Management Accounting & Financial Management 1

Further Revision Questions 2013

Syllabus Area 1: Management Accounting

(Section A of your !am "ill relate to this Syllabus Area#

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Management Accounting & Financial Management 1

Further Revision Questions 2013

$ecture 2 % &ost stimation

Question 1 A company is about to introduce a new product. The first unit completed will require 8 hours of labour. Assume that a ! " learning cur#e will apply to the production of this product. Required; $alculate the a#erage direct labour hours per unit and the total direct labour hours for a cumulati#e output of %& units. '( mar)s* Question 2 A company is about to introduce a new product. The first unit completed will require + hours of labour. Required; Assuming that an 8 " learning cur#e will apply to the production of this product, what will be the a#erage direct labour hours per unit and the total direct labour hours for a cumulati#e output of -+ units. '( mar)s*

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$ecture ' % Alternative &osting (echni)ues

Question 3 * /aw)shaw 0td uses an acti#ity based costing system in the manufacture of its product which is called the 1ra#itas paperweight. The following information is a#ailable for the % cost pools for the ne2t period. Materials handling Machine runs 5uality Assurance Machine idle hours 6upplier queries recei#ed 5uality inspections 6taff training days Material requisitions Absenteeism 'days* Production start7ups $ustomer deli#eries 3%&(, 34( , 3% , -, 1, & % -( &4( 1( +&(

Required; $hoose an appropriate cost dri#er for each cost pool and calculate the absorption rate for each cost dri#er chosen. '( mar)s* Question ' * 8romley 0td uses an acti#ity based costing system in the manufacture of its product which is called the 9lgin. The following information is a#ailable for the % cost pools for the ne2t period. Materials handling Machine runs 5uality Assurance Machine idle hours 6upplier queries recei#ed 5uality inspections 6taff training days Material requisitions Absenteeism 'days* Production start7ups $ustomer deli#eries 3+ 33( , , , +, 1( ( 1 8 ( 1( &

Required; $hoose an appropriate cost dri#er for each cost pool and calculate the absorption rate for each cost dri#er chosen. '( mar)s* Page %

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Further Revision Questions 2013 Question + % The 6ingleton $osmetic 6urgery $linic is a small pri#ate hospital which offers a number of different procedures to its clients, including surgical facelifts, nose7:obs and body7:et liposuction. The $linic charges its patients a fee by adding a 1 " mar)7up to total cost of each operation. $urrently the costs are attributed to each patient are based upon the number of hours spent in the initial and follow up consultations. The 6ingleton $linic is now considering changing to an acti#ity based costing system. The annual costs and the causes of these costs ha#e been analysed as follows; 3 1,-& , ( , 4, &8 , - ,

<nitial and follow up consultations =equesting information from 1P>s? $hanging medication 0aboratory testing @pdating medical records

The following details relate to three of the clinics indi#idual patients, and to the clinic as a whole; Patient A /ours spent in initial and follow up consultations =equests for information from the 1P Bo. of medication changes Bo. of laboratory tests @pdates to medical records performed % 1 & % 1 Patient 8 8 & % & Patient $ 8 1 & 1 Ahole $linic !,! %, %+ 4, 1,(

Required; Prepare calculations to show how the change to the new costing system would affect the fees charged to each of the three patients. '1+ mar)s*
* A GP is a general practitioner who treats illnesses and provides preventive care and health education to patients

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Further Revision Questions 2013

$ecture + % &,- Analysis

Question . * 1rimble produces a single product which sells for 31! per unit. =e#enues and costs for the last four quarters were as follows; 5uarter =e#enues '3* $osts '3* 1 &+4, &14,( & &4%,&%(, % % 4,8 &(4,( + % ,& &(&,( Required; Assuming no changes in costs or selling price, if + , units are sold in the coming year, what will the margin of safety be in units and as a percentage of sales. '( mar)s*

Question / * Abacus 0td produces a single product which sells for 3&1 per unit. =e#enues and costs for the last four quarters were as follows; 5uarter =e#enues '3* $osts '3* 1 &8!,8 &((,& &-&,( &+ , % %%-, &8&, + %&%,+ &4+,8 Required; Assuming no changes in costs or selling price, if +!, units are sold in the coming year, what will the margin of safety be in units and as a percentage of sales. '( mar)s*

