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Class Test

Examination Session:
March 2014

Year:
2014
Exam Code:


/


Title: Management Accounting Summative Assessment-
PRE- RELEASE QUESTION
This pre-release part question will be available on DUO on Monday 17
th
February 2014
No figures will be provided in the question until the day of the test (12
th
March 2014)

Time Allowed: One Hour
Examination Material Provided: Exam book
Additional Materials Permitted: Course Book and notes from lectures or seminars.
Only Casio Fx83 and Casio FX85 series calculators may be
used. Calculators with additional text after the model
designation are acceptable, e.g. Casio FX85GT Plus or
Casio FX 85 ES, but the model designation must start FX83
or FX 85.
Instructions: Write up your answer and wait until it is collected before you
leave the room.
Revision:



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Question
LEO Ltd manufactures a product known as the Matrix. A large number of other
companies also manufacture the Matrix and the market price of the Matrix is forecast
to be ? during 2014. Market demand for the Matrix is highest towards the end of the
year. Customers prefer to place orders with manufacturers who are able to deliver
Matrixes immediately from their inventory.
A summarised version of LEO's balance sheet at 31 December 2013 is shown
below.
Summarised financial position of LEO Ltd as at 31 December 2013

Plant and equipment (net) ?
Inventory ?
Debtors ?
Cash at bank ?
Creditors ?
Net assets ?

Share capital ?
?% loan from shareholders ?
Retained earnings ?
Capital ?

During 2014, LEO is committed to:
repaying ? of the 16% loan from shareholders in June and paying ? interest on
the loan in June and ? interest in December;
paying interest on its bank overdraft at a rate of ?% per quarter on the balance
outstanding on the last day of each quarter;
incurring fixed overhead costs (excluding depreciation) at a rate of ? per quarter
(all such costs are paid in the month in which they are incurred);
incurring variable production costs at a rate of ? per Matrix (?% of these costs are
paid for in the month they are incurred and ?% in the month after they are incurred).

LEO's accounting policies include:
providing for depreciation at a rate of ?% per quarter on the net book value (i.e.
cost less depreciation) of plant and equipment outstanding at the end of each
quarter;


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valuing inventory (or 'stock') at a standard production cost of ? per Matrix.
In early January 2014, LEO's executives meet in order to discuss the commercial
strategy for the coming year. The sales director advocates an aggressive strategy
(Strategy 1), involving new investment, high inventories and an expansion of sales.
The finance director advocates a conservative strategy (Strategy 2) involving no new
investment, minimising inventories and the adoption of a 'tight' credit policy on sales.
Relevant details concerning the two strategies are described in the following section.

Strategy 1
In January, acquire new production equipment at a cost of ?.
Offer ?% (by sales value) of customers, ? months' credit and require the rest to pay
immediately.
Make sales at a rate of ? units per month (quarters 1 and 2) and ? units per month
(quarters 3 and 4).
Produce at the rate of ? units per month (quarters 1 and 2) and ? units per month
(quarters 3 and 4).
A review of outstanding debts at the end of 2014 is forecast to result in a bad debt
write-off totalling ? (all relating to quarter 4 sales).

Strategy2
Continue the existing credit policy of offering ?% (by sales value) of customers 1
month's credit and require the rest to pay immediately.
Make sales at a rate of ? units per month (quarters 1 and 2), 1,000 units per month
(quarter 3) and ? units per month (quarter 4).
Produce at a rate of ? units per month (quarters 1 and 2) and ? units per month
(quarters 3 and 4).
A review of outstanding debts at the end of 2014 is forecast to result in a bad debt
write-off totalling ? (all relating to quarter 4 sales).

Requirements
(a) Prepare a cash-flow budget and a profit budget for LEO on the basis of Strategy
1.
The budgets should be split into quarterly intervals showing cash-flow and profit
forecasts for each individual quarter. (22 marks)
(b) Prepare a cash-flow budget and a profit budget for LEO on the basis of Strategy
2.
The budgets should be split into quarterly intervals showing cash flow and profit
forecast for each individual quarter. (18 marks)
(c) Compare and contrast the two sets of budgets you have prepared in answer to
requirements (a) and (b). Advise LEO's management on the relative merits of the two
alternative strategies. Advise which strategy should be adopted. (10 marks)
(Total = 50 marks)
Note: In preparing your answer you may assume that cash is held on current
account where it earns no interest and any cash deficit requirement is satisfied by
drawing down on the overdraft facility.