Answer FOUR questions; THREE questions from Section A and ONE question from Section B.

Transcription

1 UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series PG Examination MANAGERIAL ACCOUNTING NBS-7044B Time allowed: 3 hours Answer FOUR questions; THREE questions from Section A and ONE question from Section B. Candidates using a calculator are advised to include some working details in their answers. All questions carry equal marks. Notes are not permitted in this examination. Do not turn over until you are told to do so by the Invigilator NBS-7044B Module Contact: Dr. Ricardo M Santana, NBS Copyright of the University of East Anglia Version 1

2 Page 2 SECTION A Question 1: CVP analysis Ronald Co is a small-size ice-cream maker located in the east of England. A large box of its most successful ice-cream only available to supermarkets, sells for 50 per box. Variable expenses are 35 per box, and fixed expenses associated with the production of this ice-cream total 105,000 per month. Required: a) Compute the break-even point in number of boxes and in total sales pounds. b) Assume that the fixed expenses remain unchanged. If the variable expenses per box increase as a percentage of the selling price, will it result in a higher or a lower break-even point? Briefly explain your answer. c) Currently, the company sells 10,000 boxes per month. The owner of the company is convinced that a 10% reduction in the selling price would result in a 20% increase in monthly sales of the product described above. Prepare two contribution profit and loss accounts, one under present operating conditions, and one as operations would appear after the proposed changes. Show both total and per unit data on your statements. d) Refer to the proposed changes in price presented by the owner of the company. How many boxes would have to be sold at the new selling price to yield a minimum profit of 30,000 per month.

3 Page 3 Question 2: Costing: Variable and Absorption costing Sacher Café produces and sells a single type of cake the original Sacher-Torte. This is a specific type of chocolate cake, invented by in 1832 in Vienna, Austria. It is one of the most famous Viennese culinary specialties. Selected cost and operating data relating to the product for two years are given below: Description Selling price per unit 40 Manufacturing costs: Variable per unit produced: Direct material 10 Direct labour 5 Variable overhead 3 Fixed per year 100,000 Selling and administrative costs: Variable per unit sold 5 Fixed per year 15,000 Description Year 1 Year 2 Units in beginning stock 0 2,000 Units produced during the year 10,000 5,000 Units sold during the year 8,000 7,000 Units in ending stock 2,000 0 Required: a) Assume that the company uses absorption costing (absorbed over production). Compute the unit product cost in each year. b) Assume that the company uses variable costing. Compute the unit product cost in each year. c) Prepare a profit and loss account for each year in the contribution format using variable costing. d) Reconcile the absorption costing and the variable costing profit figures for each year. TURN OVER

4 Page 4 Question 3: Relevant costs for decision making Hoywood Cinema Norwich is part of a larger movie theatres chain in the Norfolk. It has suffered from decreasing profits in the last 3 years. Ms Smith, manager at Hoywood Cinema Norwich, is convinced the decreasing profit is the result of the extended opening hours (from 9 pm to 11 pm) that were introduced by the company four years ago. In an attempt to improve performance, she has proposed the company to reduce the opening hours and concentrate activities during the busiest and most profitable hours. After months studying the problem, Ms Smith presented the company with a statement of profit or loss for one typical day during the extended opening hours: Ticket revenue (400 seats x 15% occupancy x 6 average 360 ticket price) Extra consumption (food & drinks, 1 per ticket sold) 60 Less variable expenses ( 1.5 per ticket sold) 90 Contribution margin 330 Less cinema expenses Salaries, employees 100 Advertisement costs 80 Licences 70 Depreciation 60 Liability insurance 50 Total extended opening hours expenses 360 Operating loss (30) The following additional information is available about the operation of Hoywood Cinema Norwich during the extended opening hours. Employees are paid extra for the extended opening hours. Advertisement costs include the costs with advertising banners and signs that were produced to inform customers of the extended opening hours. The liability insurance is paid for the extended opening hours regardless of the number of people inside the theatre. If the extended opening hours are cancelled the theatre cannot be used for any other purpose. Depreciation is fixed and the depreciation due to wear and tear is negligible. Licences are paid annually and allow Hoywood Cinema Norwich to operate as an entertainment venue regardless of the opening times.

