AC2097

AC2097 Management Accounting

Summer 2020 online assessment guidance

The assessment will be an open-book take-home online assessment within a 24-

hour window. The requirements for this assessment remain the same as the
originally planned closed-book exam, with an expected time/effort of 3 hours and 15
minutes (inclusive of fifteen minutes reading time).

Candidates should answer FIVE of the following EIGHT questions: FOUR from
Section A and ONE from Section B. All questions carry equal marks.

Please note that word limits have been added to some of the questions. Anything
beyond word limits will not be read.

Workings MUST BE submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.

You may use any calculator for any appropriate calculations. Credit will only be given
if all workings are shown.

You should complete this paper using word processing software (e.g. Microsoft
Word). This should be saved as a .doc or .docx file and then uploaded to the VLE
as ONE individual file including the coversheet. Each page should have your
candidate number in the header. Please do not write your name anywhere on
any part of your submission.
You may hand-write calculations, formulae, or diagrams, but these should be
scanned or copied and included as images in the Word document that you submit.
Please ensure that any images are inserted at the appropriate point of your
document and correctly aligned (i.e. markers will not need to rotate images to read
them).
The paper will be available at 12:00 midday (BST) on Friday 3 July 2020.
You have until 12:00 midday (BST) on Saturday 4 July 2020 to upload your file
into the VLE submission portal. However, you are advised not to leave your
submission to the last minute. We will deduct 5 marks if your submission is up to one
hour late, 10 marks if your submission is more than one hour late but less than two
hours late (etc.).

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If you think there is any information missing or any error in any question, then you
should indicate this but proceed to answer the question stating any assumptions you
have made.

The assessment has been designed with a duration of 24 hours to provide a more
flexible window in which to complete the assessment and to appropriately test the
course learning outcomes. As an open-book assessment, the expected amount
of effort required to complete all questions and upload your answers during this
window is no more than 3 hours and 15 minutes. Organise your time well and
avoid working all night.
You are assured that there will be no benefit in you going beyond the expected 3
hours and 15 minutes of effort. Your assessment has been carefully designed to help
you show what you have learned in the hours allocated.
This is an open-book assessment and as such you may have access to additional
materials including but not limited to subject guides and any recommended reading.
But the work you submit is expected to be 100% your own. Therefore, unless
instructed otherwise, you must not collaborate or confer with anyone during the
assessment. The University of London will carry out checks to ensure the academic
integrity of your work. Many students that break the University of London’s
assessment regulations did not intend to cheat but did not properly understand the
University of London’s regulations on referencing and plagiarism. The University of
London considers all forms of plagiarism, whether deliberate or otherwise, a very
serious matter and can apply severe penalties that might impact on your award. The
University of London 2019-20 Procedure for the Consideration of Allegations of
Assessment offences is available online at:
https://london.ac.uk/sites/default/files/governance/assessment-offence-procedure-
year-2019-2020.pdf
The University of London’s Rules for Taking Online Timed Assessments have been
included in an update to the University of London General Regulations and are
available at:
https://london.ac.uk/sites/default/files/regulations/progregs-general-2019-2020.pdf

© University of London 2020

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 SECTION A

Answer any FOUR questions from this section.

1. Drake Ltd makes three products for industrial use, with the following details per unit:
RG40 RG50 RG60
£ £ £
Selling price 110 140 100
Direct labour (£12 per hour) 30 24 36
Direct material A (£5 per litre) 10 5 0
Direct material B (£8 per kilo) 16 0 32
Variable overhead: Labour related 3 2.4 3.6
Machine related 5 7 3
Component XG 50
Total variable cost 64 88.4 74.6

Machine hours per unit 5 7 3

Maximum demand per week 800 3,000 2,400

Component XG, used in product RG50, is currently purchased from an outside supplier
but could be made internally using the following resources;

Direct labour: 1 hour

Direct material B: 2 kgs.
Machine time: 0.5 hour

In addition to the demand shown above Drake Ltd has signed a contract with a new
customer Brook Ltd to provide the following units each week for the next six weeks:

Product units
RG40 200
RG50 200
RG60 300

The machine hours available each week are 37,500 hours.

