This paper is not to be removed from the Examination Halls

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1 ~~AC3097 ZA d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC3097 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route Management Accounting Thursday, 8 May 2014: 14:30 to 17:45 Candidates should answer FOUR of the following EIGHT questions: TWO from Section A, ONE from Section B and ONE further question from either section. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book. PLEASE TURN OVER UL14/0009 Page 1 of 1

2 SECTION A Answer two questions and no more than one further question from this section. 1. Kevin Paterson is a sports groundsman working in Sydney, Australia. After several years working for employers, he has decided to establish his own business. For six months each year from October to March he will concentrate on the maintenance of cricket grounds. He intends to work eight hours a day, for six days a week, for the 26 weeks of the season; a total of 1248 hours. From experience with several cricket clubs, he knows that the work falls into three types: Outfield maintenance, Maintenance of the cricket square and Preparation of pitches for specific matches. He will charge his own time at $15 per hour. There will be variable material costs of $15 per Outfield maintenance, $12 per Square maintenance and $9 per Pitch preparation. The fixed overheads covering insurance, equipment and repairs will be approximately $9360 for the six month period and will be charged to the each type of work based on Kevin s labour time. Kevin will work for several local clubs. He estimates that Outfield maintenance will occupy eight hours, Square maintenance four hours, and Pitch preparation two hours. After discussions with the local clubs, he plans to charge $210 per Outfield maintenance, $110 per Square maintenance, and $70 per Pitch preparation. At these prices he believes he can secure orders for 78 Outfield maintenances, 130 Square maintenances and 234 Pitch preparations during the season. Required: (a) i. Prepare a schedule to show the revenues, costs and profit of each type of work. In view of Kevin s time limitation advise him of the most financially beneficial mix of work to be undertaken and the profit he could earn. (10 marks) Kevin has established a good reputation during his first season. He decides to abandon Outfield maintenance and concentrate on the more specialised Square maintenance and Pitch preparation. He plans to hire a contractor with a high class mower to further improve the standard of his work. The contractor charges $15 per hour but can only work 30 hours per week for Kevin. Kevin will still need to spend the same amount of time on each type of work as previously estimated and his other costs will remain at the same levels as the previous year. With this additional contractor Kevin feels he will be able to charge $150 for a Square maintenance (which will require 2 hours of contractor time), and $90 per Pitch preparation (which will require 1 1/ 2 hours of contractor time). Kevin s projected orders are 260 Square maintenances, and 468 Pitch preparations in the season. Advise Kevin of the optimum volume and mix of work to be undertaken in this situation and the profit he will earn based on your recommendation. Comment on the results of your calculations in (a) and above. (10 marks) (c) Kevin is considering using the mowing contractor more and would like him to work an extra 2 hours per week. He is prepared to pay $23 per hour for this extra work. Provide calculations to show whether this would be worthwhile for Kevin. (5 marks) UL14/0009 Page 2 of 2

3 2. Modern Manufacturing Ltd makes several products and is considering its operations for the forthcoming year. The following activity cost centres are used and the budgeted usage on forecast production and sales is shown; Table 1 Activity cost centre Machine Cost driver machine hours Total capacity of Cost driver Budgeted usage of Cost driver Activity Centre Fixed Costs Variable Cost per driver hours hours 100,000 80,000 2,400,000 6 Setup hours 2,500 2, , Stores handling hours 1,000 1, , Stores Required: cubic metres per year 60,000 50, ,000 0 Administration hours 100, , ,000 0 (a) Calculate the total cost per cost driver for each activity centre based on the budgeted usage shown in Table 1. (5 marks) The company is considering launching a new product and has estimated the cost of obtaining additional capacity in each activity cost centre as shown in the table below. Table 2 Fixed cost changes due expanding capacity of each resource from current total capacity would involve the following: Activity centre Additional Fixed cost Additional yearly capacity Machine Buy new machine with a 5 year life 6,000,000 and no residual value^ Setup Part time employee 14,000* Full time employee 28,000* Stores handling Part time employee 14,000* Full time employee 28,000* 40,000 hours per year. 800 hours 1,600 hours 800 hours 1,600 hours Stores Additional storage unit 30,000 annual rent 20,000 cubic metres Administration Part time employee 17,000* Full time employee 34,000* 800 hours 1,600 hours ^ project appraisal is not required use depreciation as annual cost * Step fixed costs UL14/0009 Page 3 of 3

