MBA: Accounting for Business Decision Making

BMAC5203/SEP20i1/F-AA

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PART A

INSTRUCTIONS:

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

2. ANSWER BOTH QUESTIONS.

Question 1 – CVP analysis (break even analysis)

Marble Deco designs and manufactures kitchen cabinets. In recent years the company has faced intense competition from technologically developed modern designers. Marble's income statement for 2011 is as follows:

Income statement for the year ending June 2011

Sales (58,000 units)

Variable costs:

Direct material

Direct labour

Variable manufacturing overhead

Total variable costs

Total contribution

Fixed manufacturing overhead

Fixed selling and administration costs

Operating income

RM RM

2,436,000

812,000

487,200

324,800

1,624,000

812,000

400,000

200,000 600,000

212,000


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Required:

a. Calculate the break-even point in units and Ringgit. Determine the margin of safety. workings:

*FC 600,000

** contribution/unit total contribution sales units

812,000

58,000

14 SP/u

2,436,000

58,000

42

BEP (UNITS) FC 600,000

42,857 units

contribution per unit 14

BEP(RM) 42,857 units x

42

1,799,994

MOS expected sales - BEP

58,000 -

42,857

15,143 units

OR

2,436,000 -

1,799,994

RM 636,006

OR

15,143 X

100

58,000

26 % BEP = 42,857 units MOS = 26%

[4 marks]

b. For 2012, Marble Deco is considering an investment in new technology that will increase


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fixed costs by RM500,000 per year but will lower total variable costs to 45 per cent of sales. Assume that units sold remain unchanged and proportion of material costs, labour costs and variable manufacturing overhead remain the same. Prepare a budgeted income statement for 2012 assuming that Marble Deco makes this investment. Calculate the revised break-even point in units and Ringgit and determine the new margin of safety. Explain your answer.

b) income statement for fye june 2012

sales 58,000

2,436,000

vc

direct material 548,100

direct labour 328,860

variable manufacturing overhead

219,240

total vc 1,096,200

contribution 1,339,800

fc

fixed manufactring overhead 770,000

fixed selling 330,000

1,100,000

operating income 2,439,800

Workings:

Contribution per unit = total contribution / sales

= 1,339,800 / 58000

= 23.10 units

Sales price per unit = sales price / sales units

= 2,436,000 / 58000

= 42 units

BEP = FC / contribution per unit

= 1,100,000 / 23.1

= 47,619.05

MOS = expected sales – BEP

= 58,000 – 47,619

= 10,381 units

= or 10,381 x RM42

= RM43,6002

= or RM43,6002 / Rm2,436,000 x 100

= 17.90%

Marble Deco must sell at least 47,619 units kitchen cabinets to exactly cover its expenses. 17.90% MOS is

the risk of loss to which Marble Deco is subjected by the new investment. It shows that the new

investment reduces the risk and costs but still gaining the same sales income as previous year.

[12 marks]


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c. State the underlying assumptions of the cost volume profit analysis tool.

CVP is applicable for short term planning. In a long run it is difficult to do assumption. It is assumed that there only one product produced by the company. It is also assumed that the selling price is constant for any sales volume.

In Marble Deco’s situation, the assumption is that they have a constant sales price. The variable cost per unit and total fixed cost have slight change due to the new investment. It is also assumed that the units sold equal units produced.

[4 marks]

[TOTAL: 20 MARKS]

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BMAC5203/SEP2011/F-AA

Question 2

You are employed as a senior manager in an audit firm. One of your responsibilities is to

randomly review claims for reimbursement that have been submitted by staff who have traveled

to client's premises.

By accident, you have pulled a claim that was submitted by Eley, your cousin who is a senior

audit assistant in the firm. Your findings show some false information and you decide to confront

your cousin with your findings. Eley, knowing you are her cousin, replies: "Sure the claim

contains false items. All the seniors do it and it is almost expected!"

Stunned by her confession, you tell her that she has to resubmit an accurate reimbursement

claim. Eley responds: "Look Martin, I am underpaid and I am stretched every month, and this is

my way of getting a few extra dollars each month. You know how they have been working all of

us to meet impossible deadlines. They should be either hiring more staff or giving us a pay rise.

