Managerial Accounting Essay Assignment

ACC220 MANAGERIAL ACCOUNTING – SPRING TERM, 2019

GROUP HOMEWORK 1

GENERAL GUIDELINES:

- It is group assignment (maximum of 3 students per team). Hence, it is important that

students provide a complete and coherent work as one assignment.

- Any materials based on different source (i.e textbook, academic articles, newspapers

etc) should be clearly referenced. Students should aim to write their own

understanding and interpretation.

- All questions should be answered in full. If you miss any question, it can significantly

impact your overall mark.

For questions requiring only discussion (Q1 –Q4):

- Students are expected to clearly explain their answers and provide a reasonable

discussion. Students should aim to write their own understanding and interpretation.

- Maximum length: up to 200 words is expected for each 3 points question. Up to

400 words is expected for each 5 points question.

For questions with emphasis on calculations (Q5- Q9):

- Students are expected to clearly explain their answers and cover each part of the

requirement in detail.

- All calculations and full workings should be clearly presented.

- Any assumptions made should be clearly written to support your workings.

Q1:

1.1 Critically discuss the impact of AI (artificial intelligence), automation, smart systems and blockchain on the industries and their wider implications on a society. (5 marks)

1.2 Critically discuss the role of ethics and sustainability for a business and their implications on company performance and strategy. (5 marks)

1.3 Discuss the usefulness and steps of strategic management framework based on

your reading of Chapter 1. Use any company of your choice to support this discussion. (5 marks)

Q2: Chapter 1 2.1 Fox and Co is pursuing the generally accepted goal of maximisation of owners’ wealth.

In an attempt to achieve this, the management has decided to cut costs by reducing staff salaries.

- Would this action be expected to achieve its purpose? Explain why or why not. (3 marks)

- What general conclusion can be reached about the business’s goal and the treatment of other ‘stakeholders’ (groups involved with the business)? (3 marks)

2.2 Broadly, all of the groups that were identified in the chapter as being users of accounting information about a business, except for the managers of the business, tend to have access to the same items of accounting information. This is typically the traditional annual accounting statements (the income statement, the statement of financial position (balance sheet) and the statement of cash flows). The managers, on the other hand, have access to all the information that they want.

Why are managers treated so much better in the provision of accounting information than the other groups? (3 marks)

2.3 Read Two case studies – Chapter 1 file and prepare short written answer for the questions (file is available under Week 1)- (3 marks)

Q3. Chapter 2

3.1 Why is it wrong, to take account of the historic cost of an asset in making a decision about that asset’s future? (3 marks)

3.2 Explain the key concepts of opportunity cost, sunk and committed cost in the context of relevant costing and decision making. Support the discussion with examples. (3 marks)

3.3 Read Case study – Chapter 2 file and prepare short written answer for the questions (file is available under Week 2)- 3 marks

Q4: Chapter 3

4.1 ‘Where a business activity has both fixed and variable costs, as volume alters the variable cost per unit of output stays the same, but the fixed cost per unit changes.’

Comment on this statement. (3 marks)

4.2 For a particular business activity, labour is a variable cost (staff are paid by the

unit of output).

What factors could cause the (variable) labour cost not to be constant per unit of output? (3 marks)

4.3 Read Case study – Chapter 3 file and prepare short written answer for the questions (file is available under Week 5)- (3 marks)

Q5: (Chapter 2 – Relevant Costing)

Part 1:

Inventory Historic cost

(£/unit)

Sales value

(£/unit)

Replacement

cost (£/unit)

Component X 6 7 9

Component Y 15 10 12

Component Z 10 3 8

Component X is constant use in business. We currently have 50 units of Component

X.

Component Y was bought several years ago and there are 200 units in stock which

has no current use in business. It could be sold at sales value of £10 per unit.

Component Z was bought specifically for Project X which was abandoned and there

is no other use. We have 500 units. Its scrap value is £3 per unit. Alternatively, it can

be used as a substitute for other Component D which is currently used. It will requie

further processing cost of £2 per unit. Component D’s purchase price is £8 per unit.

For a New Project 1, we need 180 units of Component X, 470 units of Component Y

and 340 of Component Z.

Calculate the total relevant cost to be included for Component X and Y for this

New Project 1 and briefly explain the rationale for your choice. (5 marks)

Q5: (Chapter 2 – Relevant Costing)

Part 2: LCG

The London Consulting Group (LCG) is bidding for a consulting project for the local

government.The project would be staffed as follows:

Staff grade Hours

required

Number of

staff

Junior

consultant

1,500 2

Project manager 500 1

IT specialist 300 1

Additional information:

(1) LCG employs a number of full-time junior consultants who are paid a fixed salary

of £38,000 per annum. The staffing plan shows that at least 10 of LCGs junior

consultants would be available to join the project if the firm wins the bid.