4 After performing market research the company wishes to go ahead with a new product in addition to its existing budgeted work shown in Table 1. The new product will have the following characteristics: Sales information: Predicted annual demand 10,000 units Selling price per motor 350 Cost information and resource use per motor: Direct material per motor 30 Direct labour-hours per motor (rate 20 per hour) 2.0 hours Machine hours per motor 4.5 hours Number of motors per batch 500 Setup hours per batch 8 hours Stores use of space per motor 2 cubic metres Handling - Number of different components per motor 30 components Handling hours per component per batch 0.2 hours Administration hours per unit 1 hour i. Provide a statement for each of the activity centres showing: the spare capacity available in each of the activity centres after producing existing production. the total cost of capacity needed to make the existing production and 10,000 units of the new product. the revised cost per cost driver at this level of production. (10 marks) Provide a statement of the future incremental revenues and costs which would occur if 10,000 units of the new product were made. (4 marks) i Produce a statement of the ABC cost and profit of the new product. (2 marks) iv. Comment on whether the company should produce and sell the new product. Include in your answer any other issues which the company should consider. (4 marks) UL14/0009 Page 4 of 4

5 3. Boris Bikes PLC is a U.K. company manufacturing motor scooters. It has recently decided to build a factory in Singapore, to serve both the Singaporean and other markets in the Far East. After the initial period of capital investment, you have been appointed Financial Director of the Singaporean subsidiary. The new factory is due to open in January You are aware that the first four months of operations will be critical to its long term survival and you wish to prepare budgets for that period. After consultation with the Boris Head Office you discover that: Expected sales are $2.0 million in January, $3.0 million in February, $4.0 million in March and $5.0 million in April. Monthly fixed expenses are expected to be: Production overheads $2,000,000 Selling overheads $250,000 Administration overheads $250,000 The budget for variable operating expenses is expected to be: Direct Materials Direct Wages Production Overhead Selling Overhead 20% of sales revenue 10% of sales revenue 5% of sales revenue 2% of sales revenue Required: (a) Prepare in columnar form, an operating budget for the months of January to April showing projected income, operating expenses, and the budgeted operating income. (6 marks) You also establish that on 1 st January 2015 Head Office will provide you with an opening cash balance of $1.5million at, and you are concerned as to whether this will be sufficient. On researching the timing of receipts and payments relating to the operating budget you discover the following: Sales Revenue will be 50% within Singapore and 50% from exports. Singaporean customers will pay in the month following the sale, export customers two months after the sale. Direct Materials will be paid for in the month after their usage. Direct Wages and Variable Production Overheads will be paid for in the month to which they relate. Fixed Production Overheads relate largely to the manufacturing plant which is highly automated. They therefore include a monthly depreciation charge of $1.0 million. They also include an annual insurance premium of $2.8 million which must be paid in January, and property taxes of $1.6 million must be paid twice a year in March and September (a yearly total of $3.2million). The remaining costs are due for payment in even monthly amounts throughout the year. UL14/0009 Page 5 of 5

6 Variable Selling Overheads are payable in the month following the month to which they relate. Fixed Selling Overheads and Administration Overheads are spread evenly throughout the year, and are payable in the month to which they relate. A payment of $4 million is outstanding on the capital cost of the automated plant and providing that the plant is working satisfactorily will be paid in April. In setting up the Singaporean subsidiary Boris purchased more land than was needed. A site of 2 hectares is now being sold for its cost price, of $3 million which will be received in March. You have established good relations with the local branch of a major bank, and are aware that short term overdraft facilities are available. Interest will be paid at 1% per month on the balance outstanding at the previous month end. Prepare a cash budget for Boris Bikes (Singapore) for the months of January to April. (15 marks) (c) Rather than using the short term overdraft facilities with the bank as described above you could negotiate a formal loan of $6.0 million for one year from Boris s subsidiary finance company. This will involve formal interest payments of $150,000 payable quarterly. Discuss the issues involved in this approach. Which alternative would you recommend to your Board of Directors, and why? (4 marks) UL14/0009 Page 6 of 6

