SINGAPORE INSTITUTE OF MANAGEMENT

UNIVERSITY OF LONDON
PRELIMINARY EXAM 2016

PROGRAMME : University of London Degree and Diploma Programmes

MODULE CODE : AC3097

MODULE TITLE : MANAGEMENT ACCOUNTING

DATE OF EXAM : 23/02/2016

DURATION : 3 HOURS 15 MINUTES (includes 15 minutes reading time)

TOTAL NUMBER : 8 pages

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THIS PAGE)
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INSTRUCTIONS TO CANDIDATES :-

Candidates should answer FOUR of the following EIGHT questions: TWO from
Section A, ONE from Section B and ONE further question from either section. All
questions carry equal marks.

Workings should be submitted for all questions requiring calculations. Any

necessary assumptions introduced in answering a question are to be stated.

A calculator may be used when answering questions on this paper and it must comply
in all respects with the specification given with your Admission Notice. The make and
type of machine must be clearly stated on the front cover of the answer book.

Candidates are strongly advised to divide their time accordingly.

DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU ARE TOLD TO
DO SO.

Calculator: Non-programmable, 8-column: accounting paper: Yes

AC3097 Management Accounting Page 1 of 8

SECTION A:
Answer two questions and no more than one further question from this section.

1. “The Redwoods”, a medium-sized hotel with 50 bedrooms, is run by Jane Wood who owns 100%
of its share capital. The buildings are in good condition and are regularly upgraded. Jane Wood
wants to retire in five years’ time and is looking for a co-owner to take over the hotel on her
retirement.

The following information is provided relating to “The Redwoods” performance over the
past two years, along with average hotel data for similar size hotels in the region:
Current Previous Other Hotels
Financial data
year year Current year
Turnover - accommodation £650,000 £700,000 780,000
Restaurant 160,000 130,000 300,000
Bar 32,000 20,000 100,000
Shop, local trips commission etc. 1,500 1,000 120,000
Wages and administration 620,000 590,000 850,000
Advertising 30,000 40,000 120,000
Net profit £193,500 £221,000 330,000
Estimated market value of non-current assets 2,000,000 2,000,000 2,800,000
Net Current assets £23,000 £15,000 25,000
Non Financial data
Staff courtesy rating 78% 78% 75%
Room occupancy (during 300 nights open each year) 7,400 nights 7,600 nights 60%
% of revenue provided by accommodation, restaurant & bar 99.8% 99.9% 90.8%
Market share of overnight hotel accommodation in the region 3.7% 3.67%
Percentage of work procedures meeting job specification 80% 75% 70%
Percentage of staff with hotel and restaurant qualifications 65% 40% 50%
Year on year employee retention rate 60% 40% 70%
Customer satisfaction rating - accommodation 65% 60% 70%
Customer satisfaction rating - restaurant 75% 50% 55%
Staff responsiveness to customer needs 80% 50% 80%
Staff competence rating 90% 60% 85%
Customers who would return to “The Redwoods”. 65% 45% 50%

Required:
(a) Providing ratio calculations where necessary, discuss the financial performance of The Redwoods
based on the financial information provided. (7 marks)
(b) Organise the Non-financial data provided into appropriate categories. (5 marks)
(c) Using all the information at your disposal, describe the apparent trends in The Redwoods’ activities
and advise on the future prospects of the hotel. (9 marks)
(d) Explain why Financial and Non-financial data are required to appraise the future success of a
company (4 marks)

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2. Glass Delivery Ltd is a warehousing and distribution company which handles products on
behalf of glass manufacturers. The company receives the products packed in large
quantities. The products are repacked into small batches or single units to be distributed to
end customers, as required. Three types of product are handled: Small Glassware, Large
Glassware and Crystal Glass. The cost of materials used in re-packing each unit of the
products varies in the ratio 1:4:8 for Small Glassware, Large Glassware and Crystal Glass,
respectively. This ratio is linked to the size and fragility of the goods.

