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2.2 Management Accounting
Home Level 2 2.2 Management Accounting Page 7

Category: 2.2 Management Accounting

2.2 Management AccountingLevel 2Outsourcing

May 2018 Q4 b.

PieceJoz FM, a media organisation is considering hosting a two-day beauty pageant in June 2018. The show will be expensive to run and promote. There will be three cash prizes on offer for the pageant, namely:

  • 1st Place – GH¢5,000, 2nd Place = GH¢2,000, 3rd Place = GH¢1,000.
    Other costs will include:
  • Three judges of the show will each be paid GH¢400 per day plus a one-off travel expense allowance of GH¢150.
    The following costs will be incurred by PieceJoz FM if they were to organise the show;
  • Promotional costs of GH¢ 3,000 have been spent to date. A further GH¢1,000 per month will have to be incurred for the five months leading up to the pageant and GH¢4,000 in the month of the show.
  • Utility costs incurred each day of the pageant are estimated to follow the function GH¢ 200 + 5X where X is the number of contestants performing. The council expects 30 contestants per day.
  • Stocks of wood and steel to construct the stage. 400 metres of wood already in stock will be used. This originally cost GH¢20 per metre but will not be replaced. It was due to be sold to an employee at a price of GH¢8 per metre. 60 metres of steel that originally cost GH¢18 per metre is to be used. Steel has a scrap value of GH¢10 per metre. This steel will have to be replaced. The market price of steel has increased to GH¢15 per metre.
  • 140 labour hours to build the stage. Currently, PieceJoz FM maintenance employees are paid GH¢600 each, plus 20% employers’ costs for a 40-hour week. Two such employees will be idle for the week required to build the stage. The remaining labour will be hired in at a casual rate of GH¢10 per hour.
    PieceJoz FM expects that:
  • 1,000 people will attend the beauty pageant on the first day and 2,000 on the final day.
  • Daily tickets will sell at GH¢12 per adult ticket and GH¢5 per child ticket. It is expected that ticket sales will be 40% children and 60% adult.
  • An event organiser called Magic Media have submitted proposal to organise this program on behalf of PieceJoz FM at a fee of GH¢13,100 including utility cost of GH¢900.

Required:

Explain THREE non-financial factors PieceJoz FM should also consider when making the decision to outsource.        (3 marks)

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  • Can the council ensure the health and safety of participants and spectators?
  • Is there any competing events in the region for the days for which the talent show is planned?
  • Will the talent show detract from attendance at other events to be held by the council around the same period? ·
  • How will an oversubscribed list of applicants be managed?
  • Has the council a contingency plan in the event of poor weather? ·
  • How firm is the commitment from the corporate sponsors?                                                                  (Any 3 points)

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2.2 Management AccountingLevel 2Make or Buy DecisionOutsourcing

May 2018 Q4 a.

PieceJoz FM, a media organisation is considering hosting a two-day beauty pageant in June 2018. The show will be expensive to run and promote. There will be three cash prizes on offer for the pageant, namely:

  • 1st Place – GH¢5,000, 2nd Place = GH¢2,000, 3rd Place = GH¢1,000.
    Other costs will include:
  • Three judges of the show will each be paid GH¢400 per day plus a one-off travel expense allowance of GH¢150.
    The following costs will be incurred by PieceJoz FM if they were to organise the show;
  • Promotional costs of GH¢ 3,000 have been spent to date. A further GH¢1,000 per month will have to be incurred for the five months leading up to the pageant and GH¢4,000 in the month of the show.
  • Utility costs incurred each day of the pageant are estimated to follow the function GH¢ 200 + 5X where X is the number of contestants performing. The council expects 30 contestants per day.
  • Stocks of wood and steel to construct the stage. 400 metres of wood already in stock will be used. This originally cost GH¢20 per metre but will not be replaced. It was due to be sold to an employee at a price of GH¢8 per metre. 60 metres of steel that originally cost GH¢18 per metre is to be used. Steel has a scrap value of GH¢10 per metre. This steel will have to be replaced. The market price of steel has increased to GH¢15 per metre.
  • 140 labour hours to build the stage. Currently, PieceJoz FM maintenance employees are paid GH¢600 each, plus 20% employers’ costs for a 40-hour week. Two such employees will be idle for the week required to build the stage. The remaining labour will be hired in at a casual rate of GH¢10 per hour.
    PieceJoz FM expects that:
  • 1,000 people will attend the beauty pageant on the first day and 2,000 on the final day.
  • Daily tickets will sell at GH¢12 per adult ticket and GH¢5 per child ticket. It is expected that ticket sales will be 40% children and 60% adult.
  • An event organiser called Magic Media have submitted proposal to organise this program on behalf of PieceJoz FM at a fee of GH¢13,100 including utility cost of GH¢900.

