Questions and Answers of Accounting Principles

Sam has set-up a transport business, Smart Drive, to distribute sports equipment in the UK. It has been so successful that it now has its own customers as well as Sam’s business. It has two
To understand whether the costs are being controlled effectively, the operational efficiency also needs to be assessed. For example, at Smart Drive it is important to keep van costs as low as
Consider how the balanced scorecard could be used in an airline industry (see Figure 16.3). As a commercial operation, an airline business is looking to maximize its return on investment. Keeping its
From your understanding of financial measures, what do you consider to be the most appropriate financial objectives and measures for Smart Drive?
Develop some customer objectives and measures that might give Smart Drive some warning about a future decline in profits. Think about what a customer might expect and whether these expectations are
Take the customer objectives developed in Demonstration Exercise 16.5 for Smart Drive. What internal process objectives and measures would be appropriate to ensure that the needs of Smart Drive’s
The fourth perspective of the balanced scorecard is ‘learning and growth’. This includes all aspects concerning how a business looks to its future, such as developing new products or services and
Sam analyses the three ways in which he sells his team kits to his customers: directly to his customers, through a retailer, or over the internet. Selling products directly to customers involves
Sam is now considering his future strategy. His ambition is to float the company on the stock exchange and go travelling. To do this, he needs to develop a fiveyear plan with a detailed strategy for
Tarun owns a small chain of middle-range hotels in the Netherlands and wishes to assess their relative performance. In addition to providing rooms, every hotel has a bar and a small restaurant. He
Draw up a list of additional objectives and performance measures for Tarun’s hotel chain, and use them, with the performance measures in Practice Question 16.1, to design a balanced scorecard. For
Jabu, a brand manager in a South African confectionery manufacturer, reviews his product profitability sheets. His energy sweets are making an overall loss, but he needs to know whether this is true
How can the balanced scorecard contribute to the successful management of a business?
Why should non-accountants have an understanding of accounting?
Why should accountants have a sound understanding of business?
In what way can accountants contribute to setting corporate strategy?
Table 15.1 shows figures taken from the management consultants’ report prepared for Smart Sports Ltd into the launch of the new internet site and warehouse, identifying the forecast costs and
Note that the amount of £25k that has already been spent on developing the website is not included in this analysis, as it represents a sunk cost. The decision rule for ARR is that a project should
If we refer again to the cash flows that will arise from the Smart Online project, we can determine the payback period for that project.
Forecast cash outflows and inflows from the bottles project are shown in Table 15.5:Danni and Sam have agreed a target payback period of three years.Calculate the payback period for the bottles
The joint venture that Sam and Danni are considering has the forecast cash outflows and inflows as shown in Table 15.10.Danni and Sam have agreed that a discount rate of 15% would be required from
Smart Sports is also planning to launch a range of drinks products. The products have been developed by Hydration Labs Ltd and are designed to be sold as powders that dissolve easily in water. They
Juliet opened a coffee shop in Paris two years ago. The business has grown steadily, and the shop is frequently so full that some potential customers have to be turned away. She is considering three
Bryd Ltd runs a chain of five small supermarkets in Wales specializing in the sale of local produce. The supermarkets have been doing well in recent years, and the company has funds available to
How can management improve the quality of decision-making?
For how long will fixed costs remain as fixed costs? Will they then be considered relevant or non-relevant?
Can qualitative factors in short-term decision-making ever be measured financially?