The purchasing manager has been informed by suppliers that for the next six weeks
the availability of Material B will be restricted to 12,000 kg

Required:

a) Alison Drake, The Director of Drake Ltd is not an accountant. She wishes to know
the most profitable weekly use of the restricted machine hours and material B
resources during each week of the next six weeks, including whether to produce
component XG or continue to outsource it. (Linear programming is not required).
She also wants to know the impact on profits of Drake Ltd if the new contract with
Brook Ltd could be deferred for six weeks.
Prepare statements to calculate the above information. (13 marks)

b) Using your workings, describe clearly to Alison Drake how the information provided
by each of the statements you have prepared is used to calculate how she should
proceed during the six weeks and give your recommendations. (7 marks)

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2. The directors of Silberman Ltd are considering a proposal for a new machine that is
estimated to cost £2,500,000. This would enable the company to manufacture a
superior, additional new product, product Z.

The accountant has prepared the following profit forecast on the assumption that the
funds will be borrowed and the loan repaid at the end of the project:

Profit forecast Year 1 Year 2 Year 3 Year 4

£000 £000 £000 £000
Sales 3,125 3,750 5,000 6,250
Less: Cost of sales 1,875 1,950 3,450 4,200
Other production expenses 550 575 700 940
Administration charge 750 820 930 1,050
Interest on loan 100 100 100 100
Profit/(loss) (150) 305 (180) (40)

The figures in the profit forecast are based on the following:

Cash received from sales and paid for costs will coincide with the financial year.

The administration charge is an apportionment of central administration fixed

overheads.

It is assumed that the product has a four-year life. The machinery could be sold for
£400,000 at the end of year 4.

The other production expenses include the depreciation of the machine, using
straight line depreciation.

The following additional information not included in the profit forecast above is
available:

The production manager has said that if the new machine were installed there
would be sufficient capacity to enable an existing machine to be sold immediately
for approximately £350,000 and would create annual operating savings of
£250,000. However, the accountant has told him that the existing machine
currently stands in the books at £675,000 and the company could not afford to
write off the asset against this year's profits.

Initial market research for the new product has been performed by marketing
consultants whose fee of £110,000 has just been received.

The accountant has not included the following costs in the four-year profit
calculation:

The directors have spent a considerable amount of time on this project so far and
they estimate the costs of their time equates to £50,000.

Question continues on next page

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2. (Continued)

Marketing has estimated that to meet the required sales forecasts additional
advertising and sales promotion costing £400,000 would be needed at the start of the
project. Additionally for years 1 & 2, £80,000 per year and for years 3 & 4, £60,000
per year would be needed.

Maintenance costs for the new machine are estimated to be £25,000 in the first year
and increase by 40% in each subsequent year.

The replacement of key components of the machine at the end of year 2 are estimated
to be £65,000.
The company uses a cost of capital of 10%. The discount factors for years 1 to 4
are as follows:
Year Discount factor
0 1.000
1 0.909
2 0.826
3 0.751
4 0.683
Required:
a) Calculate the relevant cash flow for each year of the project providing all workings
and clear explanations of the figures you have included. (8 marks)

b) Using the relevant cash flows from part a) determine the net present value of the
project and state whether the project is worthwhile. (2 marks)

c) The marketing director is very concerned about the impact on other products
within the product range. If the investment goes ahead, he believes it will lead to
a reduction in sales and the contribution to sales (C/S) ratio of two of the
company’s competing products as follows:

Year 1 Year 2 Year 3 Year 4

£000 £000 £000 £000
Product W
Reduction in sales 625 500 500 400
C/S ratio of product W 40% 40% 50% 44%
Product G
Reduction in sales 600 500 400 300
C/S ratio of product G 30% 28% 24% 26%

Recalculate the net present value of the project taking the marketing director’s
concerns into account and determine whether the project is worthwhile. (4 marks)

d) Briefly explain the problems of short run and long run issues in investment
decision making picking up on the accountant’s concern relating to the loss on
sale of the existing machine. (3 marks)

e) Discuss any other factors that the company should consider before making a
decision to proceed with product Z and invest in this machine. (3 marks)

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3. The Choco Spread department of a food processing company produces one type of
product, a 5 kilo pack of chocolate spread (Choco Spread) for use in the catering
industry.
The delivery of ingredients, process and delivery to customers all work on a Just in
Time (JIT) basis. The production is fully automated so the fixed costs incorporate all
production costs.
For the month of March the following budget was prepared based on a sales quantity
of 500,000 packs of Choco Spread.
Choco Spread Department standard costs and Budget for March

