HERIOT-WATT UNIVERSITY

ACCOUNTING – DECEMBER 2019

Section II

Case Studies

Case Study 1

‘Oh no!’ exclaimed Peter. ‘It’s great news but what will we do about the financial
reports?’

Peter was talking only to himself in his room. It’s 8 January 2020.

Peter Schmeichel is the Business Manager of Copenhagen Designs A/S, a manufacturing

company based in Copenhagen. He’d just finished a telephone call with Christian
Erickson, the company’s financial controller. Christian’s baby son had been born safely,
but two weeks premature – with the result that he will be on immediate paternity leave.

Peter had a problem. The company’s financial statements for the year to 31 December
2019 were due to be completed for the company’s Board Meeting on 18 January 2020.

Peter had studied accounting as a course during his MBA and had passed it with
distinction. Reluctantly, he was now compelled to find his accounting notes and review
his knowledge base.

He discovers some materials describing the role of the accounting equation and is
delighted to uncover the following accounting equation prepared up to 30 November
2019 on Christian’s desk:

DKK DKK
Motor Vehicles 25,200 Creditors 43,275
Raw Materials Inventory 18,250 Bank Overdraft 37,670
Finished Goods Inventory 37,115 Ordinary Share Capital 8,000
Debtors 196,210 Retained Profits 187,830
276,775 276,775

Peter then gathers together the various accounting transactions that have occurred during
December and realises that these need to be included within the company’s accounting
records:

1. Raw materials of DKK6,250 have been purchased on credit, payable in January.

2. DKK9,000 of the raw materials has been converted into finished goods by
incurring DKK1,500 of direct wages paid.
3. Cash of DKK25,755 has been received from debtors.
4. Insurance premiums of DKK5,000 have been paid, and DKK3,700 has been paid
for advertising.
5. Finished goods, costing DKK12,225, are sold for DKK18,706, on a cash basis.
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 6. Defective raw materials, costing DKK5,000, are returned to suppliers (Creditors).
7. Finished goods, costing DKK9,985, are sold for DKK17,225 on credit.
8. Office salaries of DKK11,450 are paid.

Peter recalls that the preparation of financial statements involves other factors that affect
the measurement of profitability and financial status. He reviews all of Christian’s
working papers and identifies several items that seem to be important:

(i) He has noted that the DKK5,000 paid for insurance (Item 4 above) relates to the
insurance cover for the year to 31 December 2020.
(ii) He is advised that some finished goods, costing DKK11,000, have been identified
as obsolete but have not yet been adjusted for.
(iii) Christian’s notes state he has yet to provide for any depreciation on motor
vehicles in the Income Statements for 2019. That means that the entire year’s
depreciation charge has to be computed and applied in December. Depreciation
on motor vehicles is computed at a rate of 25% per annum, on a reducing balance
basis.

From his own files, Peter has found the Income Statement for the eleven months to 30
November 2019:

Income Statement
Actual – 11 months to
30 November 2019
DKK
Sales 741,577

Cost of Sales 332,400

Gross Profit 409,177

Less: Overheads
Office Salaries 122,450
Telephone 7,150
Rent 24,000
Advertising 15,750
Travel Expenses 19,175
Heat & Light 7,100
Insurance 4,800
Other Marketing Costs 14,237
214,662

Net Profit 194,515

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Required:

1. Prepare the accounting equation as at 31 December in a tabular spreadsheet

format, detailing all of the transactions for December and incorporating the
various adjustments identified by Peter.
(17 marks)

2. Prepare the Income Statement for the year to 31 December 2019.

(13 marks)

3. Prepare the Balance Sheet as at 31 December 2019.

(5 marks)

Total 35 marks

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Case Study 2

You are the new CEO of Jutland Engineering A/S and today is your first day in the
office. Jutland Engineering A/S is the parent company of a group of small light
engineering companies in the Jutland region of Denmark. Your MBA qualification and
financial expertise were crucial factors in your appointment, especially your knowledge on
assessing product profitability.

Your first diary appointment is with Helen Bogartsen, the Business Development
Manager of Helsingor Airflows A/S, a subsidiary company which specialises in supplying
specialist refrigeration units for the food and drinks sector. The discussion centres
around how Helsingor should develop its budget strategy for the coming year.

Helen has some issues of concern to cover, where she needs your financial advice.

‘We’re considering various separate alternatives prior to settling on the 2020 budget.
These are the three options.’

Option 1
Maintain present strategy, with a selling price of DKK2,480 per unit and continue to sell
3,250 units per year.

Option 2
Increase the selling price by 10% to DKK2,728 per unit and accept the fact that the
higher price will cut demand down to 2,650 units per year.

Option 3
Reduce the selling price to DKK2,200 per unit and sell at full capacity of 4,100 units per
year.

‘OK, but what about the current cost structure?’ you ask.

Helen hands across a sheet with the following data:

The following cost data relate to 2019 when 3,250 units were sold at a selling price of
DKK2,480 per unit:

Total Costs
% variable
DKK
Labour 2,775,000 85%
Materials 2,040,000 100%
Selling costs 576,000 65%
Other fixed costs 1,875,000 0%

Total costs 7,266,000

‘What do you think? We need to know our breakeven level of operation. Also, can you
please recommend the best option to pursue to maximise profits?’

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You have another diary appointment in ten minutes’ time so you advise Helen that she
can come back this afternoon at 2.00pm, when you will have had the opportunity to work
through an analysis of the data she has supplied.

Your next appointment, Sven Hilverssen, has arrived early and is waiting outside your
office as Helen departs. Sven is the Senior Engineering Manager of Alborg Devices A/S,
a group company which specialises in manufacturing optics-based burglar alarms.

Sven introduces himself and outlines the difficulties that Alborg Devices has been having
with its three product lines.

‘We’ve no idea which of the three product lines – the Guardian Basic, the Guardian Plus
and the Guardian Supreme – is making the biggest contribution. Also, in our current
budget, we’re assuming that we can sell 65,000 units of the Guardian Basic, 52,000 units
of the Guardian Plus and 31,000 units of the Guardian Supreme, but we have no idea
what our overall breakeven DKK sales revenue would be if we achieved that sales mix.
We’ve heard that you’re an expert in product profitability assessments – can you help us?’

Sven hands over some basic cost data, on which next year’s budget is based:

Guardian Guardian Guardian

Basic Plus Supreme

DKK DKK DKK

Selling price/unit 1600 1900 2300

Variable costs/unit:
Electronic components 160 195 260
Optical components 350 375 395
Skilled labour 340 415 475
Variable overheads 310 405 370

Budgeted fixed costs (DKK) 16,000,000

‘Thanks, Sven. I will review this and come back to you tomorrow morning,’ you advise,
stifling an inward groan.

5
Required:

Prepare a bullet point memorandum for your follow-up meetings with answers to the
following:

Helsingor Airflows A/S

1. What is the current breakeven point in units?

(4 marks)

2. Assess the three alternative budget strategies and recommend the most profitable
option.
(9 marks)

Alborg Devices A/S

3. Which alarm system makes the highest contribution margin on a per unit and %
basis?
(3 marks)

4. If the products are sold in the current budgeted mix, what is the overall breakeven
DKK sales revenue?
(5 marks)

5. Identify and list the major advantages of the budgeting process.

(4 marks)

Total 25 marks

END OF PAPER