I'm entitled to this, and I refuse to resubmit the claim."

Page 16 ‐ 17 Required:

a. What do you think of Eley's argument? Support your answers with reference to the code

of ethical practice.

b. Should you have approached her differently?

c. What should you do now and why?

[8 marks]

[6 marks]

[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

Prime Machine Bhd manufactures washing machines. One of its plants manufactures two

version of domestic washing machines: a standard model and a custom model. The current

cost accounting system allocates manufacturing overheads to the two products on the

basis of direct labour hours. For 2011, the company has estimated that it will incur

RM1,525,500 in manufacturing overhead costs and produce 60,000 units of the standard

model and 15,000 units of the custom model. The standard model requires one

direct labour hour and the custom model requires two direct labours. Materials and

labour costs

per unit and selling price per unit are as follows:

Standard model

(RM) Custom model

(RM)

Direct material cost

Direct labour costs

Selling price

48

15

135

67.5

30

225

After attending an activity based costing workshop, the management accountant decided to

allocate overhead costs based on four activities. The budgeted manufacturing overhead

costs traceable to the four activities for 2011 are given below:

Activity

Budgeted 0/head

RM

Cost Driver

Total level for cost driver

Standard model

Custom model

Machine set-ups

612,000 Number of set- Ups

2,400

600

1,800

Purchase orders 126,000 Number of orders 1,050 300 750Machine maintenance

315,000

Machine hours

26,250

10,500

15,750

Quality control

472,500 Number of inspections

2,250

900

1,350

Total

115251500

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Required:

a. Compute the manufacturing overhead absorption iate using the direct labour hour

rate and determine the cost to manufacture one unit of each model

OAR total budgeted overhead * 1,525,500.00

16.95 per hour

total budgeted labour hours ** 90,000.00

* 1,525,500.00

** standard 60,000.00 1 lab hr 60,000.00

customade 15,000.00 2 lab hr

30,000.00

** 90,000.00

std cust

direct material 48.00 67.50

direct labour 15.00 30.00

overhead 16.95

33.90

79.95 131.40

ABC

m set up 612,000.00 255.00 per set up

2,400.00

p ord 126,000.00 120.00 per order

1,050.00

mach main 315,000.00 12.00 per machine

26,250.00

QC 472,500.00 210.00

per inspection

2,250.00

[6 marks]

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b. Using the activity based costing data, compute the total costs to manufacture one unit of

each product. std cust direct material 48.00 67.50 direct labour 15.00 30.00 prime cost 63.00 97.50

x 60,000.00

15,000.00

3,780,000.00

1,462,500.00

m set up

600.00 x

255.00

153,000.00

1,800.00

459,000.00

p ord 300.00 x

120.00

36,000.00

750.00

90,000.00

mach main 10,500.00 x

12.00

126,000.00

15,750.00

189,000.00

QC 900.00 x

210.00

189,000.00

1,350.00

283,500.00

4,284,000.00

2,484,000.00

divide 60,000.00

15,000.00

cost per unit 71.40 165.60

[10 marks]

c. Compare the profits calculated under the traditional costing system and the activity

based costing. Explain the differences. c) traditional ABC standard cust standar cust

SP 135.00

225.00

135.00

225.00

TC 79.95

131.40 71.40

165.60

profit/loss 55.05 93.60 63.60

59.40

standard cust

traditional profit 55.05 93.60 abc profit 63.60 59.40

difference (8.55) 34.20

ABC is better because it is more accurate. It spreads the cost based on activities. traditional approach is customized

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[4 marks]

[TOTAL: 20 MARKS]

Question 2 (cash budget)

Apex Enterprise is a medium sized furniture manufacturing company operating in Subang. The

company is planning to expand its business overseas. However, the owner Mr Alan is worried

about his cash flow. Mr Alan has asked you to prepare a cash budget for December. After

examining the records of the company, you find the following:

a. Cash balance on December 1 is RM8,300.

b. Actual sales for October and November are as follows:

October November

RM RM

Cash sales 100,000 150,000

250,000 350,000 Credit sales

Total sales 350,000 500,000

c. Credit sales are collected over a three month period: 50 percent in the month of sale, 30

percent in the second month, and 15 percent in the third month. The sales collected in

the third month are subject to a 1 percent late fee, which is paid by those customers in

addition to what they owe. The remaining sales are uncollectible.

