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Department of Accounting & Finance 

AG310 Contemporary Management Accounting

2022

Section A – answer question 1

Question 1

(Questions A, B and C are independent)

(A) Answer the following questions using the information below:

GG ltd received a one-time order from a client to buy 2000 units at £35 per unit. Offer from the client does not include £1 freight charge per unit.

Production capacity	12000 units
Budgeted production for the next financial year	10000 units
Direct labour per unit	£20
Direct material per unit	£15
Variable manufacturing OH	£3
Fixed manufacturing OH	£6
Marketing and distribution fixed costs	£4
Toral cost per unit	£48
Selling price per unit	£55
Contribution per unit	£7

Required:

Should GG ltd accept the offer from the client? Please comment on the decision for or against the purchase.

(Marks 10)

(B) (Drury 2018, p. 397) Every time Apple releases a new device it cannot satisfy immediate demand. This is a result of Apple’s precise JIT manufacturing system. Apple does not wish to take the risk of producing more devices than it will sell. So it adjusts manufacturing to match demand based on pull system. Apple has adopted this system in order to reduce its inventory costs and this increase its profit, but Apple’s production is insufficient to keep up with sudden increases in demand. How can Apple make products faster than it does now? It could set up factories in many different countries and invest in next-generation production capabilities that might produce its devices even faster.

Required:

i. What are the advantages and disadvantages of Apple adopting a JIT system?

(Marks 5)

ii. What should be the main feature of a management information system for a company that adopts a JIT manufacturing philosophy?  

(Marks 5)

(C) Management control system is an important part of governance within an organisation. Could you identify and explain the harmful side effects of a control system?

(Marks 10)

(TOTAL 30 MARKS)

Section B – answer any TWO questions

Question 2

(Questions A, B and C below are independent)

(A) DJCAD has organised a theatrical exhibition for emerging artists. There fixed cost is £15,000 and they expect to sell 2000 tickets with the unit selling price of £15 per ticket. Lunch will be provided to the attendees with the variable cost of £7 per attendee.

Required:

i. Calculate the break-even point.

ii. How many tickets must be sold to earn £10,000 profit?

iii. Calculate the profit-volume ratio.

(Marks 9)

(B) (Drury 2018, p.57) According to an article published in the Financial Times the chief executive of The Guardian newspaper group and the paper’s editor stated in a memo to staff that the publisher has ‘made progress’ and ‘successfully’ met its first year’s objective of reducing losses as part of a three-year plan to break even. However, the memo warned that ‘our operating costs remain too high, trading conditions remain tough and further changes and cost savings will be necessary if we are to meet our target of breaking even at an operating level by 2018/19.’

The article reported that The Guardian has been hit by declining print revenue and a digital advertising market value where most revenues flow to Google and Facebook. This has prompted the Guardian Media Group, the parent company of the Guardian and Observer print and digital businesses, to reduce their print operations, shed jobs, move the newspaper from their Berliner formats to tabloid editions and to also outsource printing to Trinity Mirror.

Required:

i. Is break-even a good performance monitor over the longer term?

ii. How do decreasing margins effect the break-even point and margin of safety?

(17 marks) 

(C) Rex plc has two projects with an expected completion of 5 year each.

Estimated cash flows	Project A (£)	Project B (£)
Year 1	150,000	110,000
Year 2	160,000	250,000
Year 3	125,000	100,000
Year 4	80,000	50,000
Year 5	35,000	45,000

Initial project outlay is 25,000 and the opportunity cost of capital is 2%.

Required:

Calculate the NPV of each project. Based on NPV, please explain whether Rex plc should invest in Project 1? (Assume these two projects are not mutually exclusive.)                                                                                                

(9 marks)

(TOTAL 35 MARKS)

Question 3

(Questions A, B and C below are independent)

(A) Explain how a Balance Scorecard could be used as an appropriate tool to integrate non-financial performance measures.

(12 marks)

(B) Discuss the major limitations and strengths of the ABC system over traditional method. Also explain four stages of the ABC system.

                                                                                      (12 marks)

(C) (Drury 2018, p. 403). In April 2010, the Deepwater Horizon drilling rig, which was ultimately under the control of British Petroleum (BP), exploded in the Gulf of Mexico. An oil slick resulted, which lasted for approximately 3 months and caused extensive damage to the environment and coastlines around the Gulf of Mexico. By June 2010, the costs to BP had racked up to $1.25 billion. By September 2010, the total costs had risen to almost $10 billion, with BP setting aside a provision of $20 billion. In January 2011, a US presidential commission squarely laid the blame for the disaster at the door of BP and its contractors. The report cited several systematic failures, short-cuts and sub-standard materials and workmanship as the cause, all of which it attributed to management failures. By 2014, BP had increased the provision to $42 billion.

Required:

List some of the internal and external failure costs for the Deepwater Horizon disaster with particular focus on the cost of failures in quality control and the role of management accountants.

(11 marks) 

(TOTAL 35 MARKS)

Question 4

(Questions A and B below are independent.)

(A) Budgeting is an important management accounting tool. Please discuss the purposes of budgeting and why do we produce budgets?

(12 marks)

(B) (Drury 2018, p.266) Some years ago in a BBC documentary called Power to the People. Michael Portillo visited a “You Decide” session organised by the local council in Tower Hamlets, London. At this session, local people decided what was to be done with £250,000 of council money. They were given fully costed options under headings like healthcare, the elderly and local policing. The options in each category could be debated for a time, then all present “voted” for their preferred option using an electronic voting system. This continued until all funds were used up. This, it could be argued, saves the council some time and allocated resources to where residents deem most appropriate. Of course, £250,000 is a long way off a council’s full budget, but at least there is participation in how the money is spent. This idea developed into a ‘You Choose’ budget simulator website that encourages the public to consider where council budget cuts might fall, where efficiencies might be made, where income might be generated and effects of changes in budget allocation. This latter point is particularly relevant, as local councils are expected to produce a balanced budget, and with the simulator, the public can see what happens if more or less money is allocated to particular areas of expenditure.

As an example, here is an extract from the webpages of Tameside Council:

There are three parts to the budget simulator:

· Use the sliding budget lines to tell us if you feel individual service budgets should go up or down. As you make changes, ‘consequences’ start to appear – you can change our mind as many times as you like until you are ready to ‘submit’ your thoughts.

· Read about ‘how we can bring money in’ and ‘how we can save money’ and tick the ideas you like.

· Give us your comments on your budget priorities and any suggestions on saving money by clicking the ‘suggestions’ button in the bottom left of the screen.

Required:

i. Can you think of any advantages of scheme of tools like those mentioned above?

(Marks 13)

ii. What are the limitations and disadvantages of innovative schemes like those mentioned above?

(Marks 10)

(TOTAL 35 MARKS)

Question 5

(A) Explain the purpose of transfer pricing?

(9 marks) 

(B) What are the major limitations and strengths of the Internal rate of return (IRR).

(10 marks) 

(C) Identify and explain advantages and disadvantages of divisionalisation.

(7 marks) 

(D) Explain the difference between manager performance and economic performance.

(9 marks)

(TOTAL 35 MARKS)