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Question 0 % Moby 0td specialise in the construction of portable accommodation for site offices. The company produce a standard unit which sells for 3% , . Curing & 1&, the following results were recordedD 6ales 'units* Profit Eanuary F March %8 31%&, April F Eune (& 3%&8, Euly F 6eptember +3&++, Gctober F Cecember %+ 34-, Fi2ed costs occur e#enly throughout the year and #ariable costs are assumed to be constant at all le#els of output. From Eanuary & 1%, the fi2ed costs ha#e increased by (" and the #ariable costs by 1 ". Bo further increases are e2pected this year. To compensate for these cost increases the management are considering increasing the selling price, but are already concerned about relati#ely poor sales. The sales director considers that a reduction in selling price of 3(, would boost sales by & ". Required; a* Tabulate a profit statement with quarterly and total results for & 1&. $learly show the sales re#enue, #ariable costs, fi2ed costs, contribution and profit. $alculate the brea)7 e#en point and the margin of safety, gi#ing an e2planation of the latter '! mar)s* b* Ta)ing account of the cost increases in & 1%, calculateD i. ii. iii. i#. The sales required to maintain last year>s profit 'assuming no change in selling price* The selling price required to achie#e a profit increase of 1 " on last year if the sales remain the same as in & 1& and The profitHloss e2pected if the sales director>s proposal to reduce the selling price in order to increase sales is implemented. Pro#ide a brief recommendation regarding the selling price, based upon your calculations in 'bi* to 'biii* '1 mar)s*

c* $onsider the e2tent to which the assumption that fi2ed and #ariable costs are constant throughout the output range is realistic. 'mar)s* Page -

Management Accounting & Financial Management 1

Further Revision Questions 2013

((otal: 2+ Mar1s#

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Further Revision Questions 2013 Question 2 % Ferguson 6oft Crin)s plc produces and sells =on>s =ed $ola. The drin) normally sells at - p per can, and re#enues and costs for the last three months were as shown below;7 =e#enues 3 1++, 1!&, 1%&, $osts 3 !8,8 1&+,+ !&,+

Management belie#e that demand for =on>s =ed $ola is declining worldwide. /owe#er the managing director, Mr =obin /o, ha#ing identified a mar)et for more up7mar)et soft drin)s, has de#eloped a new product, 8lue Moonshine. The new product has a #ariable cost of 4 p per bottle. Furthermore its production will mean that monthly fi2ed costs will increase by ! " for the first + , bottles produced, followed by a stepped increase of 3(, per month after e#ery additional 1 , bottles. Monthly demand for 8lue Moonshine is e2pected to #ary #arying in accordance with selling price per bottle as follows;7 6elling price; Cemand 31.- , 31.8 ((, 3&. 3&.& +!,

%8,

Cemand for 8lue Moonshine is e2pected to affect demand for =on>s =ed $ola. <t is anticipated that appro2imately % " of sales of the new product will come from customers switching from the old product.

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a* Tabulate calculations, for each of the potential selling prices, which show the net increase in profits resulting from the introduction of the new product. '1& mar)s* b* Further research re#eals that demand more predictable than was originally thought. At a selling price of 3& per bottle, the following sales estimates are made for ne2t month;7 There is a ( " chance of selling +!, bottles. There is a & " chance of selling (+, bottles There is a % " chance of selling +(, bottles There is a - " chance that % " of the sales will come from customers switching from the old product. There is a + " chance that & " of the sales will come from customers switching from the old product. $alculate the e2pected contribution at a selling price of 3& per bottle. mar)s* c* 8riefly discuss the limitations of the method of analysis used in part 'b* abo#e. '+ mar)s* (otal 2+ mar1s '!

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$ecture . * Relevant costs 3 revenues for short term 4ecisions

Question 10 * A company is producing an estimate for a :ob for a customer. The :ob would require the following materials; Material A 8 $ C =equired )g +, &,+ &, % 6toc) )g &, &,1,+ $ost per per )g 34.( 3-.+ 3(.& 7 =esale #alue =eplacement cost per )g 3-.( 31 .( 3&.8 38.3-.& 34.+ 7 3 -.(

Material A is in continuous use by the company. The only alternati#e use for material 8 is as a substitute for another material, 9, which is in continuous use and costs 3(.& per )g. There is no alternati#e use for material $. Required; $alculate the rele#ant costs of material in deciding whether or not to accept the contract. '( mar)s*

Question 11 * Iour firm has been approached by a customer who would li)e a special :ob done and is prepared to pay 3& , for it. The :ob would require the following materials; @nits required ( 1, 1,( 1,& 6toc) 'units* ( 8 $ost per unit 3+ 3% 3+ 7 =esale #alue =eplacement cost per unit per unit 3% 3( 31.( 33&.3% 7 34