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d. Inventory purchases average 75 percent of a month's total sales. Of those purchases,

20 percent are paid in the month of purchase. The remaining 80 percent are paid for in

the following month.

e. Salaries and wages total RM87,000 per month, including RM45,000 salary paid to the

owner.

f. Rent is RM13,400 per month.

g. Taxes to be paid in December are RM5,500. The owner also tells you that he expects cash sales RM150,000 and credit sales of RM500,000

for December. The company does not have access to short term loan.

Required:

a. Prepare a cash budget for December. Include supporting schedules for cash collections

and cash payments. workings 1: purc 75% of a months total sales sales purc 75% 20% nov nov 500,000.00

375,000.00 80% dec

300,000.00

dec 650,000.00

487,500.00 20% dec

97,500.00

80% jan

397,500.00

workings 2: credit sales fee charge 50% oct oct 250,000.00 30% nov

15% dec 37,500.00 1% 375.00

50% nov nov 350,000.00 30% dec

105,000.00

15% jan

50% dec 250,000.00

dec 500,000.00 30% jan 15% feb

392,500.00

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December receipts: $

cash sales 150,000.00

credit sales 392,500.00

fee charged 375.00

A 542,875.00

payments:

rent 134,000.00

salary/wages 87,000.00

tax 5,500.00

credit purchases 397,500.00

B 624,000.00

opening balance 1 dec 8,300.00

surplus/deficit (A-B)

39,475.00

closing balance 47,775.00

[15 marks]

b. Assuming Mr. Alan has no hope of securing a line of credit for the business, what

recommendations would you give him? 1. consider reducing credit period to 1.5 months or 1 month credit and encourage cash payment with discounts 2. factoring the debts 3. demanding for longer credit period 4. increase penalty for late payment

[5 marks]

[TOTAL: 20 MARKS]

Question 3

Window Blinds Manufacturing has developed the following standards for one of its products:

Materials: 10 meters at RM9 per meter

Direct labor: 4 hours at RM12 per hour

RM90

RM48

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The company records materials price variances at the time of purchase.

The following activity occurred during the month of December:

Materials purchased:

Materials used:

Units produced:

Direct labor:

20,800 meters costing RM179,400

19,500 meters

2,000 units

8,400 hours costing RM107,100

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Required:

a. Calculate the direct materials price variance and usage variance.

d/mat cost variance

= SC-AC = $90 X 2000 - $179,400

= $600 (F)

D/mat price d/mat usage (SP-AP) AQ purchased (SQ of AO - AQ used) SP

($9 x 20,800 - $179,400) (10x2000 - 19500) $9

7,800.00 (F)

4,500.00 (F)

5 marks] b. Calculate the direct labor rate and efficiency variances.

b. Calculate the direct labor rate and efficiency variances. d/labour rate variance (SR - AR) AH 12

($12 X 8,400 - 107,100) 8400

-6300 (A) 107100

-6300

d/labour efficiency (SH of AO - AH) SR)

(4 X 2000 - 8400) 12 4

-4800 (A) 2000

8400

-400

` [5 marks]

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c. The controller has asked you to investigate and submit a report on all variances. Explain

in your report the possible reasons for the variances. REPORT TO: FROM: SUBJECT: Variance Analysis introduction: I've done investigation and I found the followings:

d/mat price 7,800.00 (F)

d/mat usage 4,500.00 (F)

d/lab rate variances -6300 (A) d/lab efficiency -4800 (A) d/mat price is favourable condition because 1.price fluctuation 2. due to quality of material purchased d/mat usage is favourable because: 1. lesser wastage 2. quality and usage go hand in hand 3. usage indicating that quality isn't an issue d/lab rate variances 1. shortage of labour 2. high skills of labour d/lab efficiency 1. poor quality material 2. machine breakdown

[10 marks]

[TOTAL: 20 MARKS]

Question 4

Felix Bhd uses a common material to produce two products: Lego and Hego. The material is

imported and need to be ordered six months in advance. Lego uses 4 kilograms of the material

for every one unit produced, and Hego uses 10 kilograms. Felix has only 32,000 kilograms of

the material in the stores. Felix estimated its current demand for Lego and Hego to be 4,000

and 8,000 units respectively. The unit contribution margin is RM45 for Lego and RM90 for Hego.