Brookes Ltd is a market research company providing data to consumer goods companies about the markets in which they operate. In order to tender for a contract, they have undertaken some initial
Carlos, an Italian ice cream manufacturer, is considering extending his product range to include frozen yogurt, boxes of frozen chocolates, and sorbets. He could either buy in products made to his
Fleur runs a bookshop and is reviewing the profitability of her product sales. She allocates the rent and staff costs on a sales revenue basis, but promotional expenses are directly incurred by each
Juan is very keen to run a major marketing campaign to support the Smart brand name. Until now, Smart Sports has used trade newspapers and the internet to advertise its kits and racquets, but Juan is
Nina has been asked to assess the financial viability of a contract to supply the British football team with 20 sets of kit for the Olympic games, which would generate £75,000 of sales revenue. She
Anna proposes to expand the range of sports equipment offered by Smart Sports. She would like to add hockey sticks, table-tennis bats, and cricket bats to the racquet collection. She is unsure
Smart Sports has relied on its own staff to manage all aspects of its business. However, it has grown sufficiently large to consider how best to manage certain support functions. Sam is considering
The launch of the squash racquet has been so successful that the frame machines are being used to their full capacity of 1,400 hours for three months. Nina calculates which racquets should take
Anna has been told that racquet string will be in short supply owing to distribution problems. As they have now installed a new machine increasing frame capacity, there is no limitation on the number
Anna has been looking at how her products are labelled before despatch. Currently, this is a labour-intensive process, with every product being labelled manually. While a fully automated packing and
Lee, one of Smart Sports’ clothing suppliers, is considering upgrading his cutting equipment. Currently, he has a manually intensive cutting process, but this could be more efficient with new
Sam reviews the performance of his Indian operation with Raja. Their Indian retail business has been very successful overall, but some of the shops have been less successful than others. They
Danni is reviewing the profitability of his range of drinks. He is considering discontinuing his energy drink products as they look unprofitable. Manufacturing costs are allocated on a volume-basis,
Discuss the sort of non-financial factors that a business should take into consideration when it is appraising a new capital investment project.
Given the limitations of the payback period as a method ofa ssessing potential projects, why do you think it is still a commonly used technique in practice?
A business appraises its capital investment projects using the NPV method and is currently considering two competing projects. Why should the business not necessarily use the same discount rate in
How could the NPV technique be used to assess the acquisition of a company?
Renata has set-up a jam-making business. As the fruit-picking season approaches, she needs to calculate her raw material requirements for the year ahead. Given her sales estimates in Table 12.13:a)
A Turkish toy manufacturer makes luxury teddy bears and needs to calculate the labour requirements to make them. Each standard teddy takes 30 minutes to make, while 60 teddies can be packed every
The board of a shoe manufacturer, Sole, is reviewing the first draft of the budget for 2019, drawn up by the management accountant. The coinpany operates in a very price competitive market with
Sam asks his marketing manager, Juan, to forecast the sales for each of his products for the following year. Anna, his production supervisor, will then be able to produce a raw materials budget based
Anna estimates that raw material inventory levels will be 10% of production requirements at the beginning of the year and has made the following assumptions for closing raw material inventory levels:
Sam now needs to calculate the labour requirements to make the kits and racquets. He expects to pay all his direct labour staff at £10 per hour. A team kit requires 0.25 hours of direct labour to be
Sam and Anna discuss what assumptions are reasonable so that she can estimate the factory overhead costs for 2019 using incremental budgeting. Use the total factory overhead cost for 2018 (see Table
Nina, Sam’s management accountant, can now put together a budget income statement for 2019. She has agreed estimated expenses with Sam: sales and marketing of £98,000, distribution of £23,000,
Sam is having discussions with a Croatian company that might supply him with folding chairs and tables for sports events. Sam has been quoted a price of 100 kuna per chair and 400 kuna per table. As
Sam now wishes to assess how well the badminton racquets have performed in the first six months of 2019. Calculate a flexed budget in Table 12.10 based on the actual numbers of badminton racquets
After six months of comparing the business’s actual performance against budget, Sam is keen to understand why the labour costs are so high. Nina has given hima report on the variance analysis for
When setting selling prices, what conflicting issues should be considered?
How should competitors be taken into account when determining pricing Strategy?
Which costing methods should be used in assessing product profitability?
What wider considerations should be taken into account when setting transfer prices between divisions, particularly those in different countries?
