Club Atlantic (20 marks)

Club Atlantic is an all-weather holiday complex providing holiday accommodation and

associated services throughout the year. The fee charged to guests is fully inclusive of
accommodation and all meals. However, because the holiday industry is so competitive, Club
Atlantic is only able to generate profits by maintaining strict financial control of all activities.
The club's restaurant is one area in which there is a constant need to monitor costs. Susan
Green is the manager of the restaurant. At the beginning of each year she is given an annual
budget which is then broken down into months. Each month she receives a statement
monitoring actual costs against the annual budget and highlighting any variances. The
statement for the month ended 31 October is reproduced below along with supporting
assumptions:
Club Atlantic Restaurant Performance Statement Month to 31 October

Variance
Actual Budget
(over)/under
Number of guest days 11 160 9 600 (1 560)
R R R
Food 205 000 201 600 (3 400)
Cleaning materials 22 320 19 200 (3 120)
Heat, light and power 20 500 24 000 3 500
Catering wages 84 000 72 000 (12 000)
Rent, rates, insurance and depreciation 18 600 18 000 (600)
350 420 334 800 (15 620)

Assumptions:
a. The budget has been calculated on the basis of a 30-day calendar month with
the cost of rent, rates, insurance and depreciation being an apportionment of
the fixed annual charge.
b. The budgeted catering wages assume that: (i) there is one member of the
catering staff for every 40 guests staying at the complex, (ii) the daily cost of a
member of the catering staff is R300.
c. All other budgeted costs are variable costs based on the number of guest days.

Club Atlantic uses its current budgets and performance statements to motivate its managers as
well as for financial control. If managers keep expenses below budget they receive a bonus in
addition to their salaries.
A colleague of Susan is Brian Hilton. Brian is in charge off the swimming pool and golf course,
both of which have high levels of fixed costs. Each month he manages to keep expenses below
budget and in return enjoys regular bonuses. Under the current reporting system, Susan Green
only rarely receives a bonus. At a recent meeting with Club Atlantic's directors, Susan Green
expressed concern that the performance statement was not a valid reflection of her
management of the restaurant.
You are currently employed by Hall & Ball, the club's auditors, and the directors of Club Atlantic
have asked you to advise them whether there is any justification for Susan Green's concern. At
the meeting with the Club's directors, you were asked the following questions:
a) Do budgets motivate managers to achieve objectives?
b) Does motivating managers lead to improved performance?
c) Does the current method of reporting performance motivate Susan Green and Brian
Hilton to be more efficient?

Required:

(a) Using the data presented in the Restaurant Performance Statement for October, and
the supporting assumptions, prepare a revised performance statement using flexible
budgeting principles. Your statement should show both the revised (flexed) budget and
the revised variances. (10 marks)

(b) Write a brief letter to the directors of Club Atlantic addressing their questions and
justifying your answers. (10 marks)

Association of Accounting Technicians (AAT) Technicians Stage (adapted)

A2Z (40 marks)

You are the group management accountant of A2Z, a large divisionalised group with a
31 December financial year end.
There has been extensive board discussion of the existing system of rewarding divisional
general managers with substantial bonuses based on the comparison of the divisional profit
with budget.
The bonus scheme is simple: the divisional profit before interest and tax (PBIT) is compared
with the budget for the year. If budget is not achieved no bonus is paid. If budget is achieved a
bonus of 20 percent of salary is earned. If twice budgeted profit is achieved, a bonus of 100
percent of salary is paid, which is the upper limit of the bonus scheme. Intermediate
achievements are calculated pro rata.
The finance director has been asked to prepare a number of reports on the issues involved and
has asked you to prepare some of these. He has decided to use the results for Division X as an
example on which the various discussions could be based. A summary schedule of available
data for Division X in respect of the 2020 financial year is given below:
Division X – Summary of management accounting data

Strategic Plan Budget Latest estimate

2020 2020 2020
Prepared Prepared Prepared
Aug 2019 Oct 2019 Apr 2020
Unit sales 35 000 36 000 35 800
R’000 R’000 R’000
Sales 28 000 28 800 28 100
Marginal costs 14 350 15 300 14 900
Fixed factory cost 6 500 6 800 7 200
Product development 2 000 2 000 1 400
Marketing 3 500 3 200 2 600
PBIT 1 650 1 500 2 000

Division X manufactures and sells branded consumer durables in competitive markets. High
expenditure is required on product development and advertising, as the maintenance of market
share depends on a flow of well-promoted new models.
Reliable statistics on market size are available annually. Based on the actual market size for
2019, where stronger than anticipated growth had occurred, a revised market estimate of
165 000 units for 2020 was agreed by group and divisional staff in May 2020. This is a significant
increase on the estimate of 150 000 units made in May 2019 and used since.
The divisional general manager of Division X has commented that action now, almost halfway
through the year, is unlikely to produce significant results during this 2020 financial year.
However, had he known last year, at the time of producing the budget, that the market was
growing faster, he indicated that he would have taken the necessary action to maintain the
strategic plan market share. These actions would have been:
 cutting prices by R10 per unit below the price presently charged and used in the latest
estimate for 2020;
 increasing marketing expenditure by R300 000 compared with the strategic plan.
The group managing director, commenting on the same data, said that the divisional general
manager could have maintained both strategic plan market share and selling prices by an
alternative approach. The approach, he thought, should have been:
 maintaining expenditure on product development and marketing at 20 percent of sales
over the year;
 spending his time controlling production costs instead of worrying about annual
bonuses.
A non-executive director has commented that she can understand the case for linking executive
directors' rewards to group results. She is not convinced that this should be extended to
divisional managers and certainly not to senior managers below this level in divisions and head
office.