5 Page 5 Required a) Prepare an analysis showing what impact reducing the opening hours would have on the theatre s profits. b) Ms Smith has criticized the Marketing Director of Hoywood Cinemas because only about 15% of the seats at Hoywood Cinemas Norwich are being filled during the extended opening hours compared to an average of 40% for the industry. The Marketing Director has explained that the average seat occupancy could improve to 30% by reducing 20% current ticket prices. Would you recommend the company to adopt the price reduction? Explain. c) What other factors would you recommend that the company consider before making a decision? TURN OVER

6 Page 6 Question 4: Transfer pricing King Lynn Components Ltd is a leading developer and manufacturer of complex electronic devices. The company s Eletronic Division produces a variety of electronic items, including a component called ED-Magna ChIP (ED Chip). Revenue and costs associated with one box containing one dozen of ED Chip follow: Selling price 200 Less expenses Variable 60 Fixed (based on a capacity of 5,000 boxes per year) Net profit 105 King Lynn Components Ltd has just acquired a small company that manufactures microscopies. This company will be treated as a the Medical Division of King Lynn Components Ltd with full profit responsibility. Currently, the newly formed Medical Division purchases 500 boxes of ED Chip per year from a German supplier at a cost of 200 per box. Due to its large purchases a discount of 10% is always expected. Manager director at King Lynn Components Ltd expect great benefits resulting from the new acquisition. She is anxious for the Medical Division to begin purchasing ED Chip from the Eletronic Division. Required For a) and b), assume the Eletronic Division can sell all its ED Chip to outside customers at the normal 200. a) Are the managers of the Eletronic and Medical Divisions likely to agree to a transfer price for 500 boxes of ED Chip next year? Why or why not? b) What will be the effect on the profits of the Eletronic Division, the Medical Division, and the company as a whole if the Eletronic Division meets the price that the Medical Division is currently paying to the outside supplier and sells 500 boxes of ED Chip to the Medical Division each year?

7 Page 7 Required For c) and d), assume the Eletronic Division is operating at only 60% of capacity and sells ED chip for 200 per box. c) Are the managers of the Eletronic and Medical Divisions likely to agree to a transfer price for 500 boxes of ED Chip next year? Why or why not? d) If the Medical Division s German supplier drops its price (net of the quantity discount) to only 150 per box of ED Chip. Should the Eletronic Division meet this price? Explain. If the Eletronic Division does not meet the 150 price, what will be the effect on the profits of the company as a whole? TURN OVER

8 Page 8 SECTION B: Question 5: Decentralization and SMA a) From a management accounting perspective, discuss the benefits and disadvantages of decentralisation. b) Describe the key features of the balanced scorecard and critically evaluate its usefulness in the public sector (e.g. schools, hospitals, and universities). (15 marks) Question 6: Activity-based costing and management a) Describe in what fundamental ways does activity-based costing differ from traditiontal costing methods. (15 marks) b) Explain the concept of Activity Based Management. END OF PAPER

9 NBS-7044B Managerial Accounting Feedback Dear students, First of all we would like to congratulate 33 students who achieved a distinction mark in the exam. Those who have done equally well in their coursework and managed to gain maximum marks in the in-lab test would have gone on to obtain an overall first for this module. Section A: Most students preferred to answer Q1 (i.e., CVP analysis) and Q2 (i.e., Costing: variable and absorption costing). Students who did well in this section (i.e., either Q1 or Q2) would have made very few or no calculation mistakes. I did, however, award marks for partially correct/ completed answers as long as they are relevant and shown reasonably clearly. The same goes for the discussion sub-questions, i.e., I would reward any reasonable discussion as long as it is relevant and based on the answers obtained for the calculation part. The performance on questions Q3 (i.e., Relevant costs for decision making) and Q4 (i.e., Transfer pricing) were not as good as the in the first two questions. In Q3 many students incorrectly identify advertisement cost as relevant cost. In Q4 the main problem was in item d) were many students could not provide a compelling and numerical explanation for their recommendation. Section B: Most students preferred to answer Q6 (i.e. activity-based costing and management). Better marks, were characterised by relevant, coherent and thoroughly explained answers. Those who did relatively poorly tend to provide a limited or incomplete answer that did not sufficiently cover the key issues. Best wishes, Ricardo Malagueno