This individual project counts 70% of the final course mark.

Marks will be awarded for

the appendix. Overall, 40% of the marks are available for the calculated parts of the
case, with the remaining 60% for the analysis. The quality of the structure and
presentation are important to the final outcome, so reflect on how best to present the
information.

The text of the report should be 2000 words in length. This does not include any tables, charts
or calculations that you wish to present with the report. 10% above or below the word count is
acceptable.

Along with the report you should present an appendix that shows in detail the calculations
underlying the data and recommendations that you have presented in the report. The appendix
should be organised in the same way as the tasks in the case.

The report will require reflection on the particular circumstances of the business situation in
the case. Reports that assume that their calculations automatically provide the ‘best’ answer
will not score highly. The qualitative factors that are exhibited in the circumstances of the
case are of particular importance and should be incorporated in the analysis.

You may need to carry out some research on some aspects of the case and should bear in
mind that wider reading is likely to provide you with insights that are deeper than those
provided in the course materials alone. However, the case tasks are based on the topics and
materials of the course and any submissions that have not substantively engaged with the
course materials are likely to fail.

We welcome engagement with the academic literature in management accounting. While it is

possible to do well without such engagement, including references to research that supports
or critiques aspects of practice that are included in the case will attract extra credit. Where
academic research has been consulted it should be cited in the Harvard Style.

If you decide to include references, a separate reference list should be compiled at the end of
the report, before the appendix. References are not included in the word count.
The Case: Binary Ltd.
Binary Ltd. is a private company owned and operated by husband and wife team Ken and
Samantha Binary. The couple have managed to build the company into a sizeable business,
with a turnover approaching £50m, although it lacks a clear mission and they tend to take on
opportunities that they see rather than focusing their expertise and competence in one
particular area.
Recently, Ken and Samantha have disagreed more about how the organisation should move
forward. They currently have 140 employees working on various projects, with around 60%
of their turnover relating to the manufacture of bicycles, a business that has done well
recently. The bicycles they make are very high quality and at the premium end of the market.
The manufacture of the bicycles requires the use of expensive plant and machinery and needs
a skilled workforce to operate it. Samantha is happiest with this element of the business and
spends the majority of her time working on it. She would like to develop it further as she
perceives great opportunities to increase their share of this expanding market in the years
ahead. Ken on the other hand is still very keen to take on a range of other projects, which
span across retail, manufacturing and construction. He enjoys the entrepreneurial aspects of
the business and tends to get bored working on the same thing for extended periods. He is
well connected in the business community and through these connections is often offered
opportunities for project-based contracts that have on occasion proved lucrative. Ken argues
that the diversification of activity provided by the projects helps to reduce risk and gives them
potential new areas of development. He points to some one-off project successes that they
have had, which have been much more profitable than the bicycle business.
Samantha acknowledges that the projects provide diversity and reduce the risk of
concentrating on a single business, but feels strongly that the bicycle market is in a strong
growth phase and the risk of focusing on it is currently very low. Further, she feels that taking
on new projects now would be a distraction from the bicycle manufacturing that she argues is
now their core business and should be their main focus for development. It is, she observes
both their largest activity and the one that she thinks has most reliably helped them achieve
good returns (currently they look for a minimum 12% rate of return across the company). She
argues that while collectively the one-off projects have been successful and have delivered
good returns, this has been because of the spectacular success of two projects that have
disguised the much smaller returns seen on some other projects.
These differing views on the projects are strongly held, but neither party has a clear
understanding of what the comparative position between Binary Bikes and the projects really
is. The pair have recently been very busy and disagreements over what should be taken on
have increased. Ken has identified a range of new project options, but is struggling to get
Samantha to spend time considering them. Samantha on the other hand is fully occupied in
growing the bicycle business and finds Ken’s demands to look at the project-based work is
taking valuable time from her that she would rather not lose. Matters have come to a head and
the disagreements are affecting their work and personal lives to the point where the continued
success of both the business and their marriage is at risk.
Having decided that they need independent advice, they have employed you as an external
consultant to help them decide on the way forward. They have asked you to report on range
of issues including the following:
Task 1: 15 marks

Binary Bicycles, has a subunit that makes the bicycle frames. It is called Frame. Samantha
and Ken would like to understand more about how Frame performed in relation to the last
periods budget. They have supplied you with the following data:
The company uses a standard costing system which is based on production and sales of 2,500
high performance bicycle frames each month. The standard cost card for one high
performance bicycle frame is shown below.