Required:
a) Using the information above, advise, from a financial perspective, whether management of PieceJoz FM should organise the beauty pageant or outsource it to Magic Media.                                                                                                                                                                        (12 marks)

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Decision:
Net Gain: GH¢1,300 when outsourced. It will therefore be prudent from financial perspective to outsource

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2.2 Management AccountingActivity based costingLevel 2

May 2018 Q3 c.

Dunning Limited has recently introduced an Activity Based Costing System and has provided the following details for the month of January:
Cost Pool                             Overhead Cost
                                                    GH¢
Parts                                         10,000
Maintenance                            18,000
Stores                                       10,000
Administration                         2,000

You have ascertained the following activity information:
Number of employees                            40
Total number of parts                             500
Number of materials requisitions           20
Maintenance hours                                 600

During the month, 500 units of Product Y were produced. This production run required 100 parts and 150 maintenance hours; 5 material requisitions were made and 10 employees worked on the units.

Required:
i) Using Activity Based Costing, calculate the total amount of overhead absorbed by each unit of Product Y.                 (7 marks)

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ii) Identify THREE different types of controls and explain how activity based costing assists in the control of costs?   (3 marks)

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Control is one of the key features of management accounting and follows on from planning. Control can be exercised at a strategic and an operational level.
Three different types of control include:

  • Action or behavioural controls – these involve observing the actions of individuals (eg: work studies: quality and quantity controls) to inform corrective action.
  • Personnel and cultural controls – support employees to be effective by establishing values, social norms and beliefs that can influence performance.
  • Results and output controls – involve the collection, analysis and reporting of information about the outcomes of work effort. An organisation should have a system of management reporting that produces control information in a specified format at regular intervals.

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2.2 Management AccountingAbsorption and marginal costingLevel 2

May 2018 Q3 a.

Resol Ltd commenced trading on 1 April 2011 making the product Resol. The standard cost sheet for Resol is as follows:

Sales price                                  35.00

The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 24,000 units per annum. Fixed Sales and Administration costs are estimated at GH¢24,000 per annum. You may assume that all budgeted fixed expenses are incurred evenly over the year.

The sales price is GH¢35.00 and the actual number of units produced and sold was as follows:
.                                                    April                 May
Production – units                     2,000                2,500
Sales – units                               1,500                3,000

Required:
Prepare a profit statement for each of the months April and May using:        (12 marks)

  • Marginal costing.

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  • Absorption costing.

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2.2 Management AccountingLevel 2Standard Costing

May 2018 Q3 b.

Identify THREE disadvantages of a standard costing system.                                                               (3 marks)

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  • Reports and information is prepared after the event on a historical basis.
  • Standards used inappropriately, with a focus on negative impacts, can have a demotivational impact.
  • Calculation of efficiency variances assume labour is always variable and that normally production is a factor of labour.
  • Favourable and adverse variance can be difficult to understand.
  • No consideration of qualitative factors.                                                             (Any 3 points)

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2.2 Management AccountingAccounting for MgtLevel 2

May 2018 Q2 c.

Explain TWO limitations of management information in providing guidance for managerial decision-making.             (4 marks)

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Management accounting information may fail to meet its objective of assisting management in the decision making process.

