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business
financial accounting an introduction
Questions and Answers of
Financial Accounting An Introduction
How might the business try to eliminate the ‘free-rider’ problem just mentioned?
Can you think of another example of how a manager may achieve a favourable direct materials price variance but in doing so would create problems for a business?
Toscanini Ltd makes a standard product, which is budgeted to sell at £4.00 a unit, in a competitive market. It is made by taking a budgeted 0.4 kg of material, budgeted to cost£2.40/kg, and having
How might a manager respond to budget information that indicates a subordinate has not met the budget targets for the period, assuming the manager adopts:(a) a budget-constrained style?(b) a
What possible reason is there why the sales manager mentioned above should not go ahead with the price reduction?
Indisurers Ltd finds that the variances for direct labour efficiency for processing motor insurance claims, since the beginning of the year, are as follows:The average total cost of labour performing
What broad approach do you feel should be taken as to whether to spend money investigating a particular variance?
The variances that we have considered are:● sales volume● sales price● direct materials usage● direct materials price● direct labour efficiency● direct labour rate● fixed overhead
The following are the budgeted and actual income statements for Baxter Ltd for the month of July:Produce a reconciliation of the budgeted and actual operating profit, going into as much detail as
Using the figures in Activity 13.4, try reconciling the original operating profit figure for June with the actual June figure.
If you were the chief executive of Baxter Ltd, what attitude would you take to the overall difference between the budgeted profit and the actual one?How would you react to the individual variances
Using the figures in Activity 13.4, what was the direct labour rate variance for June?
Using the figures in Activity 13.4, what was the fixed overhead spending variance for June?
Using the figures in Activity 13.4, what was the direct labour efficiency variance for June?
Using the figures in Activity 13.4, what was the direct materials price variance for June?
Using the figures in Activity 13.4, what was the direct material usage variance for June?
Using the figures in Activity 13.4, what is the sales price variance for June?
What else do the relevant managers of Baxter Ltd need to know about the May sales volume variance?
Can you see any problems in comparing the various items (sales revenue, raw materials and so on) for the budget with the actual performance of Baxter Ltd in an attempt to draw conclusions as to which
Explain the nature and importance of investment decision making.
Identify the four main investment appraisal methods found in practice.
Discuss the strengths and weaknesses of various techniques for dealing with risk in investment appraisal.
Explain the methods used to monitor and control investment projects.
Discuss the role and limitations of budgets for performance evaluation and control.
Undertake variance analysis and discuss possible reasons for the variances calculated.
Discuss the issues that should be taken into account when designing an effective system of budgetary control.
Explain the nature, role and limitations of standard costing.
Define a budget and show how budgets, strategic objectives and strategic plans are related.
Explain the budgeting process and the interlinking of the various budgets within the business.
Indicate the uses of budgeting and construct various budgets, including the cash budget, from relevant data.
Discuss the criticisms that are made of budgeting.
Antonio Ltd has planned production and sales for the next nine months as follows:During the period, the business plans to advertise so as to generate these increases in sales. Payments for
Have a go at preparing the trade payables budget for Vierra Popova Ltd for the six months from July to December (see Activity 12.12).
Vierra Popova Ltd (Example 12.1) now wishes to prepare its cash budget for the second six months of the year. The budgeted income statements for each month of the second half of the year are as
Can you think of any disadvantages of using ZBB?
What are the advantages and disadvantages of each type of budgeting approach (bottom-up and top-down)?
Why would those responsible for the budget-setting process need to have real authority?
The third point on the above list of the uses of budgets (motivation) implies that managers are set stated tasks. Do you think there is a danger that requiring managers to work towards such
Which method of budgeting do you think is likely to be more costly and which method is likely to be more beneficial for forward planning?
The approach described in step 3 above suggests that managers will systematically collect information and then carefully evaluate all the options available. Do you think this is what managers really
Can you work out the EVA® for the second year of the business in Example 11.4?
Can you suggest what managers might do in order to increase EVA®?
What are the traditional methods of measuring shareholder returns?
Do you think this is a rather hard-nosed approach to dealing with staff development?Should staff development always have to be justified in terms of the financial results achieved?
How might we measure:(a) employee satisfaction(b) customer loyalty(c) the level of product innovation?
Though target costing seems effective and has its enthusiasts, some people feel it has its problems. Can you suggest what these problems might be?
A decision taken at the design stage (during the pre-production phase) could well commit the business to costs during the post-production phase. Can you suggest a potential cost that could be built
Comma Ltd manufactures two types of Sprizzer – Standard and Deluxe. Each product requires the incorporation of a difficult-to-handle special part (one of them for a Standard and four for a Deluxe).
What is the difference in the way in which direct costs are accounted for when using ABC, relative to their treatment taking a traditional approach to full costing?
Can you think of any other benefits that an ABC approach to costing may provide?
Intermediate Products Ltd produces four types of water pump. Two of these (A and B) are sold by the business. The other two (C and D) are incorporated, as components, into other of the business’s
Deduce the full (absorption) cost of a cost unit in a single-product environment.
Deduce the full (absorption) cost of a cost unit in a multi-product environment.
Discuss the problems of deducing full (absorption) cost in practice.