Budget estimates for each month of the year to 30th June 2014 for volumes and costs are as
follows:

Products Handled per month (Units)

Small Glassware 10,000
Large Glassware 4,000
Crystal Glass 6,000

Costs per month (£000)

Re-packing materials 111
Labour 110
Occupancy 180
Administration 120

Required:
(a) Assuming that Glass Delivery Ltd adds 30% to full cost to determine price, calculate the
budgeted average price per unit of each of the three products. Allocate re-packing material
costs based on the ratio indicated and all other costs on a per unit basis. (5 marks)

(b) Additional information has been obtained to enable costs per unit of each product to be
calculated using an activity-based costing approach. Costs have been identified as
attributable to each of three work centres – “Receipt and Inspection”, “Storage” and
“Repacking”.

For the year to 30 June 2014, the following cost breakdown has been determined:
Receipt & Inspection % Storage %* Repacking %
Labour 30 3 67
Occupancy 15 70 15
Administration 40 20 40
*units are stored for an average of 1 month

An activities analysis has revealed that the size and fragility of products affects the Receipt
and Inspection time required by each product. “Storage” is related to the average size of the
products coming in and “Repacking” is related to the complexity of repacking required for
each product. The relative requirements per unit of product have been estimated as follows:

AC3097 Management Accounting Page 3 of 8

 Receipt & Inspection Storage Repacking
(minutes) (Sq. Metres) (minutes)
Small Glassware 5 0.15 8
Large Glassware 6 0.6 12
Crystal Glass 15 0.3 40

Using the additional information above and a 30% mark-up on cost, calculate an activity-
based price for each product. (12 marks)

(c) Comment on the difference in prices using the two costing methods (3 marks)

(d) Crystal Glass demand estimates above were based on prices calculated in part (a) above. The
information provided by part (b) means that the company is considering reviewing their
prices. Their reputation for crystal glass packing is highly regarded. The new market
research finds that the following demand will arise:

Products Handled per month (Units)

Small Glassware 26,000
Large Glassware 2,000
Crystal Glass 5,000

Assuming that all costs except re-packing material are fixed and there is sufficient capacity
to meet this demand, show calculations to indicate whether Crystal Glass should change all
their prices to the ABC amounts. (5 marks)

AC3097 Management Accounting Page 4 of 8

3. The Crabtree Co Ltd which works on contracts to customers’ specification, has been
approached to accept a contract with the following requirements:

The production of 20,000 Kg of product X with a contract price of £400 per Kg. The
resources used in the production of each Kg of X include:

Resources per Kg of X
Labour – Grade 1 2 hours
Grade 2 6 hours
Material – A 2 units
B 1 litre

Grade 1 labour is highly skilled and although it is currently under-utilised in the firm it is
Crabtree’s policy to continue to pay grade 1 labour in full. Acceptance of the contract would
reduce the idle time of grade 1 labour. Idle time payments are treated as production
overheads. Grade 2 is unskilled labour with a high turnover and is considered a variable
cost.

The costs to Crabtree Co Ltd of each type of labour are:

Grade 1 £20 per hour

Grade 2 £9 per hour

The materials required to fulfil the contract would be drawn from materials already in
inventory. Material A is widely used within the firm and amounts used for this contract will
need to be replaced. Material B was purchased to fulfil an expected order which did not
proceed; if material B is not used for this contract it will be sold. For accounting purposes
FIFO is used. The various values and costs for A and B are:

A B
per unit per litre
£ £
Book value 32 120
Replacement cost 40 128
Net realisable value 36 100

Variable production overheads are £10 per productive labour hour using both skilled and
unskilled labour. A single recovery rate for fixed factory overheads is used throughout the
firm. The overhead is recovered per productive labour hour (skilled and unskilled).
Estimates of the year’s activity, show budgeted annual fixed production overheads of
£3,000,000 and budgeted productive labour hours of 500,000.

A special machine is required for this contract. The fixed costs for running and depreciating
the machine are included in production overhead. Accepting the contract would not cause
these costs to change but using the machine time would mean that Crabtree Co Ltd would

AC3097 Management Accounting Page 5 of 8

 not be able to make 5,000 units of product Y, a product in regular demand, thus decreasing
the total expected sales. Details of Product Y’s revenues and cost are as shown below:
Per unit
Sales price £350
Labour – grade 2 4 hours
Materials – relevant variable costs £60

Crabtree Co Ltd uses full absorption job costing in order to derive a profit figure for each
contract. If this contract for 20,000 Kg of product X is accepted, it will be treated as a
separate job for routine costing purposes.