A 8 $ C

Materials A and 8 are in stoc) as the result of pre#ious o#er7buying. Bo other use can be found for A but the stoc) of 8 could be used in another :ob as a substitute for & units of Material 9 which currently costs 34 per unit. 8 and $ could both be sold if not used. Material $ is used regularly and if units of $ are used on this :ob they would ha#e to be replaced to meet demand. Required; Ahat are the rele#ant costs of material in deciding whether or not to accept the contract. '( mar)s* Page 1

Management Accounting & Financial Management 1

Further Revision Questions 2013

$ecture / % -ricing
Question 12 * Many companies operate a cost7plus pricing system, yet such systems are criticised for gi#ing little or no consideration to the mar)et. Ciscuss the issue of pricing in relation to cost plus and mar)et based approaches, pro#iding e2planations of the methods and e#aluation of the benefits and limitations of each. (otal 2+ mar1s

$ecture 0 * 5u4geting
Question 13 % Trails Transport pro#ides a #ariety of courier ser#ices for corporate customers. The operation co#ers hea#y haulage, smaller regional and local deli#ery #ans and fast motor cycle courier. The company operates from four regional depots in the @J mainland, one of which also accommodates the head office function. =egional managers are responsible for each depot. The company operates a budgeting system with monthly reporting procedures. Required; 'a* 8udgets are used for 'i* resource allocation, 'ii* authorisation and 'iii* control. 92plain each of these purposes, gi#ing an e2ample which could be rele#ant to the abo#e company. '! mar)s* 'b* Gutline and discuss beha#ioural issues that may be associated with the budgetary uses listed in 'a* abo#e. '1 mar)s* 'c* <n the conte2t of budgeting, e2plain what you understand by the terms Kfeedbac) control> and Kfeed forward control> '- mar)s* (otal 2+ mar1s

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Further Revision Questions 2013

$ecture 10 * A4vance4 ,ariance Analysis

Question 1' /elmshore 0td has underta)en an analysis of one of its production processes which has re#ealed the following information. The cost of in#estigating ad#erse #ariances is 3&,& . <f a fault is found an additional 31, is spent correcting the fault. The cost to /elmshore of an uncorrected fault is 3+, Faults were identified in 4 " of in#estigations conducted. The company policy to date has been to in#estigate ad#erse #ariances. Required; $alculate the a#erage cost sa#ing for /elmshore 0td if the company were to change to a policy of ignoring ad#erse #ariances. '( mar)s*

Question 1+ /ondru operates a standard costing system. The standard direct materials to produce 1, units of output is as follows; Material A 8 $ <nput 5uantity ')gs* 8 &+ %6tandard price per )g 'L* 1.1 &.+ 1.( units. The actual materials issued

Curing April the actual output of the product was &1, to production were; Material A 8 $ 5uantity ')gs* 1+, (,( (,( L 1(,-8 1&,!&( 8,% (

Required; $alculate the material price, mi2 and yield #ariances. $omment on the figures calculated. Page 1&

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Further Revision Questions 2013 Question 1. % Pan Gcean $hemicals has one product, which requires inputs from three types of material to produce batches of 6ynthon. 6tandard cost details for a single batch are shown below; Material 61 6& 6% <nput 5uantity ')gs* 8 ( % 6tandard price per )g 'L* .% .( .+

A standard loss of 1 " of input is e2pected. Actual output was 1(,+ 8 )gs for the pre#ious wee). Cetails of the material used were; Material 61 6& 6% 5uantity ')gs* 8,&8+ 4,(%( %,%%+ L &,81-.(%,!18.& 1,%--.!+

Required; $alculate the material price, mi2 and yield #ariances, and the total materials usage #ariance.

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Management Accounting & Financial Management 1

Further Revision Questions 2013

Syllabus Area 2: Financial Management

'6ection 8 of your 92am will relate to this 6yllabus Area*

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Question 1/ * The Managing Cirector of a multinational company, 0incolnis plc, has become increasingly concerned about the performance of the company compared to its @J and o#erseas competitors. 0incolnis plc is financed solely by equity, and its primary shareholders are ma:or financial institutions. At present, the financial mar)ets require returns on 0incoln plc equity shares of 8". Iou ha#e been assigned the tas) of assessing the relati#e performance of 0incolnis plc compared to two companies in the same industry; Melun 6A 'operates in o#erseas mar)ets* and has a beta of .-( Bequam plc 'operates in @J domestic mar)ets* and has a beta of 1.&( Iou ha#e decided to use the $apital Asset Pricing Model to e#aluate each company. The Managing Cirector notes that the current ris)7free rate is 1" per annum, and the e2pected rate of return on the mar)et portfolio is -". Required; 'a* $alculate, using $APM, the required rate of return on equity for Melun 6A and Bequam plc equity shares. '( mar)s* $alculate the beta of 0incoln plc and e2plain why it might be higher than the betas for Melun 6A and Bequam plc. '4 mar)s* 92plain the significance of the beta factor in the capital asset pricing model. mar)s* 9#aluate the e#idence for the #alidity of the capital asset pricing model. '4 mar)s* (otal 2+ mar1s '-

