BEA2017 INTERMEDIATE MANAGEMENT ACCOUNTING

SECTION A

Compulsory Question

QUESTION 1

The Zeba Group (ZG) commenced operations in 1956 as a manufacturer of machines used for various purposes in a number of industries. The group has since diversified into other lines of business in search of higher profits. The three major divisions within the group are the Machinery Division, the Retail Division and the Recreation Division. Although the divisions operate in different industries, they adopt the same competitive strategy: differentiation. The divisions attempt to differentiate themselves from competitors by delivering products and services that are unique from those provided by their competitors.

The Machinery Division uses patented technology for the manufacture of various types of machines. This state-of-the-art technology enables the Machinery Division to produce machines that competitors are currently unable to match. This competitive advantage has not gone unnoticed. Ava International, a potential major customer that the Machinery Division would like to secure for strategic reasons, has recently requested a quotation for the next-generation machine. The Machinery Division knows that its reputation will be enhanced if this strategic customer is secured.

The following information has been gathered to aid the preparation of the quotation for the next generation machine requested by Ava International:

(1) The manufacture of the next-generation machine will require 3,000 units of either Component NX or Component GT. Component NX is no longer used by the Machinery Division for the manufacture of any other machines but Component GT is used for the manufacture of various lines of machines. 6,000 units of Component NX were purchased two months ago at a price of £50 per unit and remain in stock. The current purchase price of Component NX is £55 per unit and the Machinery Division is able to sell the unused units of Component NX for £40 per unit. The 4,000 units of Component GT currently in stock were purchased at a price of £60 per unit one month ago. The current purchase price of Component GT is £65 per unit and any unused units of Component GT can be sold for £45 per unit. The division has decided to use the cheaper component for the manufacture of the next-generation machine required by Ava International.

(2) Other incremental material costs required for the manufacture of the next-generation machine are expected to amount to £300,000.

(3) The manufacture of the next-generation machine will require 250 hours of specialist direct labour. The specialist direct labour is hired when required but there is currently a shortage of such labour in the market. All the specialist direct labour that the division has been able to employ is currently fully utilised. If the Machinery Division undertakes the potential order from Ava International, the specialist direct labour will have to be transferred from other work which would otherwise earn a contribution of £70 per hour. The specialist direct labour is paid a rate of £30 per hour.

(4) The manufacture of the next-generation machine will incur variable overheads amounting to £152 per specialist direct labour hour.

(5) Fixed overheads allocated to the potential order will amount to £135,000.

(6) A piece of equipment will require repair if the Machinery Division is to proceed with the manufacture of the next-generation machine. The repair cost will amount to £18,000.

(7) It is forecast that the manufacturing facility of the Machinery Division will be operating at 80% capacity when the manufacture of the next-generation machine for Ava International is to be undertaken. The manufacture of the next-generation machine for Ava International will utilise 12% of the manufacturing facility. The Machinery Division will be able to save £90,000 if the utilisation of the manufacturing facility does not exceed 90% compared to full utilisation. There will be no cost savings if utilisation of the manufacturing facility exceeds 90%. (

8) The preparation of the quotation will cost £1,000.

Required:

a) Using relevant costing, determine the minimum selling price that would be acceptable to the Machinery Division if the quotation was accepted by Ava International. (10 marks)

b) Highlight five factors that the head of the Machinery Division should consider before quoting Ava International the minimum selling price in part (a). (5 marks)

c) The accountant of the Machinery Division recently read about the two dimensions of quality.

Required: Using examples, explain what is meant by design-quality and conformance-quality. (6 marks)

d) The Retail Division is considering carrying out a value chain analysis. However, the accountant of the division is unsure about how the degree of disaggregation into individual value activities can be determined. The accountant is also unsure as to how the benefits of value chain analysis as opposed to value added analysis can be explained to employees within the division.

Required: Explain the criteria that can be used to ascertain the degree of disaggregation into individual value activities. Using examples, explain how value chain analysis is more beneficial compared to value added analysis. (9 marks)

e) The board of directors of ZG is aware that the group will have to start issuing an integrated report that extends beyond the focus on financial statements at some point. However, the board is unclear as to what to include in the report and the principles that should be adhered to in the preparation process.

Required: Advise the board of directors of ZG on the guiding principles that should be adhered to in the preparation of an integrated report as proposed by the International Integrated Reporting Council. (10 marks)

(Q1 Total 40 marks)

SECTION B

Answer any TWO questions from the THREE in this section

QUESTION 2

Creative Limited (CL) manufactures three products: Product RR, Product TT and Product VV. The contribution per unit of the respective products is as follows

The monthly availability of Process 1, Process 2 and Process 3 hours are limited to 5,000 hours, 9,000 hours and 7,000 hours respectively. The objective of the company is to maximise contribution. Required:

a) Formulate the initial simplex tableau that can be used to determine the optimum monthly production plan. (4 marks)

b) Using the initial simplex tableau in part (a) as the starting point, formulate the second simplex tableau. You should show all workings and your answer should be rounded to 1 decimal place. (18 marks)

c)where Z = Total contribution per month, RR = Units of Product RR, TT = Units of Product TT, VV = Units of Product VV, S1 = Slack variable for Process 1, S2 = Slack variable for Process 2, S3 = Slack variable for Process 3. Interpret the final simplex tableau. You should concentrate on the economically significant components of the tableau. (8 marks)

(Q2 Total 30 marks)

QUESTION 3

The finance manager of Ancient Group recently read an article on the limitations of traditional investment appraisal for capital investment decisions. The author of the article argued for an alternative: strategic investment appraisal. However, the article did not clearly define what the term strategic investment appraisal meant and there was a lack of elaboration as to why it is considered appropriate for capital investment decisions.

Required: Explain to the finance manager the meaning of the term strategic investment appraisal and discuss why the use of strategic investment appraisal may be appropriate for capital investment decisions. In addition, explain how the various strategic investment appraisal techniques could be used to support strategic investment appraisal and evaluate the usefulness of these techniques. (30 marks)

(Q3 Total 30 marks)

QUESTION 4

a) Peter is a self-driven person and believes in always giving his best, regardless of whether he is in work or at play. His inherent drive to succeed has been instrumental in his climb up the corporate ladder. Peter is currently the sales director of Rapid Limited, a company that operates in a fast-paced environment where innovation is critical to success. Peter has just joined the company and is feeling frustrated as the managing director adopts an authoritarian management style. The sales budget is determined solely by the managing director without the input of Peter. This has left Peter feeling exasperated as he feels that he should have been consulted. He is instead forced to accept a sales budget which he believes to be unreasonable. Required: Using relevant theories and research findings, advise the managing director of Rapid Limited if Peter should be allowed to participate in the budget-setting process. (15 marks)

b) Brita plc manufactures a single product, product Freya, and has provided you with the following information relating to the period which has just ended

Required: (i) Calculate the materials mix, yield, usage and price variances. (10 marks)

(ii) Comment on your findings from the calculations in (b)(i) above. (5 marks)

(Q4 Total 30 marks)