mba: accounting for business decision making

BMAC5203/JAN2012/F - AA

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PART A

INSTRUCTIONS: 1. THERE ARE TWO (2) QUESTIONS IN THIS PART.

2. ANSWER BOTH QUESTIONS.

Question 1

Apex Sdn Bhd designs and manufactures special decorative porcelain vases. A highly

sophisticated machinery was purchased for the production of the vases. The production

department established the following standards for the product's variable input.

Standard costs per unit

RM

Direct materials 18kg at RM5.25 94.50

Direct labour 2hours at RM7.50 15.00

Variable overhead 2hours at RM3.00 6.00

Total unit cost 115.50

During the month, Apex had the following actual results:

Units produced 9,000

Actual labour hours 16200 hours

Actual labour costs RM129,600

Materials purchased and used 161,000 at RM5.50

Variable overhead costs RM55,500

Required:

a. Compute and explain the material price and usage variances.

b. Compute and explain the labour rate and efficiency variances.

[7 marks]

[7 marks]

c. Compute and explain the variable overhead expenditure and efficiency variances.

[6 marks]

[TOTAL: 20 MARKS]


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DISCUSSED: 19 July 2014

Question 2

The production capacity of Auto Parts and Components Sdn Bhd is 200,000 units per year. Due

to an economic slowdown Auto Parts and Components Sdn Bhd was operating below capacity

producing only at 120,000 per annum. The unit costs of component Z are as follows:

RM

Direct materials 2

Direct labour 1

Variable overhead 3

Fixed overhead

Total unit costs

Auto Parts also has fixed selling costs totaling RM150,000 per annum and variable selling costs

of RM1 per unit sold. The normal selling price of Component Z is RM12 each.

The company has just been given an opportunity to produce 50,000 units of component Z for

a customer located in Singapore. The Singapore Company has offered to buy component Z

for RM8. Since there will be no sales commission involved, this order will not have any

variable selling costs.

Required:

a. Based on a financial analysis, should the company accept the special order? Explain the

impact of your decision on the company profit.

Compare: SO price 8 Vc 6 2 ACCEPT RM2 x 50,000 units = ↑ in profit of RM100,000

- Accepting this special order on a financial basis results in an increase of company profit of RM100k.

- These profits are achieved because the company has available capacity to accept the special order.

- Irrespective of whether the order is accepted or not, the fixed overheads will still be incurred. Hence, the financial decision to accept the order is made on the grounds that fixed cost is general and therefore irrelevant.

- The additional contribution of 100,000 will directly contribute to profit if fixed cost has already recovered.


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b. What qualitative factors might impact on the decisions? [to elaborate more]

1. there’s spare capacity available, therefore doesn’t affect normal sales 2. the acceptance of the special order doesn’t affect the relationship with

your normal customers.

[8 marks]

c. Explain why is knowledge of cost behaviour important for managerial decision making?

[to elaborate more] Variable cost per unit is constant. Any cost that is avoidable is important for decision making. However, variable cost because unavoidable, is irrelevant.

[6 marks]

[TOTAL: 20 MARKS]


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PARTB

INSTRUCTIONS: 1. THERE ARE FIVE (5) QUESTIONS IN THIS PART.

2. ANSWER THREE (3} QUESTIONS ONLY.

Question 1

AZ Bank has requested an analysis of checking account profitability by customer type.

Customers are categorized according to geographical location: Inner city, Outer city and

Suburb. The activities associated with the three different customer categories and their

associated annual costs are as follows:

RM

Opening and closing statements 50,000Issuing monthly statements 75,000

Processing transactions 512,500

Customer inquiries 100,000

Providing ATM services 280,000

Total cost 1,017,500

Additional data concerning the usage of the activities by the various customers are also

provided:

Account Balance

Inner city Outer city Suburb

Number of accounts opened/closed 3,750 750 500 Number of statements issued 112,500 25,000 12,500

Processing transactions 4,500,000 500,000 125,000

Number of telephone minutes 250,000 150,000 100,000 Number of ATM transactions 337,500 50,000 12,500 Number of accounts 9,500 2,000 1,000

Required:

a. Calculate the cost per account by customer category using activity based costing.

