VCE-ACCT-U34 5.2.2 📋 – Mock Exam 2: Q2-Q8 Variance, Statements, Concepts, Budget and Extended Response

Mock Exam 2 — Questions 2 and 3

Sunrise Athletics | Continue on paper

(a)4 marks

For each of the four items, state whether the variance is favourable or adverse and calculate the variance amount.

Tip: Favourable = actual better than budget. Sales and NP are favourable when actual > budget; expenses are favourable when actual < budget.

(b)4 marks

Analyse the likely causes of the adverse net profit variance for April 2026. In your answer, consider at least two contributing factors.

Tip: Main driver: $8,800 adverse sales. COGS is favourable ($4,400) consistent with lower sales. Wages adverse ($1,400). Link them to explain how they combine to produce $4,500 adverse NP.

(c)4 marks

With reference to the accounting period assumption, explain why monthly reporting is more useful to Liam than annual reporting.

Tip: State assumption, apply to monthly reporting (timely identification of variances), explain consequence of annual reporting (too late to act on problems).

(a)4 marks

Sunrise Athletics has a Gross Profit Margin of 50% (industry average: 45%) and an inventory turnover of 68 days (industry average: 40 days). Analyse the likely effects of having an inventory turnover significantly slower than the industry average.

Tip: Trend: 68 vs 40 days. Cause. Two consequences (cash tied up, holding costs / obsolescence).

(b)3 marks

Explain how Sunrise Athletics can have a GPM above the industry average yet still have a slower inventory turnover than competitors.

Tip: High GPM = high margin per unit (premium pricing). But slow turnover = fewer sales cycles. Total GP = margin × frequency – high margin achieved slowly may be outperformed by lower margin with faster turnover.

(c)3 marks

Liam is considering reducing all selling prices by 10% to increase sales volume. With reference to financial and non-financial considerations, discuss this decision and make a recommendation.

Tip: Financial: 10% price cut reduces GPM; volume needed to maintain profit must be calculated. Non-financial: competitive positioning, customer perception, staff morale if target pressure increases. Recommendation with justification required.

(a)6 marks

Calculate the Gross Profit for May, showing Net Sales and Cost of Sales as separate line items.

Tip: Gross Profit = Net Sales − Cost of Sales = $52,800 − $26,400 = $26,400.

(b)4 marks

Prepare the Other Revenue and Expenses sections of the Income Statement, listing each item and its subtotal.

Tip: Other Revenue: Interest Revenue $180. Total Expenses: Wages $9,600 + Rent $4,200 + Depreciation $2,400 + Advertising $520 + Bad Debts Expense $900 = $17,620.

(c)3 marks

Calculate Net Profit for May.

Tip: Net Profit = Gross Profit + Other Revenue − Total Expenses = $26,400 + $180 − $17,620 = $8,960.

(d)3 marks

With reference to the expense recognition (matching) principle, explain why Bad Debts Expense of $900 is recorded in May’s Income Statement even though it relates to a credit sale made in an earlier month and the cash will never be collected.

Tip: State the matching principle (expenses are recognised in the period the associated revenue/loss of benefit is identified, not when a cash outcome is known). Apply to bad debts specifically. State the impact if not recorded (expenses understated, Accounts Receivable and profit overstated).

(a)4 marks

With reference to faithful representation, explain why Sunrise Athletics must increase the Allowance for Doubtful Debts from $1,800 to $2,200, even though this reduces reported profit.

Tip: State faithful representation (reports must reflect what has actually occurred/is realistically expected, free from bias). Apply to the increased allowance specifically. State the impact if not recorded (Accounts Receivable and profit would be overstated, misleading Liam and any external users).

(b)4 marks

With reference to comparability, explain why Sunrise Athletics must continue applying the Perpetual FIFO method consistently from period to period rather than switching inventory cost methods.

Tip: State comparability (requires consistent methods across periods to allow valid comparison). Apply to Perpetual FIFO specifically. State the impact of switching (the 68-day inventory turnover trend from Question 3 would no longer be meaningfully comparable across periods).

(a)4 marks

Calculate the variance for Cash Receipts and for Cash Payments, stating whether each is favourable (F) or unfavourable (U).

Tip: Receipts: $60,000 − $54,000 = $6,000 U (less cash received than budgeted). Payments: $49,500 − $46,000 = $3,500 U (more cash paid than budgeted).

(b)4 marks

Explain one likely cause of the unfavourable Cash Receipts variance, with reference to information given earlier in this exam.

Tip: Link to the slow inventory turnover (68 days vs a 40-day industry average) from Question 3 — if stock takes longer to sell than budgeted, the cash cycle from purchase to sale to collection is delayed, so less cash is received in May than planned.

(c)6 marks

Discuss how preparing a Cash Budget benefits Liam’s decision-making, and recommend one action he should take in response to the May variances.

Tip: Benefit: allows Liam to anticipate cash shortfalls and arrange finance in advance rather than being caught out. Recommendation: tighten credit terms or follow up overdue debtors, and review purchasing to reduce slow-moving stock — justify with reference to the receipts shortfall.

(a)6 marks

Discuss the financial implications of this change, with reference to the increasing Allowance for Doubtful Debts identified earlier in this exam.

Tip: Under Direct Write-Off, Bad Debts Expense would only be recorded once a specific debt is confirmed uncollectable, often in a later period than the related credit sale — this breaches the matching principle and can overstate Accounts Receivable and profit until a (potentially large) write-off occurs. Switching now would remove the early-warning signal that the growing allowance ($1,800 → $2,200) currently gives Liam about deteriorating debtor quality.

(b)6 marks

Discuss the non-financial implications of this change for Liam and his staff.

Tip: Less time would be spent estimating and adjusting the allowance each period, freeing staff time for other tasks. However, external users of Sunrise Athletics’ reports — such as a bank assessing a loan application — would receive less reliable information, since receivables would appear healthier than they truly are until specific accounts are written off.

(c)4 marks

Make a recommendation to Liam, justified by reference to both the financial and non-financial considerations above.

Tip: A clear recommendation (“should” / “should not” switch) that weighs the administrative time saved against the loss of faithful representation and the early-warning value of the allowance trend — particularly given Sunrise Athletics has an outstanding loan — scores full marks.