DO NOT TURN OVER UNTIL TOLD TO BEGIN

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1 THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALLS University of London BSc Examination 2011 for External Students BBA0120 Business Administration Management Accounting DATE DO NOT TURN OVER UNTIL TOLD TO BEGIN Time allowed: THREE hours Answer THREE Questions; ONE question from section A, ONE question from section B and ONE further question from either section A or B All questions carry equal marks No credit will be given for attempting any further questions Electronic calculators may be used. These should be of a hand-held non-programmable (where relevant) type and the name and model should be stated CLEARLY on the front of your answer book. University of London 2011 UL11/ PLEASE TURN OVER 1 of 7

2 SECTION A QUESTION 1 When James Beech, a skilled carpenter, was made redundant he set up KitTab Limited to produce a self-assembly dining table, the Constable. A few years later he introduced the Cotman, also a self-assembly kit, and for several years KitTab achieved steady growth in turnover and profits selling the two tables to DIY stores. The increased competition of the late 1990s forced James to design the Dali, a more complex, adjustable table but still in kit form. The Dali has proved a success, its sales increasing as the demand for the Constable and the Cotman declined. Moreover the Dali continues to sell surprisingly well despite a recent price increase. Ongoing demand for the Constable and the Cotman appears to be dependent on maintaining old prices and as overall profitability is falling James is considering phasing these out and concentrating on the Dali and other new tables of more unusual design. James is, however, worried that his present product costing system is flawed and he has called you in as a consultant to advise him. You establish that James runs a very organised workshop using a batch production system, making each table type in alternate batches. To minimise the number of time consuming set ups of his sawing and planing machines he produces in batches larger than the sales order quantities and holds the excess in stock for the next order. All production overhead is currently absorbed on a machine hour basis but you ascertain that KitTab s processes involve four main activities. The budgeted costs and revenues, and cost driver information for a typical month are as follows: Activities Machining Set-up Purchasing and Materials Handling Packing and Dispatch Costs 13,400 4,400 6,000 4,200 Cost Drivers machine hours production runs purchase orders sales orders 2 of 7

3 Sales Units Sales Revenue ( ) Direct Costs: Materials ( ) Labour ( ) Machine Hours Production Runs Constable Cotman Dali ,000 20,800 12,800 5,250 7,680 4,000 1,800 2,880 1, Sales orders are always in batches of 30 for the Constable and 20 for the Cotman but James has as yet been unable to persuade his customers for the Dali to take more than 10 at any one time. Each table uses different types of wood and fittings and each month the Constable and the Cotman cause 10 purchase orders each whilst the Dali causes 20 purchase orders. REQUIRED: Your report to James Beech covering the following: a) An explanation of any evidence you find to support his suspicions that the present product costing system is flawed. (7 marks) b) A calculation of contribution and total profits, analysed by product, using the present (machine hour absorption) costing system. Highlight each product s profit margin. (7 marks) b) A similar analysis using appropriate activity based costing methodology and highlighting the amended product profit margins. (10 marks) c) Your explanation of the differences observed and your reasoned conclusions as to which system gives more useful information, together with your recommendations on future product and production strategies that KitTab should adopt as a consequence of the analysis. (9 marks) 3 of 7

4 QUESTION 2 Fylde Corporation manufactures a single product. You obtain the following information Unit Selling price 30 Variable selling cost per unit 6 Variable manufacturing cost per unit 8 Annual budgeted volume (units) 12,000 Annual fixed factory costs 24,000 Annual admin fixed costs 20,000 Information on inventory, production and Sales (in units) Year Opening inventory Production Sales Closing inventory REQUIRED a) Prepare income statements for both years under both absorption costing and marginal costing methods. (24 marks) b) Discuss the behavioural effects to which absorption costing might give rise and how organisations can seek to protect themselves from their implications. (9marks) 4 of 7

5 QUESTION 3 BLAKE AND MCGINLAY Blake and McGinlay is a small family owned departmental store which does not employ a sophisticated form of management accounting. Although over the last few years the profits have been declining, this has not over-worried the owners. However, the most recent profit and loss account, for the 3 months to ended 31 December 2010, shows a loss of 68,700. (The summarised profit and loss account is reproduced as Appendix 1). This loss, coupled with a poor financial position has caused the owners to call an emergency meeting to discuss the situation. At the meeting the information contained in Appendix 2 was presented by the Company bookkeeper. One of the directors proposed that the best solution would be to close the restaurant and the toy department and to reduce selling prices in all other departments by 5% in order to stimulate increased sales by making prices more competitive with other stores. APPENDIX 1 SUMMARY PROFIT AND LOSS ACCOUNT FOR YEAR ENDED 31 DECEMBER 2010 Sales 15,150,000 Deduct: Cost of Sales 10,477,500 4,672,500 Wages Departments 1,375,000 Office 645,000 Restaurant 405,000 2,425,000 Bad debt 125,000 Departmental expenses 292,500 Delivery expenses 147,500 Directors fees and Emoluments 497,500 Discounts Allowed 84,000 Establishment Charges (Rent, heating, etc.) 615,000 Interest on Bank Overdraft 52,600 Professional fees 287,500 Sales Promotion 125,000 Sundry Expenses 89,600 4,741,200 Net Loss for the quarter 68,700 5 of 7

6 APPENDIX 2 DEPARTMENTS General Womens Mens Toys Restaurant Sales 2,400,000 5,050,000 2,250,000 3,500,000 1,950,000 Purchases 1,700,000 3,250,000 1,245,000 2,900,000 1,525,000 Opening Stock 975, , , , ,500 Closing Stock 1,015, , ,500 1,047, ,000 Wages 400, , , , ,000 Department Expenses 55,000 35,000 10, ,000 67,500 Sales Promotion 20,000 15,000 15,000 75,000 Floor Space 20% 20% 15% 35% 10% Note: Restaurant floor space also contains all administrative offices. REQUIRED a. Prepare a report which examines the proposals to (i) (ii) close the toy department and restaurant reduce selling prices by 5% in the other departments (25 marks) b Identify and examine the strategic management issues arising from these proposals (8 marks) 6 of 7

7 SECTION B QUESTION 4 An important aspect of the changing view of accounting is that increasing attention is being given to its human and social dimensions. Both accountants and managers are now explicitly recognising that it is impossible to deal adequately with accounting problems without also considering the motivations values and behaviour of human members of the enterprise. Anthony Hopwood (1977) Analyse this statement showing clearly how management accounting has responded to the need for attention being given to human and social dimensions of organisations since Hopwood made his original observation. QUESTION 5 The main issue which affects management accounting system is the existence and allocation of fixed costs (Upchurch, 2004). Discuss this statement showing how fixed costs are problematic in management accounting decision-making and how these problems are resolved. TOTAL 33 marks QUESTION 6 Net present value and the internal rate of return are regarded as robust techniques for the appraising and ranking of long-term projects in situations of capital rationing. Identify and analyse the major issues involved in making decisions based on these techniques. TOTAL 33 marks END OF PAPER 7 of 7