£
Direct material: 10 metres of aluminium at £2.50 per metre 25.00
Direct labour: 3 hours at £10 per hour 30.00
Fixed overhead 15.00
Standard cost of one high performance bicycle frame 70.00
Standard selling price of one high performance bicycle frame 100.00
Standard profit 30.00

During the month of June, the following results were recorded:

 2,700 high performance bicycle frames were produced and sold at a price of £98 each.
 26,890 metres of aluminium were used at a total cost of £69,914.
 8,000 labour hours were worked at a total cost of £84,000.
 Fixed overheads for the month totalled up to £38,000.
 The actual profit for the month was £72,686.

At the beginning, and end of the month, Frame had no inventory of any material, work-in-
progress or finished product.

Required:

(a) Calculate the following variances for the month of June for Frame:
i. Direct materials total, price and usage variances
ii. Direct labour total, rate and efficiency variances
iii. Fixed overhead expenditure variance
iv. Sales price and volume variances
(b) Prepare a Variances Summary Statement in tabular form which summarises the variances
for the month of June and reconciles the expected profit for the month to the actual profit
for the month.
(c) Discuss the variances that you have calculated, suggesting reasons why they might have
occurred.
Task 2: 8 marks
Ken and Samantha also want you to help construct Frame’s budget for the next period. In the
three months of October, November and December, Frame makes the following forecasts for
sales, costs, and other payments made in cash.

Unit Costs: Frame A Frame B Frame C

£ £ £
Selling Price 300.00 400.00 500.00
Materials: Metal Costs 46.00 44.00 48.00
Materials: Other Costs 20.00 25.00 28.00
Direct Labour Costs 14.20 10.80 18.00

Sales Budget October November December Total

£ £ £ £
Frame A 180,000 240,000 291,000 711,000
Frame B 200,000 240,000 320,000 760,000
Frame C 500,000 600,000 800,000 1,900,000
Total 880,000 1,080,000 1,411,000 3,371,000

Direct Labour Budget January February March Total

£ £ £ £
Frame A 8,517 11,356 13,769 33,642
Frame B 5,400 6,480 8,640 20,520
Frame C 18,000 21,600 28,800 68,400
Total 31,917 39,436 51,209 122,562

Direct Materials Budget: October November December Total

Metal
£ £ £ £
Frame A 27,600 36,800 44,620 109,020
Frame B 22,000 26,400 35,200 83,600
Frame C 48,000 57,600 76,800 182,400
Total 97,600 120,800 156,620 375,020

Timing of Cash Receipts Timing of Cash Payments

From Sales to Suppliers of Metal
In the Month of Sale/use 50% 20%
In the Following Month 50% 30%
After Two Months 50%

Direct Materials Budget: Other October November December Total

Costs
£ £ £ £
Frame A 12,000 16,000 19,400 47,400
Frame B 12,500 15,000 20,000 47,500
Frame C 25,000 33,600 44,800 103,400
Total 49,500 64,600 84,200 198,300
Notes:
1. Fixed costs in the income statement: £250,000 per month for October, November, and
December.
2. Forecast cash payments for rent, machinery and tools, electricity, rates, insurance, and
drawings have been 70,000 in October, 50,000 in November and 20,000 in December.
3. Cash introduced by the business in October has been: £120,000

Required:

(a) Prepare the Income Statement Budget for the three-month period.
(b) Prepare the Cash Flow Statement Forecast for the three-month period.
(c) Comment on the budgeted profitability and liquidity of Frame.

Task 3: 14 marks
Ken and Samantha are concerned about the manager of Frame. They feel he is not fully
committed to price control and that as all of his product is passed on within the company to
the assembly subunit which is called Bolt. The manager of Bolt has complained that for one
frame type in particular she can source frames of similar quality on the open market for £75
per unit, but that she is being charged an internal standard sale price of £100 per unit from
Frame. Her other material and assembly costs are £350 and the typical final sale price for this
specific bike is £490. Ken and Samantha also wonder why the manager of Frame is not able
to produce at a cost where they would also be able to sell onto the open market. This would
be particularly attractive as frame is currently not operating at full capacity.

Required:

Discuss ways in which Ken and Samantha could set policies that will encourage both subunit
managers to work to increase the overall profit of Binary. Support your arguments with
calculations.