  • Failure to meet the requirements of good information
    If information supplied to managers is deficient, then inappropriate management decisions may be made.
  • The problem of relevant costs and revenues
    Not all information produced by accounting systems is relevant to the decisions made by management.
  • The figures presented to assist in management decision-making are those that will be affected by the decision, i.e. they should be:
    Future – ignoring costs (and revenues) that have already been incurred – ‘sunk costs’
    Incremental – ignoring items such as the reapportionment of existing, unchanging fixed costs
    Cash flows – ignoring book values, historical costs, depreciation charges.
  • Non-financial information
    Managers will not always be guided by the sort of financial and other information supplied by the management accounting system. They will also look at qualitative, behavioural, motivational, even environmental factors. These non-financial factors can be just as important in relation to a decision as financial information – but they are often more difficult to estimate and quantify.
  • External information
    The environment refers to all of the external factors which affect a company and includes government actions, competitor actions, customer demands and other factors such as the weather. An organisation should have information on its environment available to it within its accounting information systems – the organisation needs external information as well as internal information.                                                                                          (Any 2 points)

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2.2 Management AccountingBudgeting and budgetary controlLevel 2

May 2018 Q2 b.

The Sales Director has recently attended a course entitled ‘Finance for Non-Accounting Managers’. He wants to understand more about a number of management accounting terms that he feels may be relevant to him.
Required:
Prepare a memorandum explaining and providing examples of the following:            (6 marks)
i) Activity Based Budgeting
ii) Zero Based Budgeting
iii) Rolling Budgeting

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MEMORANDUM
To         : Sales Director
From     : Technician Student
Re         : Accounting Terminology
Date      : X/X/XX
Management accounting can provide information for managers to support decision making, planning and control within an organisation. You have been introduced to a number of management accounting theories and related terminology. This paper aims to provide further information and explanation of a number of key terms.

Activity Based Budgeting
Is a method of budgeting in which the activities that incur costs in every functional area of an organisation are recorded and their relationships are defined and analysed. Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period’s budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices.

Zero Based Budgeting
Traditional budgeting approaches are not always clearly linked to strategy and are focused on financial aspects only. In this scenario, the annual budget uses an incremental approach whereby increases and decreases are applied to previous out-turn positions. In contrast, Zero based budgeting supports a more innovative approach, requiring managers to justify all costs as if the proposals were being considered for the first time. This approach is focused on opportunity costing and can eliminate efficiencies, however it can be quite complex and time-consuming to administer.

A definition of zero based budgeting provided by CIMA is ‘a method of budgeting whereby all activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is at zero cost. Increments of cost are compared with increments of benefit, culminating in the planning of maximum benefit for a given budget cost’.
An example of zero based budgeting
It is proposed to increase the maintenance budget by 20% to take account of the age of some equipment and other inflationary factors. Due to zero based budgeting analysis, it is identified that a particular machine, which costs €/£8000 to maintain is only used once per quarter. An alternative outsourcing option has been identified and the budget adjusted accordingly.

A rolling budget
Is one that is revised at regular intervals by adding a new budget period to the full budget as each budget period expires. A budget for one year, for example, could have a new quarter added to it as each quarter expires. In this way, the budget will continue to look one year forward. Cash budgets are often prepared on a continuous basis.

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2.2 Management AccountingLevel 2Sources of Data

May 2018 Q2 a.

Diligence Research Ltd, a research and advocacy company has undertaken an attitude survey of recent buyers of particular brands of cars in Ghana. As part of this study, recent buyers of Japan cars and recent buyers of German cars were asked to agree or to disagree with a number of statements. They were asked to choose only one out of the four options and indicate whether they agree or disagree. One of the summary tables from the survey is shown below.

.                                                          Agree                  Disagree
Japan cars are:
Easy to get serviced                           65                         35
Economical                                          81                         19
Reliable                                                76                         24
Comfortable                                       69                         31
German cars are:
Easy to get serviced                            32                       68
Economical                                           61                       39
Reliable                                                 74                       26
Comfortable                                         85                      15

Required:
Analyse the above data highlighting the most significant features of these data. Illustrate your analysis with tables.    (10 marks)

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  • For buyers of Japan Cars, they are of the view that it is economical and reliable whereas for German Cars they are of the view that it is comfortable and reliable.
  • For buyers of Japan Cars, they are of the view that it is not easy to get serviced and comfortable whereas for German Cars they are of the view that it is not easy to get serviced and economical.
  • Buyers of cars who care much about reliability and comfortability would opt for German Cars whereas buyers who care much about economy and reliability would opt for Japan Cars.
  • Those who look for reliability in buying a vehicle would be in a dilemma as to which vehicle to purchase.
  • Those who are looking for an easy to get serviced vehicle would opt for a Japan vehicle.
  • There is no significant differences between the numbers who opted for each of the options given for the Japan Vehicles. The same cannot however be said about the German Cars. A significant number choose comfortability and disagreed on easy to get serviced.