Discuss the usefulness of full (absorption) cost information to managers.
A business has just completed a service job whose full cost has been calculated at £112. For the current period, the total costs (direct and indirect) are estimated at £250,000. The profit target
Hector and Co. Ltd has been invited to tender for a contract to produce 1,000 clothes hangers. The following information relates to the contract.● Materials: The clothes hangers are made of metal
Assume that the machining department overheads (in Example 10.4) are to be charged to jobs on a machine hour basis, but that the direct labour hour basis is to be used for the other two departments.
Can you guess what the definition of a service cost centre is?Can you think of an example of a service cost centre?
Taking the same business as in Example 10.2, on closer analysis we find that of the overheads totalling £20,000 next month, £8,000 relate to machines (depreciation, maintenance, rent of the space
The point was made above that it would normally be irrational to prefer one basis of charging overheads to jobs simply because it apportions either a higher or a lower amount of overheads to a
A business, that provides a service, expects to incur overheads totalling £20,000 next month. The total direct labour time worked is expected to be 1,600 hours and machines are expected to operate
Can you think of reasons why direct labour hours are regarded as the most logical basis for sharing overheads between cost units?
Into which category, direct or indirect, would each of the elements of cost listed in Activity 10.3 fall, if we were seeking to find the cost of operating the entire business of Sparky Ltd for a
Sparky Ltd is a business that employs a number of electricians. The business undertakes a range of work for its customers, from replacing fuses to installing complete wiring systems in new houses.In
A garage bases its prices on the direct cost of each job (car repair) that it carries out.How could the garage collect the direct cost (labour and materials) information concerning a particular job?
Fruitjuice Ltd has just one product, a sparkling orange drink that is marketed as ‘Orange Fizz’. During last month the business produced 7,300 litres of the drink. The cost incurred was made up
Discuss the nature and usefulness of activity-based costing.
Explain how new developments such as total life-cycle costing and target costing can be used to control costs.
Discuss the importance of non-financial measures of performance in managing a business and the way in which the balanced scorecard attempts to integrate financial and non-financial measures.
Explain the term ‘shareholder value’ and describe the role of EVA® in measuring and delivering shareholder value.
How does activity-based costing differ from the traditional approach? What is the underlying difference in the philosophy of each of them?
What are the four main areas on which the balanced scorecard is based?
Derry and Co. is a large computer consultancy business that has a division specialising in robotics. Can you identify three non-financial measures that might be used to help assess the performance of
You own a motor car, for which you paid a purchase price of £5,000 – much below the list price – at a recent car auction. You have just been offered £6,000 for this car.What is the cost to you
A garage business has an old car that it bought several months ago. The car needs a replacement engine before it can be driven. It is possible to buy a reconditioned engine for £300. This would take
Assume exactly the same circumstances as in Activity 8.2, except that the garage is quite busy at the moment. If a mechanic is to be put on the engine-replacement job, it will mean that other work
A business is considering making a bid to undertake a contract. Fulfilment of the contract will require the use of two types of raw material. Quantities of both of these materials are held by the
HLA Ltd is in the process of preparing a quotation for a special job for a customer. The job will have the following material requirements:Material Q is used consistently by the business on various
Past costs are irrelevant costs. Does this mean that what happened in the past is irrelevant?
Activity 8.3 was concerned with the cost of putting a car into a marketable condition.Apart from whether the car could be sold for more than the relevant cost of doing this, are there any other
Distinguish between fixed cost and variable cost and use this distinction to explain the relationship between cost, volume and profit.
Prepare a break-even chart and deduce the break-even point for some activity.
Discuss the weaknesses of break-even analysis.
Demonstrate the way in which marginal analysis can be used when making short-term decisions.
Can you give some examples of items of cost that are likely to be fixed for a hairdressing business?
What volume of activity is required by Cottage Industries Ltd (see Example 9.1 and Activity 9.6) in order to make a profit of £4,000 a month:(a) assuming that the basket-making machine is not
What types of business activity are likely to have high operating gearing?
Ali plc owns premises from which it provides a PC repair and maintenance service.There is a downturn in demand for the service, and it would be possible for Ali plc to carry on the business from
A commercial aircraft is due to take off in one hour’s time with 20 seats unsold. What is the minimum price at which these seats could be sold such that the airline would be no worse off as a
What steps could be taken that might lead to a higher level of contribution for the business in Activity 9.14?
Going back to Activity 9.14, what is the maximum price that the business concerned would logically be prepared to pay to have the remaining B14s machined by a subcontractor, assuming that no fixed or
Shah Ltd needs a component for one of its products. It can subcontract production of the component to a subcontractor who will provide the components for £20 each.Shah Ltd can produce the components
Define and distinguish between relevant costs, outlay costs and opportunity costs.
Identify and quantify the costs that are relevant to a particular decision.
Use relevant costs to make decisions.
Set out the relevant cost analysis in a logical form so that the conclusion may be communicated to managers.
To be relevant to a particular decision, a cost must have two attributes. What are they?
Define the word ‘cost’ in the context of management accounting.
Can you think of any bases that could be used to compare a ratio you have calculated from the financial statements of a particular period?
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