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1 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 Monday, 21 May 2012 : 10.00am to 1.15pm 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. University of London 2012 Page 1 of 9 PLEASE TURN OVER

2 SECTION A Answer TWO questions from this section and not more than one further question. (You are reminded that four questions in total are to be attempted with at least one from Section B.) 1. Seven Seas Ltd is a cruise ship company, offering luxury passenger cruises around the Indian Ocean. One of its old ships, The Mauritius, was built 20 years ago, and is fully depreciated. It is now being refitted for less demanding cruises in the Mediterranean operating from Monaco. You are appointed to manage the Mauritius operation in the Mediterranean and are expected to earn an income of at least 10% on capital employed at the beginning of the year. The capital employed will be: the refit of the Mauritius costing 8 million, to be depreciated straight line at 20% per year: investment in dock facilities in Monaco 3 million also to be depreciated straight line at 20% per year: and working capital of 1 million. Each cruise will be a six-day tour. The Mauritius can carry up to 800 passengers and plans to operate 50 cruises per year. It could run fewer cruises if demand were low. The annual fixed costs of the operation (excluding depreciation) are estimated to be: Staff and accommodation 1.5 million, Marketing 2.5 million and allocated corporate costs 2 million. The avoidable operating costs for each 6-day cruise will be: Variable cost per passenger Fixed cost per cruise labour 30 40,000 food 50 5,000 Fuel and port fees 120,000 Supplies 14 20,000 Market research suggests that for the first year of operations the cruise can be priced at an average of 750 per passenger. Each passenger is also expected to spend 200 on drinks and entertainment aboard the ship. The contribution margin on these is 50%. Required: With regard to the first year only: (a) Discuss with supporting calculations: i. In making the decision to run each cruise, the number of passengers you would need for a cruise to break even. ii. Assuming that 50 cruises were undertaken, the number of passengers required in total for the year to ensure that the income target is met. (10 marks) (c) It is considered more attractive to customers if the ship is at least 70% full. The company is therefore considering focusing promotion on running cruises only at popular times of year. At the price suggested, how many cruises would need to be run at 70% capacity to meet the income target? (10 marks) The market value of the Mauritius after refit will be 30M. Assuming that, for performance measurement purposes, the company decides to revalue the ship to current market value and depreciate it, straight line over five years, explain the effect this would have on your answers in part (a) and. Briefly discuss the advantages and limitations for divisional performance measurement of valuing non-current assets at market value? (5 marks) Page 2 of 9

3 2. Glass Delivery Ltd is a warehousing and distribution company which handles products on behalf of glass manufacturers. The company receives the products packed in large quantities. The products are repacked into small batches or single units to be distributed to end customers, as required. Three types of product are handled: Small Glassware, Large Glassware and Crystal Glass. The cost of materials used in re-packing each unit of the products varies in the ratio 1:4:8 for Small Glassware, Large Glassware and Crystal Glass, respectively. This ratio is linked to the size and fragility of the goods. Budget estimates for each month of the year to 30 th June 2012 for volumes and costs are as follows: Products Handled per month Small Glassware Large Glassware Crystal Glass (Units) Costs per month ( 000) Re -packing materials 111 Labour (Basic) 110 Occupancy 180 Administration 120 Required: (a) Assuming that Glass Delivery Ltd adds 30% to full cost to determine price, calculate the budgeted average price per unit of each of the three products. Allocate re-packing costs based on the ratio indicated and all other costs on a per unit basis. (5 marks) Additional information has been obtained to enable costs per unit of each product to be calculated using an activity-based costing approach. Costs have been identified as attributable to each of three work centres Receipt and Inspection, Storage and Repacking. For the year to 30 June 2012, the following cost breakdown has been determined: Receipt & Inspection % Storage %* Repacking % Labour (Basic) Occupancy Administration *units are stored for an average of 1 month An activities analysis has revealed that the size and fragility of different products affects the Receipt and Inspection time required by each product. Storage is related to the average size of the products coming in and Repacking is related to the complexity of Repacking required for each product. The relative requirements per unit of product have been estimated as follows: Receipt & Inspection (minutes) Storage (Sq Metres) Repacking (minutes) Small Glassware Large Glassware Crystal Glass Using the additional information above, calculate an activity-based cost for each product. (12 marks) Page 3 of 9