Task 4: 29 marks
Ken wants to buy a factory unit that belonged to a now bankrupt company called Camtech
Ltd. The unit has machinery inside that was used to make parts for the automotive industry
and Ken believes he can resurrect the business. The unit has not been in use for two years, but
an engineering inspection suggests that, although all the equipment in it is ten years old and
dates back to Camtech’s foundation, it is in working order. Ken’s main motivation is that the
unit has been on the market for over a year without a buyer and he has been able to negotiate
a price that he feels confident will allow profits to be made. His plan is to rebuild the business
over a five-year period and then to sell it on as a profitable entity for £2,000,000. Ken
supplies the following details about the unit:
1. The purchase price of the unit is £480,000 and includes everything that is inside including
all machinery, some raw materials and a considerable amount of rubbish including scrap
parts, old computers and office furniture.
2. The machinery makes camshafts which are a key component of internal combustion
engines and Ken’s research shows that the bankrupt company was well regarded by car
manufacturers and that they had a good order book before the accountant ran off with the
bank balance, having not paid their suppliers for many months.
3. Camshafts sell for £30 each and the unit has the capacity to make up to 120,000 units per
year, based on 12 months continuous operation. Ken’s initial research suggests he can get
orders for 12,000 units in year one, doubling each year for each of the subsequent three
years and reaching capacity in year five. Ken expects sales to rise steadily through each
year until capacity is reached.
4. The cost of raw materials is £10/camshaft. Ken is confident that this is stable and not
subject to change in at least the first three years, although he concedes that it is probably
sensible to allow a 10% increase in raw material costs in years four and five.
5. The process is known to require the use of significant amounts of electricity, although the
details are not clear. Ken has found old bills that show the last two years before closure
had production volumes of 84,320 units and 102,180 units respectively and that the
electricity bills in those years were £572,707 and £687,904 respectively. Imminent rises
in the cost of electricity are not expected.
6. Ken has also found bills relating to staffing and maintenance of the machinery.
a. The company had an office staff of 8 people that cost £400,000, but Ken observes
that £100,000 of this was the managing director’s salary and he intends to fill that
role himself, at least in the short run. He says he won’t draw a salary for the first
two years while the company is restarting, but after that he thinks a new MD will
need to be appointed. He also believes a smaller office team will be required in the
first instance and that £120,000 will satisfy the salary bill for years one and two,
rising to £180,000 in year three (not including the MD appointment), £240,000 in
year four and £300,000 in year five.
b. The maintenance bills suggest that the machinery was expensive to keep going. A
local company called Smooth Running Ltd. was contracted to run regular
maintenance on the machines and the contract for running maintenance and repair
cost £45,000 per year. In addition, a two-year overhaul cycle was required to
ensure that the machines were properly calibrated to ensure the camshafts were
made to the appropriate degree of precision. These overhauls cost £50,000 and
require production to cease for one calendar month while it takes place. Ken has
checked and Smooth Running is willing to resume the contract under the same
terms. There was an overhaul in the last year of Camtech’s operation and Smooth
running think that the machines will be ok if there is an initial overhaul at the end
of year one.
7. Some immediate repairs are required to the fabric of the building including the roof and
interior walls, particularly in the office space. These repairs will take two months and
have been estimated to cost £130,000. Once repairs are completed the contractor has
offered a maintenance contract for the building at £5,000 per year if Ken pays the repair
costs up front. Ken is not sure if the repair contract is necessary.
8. The machines require a skilled staff to run them. The capacity of 120,000 units per year is
based upon a single shift pattern delivering a maximum of 10,000 units per month. At
lower volumes (below 24,000 units per year) the production line can be operated by three
engineers, but between 24,000 and 48,000 units four engineers are required and above
48,000 units five engineers are required. The requirements are laid out in the table below:

Production level up to (units) 24,000 48,000 Above 48,000

Technician level engineers 2 2 3
Graduate level engineers 1 2 2

Technicians are paid £24,000 per year, but graduates are paid £36,000 per year. It is
expected that the general tidying up and cleaning of the premises and other odd jobs can
be done by a janitor who will be paid £14,000 per year.
9. Local taxes on the unit amount to £54,000 per year and other utility cost (non-electricity
related) amount to £22,000 per year.
10. Working capital of £50,000 is required to operate the plant.

Required:

Analyse the data for Ken’s plan to resurrect Camtech and advise him on the viability of the
project. Your advice should include commentary on the qualitative aspects of the project as
well as any assumptions that you have made, or limitations that you perceive due to
limitations in the available information.

Task 5: 16 marks
Ken and Samantha are always interested in making their company more successful but are
not very clear at any point in time how well it is doing. They have heard from friends in the
business community that the balanced scorecard is an excellent tool for understanding
business performance and are interested to know more.

Required:
Briefly report on the company performance measurement options available to Ken and
Samantha highlighting the strengths and weaknesses of the alternatives. You should also
prepare a schedule of information that would be required in order to effectively undertake the
analysis using the techniques that you outline.

Final task: 18 marks

Present the responses to these tasks in a report and further comment on how Binary should
move forward in the future. You should recommend support for the approach of either Ken,
or Samantha, or perhaps some middle way. In any case your analysis should include
reflection on the future of the companies’ activities on the basis of the limited information
that you have.