Faculty of Social Sciences School of Business Managerial Accounting Examination December 2014 English Date: Monday 15 December, 2014 Time: 4 hours / kl. 9-13 Total number of pages including the cover page: 7 Total number of questions: 4 The candidate must answer all questions and their parts. Be presise. Answers are only accepted in English. Reference aids allowed: Calculator (as specified in regulations for use of calculator). One dictionary: Native language - English/English - native language or English English. Note: The candidate must ensure that the answer set is complete. The candidate s name must not be written on the answer sheets. Please write with a blue or black ballpoint pen. Emnekode: ØABED3100 (ORD)
Question 1 (7 + 9 + 9) A small firm, ABC Company (ABC), has the following information about its expenses: Total variable expenses are NOK 32 000; total fixed expenses are NOK 25 200; and the sales revenue needed to breakeven is NOK 42 000. You are required to determine ABC s: i. Current sales revenue, and ii. Operating income. b. One of your friends has recently started an online retail business selling only two products. The sale price of Product A is NOK 5 per unit and sale price of Product B is NOK 3 per unit. The variable cost of Product A is NOK 2.5 per unit and variable cost of Product B is NOK 1.5 per unit. Currently he is selling three units of Product B for every unit of Product A. Following is the income statement of his business for the month of November 2014. Income Statement for the month of November 2014 NOK Sales revenue 103,000 Variable expenses: Cost of goods sold 28,000 Marketing expenses 10,000 General & administrative expenses 3,000 Total variable expenses 41,000 Contribution margin 62,000 Fixed expenses: Marketing expenses 34,650 General & administrative expenses 7,350 Total fixed expenses 42,000 Operating income 20,000 Required: i. Determine monthly breakeven point in the number of units of Product A and Product B. Show only two category of expenses: variable and fixed. c. ii. iii. Compute margin of safety in NOK. Use the operating leverage factor to determine the new operating income if sales volume increases by 15%. Assume that sales mix remains unchanged. Lin is owner of a business producing and selling three products: X, Y and Z. Her business generates NOK 3 billion in annual sales. Lin is considering an investment of NOK 45 million in a manufacturing plant that will produce all three products. The plant has a life of 15 years after which it would have no 2
residual value. Lin uses straight-line depreciation method. Cost of production on the three products is given below: X Y Z Per unit Direct materials 15 10 25 Direct labor 10 5 15 Variable manufacturing overheads 5 2 6 Moreover, following are the estimated price and sales dat X Y Z Price (NOK/unit) 130 75 225 Annual sales (units) 487,200 150,000 100,000 Lin gets an annual salary of NOK 2 million, and incurs an annual marketing and administrative expenses of NOK 300,000. When she was considering this investment, a local competing business offered her to supply Product X for NOK 40, Product Y for NOK 25, and Product Z for NOK 65. Please help Lin to evaluate this make or buy decision. She also needs your advice on strategic considerations of this outsourcing offer. Question 2 (17 + 4 + 4) A preliminary analysis of a grocery company shows that the packaged food department is the most profitable. Consequently, the company is considering to increase its space the most. Assume that the company has only three departments: produce, packaged food and meat. The most recent annual report shows sales of NOK 3,283,200, which generated a gross margin of NOK 883,200. Sales and gross margins of the three departments are as follows: Produce Packaged food Meat Total NOK Sales revenue 634,800 1,680,480 967,920 3,283,200 Cost of sales 480,000 1,200,000 720,000 2,400,000 Gross margin 154,800 480,480 247,920 883,200 In addition to cost of products sold, the store has NOK 720,000 of support costs, so operating income is NOK 163,200 (883,200-720,000). Currently, the company uses cost of products sold as a costallocation base for allocating support costs. After attending a seminar on activity-based costing, the CEO of the company suggests that the company should undertake further analysis before deciding which product gets the largest increase in space. He has asked you to lead this analysis. Specifically, he asks you to: 3