Standard cost Budget

1 pack 500,000 packs
£ £000
Sales 6.00 3,000
Chocolate grounds 2 kilos x £0.44 per kilo (0.88) (440)
Milk concentrate 3.3 kilos x £0.20 per kilo (0.66) (330)
Total variable cost (1.54) (770)
Contribution 4.46 2,230
Fixed costs
Production overhead costs (1,800)
Ingredients Delivery (76.5)
Despatch to Customers (100)
Net income 253.5

The actual activity for March was as follows:

460,000 packs of Choco Spread were produced and sold, giving total sales receipts
of £3,059,000.

Actual Material used Quantity used Total cost

Chocolate grounds 950,000 kg £446,500
Milk concentrate 1,450,000 kg £275,500

Actual fixed overhead costs

Fixed production cost £1,860,000
Ingredients delivery £73,000
Despatch £88,000

Required:

a) Calculate the following variances:

Sales contribution volume and sales price variances,
Materials Price variance, and usage variance for each material,
Expense variances for Fixed production overhead costs,
Fixed ingredients delivery cost and Fixed despatch to customers cost.
(8 marks)

Question continues on next page

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 3. (Continued)

b) Calculate Materials mix and yield variances and explain why the figures you have
calculated are useful. (4 marks)

c) Comment on the main areas of difference between the budget and actual
performance for the month of March and explain the ways in which managers can
use the information to improve future performance. (5 marks)

d) Management considers that the cost for “Ingredients Delivery” and “Despatch to
Customers” are not fixed but also do not vary with sales quantity. The following
information relates to the budget for these activities:

Ingredients delivery of 5.1 kilos per product:

The standard quantity per delivery is 1000 kg. The budgeted cost is £76,500.
Despatch to customers:
The standard despatch quantity is 200 packs. The budgeted cost is £100,000.

Using an activity based approach for these two costs, calculate the activity based
standards and show the variances which arise. Explain clearly why this information
is more useful than the variances for these costs calculated in part (a) above.
(3 marks)

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4. The West Midlands Engineering Corporation manufactures components for the
automotive industry. It has two operating divisions one based in Wolverhampton and
one in Birmingham. The Wolverhampton division produces sheet metal components
which it sells to the Birmingham division. The Birmingham division uses one unit of the
sheet metal, for each component made, which it then processes and sells to outside
customers. The Wolverhampton division also sells the sheet metal to outside
customers. There is no scope for Wolverhampton to increase its external sales. The
following budgeted data is available for the two divisions for the financial year ending
September 2021:
Wolverhampton Birmingham
Division Division
Sheet Metal Component
External Selling Price per unit £25 £32
Direct material cost per unit £8 £3
Direct labour cost per unit £5 £3
Annual divisional fixed production
overheads £2,500,000 £875,000
Annual divisional fixed
administrative overheads £1,000,000 £375,000
Variable selling overheads per unit £1.75 £1.75
Annual production capacity 1,250,000 units 700,000 units
Sales to outside customers 900,000 units 350,000 units
Internal sales 350,000 units -

The transfer price between the Wolverhampton and the Birmingham divisions for the
sheet metal is set at Wolverhampton’s full cost plus a 25% profit mark-up. In arriving
at the full cost for the purposes of calculating the transfer price, both fixed production
and administrative overheads are absorbed on the basis of the annual production
capacity in terms of units. Variable selling overhead costs are not incurred on internal
sales and are therefore excluded when calculating the transfer price.
The management of the West Midlands Engineering Corporation measures divisional
performance on the basis of both Return on Investment and Residual Income.
Return on Investment is measured as divisional net income divided by
divisional net assets at the end of the period. The company’s target return on
investment has been set for the past four years at 12%. The company’s Residual
Income uses the cost of capital calculated as 12% of the value of the divisional net
assets at the end of the period. The values of divisional assets and liabilities for the
year ending March 2020 are shown below:
Wolverhampton Division Birmingham Division
£’000 £’000
Machinery 18,200 1,000
Inventories 6,200 2,000
Trade receivables 2,500 1,000
Cash at Bank 1,300 500
Trade payables 900 500

Question continues on next page

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4. (Continued)
Required:
a) Based on the existing transfer pricing policy, calculate the budgeted divisional
Net Income, Return on Investment and Residual Income for each division for
the year ended September 2021. Also calculate the total company Net Income
for that year. (4 marks)

b) Comment on the budgeted performance of the two divisions on the basis of

the financial calculations in part (a). (2 marks)

c) The manager of the Birmingham division has not been happy with the
performance of this division over the past three years and given the budget
projections, plans to make changes for the year ending September 2021.

