WESTMINSTER BUSINESS SCHOOL

ONLINE TIMED ASSESSMENT SEMESTER 9 2019/20

Module Code: 7ACCN018W

Module Title: Financial Analysis for Managers
Module Leader: Bijan Hesni
Release Time: ????
Submission Deadline: ????

Instructions to Candidates:

Please read the instructions below before starting the paper

 Module specific information is provided below by the Module Leader

 The Module Leader will be available in the first hour of timed release to
respond to any queries via a discussion board on blackboard

 As you will have access to resources to complete your assessment any

content you use from external source materials will need to be
referenced correctly. Whenever you directly quote, paraphrase, or
summarise someone else’s ideas, you have a responsibility to give due
credit to that person for their work. Support can be found at
https://www.westminster.ac.uk/current-students/studies/study-skills-
and-training/research-skills/referencing-your-work

 This is an individual piece of work so do not collude with others on your

answers as this is an academic offence.

 Plagiarism detection software will be in use

 Where the University believes that academic misconduct has taken

place the University will investigate the case and apply academic
penalties as published in Section 10 Academic Misconduct regulations.

 Once completed please submit your paper via the submission link
provided. You can only submit ONCE so please ensure you
submit the correct and complete document.

 Work submitted after the deadline will not be marked and will
automatically be given a mark of zero

7ACCN018W/S9/Exam/2019-20/BH Page 1 of
11
Module Specific Information

SECTION A: All questions in this section are compulsory and must be

answered. It is worth 50 marks.

(Word limit guide for any discursive question or part of the

question is 30words per 1 mark. For example, for a 10-mark
question or part of a question your answer is expected to be
not much more than 300 words (30 words x 10 marks = 300)
You should not exceed the word limit by more than 10%

There is NO word limit on calculations

SECTION B: Answer TWO questions from this section which is worth 50

marks.

(Word limit guide for any discursive part of the question is 30

words per 1 mark. For example, for a 10-mark question or
part of a question your answer is expected to be not much
more than 300 words
You should not exceed the word limit by more than 10%

There is NO word limit on calculations

All submissions are to be typed and submitted through Turnitin on

Blackboard as Microsoft Word/pdf file format.
Use ‘Arial’ font, size 12

Handwritten answers are NOT acceptable

Please DO NOT copy & paste from any source including the textbooks,
lecture slides, answers to seminar questions and marking schemes to
the past exam papers. Any direct copying will be treated as an academic
offence.

7ACCN018W/S9/Exam/2019-20/BH Page 2 of
11
SECTION A

Answer ALL FIVE questions in this section. This section is worth 50

marks in total.

Question 1
It is suggested that accounting is an ‘Art’ and not a ‘Science’. There are
several factors that make the profit figure in the income statement to be at
best a good estimate of how the company has performed during the year
rather than an exact figure for profit.

Required:
Explain the factors which make the profit to be an estimate.
(10 marks)

Question 2
a) Outline five of the main differences between ‘Financial accounts’ and
‘Management accounts.
(5 marks)

b) Charlton Ltd has been asked to bid for a contract. Two types of material
will be needed for this contract. These are 1,700 units of material X and
3,000 units of material Y. There are 2,100 units of material X in stock that
were bought for £4.30 per unit last month in anticipation of another job
which the company ultimately did not get. Material X currently has no other
use if not used for this contract. It can however be sold at a price of £4.45
per unit. The current market price of this material is £5.20 per unit. Material
Y is readily available in the market at a price of £3.10 per unit.

To complete the job, 60 hours of labour is also required. The average cost
of labour per hour is £16 although the labour force is all on fixed monthly
salary and the company currently has surplus labour hours.

The company would like to make a profit margin (percentage of selling

price) of 25% on all contracts.

What is the minimum bid price this contract to give the company the required
profit?
(5 marks)
(Total: 10 marks)

[QUESTION 3 IS ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 3 of
11
Question 3
Budgeting can be continuous or periodic. It could also be incremental
budgeting or zero-based budgeting.

Required:
a) Define a budget and explain continuous and periodic budgeting
(3 marks)

b) Explain incremental budgeting and zero-based budgeting clearly

highlighting the advantages and disadvantages of each.
(7 marks)
(Total: 10 marks)

Question 4
The South East division of Ramco Ltd produces one type of circuit board. The
standard cost per unit based on a budgeted production of 38,000 units in the
month of June 2020 was as follows:

Standard cost card for the product £

Direct materials (0.15 kg at £24 per kg) 3.6
Direct labour (0.1 hour at £15 per hour) 1.5
Fixed overheads 132,200

In the month of June the actual number of units produced was 36,000 with the
following costs:

Actual Cost £
Direct materials (5,068 kg) 126,700
Direct labour (3,240 hours) 48,600
Fixed overheads 136,460

Also, in the month of June, due to bad weather, labour was idle for 36 hours.