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2.2 Management AccountingDivisional PerformanceLevel 2

May 2018 Q1 b&c

b) Compare and contrast the use of residual income and return on investment in divisional performance measurement, stating the advantages.                                                                                                                                                                     (7 marks)

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Contrasting Residual Income & Return on Income

  • Return on investments is a financial ratio that measures the rate of return of a company’s investments. Companies use ROI to compare the efficiency of a number of investments. Residual income is another approach to measuring the performance of an investment. It is the net operating income an investment earns above the minimum required return on its operating assets.
  • The residual income (RI) for a division is calculated by deducting from the divisional profit an imputed interest charge, based on the investment in the division. The return on investment (ROI) is the divisional profit expressed as a percentage of the investment in the division.
  • It can be difficult to compare the percentage ROI results of divisions if their activities are very different: residual income can overcome this problem through the use of different interest rates for different divisions.
  • Rigid adherence to the need to maintain ROI in the short term can discourage managers from investing in new assets, since average divisional ROI tends to fall in the early stages of a new investment. Residual income can overcome this problem by highlighting projects which return more than the cost of capital.                                                            (Any 3 points)

Comparing Residual Income & Return on Income

  • Both methods suffer from disadvantages in measuring the profit and the investment in a division which include: Assets must be valued consistently at historical cost or at replacement cost. Neither valuation basis is ideal.
  • Both methods use the same basic figure for profit and investment, but residual income produces an absolute measure whereas the return on investment is expressed as a percentage.
  • Divisions might use different bases to value inventory and to calculate depreciation. Any charges made for the use of head office services or allocations of head office assets to divisions are likely to be arbitrary.              (Any 2 points)

Advantages of ROI & RI

  • Focus management’s attention upon earning the best profit possible on the capital (total assets) available.
  • Serve as a yardstick in measuring management’s efficiency and effectiveness in managing the company as a whole and its major divisions or departments.
  • Tie together the many phases of financial planning, sales objectives, cost control, and the profit goal.
  • Afford comparison of managerial results both internally and externally.
  • Develop a keener sense of responsibility and team effort in divisional and departmental managers by enabling them to measure and evaluate their own activities in the light of the results achieved by other managers.            (Any 2 points)

c) The Bottle Labelling Division of Crush Drink Ltd currently has capital employed of GH¢100,000 and earns an annual profit after depreciation of GH¢18,000. The divisional manager is considering an investment of GH¢10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of GH¢1,600. The cost of capital is 15%.
Required:
Calculate the following and comment on the results.                                                  (8 marks)
i) The return on divisional investment, before and after the new investment

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Comment:
The ROI will fall in the short term if the new investment is undertaken. This is a problem which often arises with ROI, as noted in part (b) of this solution.

ii) The divisional residual income before and after the new investment.

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Comment:
The Residual Income will increase in the short term if the new investment is undertaken.

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2.2 Management AccountingInvestment Appraisal :NPVLevel 2

May 2018 Q1 a.

The Maintenance Manager of Prudence Ltd insists that management should maintain an old equipment that had been used for 5 years and is fully depreciated rather than buy a new one. The old equipment has a current operating cost of GH¢53,000.00 per annum. The operating cost of the equipment is expected to increase at 5% every year over the next four years, with a sale value of GH¢6,500.00 in the fifth year.

The Maintenance Manager has proposed, that a new system with enhanced technology to reduce operating cost to GH¢32,000.00 for the next three years and GH¢33,600.00 for the fourth and fifth years be introduced. The new equipment will cost GH¢60,000.00 and when introduced, a redundancy cost of GH¢25,000.00 will be paid, with the old equipment sold for GH¢12,000.00. The sale value of the new equipment will be GH¢10,200.00 after its five years’ useful life.

Required:
Using Net Present Value (NPV) method of capital appraisal with 20% cost of capital, advice management on which option Prudence Ltd should go for.                                                                                                                                             (10 marks)

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NEW SYSTEM

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