4 (c) After discussion with clients, the company considers that the budget estimate for Crystal Glass could be increased by 3,000 units per month. Additional storage space of 1,800 square metres could be acquired at a cost of 30,000 per month. Using prices calculated using the ABC approach and assuming that: The packaging costs are variable. Labour is a step fixed cost so that additional work would require more staff to be employed. The company only employs full-time staff for this work. The same people work in both Receipt and Inspection and Repacking. These employees each work 10,000 minutes per month and cost 2,000 per month. Storage employees could fit in more work. All other costs are fixed. Storage space usage per month is at 96% of capacity at current budget estimates. Provide calculations and advise the company on whether efforts should be made to increase demand for Crystal Glass by 3,000 units per month. (8 marks) Page 4 of 9

5 3. Sam Kerridge is a music teacher and a lover of music. He has recently received an inheritance of 120,000. He has decided to open a café bar called Peyton Place. He plans to sell drinks and food, and host music events. Sam will book nine music groups each week of different types e.g. jazz, folk, pop, string quartets. One event each week will feature a more well-known group and tickets will be sold. The other events will be free. Sam has found a historic building, at a water-side location, available to rent. He can obtain a licence for alcoholic drinks and entertainment. Sam asks you to help with his business plan. He is uncertain of how many customers will come, and worries about the financial risk. You suggest that he prepares budgets for three levels of activity. Sam feels that Peyton Place will attract a minimum of 700 customers each week, and that an optimistic forecast would be 1,400 customers. He therefore suggests that the middle option should be 1,050. These numbers include the ticketed event. He estimates that each customer will spend 5 on drinks and one half of customers will buy a bar meal costing 8. Sam estimates that average entry price for the ticketed event will be 10 and that he can sell between 70 and 140 tickets for each event, with a middle forecast of 105. Investment in the building will involve installing, furnishing and decorating a kitchen, a bar and a stage, including audio equipment. Sam projects that he will need to spend 140,000. This capital expenditure is to be depreciated (on a straight line basis) over seven years (assume no residual value). The rent of the building will be 2,000 per month, payable quarterly in advance. Heating and lighting will be 500 per month, payable quarterly in arrears. Insurance will cost 7,000 per annum payable as an annual premium in month 1. Publicity leaflets, press advertising and a website will cost 750 per month. Local taxation will be 12,000 per annum payable in two six monthly instalments in month 3 and month 9. Initial stocks for the bar and kitchen will cost 4,000 (payable in month 1). Thereafter drinks supplied will cost 2 per customer and ingredients for meals 4 each (payable one month in arrears). Sam expects to spend 1,500 per week on the music groups. Sam will work full-time and pay himself a salary of 25,000. He will also need an administrative assistant to run the office, at a salary of 17,000 per annum. He plans to employ two qualified chefs at 22,000 per annum each and two kitchen assistants at 15,000 per annum each. He will also need to employ four bar staff at 12,000 each. Sam and the staff will be paid at the month-end. You explain that staffing may be a semi-fixed expense. He agrees that at the lower forecast he could do without one of the bar staff. Similarly at the higher forecast he should recruit one further member of bar staff. Page 5 of 9

6 Required: (a) Prepare operating budgets for the three levels of activity described above and briefly comment on the viability of the business as shown by the figures. (12 marks) Sam feels fairly confident that he can achieve the middle level of his customer forecasts in the first year. He has spoken to his bank manager about a business overdraft. The bank has asked Sam to provide a quarterly cash budget for the first year, which Sam asks you to help him prepare. You point out that the numbers of customers are likely to be low at first and build up over the year. Sam projects the following numbers of customers per month: 1 st quarter (January March) 3,000 customers per month 2 nd quarter (April-June) 4,000 customers per month 3 rd quarter (July-September) 5,000 customers per month 4 th quarter (October-December) 6,200 customers per month i. Prepare a quarterly cash budget for Peyton Place based on this forecast. Assume that when he begins trading, Sam will be 20,000 overdrawn in his business bank account. When the bank account is overdrawn, interest is payable at 3% of the quarter s closing balance. (9 marks) ii. Sam wonders whether taking out a loan for one year would be a better option than the bank overdraft. The loan would need to cover the maximum cash deficit. Compare the costs of the overdraft shown in i. above with the cost of taking out a one year loan at 6% per annum interest. Advise Sam on which is the better financing option. (4 marks) Page 6 of 9