Tatiana runs a Russian fashion accessory business and would like to know the selling price of her outfits. Based on the following cost of sales and cost-plus assumptions, calculate the selling price
Nickolai sells outdoor clothing through his Russian retail outlet. He can sell the following goods at certain sales prices. Calculate his cost of sales if he is to achieve this for:a) araincoat with
St Pierre is a Canadian company that cans certain food products such as tuna. With a worldwide overcapacity in the food-canning market, pricing is very competitive. Although St Pierre sells its tuna
Sam is considering cutting the price of his tennis racquets. If his cost of sales is £22, calculate a new price based on:a) cost-plus pricing using a mark-up of 30% on cost of salesb) margin pricing
Sam is about to launch his new squash racquet. He knows that he must have a selling price of £45 to be competitive. Calculate what his cost of sales must be if:a) he wants to make a gross profit
Sam is negotiating with one of his customers over discounts. To help Sam in his decision-making, calculate the following discounts and margins:a) The customer would like a 15% discount on Smart
Sam’s factory is busy most of the year, but in late autumn, there is not enough demand to keep the racquet frame machine operating. Lil, a tennis coach, has approached Sam with a one-off deal. She
Sam is considering bidding fora contract to print 1,000 T-shirts for the UK national indoor hockey championships. These T-shirts would be needed in January, a time when business is slow, there would
Use Sam’s estimates in Table 13.4 to calculate the optimum price he should charge for his badminton racquets in order to maximize his profits. Base your calculations on direct costs of £24 per
The UK division of Smart Sports is supplying its sister division in India with a team kit design. The UK’s variable costs are £1,250 for a design, which will be used on 500 team kits. However, the
What characteristics should a full costing system have?
Can overhead costs be allocated and apportioned fairly? On what does this depend?
Why does absorption costing not allocate or apportion non-manufacturing costs in the same amount of detail as manufacturing costs?
Will the total overhead cost each year calculated by activity-based costing be the same as that for absorption costing? If not, why not?
What are the advantages and disadvantages of investing in an activity-based costing system?
A personal products company, Elixir, produces a range of soaps. The budget manufacturing overhead costs for the soap factory was £562,500 for the current year. A blanket rate was calculated on the
Bambino is an Italian company producing a range of dry baby food in packets and wet baby food in jars using different production processes. Carmetina, its management accountant, has estimated that
Shamrock is a pizza manufacturer in Ireland and expects to make 1,345,000 Margherita and 882,000 pepperoni pizzas in the coming year. Paddy has been given information for the two manufacturing
Sam estimates that his manufacturing overhead costs will be £85,100 in 2018. He forecasts that he will sell 15,000 team kits, 6,000 tennis racquets, and 2,000 badminton racquets. Calculate a blanket
Sam estimates that the business will make 30,000 units in total and will incur £90,000 in actual costs. Calculate the blanket rate and then apply it in the following examples to calculate the
Anna has given Sam the following management accounting information. She has estimated that Smart Sports’ total manufacturing costs for 2018 will include the hire of machinery: £4,000 for the
Sam has been invited by a prospective supplier of shuttlecocks to visit his factory in Greece. Vas, the factory owner, has two manufacturing departments: first the cork-base department manufactures
Sam has talked through with his production supervisor, Anna, all the activities undertaken to make a tennis racquet. They have estimated costs by each activity and discussed what will drive these
How can the accuracy of a budget be improved?
How can budgets motivate and de-motivate managers?
Which types of businesses might put more emphasis on planning rather than control in their use of budgets?
What conflicts can occur as a result of the different objectives of budgeting?
Can all costs be clearly categorized as fixed or variable costs?
Why is it cheaper per unit to produce more of a product?
Why is contribution different to profit?
How can you calculate break-even in a complex business with many different products?
What are the business consequences of classifying variable and fixed costs incorrectly?
It is assumed that a specific decision affecting one product will not affect other products. Do you think this will always hold true?
Pippa runs a photographic studio specializing in black and white portrait photography.Clients book a one hour studio session and are entitled to receive two large photographs of their choice from the
Give three examples of variable costs and three examples of fixed costs that you might expect Sam to incur when manufacturing tennis racquets.
In order to explore the feasibility of the venture, Sam is planning to undertake break-even analysis based on his estimates for the tennis racquet project.Sam realizes that the first step in his
Sam has done some further research into the making and selling of tennis racquets and estimates that he can sell them for £25 each. For Sam’s tennis racquet costing, calculate the contribution for
Sam’s cousin Dan is over from Australia for the summer on a working visa and has decided to run football coaching days to help him fund his cycling tour of England. He has negotiated with one of
Sam’s old friend Dot is considering setting up a business offering ‘historical boating trips’ along the River Thames. Dot thinks that she may be able to make a good living out of this. She has
1. Compute and reflect upon the margin of safety for Dot’s champagne boating business.2. Would you consider it to be high risk for Dot?3. What would be your advice to Dot in terms of whether she
Using the information you obtained earlier:a) How many racquets would Smart Sports need to sell to break-even?b) What would the profit be if Smart Sports actually sold 1,100 racquets?c) If you were

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