The Birmingham division has recruited a new Purchasing Manager who can
source the sheet metal from an alternative supplier for £17 per unit. The
supplier could meet all Birmingham Division’s demand. This sheet metal is
slightly inferior to the product supplied by Wolverhampton Division but is
acceptable for production of the expected standard of component. In addition,
the sales director of the Birmingham division believes that some of the cost
savings can be passed on to the customer and recommends reducing the
selling price of each component to £30 per unit. This would lead to sales of
550,000 units per annum.

Hearing these plans from the Birmingham division, the Wolverhampton division
decides to reduce the transfer price to £17. It finds that it could manufacture the
standard of sheet metal required by Birmingham division with a saving on
material costs of £0.40 for each sheet. Their main product for external sales will
remain at the existing standard so there will be no material cost savings on that
product. They expect external sales to remain the same and wish to retain these
customers.

Using the information provided above, describe the two alternatives available
to the Wolverhampton Division and calculate for each alternative, the Net
Income of the company as a whole and of each division and the Return on
Investment and Residual Income for each division. (6 marks)

d) Comment on the results of these alternatives. (3 marks)

e) Identify the transfer price method and decision making rules which appear to
exist in this company and discuss whether different methods of transfer pricing
or company rules should be adopted. (5 marks)

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5. Reliant Ltd produces the “Rockblaster”, an industrial drill used in construction and
mining. Safety is an important aspect of the product. Complaints from customers and
returns for repair are at a higher level than the company expected and the company’s
reputation is suffering. As part of the investigation into this, the company wishes to
compile a cost of quality report as a starting point for improving the quality of its product
and its reputation.

The following information has been compiled for the three months ended 31st March
2020.

Costs incurred
Incoming material inspection £40,000
Inspection of units during production 20% inspected £10 per unit
Inspection of units on completion 100% inspected £20 per unit
Customer service department cost £500,000
Reviews of reliability of Material suppliers £500,000
Cost of rework in factory per unit £40
Cost of a warranty repair per unit returned £500
Factory Equipment Breakdown cost of repairs £200,000
Production units lost through breakdown of equipment 1,500

Information on sales, production and returns

£
Sales price per unit £5,000
Variable costs per unit £2,000

Units Produced 50,000

Units scrapped in factory 2%
Units reworked in factory 4%
Units returned under warranty : replaced 2,500 units
Repaired 3,000 units

Estimated lost sales through decline in reputation 2,000 units

The company does not hold finished goods inventory

Required:

a) Using the information given above prepare a cost of quality statement divided into
appropriate categories. Also show the total of each category as a percentage of
turnover. Briefly comment on the information revealed by the statement.
(8 marks)

b) The production director has been keeping some statistics of reasons for
scrapping some units and common complaints where drills are returned. In light
of this information the following actions are being considered:

Question continues on next page

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5 b) (continued)
For each of the actions provide appropriate calculations to indicate the relevant
financial costs and benefits as far as possible from the information available. (You
should use the results for January to March 2020 to estimate the changes in activity
through improvements).
i) One of the internal faults requiring units to be reworked is poor design of the casing
relative to the shape of the bought in engine. It has been decided to work with the
engine supplier and the casing designers to rectify this. It will involve;

Casing Design engineers’ work £100,000

Recalibration of production line £500,000
Additional inspection of each unit of the supplied engine
when delivered from the manufacturer £10 per inspection
Regular inspection and testing of the production process Annual cost £600,000

These actions could be implemented within 3 months and should result in savings
each three months of reducing internal scrapped units to zero and internal reworks
to 2%.

ii) Another main issue identified with units returned after sale is the linkage of the drill
bit to the engine which for some uses is not strong enough. It is suggested that this
should be resolved by producing a “Rockblaster Plus” with more robust linkage,
and a recommendation of the type of work for which a “Rockblaster Plus” should
be used. There should be a clear indication that Drills which have not been used
for the correct purpose will not be mended under warranty. The cost of adopting
this proposal will be:

