Reference no: EM132586968

ACC5123 Accounting for Managerial Decisions Assignment - HELP University, Malaysia

Assignment 1 - Instructions: Answer ALL 3 Questions

Question 1 - Salam plc Performance Measurement

Southern and Northern Divisions of Salam plc produce roughly the same kind of output-packaging material.  It is therefore considered appropriate by headquarters to compare their performance.  For the  accounting  period  just  ended,  finance  staff,  at  the  headquarters,  has  prepared  the  following summarised information:

	Southern Division RM	Northern Division RM
Sales:
External Customers	1,150,000	132,000
Other Divisions	53,000	926,000
	1,203,000	1,058,000
Variable costs:
Production	180,000	120,000
Selling and distribution	91,000	47,000
	271,000	167,000
Contribution	932,000	891,000
Less Fixed costs:
Production	164,000	264,000
Selling and distribution	107,000	57,000
Administration	132,000	85,000
Apportionment of headquarters costs	84,000	146,000
	487,000	552,000
Divisional operating profit	445,000	339,000
Divisional capital employed	1,800,000	2,300,000
Return on capital employed	24.72%	14.74%

Concern has been expressed at the poor ROCE achieved by Northern Division, especially in the light of the recent major investment in new plant and equipment undertaken there, and also compared to the return achieved by Southern Division with very much older operating assets. Salam plc's target return or cost of capital is 12%.

You are required to:

a) Demonstrate how the ROCE for each division has been calculated and suggest an improved approach, explaining your reasoning. As far as the figures permit, restate the divisional ROCEs on the basis of your suggested improvement

b) Calculate each division's residual income and comment on divisional performance as revealed by this measure.

c) For each of the divisions, determine the following additional indicators of financial performance (please round to 2 decimal places):

(i) Variable production costs: sales percentage

(ii) Variable selling and distribution costs: sales percentage

(iii) Contribution: sales percentage

(iv) Fixed production costs: sales percentage

(v) Fixed selling and distribution costs: sales percentage

(vi) Fixed administration costs: sales percentage

(vii) Controllable operating profit: sales percentage

(viii) Sales: capital employed percentage

d) Using your answers to (a), (b) and (c), and any other relevant information from the question, analyse the financial performance of the two divisions.

Question 2 - Activity Based Costing

Sophicticated Factories is considering introducing an activity based costing system. Initially there is data for only three customers, Onasis Ltd, Ruthberry Plc and Timbledon Ltd. The three customers have been chosen carefully. They have similar sales value and purchase similar products. The existing costing system indicates the three customers have the same profitability.

Activity data (for all customers)

Activities	Cost driver	Annual cost driver volume
Manufacture	Machine hours	76,000
Order processing and administration	Number of orders	2,300
Marketing related costs	Number of customers	950

Overheads (RMs)

Indirect manufacturing overheads	600,000
Depreciation of equipment	150,000
Inspection and quality related	150,000
General administrative salaries	500,000
Marketing related costs	300,000
Computing and technical support	180,000
Total	RM1,880,000

The overhead costs were analysed by the management accountant. A summary is given below:

Overhead costs	Manufacture	Order processing and administration	Marketing related costs	Other
Indirect manufacturing overheads	60%	25%	10%	5%
Depreciation of equipment	100%	0%	0%	0%
Inspection and quality related	50%	0%	10%	40%
General administrative salaries	0%	40%	40%	20%
Marketing related costs	0%	30%	70%	0%
Computing and technical support	0%	30%	40%	30%

Other overheads have not yet been identified with activities. Managers wanted more time to identify appropriate activities; as an immediate remedy, the managers decided to stick with labour hours from their previous costing system.

Other - no activities identified Labour hours 35,000

Customer related data

	Onasis Ltd	Ruthberry Plc	Timbledon Ltd
Machine hours	1200	1600	600
Number of orders	40	85	60
Labour hours	1000	1300	750

You are required to:

(a) Prepare a report detailing the overhead costs for the three customers using the ABC approach.

(b) Evaluate the significant differences between the costs for each customer. In your answer, you should focus on the characteristics of ABC, and clearly relate your answer to the case above.

