This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON

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1 ~~AC3097 ZB d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC3097 ZB BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route Management Accounting Thursday, 16 May 2013 : 2.30pm to 5.45pm Candidates should answer FOUR of the following EIGHT questions: TWO from Section A, ONE from Section B and ONE further question from either section. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book. PLEASE TURN OVER UL13/0010 Page 1 of 8

2 SECTION A Answer two questions and no more than one further question from this section. 1. Pine Woods Ltd, owns pine forests and cuts the wood felled into boards sized to customer orders. It has two divisions as follows: i. The Forest division which owns land on which it plants and harvests trees. Forest sells most of its wood to the Lumber division. Any harvested wood not sold to Lumber is sold externally. ii. The Lumber division cuts the wood into boards of different sizes to meet customer requirements. The following information relates to the year ended 31 st December 2012: Forest sold 200,000 metres of timber to outside customers at 4.50 per metre and 800,000 metres of timber to Lumber. Lumber purchases all its wood requirement from Forest. The transfer price of wood from Forest to Lumber is Lumber s share of Forest s direct operating expenses (calculated as Lumber s share of the total wood sold) +10%. Other financial details for the two divisions are: Forest Lumber Net asset value 2,200 2,700 Total revenues As described in paragraph above 7,600 Direct operating expenses 2,000 3,500 The company policy is to assess the performance of each division on the basis of residual income with a target return on capital of 20% per annum. Required: (a) (b) Calculate the residual income for each division and for the company as a whole based on the transfer price policy described above. In the light of your calculations discuss the way in which each divisional manager s operating decisions are likely to be affected by the current transfer price and appraisal system. (10 marks) After complaints of the unfairness of the existing transfer price system by the manager of the Forest Division, senior management is exploring moving to a transfer price of either: (i) cost +60%, or (ii) market price. For each of these methods, calculate the profit and residual income of each division. Provide advice for top management on the ways in which each divisional manager s operating decisions are likely to be affected by the change in transfer price. State your assumptions in your answers. (15 marks) UL13/0010 Page 2 of 8

3 2. The Sarah Pulin Hospital Company (SPHC) has sites in several U.S. cities. Many of the patients referred to it by insurance companies are suffering from arthritic knees. Insurance companies will pay set fees for each of two categories of treatment for the condition. SPHC is worried about the finances of the provision of these treatments and also feels that the standard of service can be improved. In order to monitor expenditure and ensure more consistent standards of care, they propose to appoint Matt Rimney, a middle level manager, to set up a small administrative centre to co-ordinate the work of the hospitals, orthopaedic surgeons, anaesthetists, etc. The centre would cost $300,000 a year to run, including Matt Rimney s salary. It would be funded by being credited with the fee paid be the insurance company for each category of treatment provided. The centre would use these receipts to pay hospitals and clinicians. After these payments there should be a sufficient margin to fund the unit. The two categories of treatment provided are: The full knee replacement is a major operation requiring up to three hours in the operating theatre and six days recuperation in hospital. The medical device which is fitted is major and expensive. The partial knee replacement involves one hour of operating theatre time, three days recuperation in hospital and a far less expensive medical device. The budgeted financial information for each of the two categories of treatment are shown below: Full Knee Replacements Partial Knee Replacements $ $ Fees to be received from insurance companies 15,200 5,700 Direct Costs Orthopaedic $600 per hour 3.5 hrs 2, hrs 900 $400 per hour 3 hrs 1,200 1 hr 400 Operating $2,000 per hour 3 hrs 6,000 1 hr 2,000 Hospital Ward $400 per day 6 days 2,400 3 days 1,200 Medical device 3,000 1,000 Total Direct Cost 14,700 5,500 Contribution to Centre Expenses Matt assumed that there would be 300 patients treated per quarter, split equally between full replacements and partial replacements. After the first quarter s operations it is clear that things are not going well financially. Matt calls upon you as the company s management accountant to investigate the situation. You decide that you need to conduct a thorough variance analysis. Question continues on next page. UL13/0010 Page 3 of 8

4 Your investigations reveal that: 250 patients were treated 100 total replacements and 150 partial replacements Orthopaedic consultants were paid for 600 hours at a cost $640 per hour, a total of $384,000, Anaesthetists were paid for 476 hours at a cost of $420 per hour, a total of $199,920, 425 hours of operating theatre time were paid for at a cost of 2,100 per hour, a total of $892,500, 1,100 ward days for recuperating patients were paid for at a cost of 418 per day, a total of $459,800, 100 full knee replacement prostheses were purchased at a cost of $320,000, 150 partial knee replacement prostheses were purchased at a cost of $165,000. Required: (a) Using Matt s budgeted treatment profiles, prepare profiles for the average treatment based on a: i. 1 to 1 ratio between full replacements and partial replacements ii. 2 to 3 ratio between full replacements and partial replacements (4 marks) (b) Prepare a table for the three months showing: i. the original budget, ii. flexed budgets for two levels of product mix 1:1 and 2:3, iii. actual expenditure, iv. the variances which arising on each type of expense. (10 marks) (c) Some of the variances arising above can be further broken down into sub-variances. Provide this analysis. (6 marks) (d) Comment on the information revealed by your analysis and give recommendations to management. (5 marks) UL13/0010 Page 4 of 8

