ABM 221 EXAMPLES

EXAMPLE 1: INTERPRETATION OF FINANCIAL STATEMENTS

Study the following financial statements of two companies and then answer the questions which follow. Both
companies are peanut butter and cooking oil processors. The values shown are in MK000s.
Spreadlight Ltd Buttercup Ltd
Profit and loss accounts
MK000 MK000 MK000 MK000
Sales 2,500 1,600
Less Cost of goods sold
Opening stock 190 110
Add Purchases 2,100 1,220
2,290 1,330
Less Closing stock (220) (160)
(2,070) (1,170)
Gross profit 430 430
Less Expenses
Wages and salaries 180 130
Directors’ remuneration 70 120
Other expenses 14 10
(264) (260)
Net profit 166 170
Add Balance from last year 104 60
270 230
Less Appropriations
General reserve 30 30
Dividend 140 112
(170) (142)
Balance carried forward to next year 100 88

Spreadlight Ltd Buttercup Ltd

Balance Sheets
MK000 MK000 MK000 MK000
Non-current assets
Equipment at cost 200 50
Less Depreciation to date (80) (20)
120 30
Vans 64 48
Less Depreciation to date (26) (16)
38 32
158 62
Current assets
Stock 220 160
Debtors 104 29
Bank 75 10
399 199
Less: Current liabilities
Creditors (189) (38)
Working capital 210 161
Capital Employed 368 223
 Owners’ Equity
Issued share capital 200 100
Reserves
General reserve 68 35
Profit and loss 100 88
168 123
Total Owners’ Equity 368 223

Required:
a) Calculate the following ratios for both Spreadlight Ltd and Buttercup Ltd:
• gross profit percentage
• net profit percentage
• Return on capital employed (ROCE)
• current ratio
• acid test ratio
• expenses as percentage of sales
• receivables period
• payables period
• stock turnover
b) Comment briefly on the comparison of each ratio as between the two companies. State which company
appears to be the most efficient, giving what you consider to be possible reasons.
EXAMPLE 2: COST BEHAVIOR
ODL Limited, a wholly owned subsidiary of LUANAR plc, is preparing its budget for the year to 30 June 2019. In
respect of cost for maintaining students, it is desired to estimate an equation of the form 𝑦 = 𝑎 + 𝑏𝑥, where 𝑦 is
the total cost at the activity level (i.e. number of students) 𝑥, 𝑎 is the fixed cost regardless of number of students
maintained and 𝑏 is the variable cost per student.

The following data relates to the year ended 30 June 2018:

Number of
Month students Cost of maintaining students (MK)
July 34 640,000
August 30 620,000
September 34 620,000
October 39 590,000
November 42 500,000
December 32 530,000
January 26 500,000
February 26 500,000
March 31 530,000
April 35 550,000
May 43 580,000
June 48 680,000
Total 420 6,840,000
Monthly Average 35 570,000

You are required to:

(a) Estimate fixed and variable elements of maintaining students from the above data by both the following
methods:
(i) High-Low
(j) Least Square Method of Regression Analysis
(b) Compare briefly the methods used in (a) above in relation to the task of estimating fixed and variable
elements of a semi-variable cost
(c) Assuming you are the manager responsible for maintaining students and the ODL Director has told you that
for the coming year, LUANAR has allocated an average of MK720,000 per month, how many students are
you going to maintain each month on average?
(d) What if LUANAR has allocated the MK720,000 per month to ODL, but the Director thinks to widen access
to education, ODL will have to triple the number of students to an average of 105 per month for the year
ending 30 June 2019? How much money should ODL source from other sources to meet the required target?
EXAMPLE 3: COST-VOLUME-PROFIT ANALYSIS
Mr. Money is planning to set up a Children’s Recreation Centre along the Bunda-Mitundu Road. The following
relates to different pricing plans of visiting the Recreation Centre and costs of running the centre.
• Pricing Plan 1 - MK30,000 per child (a special pack with a complementary drink and snacks)
• Pricing Plan 2 - MK25,000 per child (the special pack not to be included)
Variable Costs per child
• Special Pack - MK8,000
• Centre Consumables - MK7,000
• Centre Expenses - MK2,000

Total Fixed Costs - MK200,000,000

REQUIRED: Study the information above then answer the following questions.

