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business
accounting for business

Questions and Answers of Accounting for Business

What is a good operating profit margin? Your company's inventory turnover has increased from 25.5 days to 28.6 days when you compare last year's results to the current year. Is this good? Discuss.
Why does the dividend yield formula divide the dividends amount by (1-t) where t is the corporate tax rate?
A classification of ratios that you may encounter is 'solvency'. Where would solvency ratios fit in with the classification system used in this textbook? Which term would be preferred by companies
Ratios that use values from both the income statement and the balance sheet require the calculation of average amounts for the balance sheet amounts. Why is this done, and when will the usual method
An alternative efficiency measure for collection of credit sales is accounts receivable turnover, calculated as credit sales revenue divided by average accounts receivable. This calculation seems to
A criticism of ratio analysis is that it provides only part of the financial picture being reviewed. What part of the picture is missing?
You are keen to use your financial analysis skills in your new job. You want to use the price/earnings ratio as an indicator of the market's confidence in the future prospects of a particular
Describe some limitations of the analysis of financial statements. Provide suggested remedies for each of the limitations cited.
Critically evaluate the statement that 'financial reports are largely based on historical cost information and are, therefore, useful in assessing the stewardship (accountability) of management, but
1 Calculate as many useful ratios as you can, and then review these, a"er taking into account the content of the financial statements themselves.
2 Review the performance and progress of the company.
3 Identify any particular issues that you find in the process of your analysis.
LO1 Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour
LO2 Apply the distinction between fixed and variable costs to explain and apply break-even analysis
LO3 Explain and apply the concept of contribution and contribution margin
LO4 Use a spreadsheet to develop profit profiles and associated charts, using historic or forecast costs, for simple and more complex relationships
LO5 Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs
LO6 Explain and apply the concept of relevant costing to a range of decision-making situations.
Can you think of reasons why the managers of a business might find it useful to know the break-even of some activity they are planning?
Cottage Industries Ltd (see Example 11.2) expects to sell 500 baskets a month. The business has the opportunity to rent a basket-making machine. Doing so would increase the total fixed costs of
What is the break-even point if the machine is rented?Comment on the figures you calculated.
1 Explain the link between the search for cost reduction and operating gearing. Fortescue Metals Group has gone through a process of searching for efficiencies in ore processing and mining in recent
2 What are the implications for oil producers of the huge reduction in the price of crude oil over recent years, especially given the differences in costs of production and break-even levels?
3 It has been suggested that the costs of production for Saudi Arabia’s oil may well, in reality, need to include as a fixed cost the massive array of social and government expenditures carried out
4 Why might a mining business continue to extract iron ore even though it is making a loss on each metric tonne produced? Try to think of two reasons.
1 The Clem tunnel failed financially due to poor estimates of demand. Can you think of why the estimates could have been quite so far off actual traffic flows? Could some kind of profit/volume
2 Explain how the items listed in Real World 11.3(b) for Malaysian Airlines will move the business closer to break-even.
3 The emphasis on achieving break-even for Australian soccer clubs (where break-even means not making a loss or profit)may imply that soccer clubs do not see profit as a primary goal. Do you agree
We have just seen that, in practice, relationships between costs, revenues and volumes of activity are not necessarily straight-line ones. Can you think of at least three reasons, with examples, why
What do you see as the main advantages of the use of spreadsheets in the area of CVP analysis and future planning?
(a) 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$600. This would
(b) Assume exactly the same circumstances as in (a) above, 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
(c) Ali Ltd owns a workshop from which it provides an IT repair and maintenance service. There has recently been a downturn in demand for the service. It would be possible for Ali Ltd to carry on the
(a) Shah Ltd needs a component for one of its products. It can have the component made by a subcontractor, who will charge $20 for each component. The business can produce the components internally
1 What do you think are the main reasons why businesses outsource offshore?
2 What kind of businesses do you think are most likely to use offshore outsourcing?
3 Which parts of their business do you think are most likely to be outsourced?
4 Overall, do you think that offshore outsourcing is bad or good for the Australian economy?
(a) A business makes three different products, as follows:Product (code name) B14 B17 B22 Selling price per unit $250 $200 $230 Variable cost per unit $100 $80 $120 Weekly demand (units) 25 20 30
(b) What steps could lead to a higher level of contribution?
(c) What maximum price would the business logically be prepared to pay to have the remaining B14s machined by a subcontractor, assuming that no fixed or variable costs would be saved by not machining
LO1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour
LO2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis
LO3: Explain and apply the concept of contribution and contribution margin
LO4: Use a spreadsheet to develop profit profiles and associated charts, using historic or forecast costs, for simple and more complex relationships
L05: Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs
LO6: Explain and apply the concept of relevant costing to a range of decision-making situations
Use a mobile phone payment contract to illustrate the concept of fixed and variable costs.
Your accounting study buddy tells you that he has learned that the break-even point is the sales volume units where total sales revenue will be equal to the total variable costs at that sales volume.