5 3. The Majestic hotel is a five-star hotel situated in a good location in a major city. It attracts business and leisure travellers, runs conferences and welcomes non-residents to enjoy its bars and restaurant. The summary income statement for the year ended 31 st December 2012 reads as follows: Total Revenue 10,080 Direct Operating Material 900 Direct Operating Wages 2,330 Estate Fixed costs 4,240 General Fixed Costs 606 Total Operating costs 8,076 Net Annual Income 2004 The revenues and direct operating costs can be further analysed by the services provided as follows: Rooms Minibar Restaurant Bar Leisure Gift Suite Shop Total Revenues 6, ,200 1, ,080 Direct Materials Direct Wages 1, ,330 Total Room Nights Nights Available 105,000 Occupancy Rate 70% 60% 70% 40% The hotel now wishes to determine the profitability of its different types of customers. These have been identified as: Business clients on expense accounts, who use the executive rooms and make significant use of all facilities except the gift shop. Package tour clients, where tour operators look to bargain a good price and clients mostly explore the city during their stay. Individual bookings, prices of rooms vary considerably but these clients respond to discount deals offered on line. Local visitors to Restaurant and Bar, these occur throughout the year. Promotions and special events are used to attract them at times of low demand for rooms. Question continues on next page. UL13/0010 Page 5 of 8

6 Analysis of revenue from clients for the year ended 31 st December 2012 has revealed the following: Business Packages Individuals Locals Total Annual number of nights 21,000 46,500 6,000 73,500 Room revenue % Minibar revenue % Restaurant and bar revenue % Leisure suite & gift shop revenue % Analysis of costs for the year ended 31 st December 2012 has revealed that direct room costs vary per room, not per room revenue. In all other departments direct costs vary with revenue. It has been decided to allocate estate fixed costs to client groups on room occupancy, and general fixed costs on revenues. Required: (a) Analyse the income and expenditure by each of the client groups in what you consider to be an appropriate format. (12 marks) (b) Calculate supporting statistics based on rooms per night. (4 marks) (c) Comment on the information provided by your analysis and advise the management on pricing, withdrawal from any client groups and a strategy to fill more of the hotel s capacity. (6 marks) (d) Discuss whether the method used to allocate fixed overhead is appropriate. Include in your answer an alternative method which might give more useful figures. (You are not required to calculate figures for your suggested answer.) (3 marks) UL13/0010 Page 6 of 8

7 4. The Accounting Software division of Small Business Services (ACSBS) provides accounting software for small businesses. At the start of the year ended 30 th June 2014, ACSBS is planning to release two new accounting software packages. The price of each package includes one after purchase technical visit by ACSBS staff, to customise the product. Details of the packages are as follows: ASP-6 is designed for very small businesses. It is compatible with company law and tax regulation requirements. It provides basic, easy to understand weekly analyses and final year accounts. ASP-11 is aimed at larger small businesses. Compatibility features are the same as the ASP-6 but the package is designed for much greater complexity of transactions and analysis. It has more complex management accounting functions which must be customised for the user. The predicted unit costs and revenues of the products for the forthcoming year are: ASP-6 ASP-11 Selling price Variable costs - Manufacturing Marketing and customer service Technical visit The annual fixed costs to be covered by this initiative are estimated at 25,000,000. Total target sales for the first year are 250,000 units. ACSBS division wishes to explore the financial implications of this volume of sales with an expected mix of products of either: i. 30% ASP-6 customers and 70% ASP-11 customers, or ii. 40% ASP-6 customers and 60% ASP-11 customers. Required: (a) (b) (c) (d) Using the above information, for each of the predicted mixes of sales, calculate the break-even in units and the predicted operating income for the forthcoming year if the total target sales are achieved. In each case, your answer should provide a breakdown of the number of units of each product required for both break-even and operating income. (10 marks) A proposal has been put forward to spend an additional 5,000,000 on fixed production and marketing costs to increase the volume of sales of ASP-11. This initiative would only be worthwhile if it also contributed at least an additional 4,000,000 to divisional profit. Assuming that the initiative guarantees that the same number of ASP-6 packages as in mix i. above will be sold, how many ASP-11 packages would be required to meet the new divisional profit target? With this mix of products, what would be the break-even and the operating income? (4 marks) Using the assumptions in (a) above and the mix of 30% ASP-6s and 70% ASP-11s, the company wishes to explore the effect of inflation on its plans. They predicted that price inflation will be continuous throughout the year. By the end of the year all costs will be 8% higher than at the beginning of the year. The inflationary effect on ACSBS prices by the end of the year will be 6%. Due to competitive pressures it is not possible to increase the prices beyond the rate of inflation. Under these assumptions, calculate the break-even point and number of units of each product to be sold to break-even, and calculate the operating income. (5 marks) Comment on how the information you have calculated in parts (a) to (c) could be used by the company in decision making and monitoring performance. (6 marks) UL13/0010 Page 7 of 8

8 SECTION B Answer one question and no more than one further question from this section. 5. Choose five of the terms/techniques listed below and for each one: i. Explain the meaning of the term/technique; ii. iii. Drawing on your experience of management accounting, give two examples of its application; Provide a discussion of some of the practical limitations of which users should be aware with regard to the term/technique. (a) Direct cost (b) Absorption costing (c) Cost centre (d) Flexible budget (e) Opportunity cost (f) Throughput accounting (g) Value added (h) Transfer price (i) Decision tree (j) Standard product cost (5 marks each) 6. In a system of responsibility accounting, costs and revenues should be traced to the individuals who are responsible for incurring or earning them. Explain, with examples, why this simple principle is difficult to achieve in a comprehensive system of budgetary control. (25 marks) 7. Explain why management accounting can be as important in public sector industries (such as health care, education and charities) as it is in private sector industries (such as manufacturing or retailing). With regard to one type of public sector, describe how four management accounting techniques would be applied in that sector (25 marks) 8. Discuss the role of the management accounting function in the strategic success of an organisation. (25 marks) END OF PAPER UL13/0010 Page 8 of 8