a) Using the CVP formula, calculate the number of units (and its Malawi Kwacha amount) for achieving
(i) Breakeven
(ii) A profit of MK30,000,000 for both plans.
b) Calculate the Contribution Margin ratio for both plans.
c) Describe the meaning of Contribution Margin ratio.
d) Explain the relationship between Contribution Margin ratio and Number of Breakeven units.
e) Explain why it is important to calculate Margin of Safety.
f) State TWO examples of fixed cost in relation to the Recreation Centre.
g) Define Relevant Range.
h) Draw a CVP graph and identify the following on the graph:
(i) Breakeven Point
(ii) Profit Zone
(iii) Loss Zone
i) Write a report to Mr. Money for recommending which pricing plan should be adopted. Your
recommendation should include at least ONE piece of financial and ONE piece of non-financial
information.
EXAMPLE 4: MATERIALS CONTROL
Jason owns a fish shop where he sells an exotic variety of Chambo fish which he imports from Malawi. Jason
refrigerates the fish in a cold storage facility near his shop that charges him a fixed annual fee of $1000 and variable
charge of $5 per day for each fish container that is stored. Every morning, Jason brings fish from the cold storage
to his shop for sale. Jason estimates that he incurs $10,000 electricity cost each year on refrigerating the fish inside
his own shop. Jason incurs the following ordering costs:
❑ Delivery charges of $10,000 per delivery
❑ Import duties of $300 per carton
❑ Custom fees of $200 per order
❑ Import license fee of $150 per annum
Jason currently imports fish by placing one order of 20 cartons every month. Each carton costs $2,000. Jason is
wondering if he can save inventory costs by adopting EOQ model. You are required to calculate (1) the current
annual total inventory cost, (2) the economic order quantity and (3) the annual total costs if EOQ is used

EXAMPLE 5: CAPITAL BUDGETING

Mbembembe Farm, a subsidiary of Gardener Corporation is considering investing in one of the three investment
opportunities. The board of directors has approached you to advise them to decide on the best project to invest
in. The cost of capital is 10 percent; and the expected net cash flows from the projects are shown in the table
below.
Period Project A (MK) Project B (MK) Project C (MK)
0 (5,000) (5,000) (5,000)
1 1,200 900 2,200
2 1,200 2,000 2,100
3 1,300 1,200 1,500
4 1,300 1,800 1,000
5 1,400 2,000
6 1,000

(i) By using payback period, Net present value and internal rate of return, which project should the farm invest
in?
(ii) Given that the economic lives of the above projects are not equal, name the best investment appraisal
technique that can be used to choose the best project to invest in.
(iii) Using the technique mentioned in (ii) above, which project should the farm invest in?
(iv) Explain 2 non-financial factors considered before investing in any investment
EXAMPLE 6: ABSORPTION COSTING & JOB COSTING
A furniture-making business manufactures quality furniture to customers’ orders. It has three production
departments and two service departments. Budgeted overhead costs for the coming year are as follows:
Total (MK)
Rent and rates 12 800
Machine insurance 6 000
Telephone charges 3 200
Depreciation 18 000
Production supervisor’s salaries 24 000
Heating and lighting 6 400
70 400
The three production departments – A, B and C, and the two service departments – X and Y, are housed in the
new premises, the details of which, together with other statistics and information, are given below.
Departments
A B C X Y
Floor area occupied (sq.metres) 3000 1800 600 600 400
Machine value (MK000) 24 10 8 4 2
Direct labour hours budgeted 3200 1800 1000
Labour rates per hour (MK) 3.80 3.50 3.40 3.00 3.00
Allocated overheads: Specific to each
department (MK000) 2.8 1.7 1.2 0.8 0.6
Service Department X’s costs apportioned 50% 25% 25%
Service Department Y’s costs apportioned 20% 30% 50%

Required:
(a) Prepare a statement showing the overhead cost budgeted for each department, showing the basis of
apportionment used. Also calculate suitable overhead absorption rates.
(b) Two pieces of furniture are to be manufactured for customers. Direct costs are as follows:
Job 123 Job 124
Direct material MK154 MK108
Direct labour 20 hours Dept A 16 hours Dept A
12 hours Dept B 10 hours Dept B
10 hours Dept C 14 hours Dept C
Calculate the total costs of each job.
(c) If the firm quotes prices to customers that reflect a required profit of 25 per cent on selling price, calculate
the quoted selling price for each job.
(d) If material costs are a significant part of total costs in a manufacturing company, describe a system of
material control that might be used in order to effectively control costs, paying practical attention to the
stock control aspect.
EXAMPLE 7: PROCESS COSTING
‘No Friction’ is an industrial lubricant, which is formed by subjecting certain crude chemicals to two successive
processes. The output of process 1 is passed to process 2, where it is blended with other chemicals. The process
costs for period 3 were as follows:
Process 1
Material: 3000 kg @ MK25 per kg
Labour: MK12000
Process plant time: 12 hours @ MK2000 per hour

Process 2
Material: 2000 kg @ MK40 per kg
Labour: MK8400
Process plant time: 20 hours @ MK1350 per hour

General overhead for period 3 amounted to MK35700 and is absorbed into process costs on a process labour
basis. The normal output of process 1 is 80 per cent of input, while that of process 2 is 90 per cent of input. Waste
matter from process 1 is sold for MK20 per kg, while that from process 2 is sold for MK30 per kg.

The output for period 3 was as follows:

Process 1 2300 kg
Process 2 4000 kg

There was no stock or work in process at either the beginning or the end of the period, and it may be assumed
that all available waste matter had been sold at the prices indicated.

