LUBS5008M01 Accounting and Organizational Performance

Section A

Answer only one question!

Question 1

Printwork, a publishing and printing company, has been asked to quote for the production and printing of a flyer to promote a local music festival. The work would be carried out in addition to the company’s normal work. Due to existing commitments, some weekend work would be required to complete the printing of the programme. A trainee accountant has produced the following cost estimate based on the resource requirements specified by the company’s production manager.

The company would receive considerable publicity if it were able to win this order and therefore the price quoted must be competitive. The following information is available in respect of the cost estimate above:

a) The paper to be used is currently in inventory at a value of £3,500. It is of an unusual colour that has not been used for some time. The replacement price of the paper is currently £5,000, whilst the scrap value is currently £1,750. The production manager does not foresee any alternative use for the paper if it is not used for the music festival flyers.

b) The ink required is not currently held in inventory. It would have to be purchased in bulk at a cost of £2,375. Only 80% of the ink purchased would be used in printing the flyers. No other use is foreseen for the remainder, which would have no scrap value.

c) Skilled labour is in short supply and to accommodate the printing of the flyers 50% of the skilled labour time required would be worked at weekends, for which a premium of 25% above the normal hourly rate is paid. The normal rate is £9.00 per hour. The company does not normally undertake any work whatsoever at weekends.

d) Unskilled labour is currently under-utilised and at present 150 hours per week are recorded as idle time. If the music festival printing work is carried out, 25 of the required unskilled hours would have to be worked at the weekend. However, instead of being paid for this weekend work, the employees concerned would be given two hours’ time off (for which they would be paid) in lieu of each hour worked at the weekend.

e) Variable overheads represent the incremental costs of operating the printing press and binding machines for the work on the music festival programmes.

f) When not being used by the company, the printing press is hired to outside companies for £5.50 per hour. There is unlimited demand for this facility.

g) Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.

h) The costs of the Estimating Department represent time spent in discussion with the music festival organisers last month concerning the printing of their programme.

Requirements

1.1) Identify and explain the characteristics of both relevant and irrelevant costs in short-term decision-making. (maximum 100 words) (5 marks)

1.2) Using relevant cost principles, provide a revised cost estimate that shows the minimum price that the company should offer for the music festival order. Give precise reasons for each figure (including any zeros) in your relevant cost estimate. (no word count) (30 marks)

1.3) Explain three other factors Freshprints should consider before quoting for the order. (maximum 300 words) (15 marks)

(Total 50 marks)

Question 2

Chronicle Ltd produces stationery and journals. One of their products is the Daily Planner. The company’s operating budget for the month of September 20X2 included the following data for one Daily Planner:

The actual number of units produced and sold in September was 4,800 and the following actual cost data is available:

The senior manager is happy that actual net profit is higher than budgeted net profit, but would like to understand the reasons behind this increase and has asked the manager of the Daily Planner department to explain her results.

Requirements

2.1) Prepare a flexible budget for September 20X2. (no word count) (15 marks)

2.2) Prepare a reconciliation of budgeted profit and actual profit, calculating all relevant price, cost and efficiency variances. (no word count) (20 marks)

2.3) Using your calculations from (2.2) identify and explain three actions that could be taken in order to further improve the performance of the Daily Planner department. (maximum 300 words) (15 marks)

(Total 50 marks)

Question 3

SoftBox Limited produces lighting equipment for cameras. SoftBox Limited is based in the UK and operates using a divisionalised structure.

Division A produces a component, SBG, which Division B uses in the production of finished lighting units, called ‘Lightdars’. Division A sells completed SBG units to Division B; Division B then uses the SBG units to produce Lightdars, which are sold to the external market. There is also an external market for the SBG units. The following information has been provided:

Requirements

3.1) Discuss the advantages and disadvantages of an organisation adopting a divisionalised structure. (maximum 240 words) (12 Marks)

3.2) Currently Division A is forced to fulfil Division B’s demand before selling any units externally. Prepare calculations to determine the current profits for Division A, Division B and the group as a whole. State any assumptions you have made in preparing your calculations. (no word count) (8 Marks)

3.3) The manager of Division A is trying to persuade the Group Director to allow Division A to sell as many units as it wants to the external market; the manager of Division A has suggested that this level of autonomy will motivate him and his workers. Assuming Division A is free to sell as many units as it can to the external market, prepare calculations to determine the expected profits for Division A, Division B and the group as a whole. State any assumptions you have made in preparing your calculations. (no word count) (8 Marks)

3.4) The Group Director believes that the group as a whole would benefit if Division B is able to purchase its full requirement of SBG units from Division A. She is therefore encouraging the managers of Division A and Division B to work together to negotiate a transfer price which will encourage Division A to sell internally, in order that Division B will not have to purchase units from the outside market. Suggest a solution which may be accepted by the managers of both Division A and Division B, preparing profit calculations to show the impact on the profits of Division A, Division B and the group as a whole. State any assumptions you have made in preparing your calculations. (no word count) (14 Marks)

3.5) Discuss the advantages and disadvantages of allowing divisional managers to negotiate transfer prices. (maximum 160 words) (8 Marks) (Total 50 Marks)