Felix is informed that further supply of the material is temporarily halted due to trade embargos.

There is no alternative source of material. Consequently, the company has to decide how best

to meet its current demand.

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Required:

a. Compute the total contribution margin that Felix would earn if it could manufacture all

4,000 units of Lego and 8,000 units of Hego.

lego hego cont/unit 45 90 x demand 4000 1600 total contribution 4045 1690

[4 marks]

b. Determine the optimal usage of the company's 32,000 kilogram of material. Compute

the total contribution margin for the product mix that you recommend.

cont/unit 45 90material 4kg 10kg cont.per LF 45 90 4 10 11.25 9 ranking 1 2

available 32000 lego 4000 x 4kg 16000 balance 16000 hego 16000 10 1600 units optimal plan: lego 4000 hego 1600 c. Describe the role of management accountants in an organisation.

1. to buy or to manufacture internallly 2. to optimize the resources available 3. planning and allocating resources appropriately

4. to monitor and control the cost betweplanned

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[10 marksJ

[6 marks]

[TOTAL: 20 MARKS]

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Question 5 high-low method

Health Fitness Sdn Bhd manufactures fitness equipments. The company is considering

outsourcing its factory maintenance services. Before making any decision, the company

controller wants to calculate the fixed and variable costs associated with maintenance services

incurred by the factory. Data for the past six months were collected and presented as follows:.

Month

Maintenance

Cost (RM)

Machine

hours

June

50,320

9,000

July 52,340 9,620

August 54,500 10,240

September 53,360 10,020

October 55,900 10,860

November 55,000 10,380

Required:

a. Using the high-low method, compute the variable rate and fixed costs for the

maintenance service. Using the high-low method, compute the variable rate and fixed costs for the maintenance service. H 10,860.00 55,900.00 L 9,000.00 50,300.00 1,860.00 5,600.00 VC = 5,580.00 1,860.00 $ 3 per unit TC = FC + VC 55,900.00 = FC + (3 X 10,860) FC = (23,320.00)

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[6 marks]

b. Estimate the total maintenance cost to be incurred in December if 10,600

machine hours are incurred.

[2 marks]

c. Body Fitness is a division of Health Fitness Sdn Bhd. Body Fitness currently provides

fitness training for a residential community located in Shah Alam. Body Fitness's current

financial information is given below:

Sales

Operating income

Operating assets

RM300,000

RM 90,000

RM600,000

div. performance a) ROI

90,000.00 X 100.00

600,000.00

15.00 %

RI operating income 90,000.00

less 12% x 600,000 (72,000.00)

RI 18,000.00 b) ROI 90000 + 12600 X 100 600000 + 90000 1487.00% %

RI operating income 102,600.00

less 12% x 690000 ( ) 19,800.00 Based on ROI, the new investment may not be accepted as the returns are lower compared to the original amount. However, using the residual income, the new investment shows an improved performance and with therefore the new investment is highly recommended. Between the 2 methods the RI is preferred.

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The manager of Body Fitness has been recently approached to provide a series of training for

several corporate clients located in the Klang Valley. If this training program is accepted, the

manager of Body Fitness needs an additional RM90,000 investment in additional assets and

this would generate RM12,600 of additional income. The company's minimum rate of return is

12 percent.

a. Calculate the company's current return on investment (ROI) and residual income (RI).

[4 marks]

b. Calculate the company's ROI and Rl if the corporate training program is accepted.

Comment on your results.

[8 marks]

[TOTAL: 20 MARKS]

QUESTION PAPER ENDS HERE

MBA: Accounting for Business Decision Making

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