UMADS- Accounting for Managers

Question 1

Hinkler Ltd has the following capital structure:

£

600,000 ordinary shares of 50p 300,000

Share premium account 80,000

Retained earnings 160,000

Shareholders’ equity 540,000

Required:

(a) Show Hinkler Ltd’s capital structure following a bonus issue of ‘1 for 4’. (3 marks)

(b) Discuss reasons why a company might wish to make a bonus issue. (3 marks) (Total: 6 marks)

Question 2

Pendlebury Construction Limited purchases a concrete mixer lorry for £31 500 on 1st January 2021. The lorry has an estimated economic life of 4 years and an expected residual value at the end of that life of £7560.

Required:

a) Calculate the annual depreciation charge on the concrete mixer lorry by applying the straight – line depreciation method. (2 marks)

b) Calculate the annual depreciation charge on the concrete mixer lorry by applying the reducing balance method at a rate of 30 per cent per annum. (4 marks)

c) Discuss how depreciation affect the three financial statements. (3 marks) (Total: 9 marks)

Question 3

Liga Co has authorised share capital of 2,000,000 50p ordinary shares and an issued share capital of 900,000 50p ordinary shares. If an ordinary dividend of 6% is declared, what is the amount payable to shareholders in total and per share? (4 marks) (Total: 4 marks)

Question 4

RTJ Co. Ltd has the following detail for December 2021

Standard Units of product 10,000

Materials per product unit 4 kg

Raw material priced per kg $1.50

Actual performance Units of product 9,000

Materials used 39,000 kg

Material cost (total) $61,500

Determine the material cost variance in total, with a sub-analysis into material price and usage variances. (6 marks) (Total: 6 marks)

SECTION B

This part of the case study has already been made available, as has some of the information stated within questions 5, 6 and 7. Bright Ideas Co.

Bright Ideas Co. is a UK based company that manufactures and sells high quality luxury scented candles. Its manufacturing and production philosophy is that if you build in quality from the start of the manufacturing process then the finished product will be of a high standard which is expected by its customers. In recent months they have faced increasing competition from cheaper, lower quality imported candles being sold in the UK market place. In response to this the purchasing manager has sought to reduce the costs of the manufacturing process by changing material supplier and using a cheaper grade of labour.

Financial Performance Bright Ideas Co.’s retail stores have performed reasonably well in recent years but, like most high street retailers, have been subject to tough competition. The company’s directors have been able to provide draft financial statements for the last two years and these have been included within question 5.

Planning and Control Bright Ideas Co. develops two new of products --- A and B. The business is considering its marketing strategy and cost method for its products. It is suggested that ‘Activity-based costing cannot really be applied to the service sector because the activities that it seeks to analyse tend to be related to manufacturing’. These will be related to question 6.

Non-financial Performance In light of growing market competition, the director wants to improve performance by introducing a balanced scorecard in her stores. However, she is concerned because some attempts to implement improvements in the past have not been successful. She said “I do not want store managers to think a balanced scorecard is just another fad. I want them to take it seriously. I want them to give it a fair trial.” These will be related to question 7.

Appointment You have now been appointed as the consultant who will report to the Board of Directors, and you have now received additional information included within questions 5, 6 and 7.

Question 5

Required:

Prepare for the Board of Directors of Bright Ideas Co:

a) A schedule, containing FIVE ratios for both years, with at least one ratio in each of the areas of profitability, liquidity and efficiency. (10 marks)

b) An explanation of the meaning of each of the ratios that you have calculated for Bright Ideas Co. and; (10 marks)

c) A discussion of TWO ways in which financial statements for a company differ to those for a sole trader. (5 marks) (Total: 25 marks)

Question 6

Details of the two products are provided as follows:

An analysis of overhead cost for the business has provided the information related to overhead and their cost drivers:

Required:

a) Calculate the profit per unit for product A and B using both:

i. the traditional direct-labour-based absorption of overhead; (6 marks)

ii. activity-based costing (ABC) methods. (9 marks)

b) Explain the advantages ABC has over the traditional approach to the absorption of overhead expenditure. (5 marks)

c) Please comment on the statement “Activity-based costing cannot really be applied to the service sector because the activities that it seeks to analyse tend to be related to manufacturing”. (5 marks) (Total: 25 marks)

Question 7

Angela Bell, the director of Bright Ideas Co, has come to you for advice. Required: Write a short report to Ms. Bell advising her how to implement a balanced scorecard so that her store managers will give it a fair trial. This report should include:

a) Briefly introduce the Kaplan and Norton’s “Balanced Scorecard” approach over traditional management accounting views of performance measurement. (7 marks)

b) Give TWO specific objectives and measures for each perspective of the Balanced Scorecard. (8 marks)

c) Discuss the benefits and limitations of the Balanced Scorecard. (10 marks) (Total: 25 marks)