7 4. Smart Kitchens PLC is a divisionalised company making kitchen products. The company has three divisions, Small electrical appliances Utensils and Crockery. Each division makes products which are sold to many retail companies. Financial data for the three divisions for the year ended 31 st March 2014 are shown below: Income statement for year ended Appliances Utensils Crockery Total Turnover 18,500 4,650 14,500 37,650 Variable costs (5,100) (1,470) (6,100) (12,670) Contribution 13,400 3,180 8,400 24,980 Fixed costs Research & development (300) (50) (10) (360) Advertising (200) (10) (60) (270) Tangible asset Depreciation (3,000) (450) (1,600) (5,050) Other fixed costs (3,400) (840) (730) (4,970) Total fixed costs (6,900) (1,350) (2,400) (10,650) Controllable net income 6,500 1,830 6,000 14,330 Allocated head office costs* (1,850) (465) (1,450) (3,765) Divisional net income before tax 4,650 1,365 4,550 10,565 Taxation 35% (1,628) (478) (1,592) (3,698) Net Income after tax 3, ,958 6,867 Summary of Financial position at Non-current assets: Cost 23,400 8,100 22,000 53,500 Accumulated depreciation (5,000) (4,750) (15,000) 24,750 Written down value 18,400 3,350 7,000 28,750 Net current assets 1,800 2,500 2,500 6,800 Total net assets 20,200 5,850 9,500 35,550 *charged on turnover ratio Required: (a) For each of the divisions and the company as a whole calculate: i. Net income % and Return on Investment using both divisional controllable net income and divisional net income before tax. Calculate the residual income for each division based on net income after tax using an after tax capital charge of 8%. (12 marks) i. Comment on the divisional performance shown in your results in (a). i Using the more detailed information given in the table above and providing three additional ratios which would enhance the understanding of each division s performance. Comment on the insights revealed. If bonuses were payable to divisional managers on the basis of the divisional financial results, explain with reasons, how you would recommend the bonus to be calculated. (13 marks) UL14/0009 Page 7 of 7

8 SECTION B Answer one question and no more than one further question from this section. 5. (a) Describe the information contained in a Life-Cycle Budget (5 marks) Explain how the Life-Cycle Budget helps a company in the following areas: i. strategic planning. capital budgeting. i pricing. iv. annual budgeting. (20 marks) 6. The CIMA definition of Strategic Management Accounting (2005) is A form of management accounting in which emphasis is placed on information which relates to factors external to the firm as well as non-financial information and internally generated information. (a) Describe 5 aspects of external information which a company may seek to obtain in order to develop their strategy and explain how this information would be used. (12 marks) Discuss the ways in which non-financial and financial measures can be used in developing strategy and monitoring progress towards strategic goals. Include examples in your answer.(a detailed description of the Balanced Scorecard is not required.) (13 marks) 7. (a) Explain why transfer prices are needed between divisions of an organisation where each trading division is appraised using profit performance. (7 marks) Identify the considerations in choosing a transfer pricing method to be used under the following conditions: i. the product being transferred has an outside market and the producing division is working at full capacity making several different products: i the product being transferred has an outside market and the producing division has spare capacity. a product is produced using parts from different production centres none of which has an external market for their work except the centre completing the final product. (18 marks) UL14/0009 Page 8 of 8

9 8. Choose five of the terms/techniques listed below, and for each one: i. Explain the meaning of the term/technique. i Drawing on your experience of management accounting, give two examples of its application and the context in which it is used. Provide a brief discussion of some of the practical limitations of the term/technique of which users should be aware. (a) Principal Budget Factor. Job Costing (c) Marginal Cost (d) Ratio Analysis (e) Direct Material Mix Variance (f) Internal Rate of Return (g) Margin of Safety (h) Zero Based Budget (25 marks) END OF PAPER UL14/0009 Page 9 of 9