(2) LCG’s full time project managers are already fully allocated to other projects. If

LCG undertakes the government consulting project, it means that one project

manager needs to be removed from another project for which a customer is charged

£170 per project manager per hour.

(3) LCG does not employ IT experts and would need to hire a freelance consultant

for the duration of the project. The fee for the freelance consultant is expected to be

£84 per hour.

(4) To derive the above estimates, LCG had to spend £1,000 on a specialised study.

If the contract does not proceed the results of the study can be sold for £500.

(5) Additional travel costs of £20,000 will be incurred if the project is undertaken.

REQUIRED:

What is the minimum price at which LCG should offer to undertake the project

under the above circumstances? Explain the treatment of each of the items

listed in marks (1) to (5) above. (5 marks)

Q6: (Chapter 2 – Relevant Costing)

Machine Makers Ltd (MM) makes specialist machinery to customers’ specifications.

Recently, just as MM completed a particular machine for a customer, it received

information that the customer had gone bankrupt with no possibility of any payment

to MM being seen as likely. The total contract price was £150,000. The contract

specified that payment must be made in stages, as the machine’s manufacture

progressed. MM had received £40,000 in progress payments for the machine. It is

estimated that the machine could be sold, as it stands, for £74,000.

Another potential customer has been identified for the machine, but this would

require alterations to it. Details of the alterations are as follows:

1 Material A. The required quantity is held in inventories. This cost £6,000

when it was bought. It would cost £6,400 to replace it. The business uses it

constantly.

2 Material B. By coincidence the appropriate quantity of this material was

ordered recently for another contract that was subsequently abandoned

because the material was not delivered in time. MM does not normally use

this material and its scrap value is £4,000. The original cost price was agreed

at £10,000. Though the contract to buy this material is binding, the supplier

will accept £8,000 to compensate for the late delivery. The current market

buying price is now £7,000.

3 Material C. 20 units of this material will be required. This is in general use in

the business. An order for 35 units is shortly to be placed for another job. The

price for this material is £120 a unit, but the supplier allows a bulk discount of

£5 a unit, for the entire order, for orders of 50 units and above.

4 Labour. 80 hours of labour will be required for the alterations. Labour is a

fixed cost to MM, because members of staff are paid in full the normal £14 an

hour whether there is work for them to do or not. 30 hours, of the required 50

hours, can be provided by members of staff who currently have no work to do.

Only taking staff off other work can provide the remaining 20 hours. This other

work is charged out to customers at £50 an hour.

Required Show, with supporting explanations and workings, the minimum price that MM

could charge the customer for the altered machine, such that the shareholders

would be no worse off as a result. Show your workings and clearly state any

assumptions made. (Total: 10 marks)

Q7: (Chapter 3)

Heaven Ltd produces one type of sofa beds and the details per month are as follows:

Selling Price (per unit): £500

Variable cost per unit (including labour, material and other costs

£300

Fixed cost per month £80,000

Budgeted production/sales per month (in units)

700

a. Calculate profit or loss expected if budget of selling 700 units is to be achieved. (2 marks)

b. Calculate how many beds need to be sold per month in order to achieve break

even point (BEP) and briefly explain what it means for Heaven Ltd.

(3 marks)

c. If shop aims to make a profit of £44,000 per month, how many sofa beds should be

sold per month. (2 marks)

d. Calculate margin of safety in units as well as percentage terms and briefly explain what it means for Heaven Ltd. (3 marks)

(Total: 10 marks)

Q8: (Chapter 3)

Rennes Ltd provides a single standard service. The business’s results for the past two months are as follows:

April May

Sales (units of the service) 500 620

Sales revenue (£) 25,000 31,000

Operating profit (£) 10,000 14,800

There were no changes, of any description, in selling prices or costs over the two

months.

Required:

a. Given the total cost and activity levels in terms of sales units per each month, identify variable and fixed cost using high-low method. (3 marks)

b. What is the break-even point for the business’s activities? (3 marks)

c What benefit will it be for the management of Rennes Ltd to know the business’s break-even point? (3 marks)

d. Calculate contribution margin ratio per unit and briefly explain what it means for Rennes Ltd (3 marks)

e. Calculate margin of safety for each month in units as well as percentage terms and briefly explain what it means for Rennes Ltd (3 marks)

(Total: 15 marks)

Q9. Super Ltd has three products all of which require the same production facilities.

Financial data on the three products are as follows:

Product A

£ per unit

B

£ per unit

C

£ per unit

Selling price per unit (£) 250 140 160

Variable Cost per unit (£)

200

120

94

Monthly demand in units (units)

90

100

80

Machine time per unit (hours)

10

2

6

The same machine is used to produce all three products and hence, fixed cost is

not affected. Machine time is limited to 700 hours per month.

Fixed cost is £3,200 per month for all production.

Required:

With supported workings, show which combination of products to be produced

to achieve the highest profit for the company.

Clearly show your workings which shows the no of units to be produced, total contribution and total profit. (Total: 10 marks)