues and online presence including monthly podcasts. A bookkeeping service is used for basic bookkeeping, GST returns and preparing information for the tax agent.

Helen decided that she needs better cost control and regular information and has asked your firm of accountants, Good Numbers, to provide her assistance to maintain and grow her expanding business.

Question 4 Budgets

Part A

On 1 February 2020 Divine Denim has a cash balance of $40 000. Sales for the next six months are expected to be:

The gross margin on sales is expected to be 50%. The company plans to carry a finished goods inventory equal to expected sales for the next two months. Purchases are paid in the month following purchase.

Variable selling expenses are expected to equal 15% of sales. Fixed selling and administrative expenses are expected to be $30 000 per month, including $2,000 depreciation. Eighty percent of the expenses will be paid in the month incurred, the balance in the month following.

Sixty percent of sales are expected to be cash sales. Twenty-five percent of credit sales are collected in the month of sale and 75% in the month following sale.

Required:

i. As an accountant working for Good Numbers you have been asked to prepare a cash budget for the months of March, April, May and June. Comment on the results.

ii. In light of your findings in i. Good Numbers have been told that the company has arranged to borrow funds whenever necessary in order to maintain a minimum cash balance of $10,000. A line of credit has been arranged with the bank requiring interest of 1% per month on borrowed cash. Interest will be paid at the time the loan is repaid. The loan will be repaid as soon as there is enough cash to do so. Using this information, revise the cash budget.

Presentation: Use Excel to prepare your answers to parts i. and ii. Cut and paste your spreadsheet results and formula view into your word document. The formula view should include the column letters and the row numbers.

Part B

Explain to Helen how the budget is related to the organisational strategies outlined in your answer to Question 1.

Online submission via Turnitin is required for this assignment. Details will be provided by your subject lecturer.

RATIONALE

This assessment task will assess the following learning outcome/s:

be able to apply cognitive skills in the design and operation of costing systems.

be able to explain the role of management accounting in organisational contexts and the implications for management accounting of different paradigms.

be able to apply analytical and synthetical skills in report writing, and use quantitative techniques and computer software including using the Internet as a professional source.

be able to create and implement computerised decision models.

be able to critique how managers make decisions.