[14 marks]

b. AZ Bank offers free checking to all its customers. The interest revenues earned per

account by category are RM95, RM115, and RM180 from the Inner city, Outer city and

Suburb accounts, respectively. Calculate the profit earned per account for each of the

three customer categories.

[6 marks]

[TOTAL: 20 MARKS]


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Question 2

Phoenix Sdn Bhd Projected Income Statement

For the Year Ending 31 December 2012

RM RM

Sales (18,000 units) Less variable costs:

Variable manufacturing costs Variable selling costs

Total variable costs Contribution margin Less fixed costs:

Fixed manufacturing costs Fixed selling and administrative costs

Total fixed costs Operating income

90,000 54,000

127,500 52,500

360,000

144,000

216,000

180,000

36.000

Required:

a. Determine the breakeven point in sales units and dollars and explain your answer. BEP (units) = RM180,000 RM12 = 15,000 units BEP (RM) = 15,000 units x RM20* *360,000 =RM20

18,000

= RM300,000

Phoenix needs to sell 15,000 units in order to break even. This is equivalent to 300,000. any units sold below 15,000 units will result in loses to the company, while any units sold above 15,000 units will be profits made by the company.

[6 marks]

b. Explain the term margin of safety and determine Phoenix's margin of safety for the year

2012.

(maybe answered either in units or RM) Margin of safety is a measure of risk. MOS = 18,000 units – 15,000 units = 3,000 units The marginal safety of phoenix is 3,000 units which is equivalent to 20%. Any fall in the expected sales will reduce the marginal of safety hence increasing the business risks.

[5 marks]


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c. The sales- manager believed the company could increase sales by 2,000 units if

advertising expenditures were increased by RM22,500. By how much will operating

income increase or decrease if the advertising is increased as suggested? Calculate the

revised break-even point. per unit

sales 20,000.00

20.00

400,000.00

vc per unit 20,000.00 8.00

160,000.00

cost/unit 20,000.00

12.00

240,000.00

fc: current 180,000.00

additional 22,500.00

202,500.00

net income 37,500.00

↑ in income 15,000.00

BEP = RM180,000 + RM22,500 RM12 16,875 units

[4 marks]

d. Assuming the additional advertising expenditure is incurred, what is the target sales that

Phoenix need to achieve a profit of RM57,500? Critically discuss your answer. Target sales = RM202,500 + RM57,500 RM12 = 21,667 units Although the target sales is 21667 for a required profit 57500 there is no guaranteed that phoenix can sell at additional 1675 because there’s no reduction in price offered. (20k – 16875 = 3125 4800 – 3125 = 1675)

[5 marks]

[TOTAL: 20 MARKS]


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Question 3

a. What are the advantages of budgeting?

[4 marks]

b. Miller Corporation has the following sales budget for the first four months of the current

year:

Month

January February March April

Sales RM 800,000 640,000 880,000 720,000

Historically, the following trend has been established regarding cash collection of sales: 65 percent in month of sale 25 percent in month following sale 8 percent in second month following sale 2 percent uncollectible The company allows a 2 percent cash discount for payments made by customers during the

month of the sale. November and December sales were RM800,000 and RM480,000,

respectively.

Required:

i) Prepare a schedule of budgeted cash collections from sales for January, February,

and March.

ii) Does a not-for-profit agency need to budget? Why or why not?

