Management Accounting Scenarios
Question 1 Total marks for Q1. (20 marks)
a) Compare and contrast financial accounting reports from management accounting reports, providing two examples of each. (5 marks)
b) For a public company whose shares are listed on the stock exchange, answer the following questions.
• Who owns the company? In what ways do they gain ownership? (2 marks)
• Apart from shareholders, who else might be interested in the contents of financial accounting reports? (2 marks)
c) For each of the following items, classify them as either; asset, liability or equity.
• Paid up capital• Bank loan• Provision for annual leave• Brand names and intellectual property• Accounts receivable• Prepaid insurance premiums• Deposit paid by a customer for work yet to be done• Retained profit (2 marks)
d) Distinguish a cash flow budget from a statement of cash flows. (2 marks)
e) Explain the term ‘depreciation expense’ using any practical example. (2 marks)
f) For the following pairs of items, state which one of each pair you would expect to be larger and why you think it should be larger.
• EBIT and net profit
• Paid up capital and owners equity
• Dividends per share and earnings per share
• Current assets and current liabilities
• Net profit and gross profit (5 marks)
Question 2 Total marks for Q2. (15 marks)
a) Discuss the major changes that would give rise to increase or decrease in owners’ equity during the year. Use some examples to support your discussion. (4 marks)
b) Explain the reasons why business owners would leave profits in the business rather than withdrawing them for personal use? Use some examples to support your explanation. (4 marks)
c) When preparing the financial statements, how would financial performance and position be affected by not taking into account the fact that a debt was bad? Discuss using some examples. (3marks)
d) Assume that last year’s statement of cash flows for a company showed a “negative” cash flow from operating activities. What could be the reasons for this? Should the company’s management be alarmed by it? Explain using some examples. (4 marks)
Question 3 Total marks for Q3. (15 marks)
The following details concern the business of Helena Beauty, who is worried about the profitability and financial situation of her business at 30 June 2016, especially since the bank is requiring repayment of its overdraft.
30 June 2015 30 June 2016 Sales (credit) $60,000 $90,000Cost of sales 39,000 63,000All other expenses 12,000 21,000Cash at Bank 12,000 (18,000)Inventory 18,000 33,000Accounts Receivable (net) 12,000 30,000Non-current assets (net) 24,000 48,000Accounts Payable 6,000 9,000Non-current liabilities nil 12,000Helena Beauty, Capital 60,000 72,000Inventory at 1 July 2014 was $15,000Accounts receivable at 1 July 2014 were $10,000Helena Beauty, Capital as at 30 June 2014, $56,000
a) Calculate the following ratios for 2015 and 2016 (1.5 marks each)• Net profit margin• Rate of return on owners’ equity• Current ratio• Acid test ratio• Gearing• Inventory turnover period
b) Write a short report about profitability, short-term liquidity and long-term solvency of the business. (6 marks)
Question 4 Total marks for Q4. (15 marks)
The following data applies to Plastipots, a small manufacturing business that makes 2 styles of large plastic pots that are sold to plant nurseries.
Normal prices; Fancy Terracotta pots sell for $4.80 Plain Black pots sell for $2.80.
Each pot uses the same basic raw materials, but the Fancy Terracotta pots are slower to make due to a more complex shape. The business has a room and a moulding machine devoted to the production of each pot. Machine operating staff are employed on a casual basis at an hourly rate. The operator works the moulding machine and stacks the pots in the yard where they are picked up by the transport company and sent to buyers. The manager takes care of all marketing, administration and maintenance.
The following costs have been determined by Plastipots for the foreseeable future.
Plastic raw material $1.00 per kiloElectricity $1.40 per moulding machine hourMachine operator labour $14.00 per hourRent on premises $1,000.00 per monthManagers salary $2,500.00 per monthTransport and distribution $0.40 per pot
Fancy Terracotta pots require 1.5 kilo of raw material each.Plain Black pots require 1 kilo of raw material each.Fancy Terracotta pots can be produced at the rate of 14 per moulding machine hour.Plain Black can be produced at the rate of 28 per moulding machine hour.
a) Calculate the variable costs per pot for Fancy Terracotta pots. (3 marks)
b) What is the contribution margin per pot for Fancy Terracotta pots? (2 marks)
c) The variable cost for Plain Black pots is $1.95 per pot. Calculate the break even output per month if only Plain Black pots are made. (2 marks)
d) If a special request is received for a large order of 2,000 Plain Black pots at a price of $1.90 per pot, and the buyer would pick up the pots thus avoiding any transport and distribution costs, should this order be accepted? Explain. (2 marks)
e) What circumstances might make you change your conclusion in part d)? 2 marks)
f) If, for the month of May, 900 Fancy Terracotta pots and 1,700 Plain Black pots were made and sold at normal prices; calculate the profit or loss for the month of May. (4 marks) Question 5 Total marks for Q5. (15 marks)
Southern Cross Sales Pty Ltd builds sailing boats to order for customers. When quoting prices on jobs they allocate manufacturing overheads on the basis of estimated machine hours to complete the job and they allocate administrative overhead costs on the basis of direct labour hours estimated for the job. Budgeted profit margin is then added to arrive at the final price quotation.
Below is a budget for the current year showing budget total figures.
Budget for the yearSales revenue on all jobs 686,000Direct labour costs 112,000Direct materials 133,000Manufacturing overheads 124,600Administrative overheads 144,900Total costs 514,500Profit before tax 171,500
Direct labour hours 5,600Total machine hours 2,800
Using the information above, and the specific estimates for Job No. 43 below, prepare a price quotation for Job No. 43.
Job No. 43 Estimate Direct labour hours required 630Machine hours required 315Direct materials estimate $ 14,000 (15 marks)
Question 6 Total marks for Q6. (20 marks)
a) What do you think are the main factors that influence how much cash a business will hold? (discuss five possible factors) (5 marks)
b) What costs might a business incur by holding too low a level of inventory? (list at least three types of costs) (5 marks)
c) Are retained profits/earnings a free source of finance to the business? Explain the pros and cons of this source of finance (5 marks)d) When examining prospective investment opportunities, what kind of non-financial information do you think a venture capitalist would be concerned with? Explain (5 marks)