(c) The CFO suggests the following change regarding two cost drivers:

Activities	Cost driver
Order processing and administration	Order handling - minutes
Marketing related costs	Customer handling time - hours

Discuss the following statement: "Do you believe that the CFO is suggesting an improvement or deterioration? What criteria are important when evaluating a cost driver?"

Question 3 - Break even analysis

Proctor & Livings Ltd produces chocolate bars throughout the year. For the last seven years since their establishment, their profits didn't materialise as hoped for.

The CFO, Vincent Low, approaches you and asks you for your help. He provides you with a list of costs for an average month of chocolate bar production and you have been asked to examine the financial feasibility of the operation.

Variable costs are calculated at an assumption of selling 35,000 chocolate bars per month.

	RM
Materials:
Butter	3,700
Chocolate	5,000
Depreciation	2,370
Direct labour	12,000
Milk	3,550
Power supply	11,000
Rates	600
Rent	2,000
Salaries	12,300
Sales commission	13,400

Heating and lighting includes a 25 percent fixed charge. The product is to be sold at RM2 per bar.

You are required to:

a) Calculate the break-even point for this product.

b) Calculate the margin of safety as a percentage of sales units.

c) What is the profit / (loss) at a sales volume of 50,000 units.

d) Accurately draw a graph showing the following:

i. Fixed costs

ii. Total variable costs

iii. Total costs

iv. Total revenue

v. Break-even point

vi. Margin of safety

e) In this company's business proposal they have stated their aim is to achieve a yearly ROCE of 5%, their initial capital was RM3,000,000. How many units of their product need to be sold monthly to achieve this ROCE target? What does your answer tell you?

f) Based on your answers for a) and b), how does the break-even point and the MOS change if the company decides to increase their price by 15%, which in turn would lead to a reduction in units sold by one third.

g) Describe the limitations of the Break-Even method and elaborate why it might be difficult for a company with three products to apply this approach.

Assignment 2 - Instructions: Answer ALL 4 Questions.

Question 1 - Budgeting Question

Fancy Ltd. is a small company making plant pots. The company was established 2 years ago by Ravi and four of his college friends, when they graduated from Smarta College. The company supplies its products to a variety of small up market gardens centres. It has employed five people to help with the production of the pots. Ravi discussed the current situation of the company with the shareholders and they have agreed that it requires to diversify the business. Ravi is planning to acquire new equipment at the end of the year. This will require a deposit of RM10,000 in cash. Therefore, he needs to assess the financial situation of the company in the next four months. Ravi does not have any background in finance and accounting and is not sure if his financial planning is proper. He asks you to look at the financial situation of Fancy Ltd.:

The company sales in July are expected to be RM40,000 and it is predicted that it will rise at 10% every month till the end of the year. 50% of sales are usually paid in cash. Out of the remaining 30% is collected in the following month and the outstanding 20% the month after that.

As one of the machines has been replaced by a newer model, the company is intending to sell the old one for RM12,000 cash in September.

The purchases of raw materials are 40% of the sales of the previous month. The suppliers offer 5% discount if paid for within the month of purchase and normally 50% of purchases are so paid for; the remaining being paid in full the following month.

Wages consists of RM 3,500 and are paid each month.

General expenses are expected to be RM4,000 in September and October and RM3,500 November and December.

Fancy Ltd. declared a dividend of RM24,000. The company decided to pay the dividend in three equal instalments in April, July, October.

Due to financial crisis Ravi had to make redundant two of his employees and a Redundancy Payment of RM 4,000 is due in October.

Corporate Income Tax is RM5,000 and it has to be paid at the end of October.

Ravi is planning a cash purchase of two new machines for total value of RM15,000 in October. The cash balance at end of August is RM8,000 and the company normally keeps minimum cash balance in the bank of RM3,000.

You are required to:

(a) Prepare the cash budget for Fancy Ltd. for the period of September 2018 - December 2018 and briefly discuss your findings.

(b) Advise managers on what are the action that need to be taken to avoid cash deficit situation.

