AcF 213 MANAGEMENT ACCOUNTING FOR BUSINESS DECISIONS

SECTION A ANSWER EITHER QUESTION ONE OR QUESTION TWO FROM THIS SECTION. YOU MUST ANSWER ALL PARTS OF THE QUESTION SELECTED

QUESTION 1

ABC Ltd. manufactures Product A. The budgeted cost and revenue data for this product are given below, based on sales of 5,000 units.

The costs of goods sold consists of £200,000 of variable costs and £100,000 of fixed costs. Operating expenses consist of £250,000 of variable costs and £155,000 of fixed costs.

REQUIRED:

Please note: a maximum word count applies to some parts of this question.

(a) Using the information provided above:

(i) Calculate the total contribution. (4 marks) Using the contribution, calculate the break-even point in units and break-even point sales in pounds. (6 marks)

(ii) Define the margin of safety in words and provide an example of a firm where it was important particularly during the pandemic. (8 marks; max 280 words) Based on the definition, calculate the margin of safety. (4 marks)

(iii) The company received an order for 1,000 units at a price of £200. There will be no increase in fixed costs, but variable costs will increase by £10 per unit because of packaging expenses. Determine the projected increase or decrease in profits from the order, assuming there are no opportunity costs. (6 marks)

(b) List THREE main assumptions you made in (a). (6 marks; max 210 words)

Discuss how your assumptions may affect your conclusions from the analysis in (a). (6 marks; 210 words)

Regarding your answers above, provide TWO actual examples where unrealistic assumptions mislead managers’ decisions. (10 marks; max 350 words)

(Total marks for question 1: 50 marks)

QUESTION 2

XYZ Ltd. manufactures two products and applies overhead on the basis of direct labour hours. Budgeted overhead and direct labour hours for 2022 are £2,000,000 and 50,000 hours, respectively. Information about the company’s products is as follows:

The company’s overhead of £2,000,000 can be identified with three major activities: order processing (£200,000), machine processing (£1,500,000), and product inspection (£300,000). These activities are driven by the number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities are as follow:

REQUIRED:

Please note: a maximum word count applies to some parts of this question.

(a) Using the information provided above:

(i) Calculate the overhead rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system. (6 marks)

(ii) In an activity-based costing system, if the expected manufacturing volume is attained, calculate the unit overhead costs of the two products. (10 marks)

Using the unit overhead costs above, calculate the unit manufacturing costs of the two products. (4 marks)

(iii) How much per-unit overheads would be allocated to Products A and B, respectively, if the company used traditional absorption costing and applied overhead solely on the basis of direct labour hours? Ensure that you present the overhead rates for each product, which should be based on budgeted numbers. (6 marks)

Based on the calculation above, which of the two products would be underor over-costed? Provide a brief explanation for your answer. (4 marks; max 140 words)

(b) Why do product-costing systems based on a single, volume-based cost driver tend to over-cost high-volume products? What undesirable strategic effects can such distortion of product costs have? (8 marks; max 280 words)

Explain TWO factors that are likely to distort product costs under traditional, volume-based product-costing systems. Provide an example to illustrate your answer. (12 marks; max 420 words)

(Total marks for question 2: 50 marks)

SECTION B ANSWER EITHER QUESTION THREE OR QUESTION FOUR FROM THIS SECTION. YOU MUST ANSWER ALL PARTS OF THE QUESTION SELECTED

QUESTION 3

Fylde plc, based in the UK, manufactures chocolate liqueurs, using a particular brand of spirit that is imported from Europe in 1-litre bottles. Fylde plc sells these chocolates in shops, but their main source of revenue are premium hotels in London. The chocolates are sold in a standard box size of 12 pieces, at a price of £20.

Customers in shops pay in cash, with half of the Hotels paying 50% on 1 month’s credit and the remaining 50% on 2 months credit. Shop customers represent 25% of the total revenue, with Hotels comprising the remaining 75%.

The budget shows the following sales volumes:

You are given the following additional information:

(i) The company’s policy is for opening inventory of chocolates (unit: boxes) to equal 25% of each month’s budgeted sales revenue. The actual inventory of chocolates on the 1st June was 80,000 boxes.

(ii) For inventories of spirit (unit: bottle), the policy is for opening inventory to equal 40% of each month’s usage. The actual inventory of spirit on the 1st June was 5,500.

(iii) On average, a bottle of spirit will provide the necessary liqueur for 20 completed boxes of chocolate. The cost of the spirit is £100 per bottle. (iv) Carriage on raw materials includes a £20 levy for entering the UK. As of July, this levy will increase to £39.

(v) Direct labour costs are £3 per box (this includes £1 per box for handwritten icing for the company logo). Fixed overheads are £20,000 per month (including £2,500 for depreciation).

(vi) Payment for the spirits is made two months after purchase but all other expenses are paid for one month after being incurred.

REQUIRED:

Please note: a maximum word count applies to some parts of this question.

a) For the months of June, July and August, as well as the quarter as a whole, prepare the production budget (in boxes of chocolate) and the spirit purchases budget (both in bottles and in £). (18 marks)

b) For the month of August only, prepare the cash budget. Assume that the bank balance on 1st August was £500,000 overdrawn. (10 marks)

c) i) Explain the controllability principle. (4 marks; max 140 words)

ii) The purchasing manager reported to the supervisor that the supply of the brand of spirit that Fylde uses in their product has been impacted by a shortage of long-haul delivery drivers. What factors should the supervisor consider when evaluating the purchasing manager in the context of the budget against actual performance? (12 marks; max 420 words)

c) The sales manager is considering expanding the network of hotel customers to include premium bed and breakfasts within a 40-mile range of London. The sales manager is due to meet with the credit control department to get advice on what is essential to know about potential new customers, before offering them credit. Give at least THREE key pieces of information that the sales manager should know before extending credit to new customers. (6 marks; max 210 words)

(Total marks for question 3: 50 marks)

QUESTION 4

The production manager of Carter Ltd has been working with the finance manager to produce the budget for the forthcoming year. The finance manager has presented you with the following details

REQUIRED:

Please note: a maximum word count applies to some parts of this question.

a) i) Explain the term “standard cost”. (4 marks; max 140 words)

ii) Based on the budgeted information above, derive the standard costs for the following: Selling Price (per unit), Raw Material (quantity per unit and price per unit), Direct Labour (quantity per unit and rate per unit). (6 marks)

b) The HR manager is concerned about the employee morale and how it may impact their productivity levels. She has been tasked with writing a research report and will outline relevant theories of motivation which may influence the company’s policy on benefit packages. As her assistant, you have been tasked with carrying out some of this research.

i) Briefly explain the FOUR main theories of motivation. (12 marks; max 420 words)

ii) Compare and contrast two of the theories in terms of the impact they may have on the form of benefit packages the company could use. (6 marks)

c) Carter Ltd has an annual turnover of £500,000 from its production of product A. The following is an extract from the standard cost information for product A.

For the current year, the cost of capital is 10%, with an average collection period of 30 days. The manager of the credit control department is conducting a profitability analysis to evaluate three options for credit policy that will affect future cost of capital:

i) Explain the term cost of capital. (2 marks; max 70 words)

ii) Determine which option the company should take. Show full workings, clearly indicating the option you recommend and why. (20 marks)

(Total marks for question 4: 50 marks)