Valleyview Playgyms Company

On 1 January, Johnson set up Valleyview Playgyms Company to manufacture and sell children’s outdoor play gyms. He was an engineer by profession but he understood the importance of accounting information and kept his accounting records meticulously throughout the year. At the end of the year he prepared the following income statement for the year:

Valleyview Playgyms Company

Income Statement

for the year ended 31st December, 2012

Sales 450,000
Less Operating expenses:
Purchase of Raw Material $200,000
Purchase of factory supplies 10,000
Wages of the factory employees (who worked directly on the playgyms) 75,000
Wages for other factory employees 10,000
Managers’ salary 40,000
Office staff salaries 10,000
Sales Staff salaries 22,000
Advertising 10,000
Administrative Expenses 8,000
Clearing costs 5,000
Rent 25,000
Electricity 4,500
Purchase of factory equipment 140,000
Purchase of Office Equipment 10,000
Purchase of Sales vehicles 15,000
Total Operating expenses 584,500
Net Loss $(134,500)
Although disappointed, Johnson was not surprised. He knew that expenses were higher than sales because, throughout the year, he had been able to generate a cash surplus. His bank overdraft had blown out and his bank manager has asked him to present his financial statements for 2012 to the bank.

Required:

You are the bank’s accountant and the bank manager has asked you to:

Review the performance of Valleyview Playgyms in 2012 and make a recommendation as to whether Johnson’s overdraft facility should be cancelled.
Prepare a report for Johnson explaining the errors he made in his income statement.
To perform this analysis you will need to recast Johnson’s income statement. The following information may be useful:

The factory occupies 80 per cent of the rented building, the sales area 15 per cent and the administration area 5 per cent.
All the company’s fixed assets are estimated to have a useful life for five years and no salvage value at the end of their life.
Johnson spends 50 per cent of his time as factory manager and spends the remaining time equally on sales and general administration.
Electricity costs are consumed almost entirely by the factory.
At 31 December 2012, the following inventories existed:
Raw Material $20,000
Work in Process $40 000
Finished Goods $51 500
Problem # 2 Marks 7

Write a short essay (700 words) on how management accounting can help the managers of an organization to run their business efficiently?
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