Required:
(a) Show how the contract, if accepted, will be reported in the routine job costing system used
by Crabtree Co Ltd. (5 marks)

(b) Using the relevant cost approach, advise Crabtree Co Ltd on whether to accept the contract
on financial grounds. Support your advice with calculations. (8 marks)

(c) Explain how each of the two methods in (a) and (b) above are used by businesses.
(4 marks)

(e) Calculate the difference in profit revealed in your answers to (a) & (b) above. Since the
company uses a routine job costing system, if the contract were accepted explain where that
difference in the profit would be observed in the actual performance of the company.
(8 marks)

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4. Freshmeals Ltd has a chain of fast food outlets selling burgers, salads, sandwiches etc. Two
of the outlets, “Marina Mall” and “Central” have large premises with room to install pizza
ovens. The necessary equipment and installation to provide pizzas would cost £1,500,000
per store and last five years, with no residual value. It is planned to purchase the ovens at
the beginning of the financial year.

Additional cashflows from the sale of pizzas for each of the next five years, for any outlet
installing the oven is expected to be:
Revenues £1,100,000
Cash Expenses £600,000

The budgeted results for each outlet for next year, without investment in the pizza
equipment are:
Marina Mall Central
Net assets at beginning of year £3,500,000 £6,440,000
Net assets at end of year £2,800,000 £4,660,000
Revenues £4,402,000 £7,045,000
Expenses £3,598,000 £6,277,000
profit £804,000 £768,000

Freshmeals Ltd evaluates managerial performance and awards bonuses based on Return on
Investment using the average of opening and closing asset values. The company’s cost of
capital is 14%.

Required
(a) Show calculations to determine whether the pizza equipment installation is viable using the
company’s cost of capital of 14%. Comment on the result. (5 marks)

(b) As managers are evaluated on Return on Investment calculate the Total Return on Total
Investment for the first year of use of the pizza ovens, show calculations and comment for
each manager on whether s/he will proceed with the pizza expansion. (8 marks)

(c) If the evaluation method were changed to Residual Income, show calculations and comment
on whether the managers would proceed with the pizza expansion. (8 marks)

(d) Briefly discuss how performance measurement and bonuses should be handled in order to
encourage managers to behave in goal congruent ways. (4 marks)

Present value of £1 at 14%

Year Present value
1 0.877
2 0.769
3 0.675
4 0.592
5 0.519

AC3097 Management Accounting Page 7 of 8

Section B
Answer one question and no more than one further question from this section.

5. (a) i) Describe the types of organisation which would benefit from using lifecycle costing.
(3 marks)

ii) Describe the ways in which the financial information provide by lifecycle costing can
be used in strategic planning, decision making and control. (12 marks)

(b) Describe the purposes of target costing and identify the steps required to develop target
costs and prices. (10 marks)

6. (a) Define transfer prices and explain the purposes which top management are attempting to
achieve by implementing transfer pricing. (10 marks)

(b) Describe three methods of setting transfer prices and for each method explain a situation
in which the method would be most suitable. (15 marks)

7. (a) Briefly explain why it is necessary to determine the behaviour of costs and why this is
not always straight-forward. (10 marks)

(b) Explain the following two methods of cost behaviour estimation, indicating the
circumstances in which each method would be suitable and any issues which might
undermine the reliability of results for forecasting purposes:
(i) Industrial Engineering method
(ii) Least squares regression method (15 marks)

8. (a) In relation to responsibility accounting and the budgetary process, explain the following
terms used for categorising parts of a business and for each one indicate the financial
measures which are used as output measures.
(i) cost centre
(ii) revenue centre
(iii) profit centre (10 marks)

(b) Horngren et al 2015 pages 287-288 suggest the following uses of variance analysis:
(i) performance measurement,
(ii) organisational learning,
(iii) continuous improvement.

Explain how variance analysis is used for each of these purposes. (15 marks)

AC3097 Management Accounting Page 8 of 8