7 4. The Miliband NHS Ambulance Trust provides emergency and routine ambulance services to a large region. It runs a fleet of ambulances. It also runs a fleet of 200 minibuses providing other transport services, e.g. driving older and disabled patients from their homes for appointments at local hospitals. The Trust also runs a well-equipped Vehicle Maintenance department which repairs and services all ambulances and minibuses. Each minibus undergoes a Routine Service twice a year. The Ambulance Trust operates an internal accounting system. Vehicle Maintenance, sells its services to the front line service delivery departments and is expected to operate at breakeven. The Vehicle Maintenance department s budget for the 2012/13 financial year is shown below: 000 Departmental Manager and Secretary 75 Ambulance Engineers: 3@ 34,000 each 102 Ambulance Mechanics: 25,200 each 353 Oil and Spare Parts 100 Electricity 50 Maintenance of equipment 30 Apportioned General Trust overheads Vehicle Maintenance Pricing System Each Ambulance Engineer and Ambulance Mechanic can deliver 1,400 productive hours per annum. Hourly rates are 25 and 18 respectively. For charging purposes within the Trust a 50% mark-up is applied to cover the departmental overheads. Oil and Spare Parts are identified and charged separately to each job undertaken. Thus the re-charge for a Routine Minibus Service will be: Ambulance Engineer 1 25 x 150% Ambulance Mechanic x 150% Oil and Spare Parts Total re-charge The Ambulance Trust management has recently been approached by a large coach company who have offered to provide the Routine Minibus Services at 180 each. The Trust s managers are attracted by this, as it is a substantial saving over the rate at which they are being charged by the Trust s own Vehicle Maintenance department. Within the Vehicle Maintenance departmental budget shown above, electricity consumption and equipment maintenance costs are partially variable with activity. For electricity consumption, 20% is variable relating to the operation of the maintenance equipment and, of that, 15% relates specifically to the Routine Minibus Services. For equipment maintenance 50% of the budget is variable with usage and of this 10% relates to the Routine Minibus Services. Investigation reveals that most of the Ambulance Engineers and Ambulance Mechanics are members of a trade union and would be strongly resistant to any staff reductions in the department. Page 7 of 9

8 Required: (a) Based on the information you have been given, and assuming that there are to be no staffing reductions, show the relevant figures to decide whether or not to outsource the Routine Minibus Services to the coach company. Give explanations as to what figures you have included and have not included, and your recommendation as to whether the offer should be accepted. (7 marks) It may be possible to achieve staff reductions of the Ambulance Engineers and Ambulance Maintenance Staff through natural wastage. In this case, if the Routine Minibus Services were outsourced, calculate how many staff in each category can be reduced and provide calculations to indicate whether it would be financially advantageous to outsource the work. (6 marks) (c) Further investigation reveals that there is an increasing problem in recruiting skilled mechanics. A major car manufacturer is opening a new plant within the region and so the Ambulance Trust may lose some Engineers or Maintenance staff to this employer. A decision has been made to increase the number of Routine Ambulance Services so some Routine Minibus Services will have to be done in overtime. It will mean that half of the labour involved in the Routine Minibus Services will have to be paid at an overtime rate of 150% of the normal rate. Under these circumstances provide calculations and recommend whether the Ambulance Trust should outsource the routine minibus services. (6 marks) (d) If the Trust decided to outsource the Routine Minibus Services they would wish this to be a permanent arrangement. Discuss the management issues to be considered before committing to this decision. (6 marks) Page 8 of 9

9 SECTION B Answer ONE question from this section and not more than one further question. (You are reminded that four questions in total are to be attempted with at least two from Section A.) 5. (a) For each of following types of costing system explain how costs are calculated and how the information provided is used. For each type of system give two examples of industries which you would expect to use the system: i. Process costing ii. Job costing iii. Batch costing iv. Contract costing (10 marks) Discuss the relative merits of Variable Costing and Absorption Costing for management decision making and control. (15 marks) 6. (a) Discuss the issues to be considered when setting standard product costs. Explain the ways in which standards may be affected by changes in technology. (10 marks) Explain the purpose of Responsibility Accounting and the behavioural problems which can arise in companies where managerial performance appraisal is largely related to meeting budgetary targets. (15 marks) 7. Financial performance measures have met with criticism and from 1992 Kaplan and Norton have popularized the idea of the Balanced Scorecard as a way of using both financial and non-financial performance measures. Explain the criticisms of financial performance measures and discuss the ways in which the Balanced Scorecard may meet some of the criticisms. (25 marks) 8. Explain the importance of maintaining high quality products in the current business environment and describe ways in which companies can measure the amounts they are incurring to maintain and improve quality. Describe how cost benefit decisions can be made in this area. (25 marks) END OF PAPER Page 9 of 9

This paper is not to be removed from the Examination Halls

~~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,