Required:
a) Calculate total material cost variance, material price variance and
material usage variance.
(3 marks)
b) Calculate total labour cost variance, labour rate variance, labour
efficiency variance and labour idle time variance.
(4 marks)
c) Calculate fixed overhead expenditure variance.
(1 mark)
d) Outline four reasons for adverse labour cost variance.
(2 marks)
(Total: 10 marks)

[QUESTION 5 STARTS ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 4 of
11
Question 5
BH Ltd is considering a project which requires £920,000 of immediate cash
investment and is expected to last for four years. The residual value at the
end of the project is £59,000 which is included in the cash flow of year 4. The
net operating cash flows for the four years of the project are expected to be:

Year 1 Net cash flow £353,600

Year 2 Net cash flow (£166,200)
Year 3 Net cash flow £588,800
Year 4 Net cash flow £336,400

Required:
a) Calculate the payback for the following project and state clearly whether
the project should be accepted if it is company’s policy to only accept
projects with payback period of less than 3 years.
(3 marks)

b) Calculate the accounting rate of return (ARR) for the above project using
the average annual return on average investment.
(3 marks)

c) Explain the assumptions underlying the Internal Rate of Return (IRR) any
why using this method to appraise investment projects may lead to sub-
optimal decisions.
(4 marks)
(Total: 10 marks)

(Total for Section A: 50 marks)

[SECTION B STARTS ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 5 of
11
SECTION B

Answer ANY TWO of the following three questions in this section.

Each question is worth 25 marks.

Question 6
Futuretek Ltd has just developed a lithium battery for the smart mobile phones
that can be fully charged in less than ten minutes. The company has secured
production with a manufacturer in Vietnam with a maximum capacity to
produce 1000,000 batteries per year. The batteries will be sold on-line and
through independent mobile phone shops throughout the UK.

The production cost of each battery is £9. The average cost of transporting
each unit into the UK is estimated at £0.85. UK import duty will be 20% of
production cost. The total annual fixed costs of Futuretek Ltd are estimated at
£595,000.

Demand for these batteries in the coming year is expected to be 577,000

units at a selling price of £12.90

Required:
a) Calculate the company’s expected profit for the year.
(4 marks)

b) Calculate the company’s break-even point in number of batteries and in

sales value. Explain what break-even point indicates.
(3 marks)

c) Calculate the margin of safety as a percentage of expected level of sales

and briefly explain what this figure means.
(3 marks)

d) Suggest, with supporting calculations, which of the following three

strategies (if any) that the company is currently considering should be
adopted:

I. Spending £35,000 on an on-line marketing campaign to boost sales by

10% in the next year
II. Reduce the current selling price by 5%. This is expected to increase
sales by 25%
III. Increase the warranty period from one year to two years. This will
increase sales by 10% but adds on average £0.35 to the final cost of
each battery.
(6 marks)

e) Fones-R-Us, a medium sized mobile phone retail chain has offered

Futuretek Ltd to buy 100,000 these batteries at a lower price allowing it to
make a 5% profit on sales at the current selling price of £12.90. Using
7ACCN018W/S9/Exam/2019-20/BH Page 6 of
11
 supporting calculations, suggest whether this proposal should be
accepted. What would be the total profit for the year if this order is
accepted?
(To answer this part, you should assume that none of the three strategies
in part (d) above has been adopted)
(4 marks)

f) Explain the main assumptions and limitations of breakeven analysis.

(5 marks)
(Total: 25 marks)

Question 7
On 1st July 2020, Dustin Adams bought the entire share capital of Signet Ltd
using the significant inheritance that his grandfather left him in his will. The net
book values of all the assets and liabilities of Signet Ltd at the time of acquiring
the company were:

£
Fixed assets at cost 128,000
Depreciation - fixed assets 49,600
Inventories at cost 32,460
Accounts receivables (debtors) 60,800
Accounts payables (creditors) 57,960
Bank Overdraft 17,040
Other creditors (general expenses accrued) 2,480

After paying all the shareholders of Signet Ltd for their shares, Dustin was left
with £115,600 that he deposited into the business bank account on 1 July 2020.
The debtors and creditors figures relate to sales and purchases for the month of
June 2020.

Forecasts for the four months to 31 October 2020 are as follows:

(i) Gross profit will be at a constant rate of 35% of sales.

