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6012ACC
Management Accounting for Business Decisions
APRIL 2021
SECTION A - You must answer this Compulsory Question from this section.
Question 1:
Lavazza Coffee Ltd produces different kinds of Coffee drinks. The company is planning to invest in two modern equipment which are mutually exclusive. The management of the Coffee Company provides you the following information. Use 8% to calculate the positive NPV and 16% to calculate the negative NPV
|
|
Cleated Conveyor |
Cherry Washer |
|
|
£ |
£ |
|
Cost of Investment |
300,000 |
300,000 |
|
Annual cashflows |
|
|
|
Year 1 |
90,000 |
70,000 |
|
Year 2 |
80,000 |
63,000 |
|
Year 3 |
65,000 |
120,000 |
|
Year 4 |
80,000 |
65,000 |
|
Year 5 |
60,000 |
62,000 |
|
with scrap value of |
8,000 |
8,000 |
Required:
a) For each of the two equipment calculate:
(i) Accounting rate of return (5 marks)
(ii) Payback period and (5 marks)
(iii) Net present value. (10 marks)
(iv) Internal rate of return (10 marks)
b) Explain the advantages and disadvantages of using the internal rate of return to evaluate the investment. (10 marks)
(Total 40 marks)
SECTION B - You must answer any TWO questions from this section. Each question is worth 30 marks
Question 2
iRugs Ltd is a medium size company dealings in the manufacturing varieties of rugs and carpets. The company main material is wool fibre which is bought in 3 yards in lengths.
The budgeted cost for one yard length of wool is £12 and each rug produced uses 6 yards of wool. It took the company’s worker 1.50 hours to make one rug and the hourly rate for labour is £6.50 per hour.
Variable overhead rates are charged at £3.20 per direct labour hour.
The budget for each month is to produce 210 rugs with a selling price of £90 for each rug.
The newly employed management accountant of the company produced the following actual sales and costs figures:
Sales of 210 rugs with the sales figure at £20,200.
Purchases figure of wool stood at a total of £5,000 and 360 yards lengths were bought and used. Labour costs were £3,000 and 320 hours were charged.
The Variable overheads incurred for the month remains at £800.
Based on the information given above, the Finance Director requested the newly employed management accountant to provide some further analysis on the variances in the month.
Required:
a) Calculate the appropriate variances from the information provided. (10marks)
b). Prepare a statement reconciling the difference between budget and actual. (8marks)
c) Suggest possible reasons for each of these variances. (12marks)
(Total 30 marks)
Question 3
Fergana Coffee ltd specialises in the production of Coffee. The Company specifically produce two types of Coffee Green and Dried. The Product costs are computed on an overhead absorption-rate basis using a labour-hour method. Prices are set based on costs plus 30 per cent.
The planned figures for next year are as follows:
A B
Material cost (£/unit) 10 15
Direct labour hours (per unit) 0.75 0.85
Planned production/sales (units) 30,000 5,000
Next year’s overheads are planned to be £128,000. Direct labour is £7.50/hour.
The company has reduced the selling price of Dried Coffee, with the result of a very low profit margin. The company employed a new management accountant who suggested to the
management team to try the activity-based costing approach. An analysis of the overheads led to a grouping of the main business activities into Grinders (£75,000), Dispensers (£53,000)
costs. These activities can be allocated to the respective cost drivers of machine hours,
dispensers order. This reflects the use of resources in each area. Further investigation showed the proportion of each Coffee (Dried and Green) of the total volume of products:
A B
% %
Machine hours 35 65
Dispensers orders 45 55
Required:
1. Calculate for each product the full cost and selling price using:
i) The absorption costing method (8 marks)
ii) The activity-based costing method (12 marks)
2. Discuss two advantages of the activity-based costing method and two disadvantages of the method. (10 marks)
(Total 30 Marks)
Question 4
The Bell-Co plc produces and sells Computers. It competes and plans to grow by producing high- quality Computers but at low cost that are delivered to customers in a timely manner. Being a newly established computers company, Bell-Co plc has to contend with serious competition from its rival companies that deals in computers in the UK. In an attempt to edge its competitors Bell- Co hire an expert management consultant to analyse the business and to suggest possibilities for improvement. After an intensive review of the business and its operations, the consultant presented his findings to the management of the company. In his presentation, he emphasised a number of key issues that require immediate attention:
• Financial performance of the business has suffered recently, with a fall in profit from the previous year of about 30% expected.
• Product quality is an issue, as the number of returns due to quality issues has risen to 22% of all computers sold.
• A previously implemented reorganisation of the manufacturing process has had the opposite effect, leading to an 8% drop in productivity.
• Customers seem to be unhappy with the quality of the product. The frequency of complaints has increased by 18% over the last 12 months.
• Market share in their computer market in Middle-East has dropped from 40% to 20%.
• Human resources reported an increase in the rate of staff turnover, which has reached a record of 25%, coupled with employee satisfaction dropping to a low of only 28% of staff declaring to be satisfied in their job.
The management of The Bell-Co plc is convinced that continuously improving its manufacturing process and having satisfied employees are critical to implementing its strategy in 2022.
Required:
a) Design a Balanced Scorecard for The Bell-Co plc that includes the four perspectives. Describe two goals for each perspective and briefly explain your answer. (14 marks)
b) Explain in details 4 benefits and 4 limitations of the balanced scorecard and briefly comment on them. (16 marks)
(Total 30 marks)
Present Value Factors
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Year
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026