After the first 10 minutes of a 'spur of the moment decision' movie, you knew you'd made a bad decision and were going to hate it. And you were right, but you sat through the whole movie to 'get your
Provide examples from your life as a student for each of the different types of cost. Explain how each of your examples fits the criteria for that cost.
What features must a cost possess for it to be considered relevant to a decision?
Explain the meaning of 'contribution', and discuss its usefulness.
Distinguish between a break-even chart and a profit-volume chart.
Contribution represents the unit selling price less the unit variable cost. How does it relate to the concept of operating gearing?
In the case of a scarce resource, management should strive to maximise the contribution per unit of the limiting factor. Explain this statement. Should other factors be considered?
Why is an understanding of cost behaviour (e.g. fixed costs, variable costs, etc.) important? Will such understanding be more important for financial accounting or for management accounting?
Why do we bother with break-even analysis? A business is formed to earn profit, not just to not make a loss (e.g. break even). Discuss.
If historical costs are irrelevant for decision-making, why do we spend so much time analysing them?
Some students and businesses follow the policy of ignoring fixed costs when faced with a decision. Will this result in correct decisions being made? When will it fail?
11.14 LO1 Describe some of the challenges encountered by the accountant in determining cost behaviour.
11.15 LO2 Use break-even or CVP analysis to illustrate the concept of risk.
11.16 LO3 Break-even/CVP analysis seems to be a great tool. Does it have any weaknesses?
11.17 LO5 Many business decisions will have opportunity costs that should be considered in the decision process. Discuss how these opportunity costs are related to each of the following concepts:(a)
11.18 LO5/6 Why might a business logically continue to make a product when it could be acquired externally at a cheaper total unit price?
11.19 LO6 In relation to a manufacturing business, explain how you would address the following limiting factor situations:(a) sales demand(b) raw materials(c) skilled labour(d) machine time(e)
11.20 LO2/6 What strategies could be used by a hotel business that continually fails to achieve the break-even point (typically expressed as an occupancy rate)?
1 The managing director would like to know the position if selling prices were increased by 7.5%and an additional $40,000 was spent on advertising to maintain the present budgeted output.
2 The production director feels the answer is an increased output. The sales director states that he could have the factory working at 100% capacity if he were allowed to reduce selling prices by
3 The marketing director is opposed to proposal 2.She considers that more should be spent on sales promotion. She estimates that a sales promotion costing $15,000 would result in sales of 400,000
4 The sales director also reports that a European distributor is quite willing to take 100,000 units per annum, provided a reasonable selling price can be agreed. The quality required, however, would
2 Prepare statements answering all the points raised, and comment on each one.
3 Identify the behavioural factors that are likely to be driving each of the proposals and consider how you might deal with these.
LO1 Explain the nature of full costing, and the reasons why this information is useful to managers
LO2 Deduce the full cost of a unit of output in a single or multi-product (or service)environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to
LO3 Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis
LO4 Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing
LO5 Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several
Can you think of at least two types of industry where process costing may apply?
1 Why might you expect the hourly charge rate to be different for a small automobile repair shop and a large car dealership?
2 This example shows how overheads might be dealt with in terms of their recovery, but it does not tell you whether the amount incurred is reasonable. For both of these kinds of business, consider
1 Each of the four departments is treated as a separate cost centre.
2 All direct labour is paid $30 an hour for all hours worked.
3 The human resources and training department renders services to all three of the production departments.
4 The area of the building in which the business manufactures amounts to 50,000 square metres, divided as follows:Sq m Forming department 20,000 Machining department 15,000 Finishing department
5 The maintenance employees are expected to divide their time between the production departments as follows:%Forming department 15 Machining department 75 Finishing department 10
(6) Machine hours are expected to be as follows:Hours Forming department 5,000 Machining department 15,000 Finishing department 5,000 On the basis of this information:(a) Allocate and apportion
(b) Deduce overhead recovery rates for each product cost centre using two different bases for each cost centre’s overheads.
(c) Calculate the full cost of a job with the following characteristics:Direct labour hours:Forming department 4 hours Machining department 4 hours Finishing department 1 hour Machine hours:Forming
(d) Explain why you consider the basis used in (c) to be the more appropriate.
1 It is interesting that all three postal services in this example state that the service is complex, but all three are committed to ABC. Do you think that there are particular characteristics of
2 We stated earlier in the main text (‘Benefits of ABC’) that ABC produced a range of other benefits. Just what benefits of the entire system are identified by UPS?
3 How important is an interdisciplinary or cross-functional approach to the success of the system?
4 For a business as large as the Royal Mail, does 340 activities surprise or daunt you?
5 How transferable might the principles used in the postal service be? Consider whether you think there might be similarities with a hospital.
Your company manufactures two products, A and B. In one month, some 200 of A were produced and 1,000 of B. Overheads were incurred amounting to $250,000. Main activities and cost drivers have been
(b) Assign the overhead costs for the month to the two products using activity-based costing (ABC).
(c) Explain the benefits of ABC.
1 Why do you think that the use of ABC was found to be greatest in large firms?
2 Why do you think that service firms were significant users of ABC?

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