[12 marks]

[4 marks]

[TOTAL: 20 MARKS]


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Question 4 done 9/8

Hilite Sdn Bhd manufactures power mowers for the export market. The company uses a

comprehensive budgeting process and compares actual results to budgeted amounts on a

monthly basis. Each month, Hilite's accounting department prepares a variance analysis and

distributes the report to all responsible parties. The production manager, who is responsible for

the cost of goods manufactured, has implemented several cost cutting measures in the

manufacturing area and is discouraged by the unbelievable variance costs.

Hilite Sdn Bhd

Operating Results for the Month of December

Static budget Actual Variance

Units sold 20,000 19,200 800 u Revenue 480,000 475,200 4,800 u Less Variable costs:

Direct materials

120,000

118,400

1,600 F

Direct labour 88,000 82,560 5,440 F

Variable overhead 72,000 72,320 320 u Variable selling overhead 24,000 26,480 2,480 u

Contribution margin 176,000 175,440 560 u Fixed overhead 90,000 90,000 - Fixed general & admin cost 30,000 25,000 5,000 F

Operating income 56,000 60,440 4,440 F

Jenny the management accountant of Hilite believes that the company's monthly reports would

be more meaningful to every one if the company adopted flexible budgeting and prepared more

detailed analysis.


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Required:

a. Prepare a flexible budget for Hilite Sdn Bhd for the month of December and explain the

weaknesses of the existing report.

[8 marks]

b. Determine the variance between the flexible budget and actual cost for each cost item.

[5 marks]

c. Define static budget and flexible budget. What is each type used for?

[7 marks]

[TOTAL: 20 MARKS]

Question 5 [discussed 19/7/2014]

a. The following information is related to the Emas Division:

Asset base [denominator] Sales Revenues Expenses [COGS + other expenses]

RM600,000 RM925,000 RM720,500

Required:

i) Calculate the net profit margin, and return on investment (ROI) for Emas Division?

ROI = operating income / cost of investment x 100 ROI = 204,500 / 600,000 x 100 = 34.08%

[4 marks]

ii) Emas has an option to make an additional investment that would add RM100,000 to

the asset base. It would generate an additional RMSO,OOO in sales revenue and no

additional expenses. What would be the effect on net profit margin, and ROI?

Net profit margin = operating income / sales x 100

= 204,500 / 925,000 x 100

= 22.11%

[6 marks]

iii) Another alternative (independent of alternative ii) for Emas is to run an advertising


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campaign that would require additional advertising expenses of RM37,500, but the

best estimate is the campaign would generate an additional RM75,000 of revenue.

What would be the effect on net profit margin, and ROI?

Net profit margin = 254,500 / [925,000 + 50,000] x 100

= 26.1%

ROI = 254,500 / [600,000 + 100,000] X 100 = 36.36%

The propotion increased in profit (204 to 254) is greater that increased in asset based. ROI = [204,500 + 75,000 – 37,500] / 600,000 X 100 = 40.3% NP margin = [204,500 + 75,000 – 37,500] / [925,000 + 75,000] x 100 = 24.3%

b. What are the advantages and disadvantages of return on investment (ROI)?

[TOTAL: 20 MARKS]

c. Explain your answer.

- ROI is an accounting measure which can be manipulated by managers. - Manager’s bonus/reward may be typed to divisional performance using ROI.

Managers can manipulate their performance by deferring the replacement of fixed assets which have been returned down to their ‘0’ value, hence keeping the denominator in the formula low. This can artificially inflate the performance given that revenue and expenses (numerator of the formula) has not changed significantly from previous years.

- The ROI must be used together with alternative measures when assessing the performance of division/managers.

d. Calculate the residual income (RI) given 25% cost of capital.

RM

Operating income 204,500

Less: cost of capital

(10% x total assets) (150,000)

Residual income 54,500

So long as RI is positive, the divisional performance is acceptable.

QUESTION PAPER ENDS HERE


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a) asset turnover = sales / asset base

925,000 / 600,000

= 1.54 times

b) exp to sales = 720,500 / 925,000 x 100

= 77.9%

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mba: accounting for business decision making

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