Required:

(a) Analyse and comment on the results of Division X, making appropriate comparisons with
budget, with plan and with new available data. Present the results in such a form that
the board can easily understand the problems involved. (17 marks)

(b) Comment on the advantages and problems of the existing bonus system for the
divisional general manager and the way in which the present bonus scheme may
motivate the divisional general manager. (8 marks)

(c) Make specific proposals, showing calculations if appropriate, for an alternative bonus
scheme, in relation to your analysis in (a). (8 marks)

(d) Explain and discuss the case for extending bonus schemes widely throughout the
organisation. (7 marks)

CIMA Stage 4 Management Accounting - Control and Audit (adapted)

Bushworks (35 marks)

Bushworks converts synthetic slabs into components AX and BX for use in the motor industry.
Bushworks is planning a quality management programme at a cost of R2 500 000. The following
information relates to the costs incurred by Bushworks both before and after the
implementation or the quality management programme:
1. Synthetic slabs
Synthetic slabs cost R400 per hundred. On average 2.5 percent of synthetic slabs
received are returned to the supplier as scrap because of deterioration when in stock
(storage). The supplier allows a credit of R10 per hundred slabs for such returns. In
addition, on receipt into stock, checks to ensure that the slabs received conform to
specification costs R140 000 per annum. A move to a just-in-time purchasing system
will eliminate the holding of stocks of synthetic slabs. This has been negotiated with the
supplier who will deliver slabs of guaranteed design specification for R440 per hundred
units, eliminating all stockholding costs.

2. Curing/moulding process
The synthetic slabs are issued to a curing/moulding process which has variable
conversion costs of R200 per hundred slabs input. This process produces sub-
components A and B which have the same cost structure. Losses of 10 percent of input
to the process because of incorrect temperature control during the process are sold as
scrap at R50 per hundred units. The quality programme will rectify the temperature
control problem thus reducing losses to 1 percent of input to the process.

3. Finishing process
The finishing process has a bank of machines that perform additional operations on
type A and B sub-components as required and converts them into final components AX
and BX respectively. The variable conversion costs in the finishing process for AX and BX
are R150 and R250 per hundred units respectively. At the end of the finishing process,
15 percent of units are found to be defective.

Defective units are sold for scrap at R100 per hundred units. The quality programme
will convert the finishing process into two dedicated cells, one for each of component
types AX and BX. The dedicated cell variable costs per hundred sub-components A and
B processed will be R120 and R200 respectively. Defective units of components AX and
BX are expected to fall to 2.5 percent of the input to each cell. Defective components
will be sold as scrap as at present.
 4. Finished goods
A finished goods stock of components AX and BX of 15 000 and 30 000 units
respectively is held throughout the year in order to allow for customer demand
fluctuations and free replacement of units returned by customers due to specification
faults. Customer returns are currently 2.5 percent of components delivered to
customers. Variable stock holding costs are R150 per thousand component units.

The proposed dedicated cell layout of the finishing process will eliminate the need to
hold stocks of finished components, other than sufficient to allow for the free
replacement of those found to be defective in customer hands. This stock level will be
set at one month's free replacement to customers which is estimated at 500 and 1 000
units for types AX and BX respectively. Variable stockholding costs will remain at R150
per thousand component units.

5. Quantitative data
Some preliminary work has already been carried out in calculating the number of units
of synthetic slabs, sub-components A and B and components AX and BX that will be
required both before and after the implementation of the quality management
programme, making use or the information in the question.

Table1 summarises the relevant figures:

Table 1: Existing situation Amended situation

Type A/AX Type B/BX Type A/AX Type B/BX
(units) (units) (units) (units)
Sales 800 000 1 200 000 800 000 1 200 000
Customer returns 20 000 30 000 6 000 12 000
Finished goods delivered 820 000 1 230 000 806 000 1 212 000
Finished process losses 144 706 217 059 20 667 31 077
Input to finishing process 964 706 1 447 059 826 667 1 243 077

2 411 765 2 069 744

Curing/moulding losses 267 974 20 907
Input to curing/moulding 2 679 739 2 090 651
Stock (storage) losses 68 711 -
Purchase of synthetic slabs 2 748 450 2 090 651
Required:

(a) Evaluate and present a statement showing the net financial benefit or loss per annum of
implementing the quality management programme, using the information in the
question and the data in Table 1. (All relevant workings must be shown.) (27 marks)

(b) Explain the meaning of the terms internal failure costs, external failure costs, appraisal
costs and prevention costs giving examples of each. (8 marks)

ACCA Information for Control and Decision Making (adapted)