HELP MASTER OF BUSINESS ADMINISTRATION

SEPTEMBER 2014 INTAKE 9, HANOI

ACC501 BUSINESS ACCOUNTING & FINANCE

ASSIGNMENT 2
Due date

13 June 2015

Word limit

2,500 words

Weighting

50% of total marks for the subject

Facilitator

Dr. Yap Kim Len

Question 1 ( 30 marks)
Bill Robbie works for a human resource management firm, People 4 U (P4U), that searches for
middle and senior managers for large businesses. The firm receives a fee equivalent to 80% of the
salary package of the people the firm successfully finds for clients. Each job is allocated direct
expenses, such as the time spent by staff looking for potential employees and interviewing them,
stationery, advertising costs, phone calls and secretarial time.
As well as the direct costs, each job is allocated overhead costs determined by the accountant,
Crea Tive, who estimates what proportion of total work done by the firm each year applies to each
job. This estimate is very subjective. Bill regularly takes Crea out to lunch or for drinks after work
at the local hotel. Crea believes Bill is interested in a relationship with her, but Bill has steady
partner and does not reciprocate Creas feelings.
Each employee of P4U earns a base salary and a bonus equal to 10% of the profit on each job.
The profit on each job is calculated by deducting the direct cost and allocated overhead costs from
the fee charged to the client. Bill has borrowed a large amount to finance a new house, and is
having difficulties meeting his repayment, At lunch one day, Bill intimated that it might be in

Creas interests if she allocated less of overhead costs to Bills jobs and that some of the direct
costs could easily be charged to other jobs that Bill was not involved with. Eager to please Bill,
Crea agrees and charges some of the phone calls, stationery and secretarial costs for Bills jobs to
Nadias, as she doesnt like Nadia anyway. Crea also reduces the amount of overhead costs
allocated to Bills jobs. In return, Bill takes Crea to luch more often just to keep her on side, as he
has no intention of developing a personal relationship with her.
Required:
(a) Who are the stakeholders? Please explain.

(8 marks)

(b) Evaluate are the ethical issues of this case, if any, involved?

(8 marks)

(c) How are the actions of Crea likely to affect the performance evaluations of Nadia?
(14 marks)
Question 2 (30 marks)
Condensed balance sheet and income statement data for Kersenbrock Corporation appear below.

KERSENBROCK CORPORATION
Balance Sheet December 31
Cash
Receivable (Net)
Other current assets
Investments
Plant and equipment (net)
Current liabilities
Long-term debt
Common stock, $10 par
Retained earnings

2011
$25,000
50,000
90,000
75,000
400,000
$640,000
$75,000
80,000
340,000
145,000
$640,000

2010
$20,000
45,000
95,000
70,000
370,000
$600,000
$80,000
85,000
310,000
125,000
$600,000

2009
$18,000
48,000
64,000
45,000
358,000
$533,000
$70,000
50,000
300,000
113,000
$533,000

KERSENBROCK CORPORATION
Income Statement
For the Year Ended December 31
2011
Sales
Less: Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
Operating expenses (including income taxes)
Net income

$740,000
40,000
700,000
420,000
280,000
235,000
$45,000

2010
$700,000
50,000
650,000
400,000
250,000
220,000
$30,000

Additional information:
1. The market price of Kersenbrocks common stock was $4.00, $5.00, and $8.00 for 2009,
2010, and 2011, respectively.
2. All dividends were paid in cash.
Instructions:
(a) Compute the following ratios for 2010 and 2011.
i.
ii.
iii.
iv.
v.
vi.

(12 marks)
Profit margin
Asset turnover
Earnings per share. (Weighted average common shares in 2011 were 32,000 and in
2010 were 31,000)
Price-earnings
Payout
Debt to total assets.

(b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in financial
position and operating results from 2010 to 2011 of Kersenbrock Corporation.
(18 marks)
Question 3 (40 marks)
Palmer Corporation operates on a calendar-year basis. It begins the annual budgeting process in
late August when the president establishes targets for the total dollar sales and net income before
taxes for the next year.

The sales target is given first to the marketing department. The marketing manager formulates a
sales budget by product line in both units and dollars. From this budget, sales quotas by product
line in units and dollars are established for each of the corporations sales district. The marketing
manager also estimates the cost of the marketing activities required to support the target sales
volume and prepares a tentative marketing expenses budget.
The executive vice president uses the sales and profit targets, the sales budget by product line, and
the tentative marketing expenses budget to determine the dollar amounts that can be devoted to
manufacturing and corporate office expense. The executive vice president prepares the budget for
corporate expenses. She then forwards to the production department the product-line sales budget
in units and the total dollar amount that can be devoted to manufacturing.
The production manager meets with the factory managers to develop a manufacturing plan that
will produce the required units when needed within the cost constrains set by the executive vice
president. The budgeting process usually comes to a halt at this point because the production
department does not consider the financial resources allocated to be adequate.
When this stand still occurs, the vice president of finance, the executive vice president, the
marketing manager, and the production manager meet together to determine the final budgets for
each of the areas. This normally results in a modest increase in the total amount available for
manufacturing costs and cuts in the marketing expense and corporate office expense budgets. The
total sales and net income figures proposed by the president are seldom changed. Although the
participants are seldom pleased with the compromise, these budgets are final. Each executive then
develops a new detailed budget for the operations in his or her area.
None of the areas has achieved its budget in recent years. Sales often run below the target. When
budgeted sales are not achieved, each area is expected to cut costs so that the presidents profit
target can be met. However, the profit target is seldom met because costs are not enough. In fact,
costs often run above the original budget in all functional areas (marketing, production, and
corporate office).
The president is disturbed that Palmer has not been able to meet the sales and profit targets. He
hired a consultant with considerable experience with companies in Palmers industry. The
consultant reviewed the budgets for the past 4 years. He concluded that the product line sales
budgets were reasonable and that the cost and expense budgets were adequate for the budgeted
sales and production levels.
Instruction:
(a) Discuss how the budgeting process employed by Palmer Corporation contributes to the failure
to achieve the presidents sales and profit target.
(10 marks)
(b) Suggest how Palmer Corporations budgeting process could be revised to correct the problem?
(12 marks)
(c) Should the functional areas be expected to cut their costs when sales volume falls below
budgets. Explain your answer?

(18 marks)

... END .