'b*

'c*

'd*

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Question 10 * 6harpe plc is considering two mutually e2clusi#e products. 8oth products ha#e an e2pected life of fi#e years, and require the purchase of new equipment. Product M requires an immediate cash outflow of 3(& , and Product I requires an immediate cash outflow of 3+4 , . Gther rele#ant financial information 'ignoring inflation* is as follows; Product M 3 && , &&, 1+, + , Product I 3 & , &(, 1&, &+,

Annual sales re#enue Annual labour cost Annual power cost 6crap #alue at end of year (

The following forecasts of a#erage annual rates of inflation ha#e been prepared; 6ales re#enues 0abour costs Power costs -" per year (" per year &" per year

6harpe plc pays corporation ta2 of % " per year in arrears and has a money 'after7ta2* cost of capital of 1-". $apital allowances are a#ailable on a &(" reducing balance basis. Required; $alculate the net present #alue for each machine and recommend an appropriate course of action. (otal 2+ mar1s

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Question 12 * Foot <nc has the following capital structure;

Bumber Bominal #alue Mar)et #alue 0atest di#idendH return Forecast annual growth in di#idends

Grdinary shares Preference shares Cebentures

1, +

, ,

%, in issue

&(p per share +(p per share 31 per debenture

( p per share %4p per share 3!& per debenture

(p Bet 4.(" -" coupon rate

(" nHa nHa

The rate of corporation ta2 is &(". Re)uire4: $alculate the weighted a#erage after7ta2 cost of capital of Foot <nc. (otal 1+ mar1s

Question 20 * /ereford plc 'Kthe company>* has recently appointed a new Finance Cirector. As part of a re#iew of company financing and performance, you ha#e been directed to calculate the weighted a#erage cost of capital for the company, ta)ing into account all elements of the company>s e2isting capital structure. The information below has been collected to assist you in completing the calculation of weighted a#erage cost of capital. /ereford plc has - million ordinary shares in issue. 9ach ordinary share was issued at a nominal #alue of &(p. The current mar)et price for one share in the company is %( p. The most recent di#idend per share payment was & p. The Finance Cirector has indicated that she e2pects di#idend payments on the ordinary shares to grow at a rate of %" per annum for the foreseeable future. /ereford plc is also financed in the form of debentures. The current debenture issue pays a coupon rate of interest of 4", and the current mar)et price of the debenture is 3!4.( . The debentures are redeemable at par in four years time. The par #alue of the debentures in issue is 3%( million. Page 14

Management Accounting & Financial Management 1

Further Revision Questions 2013 /ereford plc pays corporation ta2 at the rate of &8". The Finance Cirector has also sent you a memorandum with additional data. The memo informs you that the beta #alue for /ereford plc is currently 1.&(D it is also noted that the current pro2y for the ris) free rate of interest is &. ", and that the current mar)et rate of return is appro2imately -. ".

Required; @sing the data relating to /ereford plc; 'a* 'b* 'c* $alculate the cost of equity for the company. '( mar)s* $alculate the cost of debt for the company. '- mar)s* $alculate the weighted a#erage cost of capital for the company. '+ mar)s* (otal 1+ mar1s

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Further Revision Questions 2013 Question 21 * Aallensis plc is a fast7growing company that is currently underta)ing a re#iew of its credit management procedures. The Finance Cirector wants to underta)e a comparison of the benefit of changing the current credit policy to a new policy that reflects standard industry practice. The current credit policy is as follows. $ustomers are offered ! days creditD this policy has supported growth in the turno#er of the company to its present le#el of 34 million. The standard industry policy is to offer - days credit, with a &.&" payment discount a#ailable if customers pay within 1( days. <ndustry research suggests that appro2imately - " of Aallensis plc>s customers would opt to ta)e ad#antage of the discount if it was introduced. The Finance Cirector belie#es that the #olume of sales would be unaffected. The cost of each item sold by the company is 3(, and the selling price is 3-. The company finances wor)ing capital using an o#erdraft at a cost of (.(". Re)uire4 'a* @sing appropriate calculations to :ustify your recommendation, ad#ise the Finance Cirector as to which credit management policy is most suitable for Aallensis plc. '1 mar)s* Ciscuss the limitations of the calculations you ha#e used in part 'a*. '( mar)s* (otal 1+ mar1s

'b*

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