You are required to show how the foregoing data would be recorded in a system of cost accounts.
EXAMPLE 9: STANDARD COSTING AND VARIANCE ANALYSIS
Belta manufacturing company produces a single product, which is known as the Princo. The product undergoes a
single operation in its manufacture. The standard cost for this operation is presented in the following standard
cost card:

Standard cost card for the product Princo K’000

Direct materials:
2kg of Y at K10000 per kg 20
1kg of Z at K15000 per kg 15
Direct labour (3 hours at K9000 per hour) 27
Variable overhead (3 hours at K2000 per direct labour hour) 6
Total standard variable cost 68
Standard contribution margin 20
Standard selling price 88

Belta limited plan to produce 10,000 units of Princo in the month of May, and the budgeted costs based on the
information contained in the standard cost card are as follows:

Budget based on the above standard costs and an output of 10,000 units
K’000 K’000 K’000
Sales (10,000 units at K88,000 per unit) 880,000
Direct materials:
Y: 20,000kg at K10000 per kg 200,000
Z: 10,000kg at K15000 per kg 150,000 350,000
Direct labour (30,000 hours at K9000 per hour) 270,000
Variable overheads (30,000 hours at K2000 per hour) 60,000 680,000
Budgeted contribution 200,000
Fixed overheads 120,000
The Budgeted profit 80,000

Annual budgeted fixed overheads are K1, 440,000,000 and are assumed to be incurred evenly throughout the
year. The company uses a variable (marginal) costing system for internal profit measurement purposes.

The actual results for May are as follows:

K’000 K’000 K’000
Sales (9,000 units at K90,000 per unit) Direct 810,000
materials:
Y: 19,000 kg at K11,000 per kg 209,000
Z: 10,100 kg at K14,000 per kg 141,400 350,400
Direct labour (28,500 hours at K9,600 per hour) 273,600
Variable overheads 52,000 676,000
Contribution 134,000
Fixed overheads 116,000
Profit 18,000

Actual production and sales for the period were 9,000 units.

Required:
Calculate sales, variable cost and fixed overhead variances AND prepare an operating statement.
EXAMPLE 10: BUDGETING AND BUDGETORY CONTROL

City plc manufactures a single product, the Graduate, using three different raw materials. The product details are
as follows:
Selling price per unit MK25000
Material A 3 kgs material price MK35 per kg
Material B 2 kgs material price MK50 per kg
Material C 4 kgs material price MK450 per kg
Direct labour 8 hours labour rate MK80 per hour
The company is considering its budgets for next year and has made the following estimates of sales demand for
the Graduate for July to October:
July August September October
400 units 300 units 600 units 450 units

It is company policy to hold stocks of finished goods at the end of each month equal to 50 per cent of the
following month’s sales demand, and it is expected that the stock at the start of the budget period will meet this
policy. At the end of the production process the products are tested: it is usual for 10 per cent of those tested to
be faulty. It is not possible to rectify these faulty units.

Raw material stocks are expected to be as follows on 1 July:

Material A 1000 kgs
Material B 400 kgs
Material C 600 kgs

Stocks are to be increased by 20 per cent in July, and then remain at their new level for the foreseeable future.
Labour is paid on an hourly rate based on attendance. In addition to the unit direct labour hours shown above,
20 per cent of attendance time is spent on tasks which support production activity.

Required:
(a) Prepare the following budgets for the quarter from July to September inclusive:
(i) sales budget in quantity and value;
(ii) production budget in units;
(iii) raw material usage budget in kgs;
(iv) raw material purchases budget in kgs and value;
(v) labour requirements budget in hours and value.
(b) Explain the term ‘principal budget factor’ and why its identification is an important part of the budget
preparation process.
(c) Explain clearly, using data from part (a) above, how you would construct a spreadsheet to produce the labour
requirements budget for August. Include a specimen cell layout diagram containing formulae which would
illustrate the basis for the spreadsheet.
EXAMPLE 11: CASH BUDGETS

The Sharpe Corporation's projected sales for the first eight months of 2004 are as follows:
January $90,000
February 120,000
March 135,000
April 240,000
May 300,000
June 270,000
July 225,000
August 150,000

Of Sharpe's sales, 10 percent is for cash, another 60 percent is collected in the month following sale, and 30 percent
is collected in the second month following sale. November and December sales for 2003 were $220,000 and
$175,000, respectively. Sharpe purchases its raw materials two months in advance of its sales equal to 60 percent
of their final sales price. The supplier is paid one month after it makes delivery. For example, purchases for April
sales are made in February and payment is made in March.

In addition, Sharpe pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax
prepayments of $22,500 are made each quarter, beginning in March.

The company's cash balance at December 31, 2003, was $22,000; a minimum balance of $15,000 must be
maintained at all times. Assume that any short-term financing needed to maintain the cash balance is paid off in
the month following the month of financing if sufficient funds are available.

Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes
place at the beginning of the month. Thus, if in the month of April, the firm expects to have a need for an
additional $60,500, these funds would be borrowed at the beginning of April with $60,500) owed for April and
paid at the beginning 1/12 interest of $605 (.12 of May.

a) Prepare a cash budget for Sharpe covering the first seven months of 2004.
b) Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will
the firm have ample cash to repay the notes?