Design engineers work £200,000

Introducing a separate manufacturing section for part of the
Rockblaster Plus production £100,000,000
Initial training of employees in new production £500,000

These actions could be implemented within 6 months and are expected to result
each quarter in 5,000 sales of “Rockblaster Plus” priced at £6,000 instead of the
“Rockblaster”. The “Rockblaster Plus” would have variable costs of £2,200. The
proposal would:
reduce sales units returned under warranty and replaced by 70%,
reduce sales returned under warranty and repaired by 50%
reduce the sales lost by poor reputation to 500 units.

iii) It has also been decided to introduce a regular routine maintenance schedule,
costing £800,000 quarterly which should avoid breakdowns entirely. (6 marks)

c) Draw up a Report for the Board of Directors commenting on each proposal. You should
indicate which should be adopted first and any concerns you have about the estimated
figures. (6 Marks)

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6. RD Tower Ltd is a company which makes a range of kitchenware products. One of
these products, the Premier frying pan, has been subject to intensive competition from
a rival company during the last year. The company is reviewing the product and
planning for the year ended 30th June 2021.The financial accountant has provided you
with the following information pertaining to this product for the six months to April 2020:
Month Activity level Cost incurred
(units) £
November 2,925 56,475
December 2,625 54,375
January 3,000 57,000
February 3,150 58,050
March 3,675 61,725
April 2,700 54,900

Required:
a) The current selling price of the frying pan is £25 per unit. Assuming that during the
year ended 31st June 2021, the monthly fixed costs and the variable costs remain
the same as the six months to April 2020, how many units would RD Tower Ltd
need to make and sell to break even for the year ending June 2021? (5 marks)

b) Assuming that the total units made and sold for the year ended June 2021 are at
the same monthly level as the six months to April 2020, calculate the profit for the
year ending June 2021. In addition, calculate the margin of safety percentage for
this product and calculate how many units of this product would need to be sold in
order for the company to make a profit of £300,000. (3 marks)
c) A number of untested, possible proposals have been put forward to try to increase
the profitability of the product for the coming year to 30th June 2021.
Proposal 1: Reduce the price by 5% which is hoped would win customers away
from the competition and it is estimated that unit sales demand would
rise by 8% per year.

Proposal 2: Reduce the price by 2.5%, and increase the advertising budget for
this product by £40,000 per year. It is estimated that unit sales
demand would rise by 12% per year as a consequence of these
actions.

Proposal 3: Spend an extra £2 per unit on the product to improve the quality of
the product, therefore changing its position in the market. The
product could then be sold for £28. Relaunch the product spending
£75,000 on advertising per year. It is estimated that unit sales
demand per year would rise by 20% as a consequence of these
actions.

Calculate the estimated profit for each proposal and, based on profitability alone,
recommend, with reasons, one of the proposals. (6 marks)

d) With regard to the proposals in part c) discuss the other business factors and
information which need to be investigated before a decision can be adopted.
(6 marks)

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SECTION B

Answer any ONE question from this section.

7. Choose four of the terms/techniques listed below and for each one:
i) Explain the meaning of the term/technique
ii) Give two examples of its application.
ii) Explain some of the practical limitations of which users should be aware
with regard to the term/technique.

a) Post completion audit of project cashflows.

b) Benchmarking.
c) Target Rate of Return pricing.
d) Value added and non value added costs.
e) Not yet controlled resources/ already controlled resources.
f) Learning curve.
(5 marks per term/technique)

Note: only the first four answers provided will be marked. Examiners value the
use of your own words. The word limit for each answer is 200 words

8. (note: This question has a choice of two topics; only one should be answered)
EITHER
a) Explain the purposes of Target Costing including the types of businesses for
which it is most suitable. (5 marks)

b) Describe, with reasons, all the different activities which may be involved in the
Target costing process from the first consideration of whether to make a
product to the acceptance of the final design and cost. (15 marks)

Note: Examiners value the use of your own words. The word limit is 600 words

OR
Discuss the need for “Environmental Cost Accounting”. Give examples of how the
costs arise and what actions can be taken to reduce Environmental Costs? Describe
how the effects of these actions can be calculated and reported. (20 marks)
Note: Examiners value the use of your own words and of some examples not in the
textbooks. The word limit is 600 words.

END OF PAPER

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