i. Compute the operating income and the operating income as a percent of sales for each department using the existing system. Use this information to assess the relative profitability per NOK of sales of each of the three departments. ii. Develop product costs using an activity-based accounting system. You determine that there are five major activities, each with a different cost driver to be used as a cost-allocation base: Ordering Placing of orders for purchases b. Delivery Physical delivery and receipt of merchandise c. Shelf-stocking Stocking of merchandise on store shelves, including ongoing restocking d. Customer support Assistance to customers, including check out and bagging e. Produce monitoring Constantly checking on the stacking and freshness of produce. The cost drivers for each activity are as follows: Ordering Delivery Shelf-stocking Customer support Produce monitoring Number of purchase orders Number of deliveries Hours of stocking time Number of items sold Direct trace to Produce Department You have determined the following information about the cost drivers: Produce Packaged food Meat Total Number of purchase orders 1,440 3,360 1,440 6,240 Number of deliveries 1,200 8,760 2,640 12,600 Hours of stocking time 216 2,160 1,080 3,456 Items sold 50,400 441,600 122,400 614,400 The total cost of each activity was as follows: Activity Cost (NOK) Ordering 124,800 Delivery 201,600 Shelf-stocking 138,240 Customer support 245,760 Produce monitoring 9,600 Total 720,000 Using these data and activity-based costing, calculate the operating income and operating income as a per cent of sales for each product. iii. Propose a strategy for this decision. Which information, that based on the current costing system or that based on the activity-based costing system, is most useful? Why? What additional information would you like to have before making a more definitive recommendation on the strategy? 4
b. Please differentiate between static and flexible budgets. c. What is the impact of under-recovery and over-recovery of overheads on current period income statement and balance sheet? Question 3 (12 + 9 + 4) An electronics manufacturer has multiple divisions that considered as profit centers and the mangers of these divisions are free to negotiate transfer prices. Two divisions are negotiating the internal transfer price of Part A that is produced by Division 1 and sold internally to Division 2 as well as externally to many other customers. Per unit prices and costs for the two divisions are as follows: Division 1 Sales price to external customers (NOK) 14 Internal transfer price (NOK)? Costs Variable cost per unit (NOK) 10 Total fixed costs (NOK) 320,000 Budgeted production (Units) 640,000 Division 2 Sales price to external customers (NOK) 170 Costs Two Part A (internal transfer cost), per unit (NOK)? Other parts, per unit (NOK) 85 Variable cost, per unit (NOK) 45 Total fixed costs (NOK) 640,000 Budgeted production (Units) 16,000 i. Compute the maximum transfer price per unit the Division 2 would be willing to pay to buy Part A from the Division 2. ii. Compute the minimum transfer price per unit at which the Division 1 would be willing to produce and sell wheels to the Division 2, assuming that the Division 1: Has excess capacity. b. Has no excess capacity. 5
b. Please fill in the missing information of the following three unrelated French companies. Company A Company B Company C Sales 114,000? 484,000 Operating income 39,900 117,000? Total assets 71,250?? Sales margin? 15% 10% Capital turnover? 2.5? Return on investment?? 22% Target rate of return 10% 22%? Residual income?? 4,400 c. i. What is benchmarking? ii. What is business process reengineering? Question 4 (17 + 8) The Chocolate Company, a Swiss manufacturer of fine chocolates, uses standard costs and a flexible budget to control its manufacturing costs. The purchasing agent is responsible for material price variances and the production manager is responsible for all other variances. Operating data for the past week are summarised as follows: i. Finished units produced: 4,000 boxes of chocolates. ii. Direct materials: Purchased and used, 4,300 pounds of chocolate at Swiss Francs (CHF) 15.5 per pound; standard price is CHF 16 per pound. Standard allowed per box produced is one pound. iii. Direct labor: Actual costs, 6,400 hours at CHF 30.5 per hour. Standard allowed per box produced is 1.5 hours. Standard price per direct-labour hour is CHF 30. iv. Variable manufacturing overhead: Actual costs, CHF 69,500. Budget formula is CHF 10 per standard direct-labour hour. 6
Compute and interpret the following: b. 1. Materials purchase-price variance 2. Materials quantity variance 3. Direct-labour price variance 4. Direct-labour quantity variance 5. Variable manufacturing-overhead spending variance 6. Variable manufacturing-overhead efficiency variance 7. Budget allowance for direct labour? Would it be any different if production were 5,000 boxes? The following budget estimates have been prepared by The Spanish Company: Cash Receipts Cash Payments May 120,000 150,000 June 110,300 150,000 The company likes to maintain a minimum cash balance of 40,000. Any excess cash is invested in a money market account earning 9 percent compounded monthly. Interest is reinvested in the money market account. Any cash deficiencies are covered by a withdrawal from the money market account. If additional cash is needed, the company has a line of credit at 12 percent interest with the local bank. Interest is paid monthly. Assume a cash balance on May 1 of 40,000, a money market account balance of 0, and a credit line loan balance of 0. Please prepare a cash budget for May and June. Q# 7