Question 2 - Investment Appraisal

Genius investment plc is considering various investment projects. They shortlisted three projects and asked a local financial analyst to recommend the best investment option. They provided the local analysts with following information about the projects:

Project I will last for 5 years. The initial expenditure is RM500,000 and the expected cash flow originating from the project is RM200,000 each year of the project life.

Project II will last for 5 years. The initial outlay is RM400,000 and the expected cash flow originating from the project is RM100,000 for the first four years of the project and RM500,000 in the last year of the project life.

Project III will last for 5 years. The outlays are estimated RM150,000 and the expected cash flow originating from the project is RM40,000 in the first year, RM50,000 in the second year, RM60,000 in the third year, RM70,000 in the fourth year and RM100,000 in the last year of the project life.

Current cost of capital is 20%.

You are required:

(a) Evaluate the three projects using:

i) Payback Period

ii) Net Present Value (NPV)

(b) Explain, which projects should be accepted and why:

i) Using both Payback Period and NPV

ii) If the projects were mutually exclusive and there was no capital rationing.

iii) If the projects were independent and indivisible, and the company hasRM1 million to invest. Explain.

Question 3 - Budgetary Control and Responsibility Accounting

Fresh Pastures is a 400 acre farm on the outskirts of the state of Perak, sprecialising in boarding horses. A recent economic downturn in the rearing industry has led to a decline in breeding activities and it has made the boarding business extremely competitive. In order to meet the competition, Fresh Pastures planned in 2018 to entertain clients, advertise extensively and absorb expenses formerly borne by clients such as veterinary and blacksmith fees.

The budget report for 2018 is presented below, As shown, the static income statement budget for the year is based on an expected 21,900 boarding days at RM25 per horse. The variable expenses per horse per day were budgeted feed RM5, veterinary fees RM3, blacksmith fees RM0.25 and supplies RM0.55. All other budgeted expenses were either semifixed or fixed,

During the year, management decided not to replace a worker who quit in March, but it did not issue a new advertising broucher and did more entertaining of clients.

Fresh Pastures Static Budget Income Statement for the year ended 31 December 2018

	Actual	Budgeted	Difference
Number of horses	52	60	8 U
Number of boarding days	19,000	21,900	2,900 U
	RM	RM	RM
Sales	380,000	547,500	167,500U
Less: Variable expenses
Feed	104,390	109,500	5,110 F
Veterinary fees	58,838	65,700	6,862 F
Blacksmith fees	4,984	5,475	491 F
Supplies	10,178	12,045	1,867 F
Total variable expenses	178,390	192,720	14,330 F
Contribution margin	201,610	354,780	153,170 U
Less: Fixed expenses:
Depreciation	40,000	40,000	0
Insurance	11,000	11,000	0
Utilities	12,000	14,000	2,000 F
Repairs and maintenance	10,000	11,000	1,000 F
Labor	88,000	95,000	7,000 F
Advertisement	12,000	8,000	4,000 U
Entertainment	7,000	5,000	2,000 U
Total fixed expenses	180,000	184,000	4,000 F
Net income	RM21,610	RM170,780	RM149,170 U

Required:

a) Based on the static budget report:

i)What was the primary cause(s) of the loss in net income?

ii) Did the management do a good, average or poor job of controlling expenses?

iii) Were management's decision to stay competitive sound?

b) Prepare a flexible budget report for the year.

c) Based on the flexible budget, answer the three questions in part (a).

d) What course of action do you recommend for the management of Fresh Pastures?

Question 4 - Corporate Governance

The development of a strong corporate governance framework is important to protect stakeholders, and to maintain investor confidence in the transitions besides attracting foreign direct investment. Corporate Governance compliance is now mandatory for listed companies in many countries.

i) What do you understand by the term Corporate Governance and state who is responsible for its compliance.

ii) Identify the stakeholders and state how they are affected in the event of Corporate Governance failure.

iii) Identify the authorities responsible for compliance and elaborate how it is pursued?

iv) Differentiate the Corporate Governance failure between Enron and Parmalat, stating the underlying causes.

v) What are some of the lessons learned from the failures of the above organisations?