(ii) Expected sales will be £96,000 in July and £120,000 in August, £216,000
in September and £194,000 in October. All sales are made on credit.
Although in the past sales have been on one month's credit, to stimulate
demand, Dustin will extend the credit period to two months on all sales
from 1 July 2020.

(iii) All purchases will be made on one-month credit and will be the
equivalent of the cost of sales in each month. This means, for example,
in July purchases will be equivalent to the cost of sales in July.

[QUESTION 7 IS CONTINUED ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 7 of
11
(iv) Staff salaries will be £11,400 per month payable on the last day of the
month.

(v) General expenses will be £9,700 per month: one third of the general
expenses are outstanding at the end of each month.

(vi) Rent for the year ending 30 June 2021 will be £64,000 and will be
payable every 3 months in equal instalments starting from July 2020.

(vii) Dustin will depreciate all the company’s fixed assets at the rate of 20%
per year on cost.

(viii) During August 2020 new fixed assets will be purchased for £19,800 for
cash.

Required:
Produce a cash budget for the four months ending 31 October 2020 clearly
showing the bank balance at the end of each month. (Your cash budget must
also include a ‘Total’ column).
(13 marks)

(b) The budget setting process in large organisations can be either

‘participative’ or ‘non-participative / authoritative’. Briefly discuss these two
approaches to setting budgets.
(8 marks)

(c) In general businesses can see cash flow problems in some months in their
cash budget. Explain four methods by which short-term cash flow problems
can be addressed.
(4 Marks)
(Total: 25 marks)

[QUESTION 8 STARTS ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 8 of
11
Question 8
SuperSound Ltd is a manufacturing company making a range of high-quality
hi-fi sound systems for cars. The company has been approached by a car
manufacturer to supply it with a bespoke luxury model to be fitted in its
executive range cars.

The quantity demanded annually by the car manufacturer is given below.

Year Demand (in units)

1 36,200
2 29,600
3 18,800
4 15,900

The assistant accountant has prepared the following estimate of the cost of
manufacturing each unit of these hi-fi sound system:

Labour (variable cost) £30.00

Material (variable cost) £142.00
Overheads (variable cost) £13.00
Supervision £16.10
Loan interest £7.12
Depreciation of the new equipment £12.65
Share of company’s fixed overheads £10.50
----------
£231.37
======

The contract is for 4 years starting in 2020 and the car manufacturer has
agreed to buy each unit of the hi-fi system for £195 which appears to be
below the total cost of manufacturing each unit. The company currently has
spare capacity and can easily meet this order within its normal operating
conditions.

The following information is relevant:

(a) Manufacturing of the new hi-fi system for this car manufacturer would
require SuperSound Ltd to purchase new equipment costing £495,000
payable as soon as the production starts. It is expected that the equipment
would last four years and at the end its life will have a scrap value of
£49,000. The purchase of this equipment will be entirely financed by a
four-year bank loan.

(b) There is a need for additional working capital of £76,000 at the beginning of
the project; this will be released at the end of the project.

[QUESTION 8 IS CONTINUED ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 9 of
11
(c) The supervision cost above refers to the salary of an existing supervisor,
who would be moved from his present work to supervise the production of
this new sound system. This person’s existing work can be undertaken by
recruiting a new supervisor on a four-year contract at an initial annual
salary of £41,000 which is expected to increase by 5% each year in the
following three years.

(d) The company's cost of capital (i.e. nominal discount rate) is 9%.

NOTE: Ignore taxation!

Required:
(a) Calculate the net present value of the above project and suggest whether the
order for the new hi-fi system should be accepted.
(20 Marks)

(b) What other factors should management consider in addition to the NPV in
determining the desirability of this order?
(5 Marks)
(Total: 25 Marks)

[END OF EXAMINATION QUESTIONS]

[PV TABLES ARE ON THE NEXT PAGE]

7ACCN018W/S9/Exam/2019-20/BH Page 10 of
11
Present Value of £1

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
(after
n
years)
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394
16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176
17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978
18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799
19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635
20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486
21 0.8114 0.6598 0.5375 0.4388 0.3589 0.2942 0.2415 0.1987 0.1637 0.1351
                     
                     

Present Value of an Annuity of £1 for n Periods

No. of
Years 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446
11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951
12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137
13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034
14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667
15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061
16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237
17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216
18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014
19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649
20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136
21 18.8570 17.0112 15.4150 14.0292 12.8212 11.7641 10.8355 10.0168 9.2922 8.6487
22 19.6604 17.6580 15.9369 14.4511 13.1630 12.0416 11.0612 10.2007 9.4424 8.7715

7ACCN018W/S9/Exam/2019-20/BH Page 11 of
11