Reference no: EM132400012

PMBA6020 - Accounting for Decision Making and Control - Nanyang Business School

Part 1 - Financial accounting

Recently you were talking to your friend who runs a small online business. She remarked "You've studied accounting, haven't you? I'm wondering if you can help me out. My business is going OK, I think, but I really don't know for sure. Would you give me some insights?"

You replied, "Sure! It's 15 July, and I remember you told me you started your business on 1 January. Tell me what happened during the six months from 1 January to 30 June"

Your friend motioned for you to take a seat. She sighed and said "Well, it's a long story. On day one I started by contributing $20,000 and borrowing $10,000 from the Singapore Startup Support Society. They're a good outfit. I don't need to repay them for 3 years, but I do need to pay $100 per month in interest at the end of each month. I've made five payments so far and will make the sixth payment half way through July.

"My major setup cost was to have a website developed, an online store. I engaged developers a few days after I took out the loan. They delivered the completed website at the beginning of month 3, and I paid them $15,000 at that time. It's a good website and I expect to use it for around three years before I'll need to develop another. I pay $200 per month in web support costs... started that in month 3

"My sales have been quite good, to be honest. I received $13,248 in pay now sales - where customers pay immediately by credit card. These customers all received an 8% discount off the normal price for selecting pay now. I made pay later sales of $24,000 - that's the invoiced amount. With pay later sales, the customer doesn't need to pay until I ship the goods and my website automatically dispatches an invoice when this happens. The total cash received from customers since I started up is $32,750. I'm not sure how much customers owe me right now

"What else? During month 3 I realised I couldn't cope with the customer enquiries, so I hired some help starting at the beginning of month 4 and paid $750 at the end of each month to a customer support employee based in the Philippines. Their service is amazing. Just recently they changed their payment terms and now I don't need to pay them until 2 weeks after the end of the month. So right now I owe them
$750 for month 6.

I also paid $800 per month for online advertising commencing in month 5. You know, facebook ads and stuff like that. I paid in the middle of months 5 and 6

"Stock! Oh, help, stock! I'm afraid it's a mess. I placed orders for 150 units at $60, of those I returned 20 units because the colour was wrong. I got a credit for the return. I then ordered another 200 units at $65 dollars. Around month five I did a mini stocktake and discovered I had 15 units on hand. I should have had 20 units on hand... no idea what happened to the missing 5! I ordered a further 100 units at $70 and of those I still have 40 units, and that is the correct quantity. The total amount I paid to my supplier was
$22,000

"I think that's about it. Ummm, well, ok, I did take out $3,000 cash in month 5 to pay for a short-break, but that was just me wanting to take a vacation. Nothing to do with the business."

Finally your friend fell silent.

REQUIRED: Prepare an income statement, balance sheet and cash-flow statement to help your friend understand her business performance and current position.

Part 2 - Cost-Volume-Profit

The Nanyang Business School wishes to publish a book containing case-studies of alumni who have achieved great things in business. They are anticipating a book of around 250 pages. The cost to author and design the book will be around $40,000. To print the book will involve a set-up cost of $10,000. The cost of paper, printing and binding for each book will be approximately $20 dollars.

(a) What price should be set to achieve break-even at sales of 1,500 books sold?

(b) If the Business School believes a price of $120 per book is appropriate, how many books need to be sold to make a profit of $50,000?

(c) Assume a price of $110 with 1,250 books sold. Calculate the contribution margin AND profit margin in percentage and dollar terms

NBS has decided to use an online channel for marketing, sales and distribution. The online channel charges an 8% commission on sales

(d) What price should be set to achieve break-even at sales of 1,000 books sold?

Assume a tax on profits of 20% now applies (in addition to the 8% commission on sales)

(e) What price would you suggest to achieve an after-tax profit of $25,000 assuming 900 books can be sold?

Part 3 - Cost allocation

At Deutschland Electronics, product lines are charged for call centre & support costs of $650,000 based on sales revenue. Last year's summary of call centre operations revealed the following:

Required:

(a) Calculate the call centre cost allocation rate under the current system (ie. based on revenue) and the amount of cost allocated to each product line

(b) Assume Deutschland decides to use the number of calls to assign last year's support costs of $650,000. Compute the amount of call centre support costs assigned to each product line under this revised system

(c) Assume Deutschland decides to use the total call time to assign last year's support costs of $650,000. Compute the amount of call centre support costs assigned to each product line under this revised system

Further investigation revealed that about $150,000 of cost related to information calls. This cost was largely a function of time taken. The balance, $500,000, was in respect of warranty calls. For warranty calls, the cost is largely driven by the number of calls and not the time taken - this is due to the standard processes that are activated when a warranty claim is made.

(d) Determine activity based cost allocation rates, and the total cost to be allocated to Surveillance and Speciality

(e) Of the four methods, which do you recommend? Why? Would your answer change if you were the head of the Surveillance division?

Part 4 - Variance analysis

Calico Aviation is a charter airline. For the last month, it prepared a budget according to the following assumptions:

• Number of charter flights    27
• Average distance              350km
• Revenue per km                $2.00
• Flight cost per km             $0.80
• Pilot salary                      $2,500 for a full time pilot
• Number of pilots               2.5 (2 x full time, 1 x 50% time)

Revenue was budgeted at 27f x 350km x $2.00/km = $18,900

Total cost was budgeted at 27f x 350km x $0.80/km + $2,500 x 2.5pilots = $13,810 Budgeted profit = $5,090

At the end of the month, the Chief Pilot was reviewing operations and observed the following:

• Number of charter flights         30
• Total distance flown               11,250km
• Revenue per km                     $2.10
• Total flight cost (excl pilot salary) $10,687.50
• Pilot salary                            $2,500

Number of pilots            2.4 (2 x full time, 1 x 40% time)

Prepare a reconciliation between budgeted profit and actual profit

Part 5 - Principles

Explain the Balanced Scorecard and the role of incentives as tools to support the implementation of strategy.