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financial accounting an introduction

Questions and Answers of Financial Accounting An Introduction

(b) State why the business might find it useful to know its BEP.A hotel group prepares financial statements on a quarterly basis. The senior management is reviewing the performance of one hotel and
The total estimated number of visitors (guest nights) for this year is 50,000. The results follow a regular pattern; there are no unexpected cost fluctuations beyond the seasonal trading pattern
(b) (i) If there is no increase in visitors for next year, what will be the required revenue rate per hotel visitor to meet the profit target?
(ii) If the required revenue rate per visitor is not raised above this year’s level, how many visitors will be required to meet the profit target?
(b) Outline and briefly discuss the assumptions that are made in typical PV or break-even analysis, and assess whether they limit its usefulness.Motormusic Ltd makes a standard model of car radio,
(b) Calculate the margin of safety for next year, expressed both in quantity of radios and sales value.
A business makes three products, A, B and C. All three products require the use of two types of machine: cutting machines and assembling machines. Estimates for next year include the following:A B C
(b) State the maximum price per product that it would be worth the business paying to a subcontractor to carry out that part of the work that could not be done internally.
Darmor Ltd has three products, X, Y and Z, which require the same production facilities.Information about the production costs for one unit of its products is as follows:X Y Z£ £ £Labour: Skilled
(b) State, with supporting workings, the maximum rate of overtime premium that the business would logically be prepared to pay its skilled workers to work beyond the basic time.
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
(b) Explain the maximum amount that it would be worth the business paying per hour to rent a second special machine.
(c) Suggest ways, other than renting an additional special machine, that could solve the problem of the shortage of special machine time.
Gandhi Ltd renders a promotional service to small retailing businesses. There are three levels of service: the ‘basic’, the ‘standard’ and the ‘comprehensive’. On the basis of past
(b) Should the standard service be offered next year, assuming that the released capacity could be used to render a new service, the ‘nova’, for which customers would be charged£75, and which
(c) What is the minimum price that could be accepted for the basic service, assuming that the necessary capacity to expand it will come only from not offering the standard service?
Deduce the full (absorption) cost of a unit of output in a single-product environment.
● Deduce the full (absorption) cost of a unit of output in a multi-product environment.
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
Into which category, direct or indirect, would each of the costs listed in Activity 10.3 fall if we were seeking to find the cost of operating the entire business of Sparky Ltd for a month?
Johnson Ltd, a business that provides a personal computer service to its customers, has overheads of £10,000 each month. Each month 1,000 direct labour hours are worked and charged to units of
Can you think of reasons why the direct labour hours basis is regarded as the most logical basis for sharing overheads between cost units?
Suppose that Marine Suppliers Ltd (see Activity 10.6) used a machine hour basis of charging overheads to jobs. What would be the cost of the job detailed if it was expected to take 5 machine hours
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
How much of the total overheads will be charged to each job if the machine-related overheads are to be charged on a machine hour basis and the remaining overheads are charged on a direct labour hour
Can you guess what the definition of a service cost centre is?
Can you think of an example of a service cost centre?
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.
What is the point of distinguishing direct costs from indirect ones? Why is this not necessary in process costing environments?
Are direct costs and variable costs the same thing? Explain your answer.It is sometimes claimed that the full cost of pursuing some objective represents the long-run break-even selling price. Why is
Bodgers Ltd, a business that provides a market research service, operates a job costing system. Towards the end of each financial year, the overhead recovery rate (the rate at which overheads will be
(b) What steps will be involved in predetermining the rate?
(c) What problems might arise with using a predetermined rate?
Athena Ltd is an engineering business doing work for its customers to their particular requirements and specifications. It determines the full cost of each job taking a ‘job costing’ approach,
(b) Derive the appropriate rate for charging the overheads of each department to jobs (that is, a separate rate for each department).
(c) Athena Ltd has been asked by a customer to specify the price that it will charge for a particular job that will, if the job goes ahead, be undertaken early next year. The job is expected to use
Pieman Products Ltd makes road trailers to the precise specifications of individual customers.The following are predicted to occur during the forthcoming year, which is about to start:Direct
(b) Comment on the validity of using financial plans in pricing, and recommend any improvements you would consider desirable for the pricing policy used in (a).
(c) Incorporate the effects of the information shown in the Appendix (below) into your estimates of direct material costs, explaining any changes you consider it necessary to make to the above direct
Paper grade 1 is regularly used by the business. Enough of this paper to complete the job is currently held. Because it is imported, it is estimated that if it is used for this job, a new purchase
Bookdon plc manufactures three products, X, Y and Z, in two production departments: a machine shop and a fitting section; it also has two service departments: a canteen and a machine maintenance
(b) One incomplete unit of Product B, which has been processed by the cutting and machining departments but which has not yet been passed into the pressing department.Consider this statement:
‘In a job costing system, it is necessary to divide up the business into departments. Fixed costs(or overheads) will be collected for each department. Where a particular fixed cost relates to the
(b) What circumstances need to exist to make a difference to a particular job whether overheads are charged on a business-wide basis or on a departmental basis. (Note that the answer to this part of
● Discuss the nature and practicalities of activity-based costing.
● Explain the theoretical underpinning of pricing and discuss the issues involved in reaching a pricing decision in real-world situations.
Can you think of any other purpose that identification of the cost drivers serves, apart from deriving more accurate costs?
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?
Comma Limited 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
(ii) activity-based costing methods.
(b) Comment on the managerial implications for Comma Limited of the results in (a) above.
A decision taken at the design stage could well commit the business to costs after the manufacture of the product has taken place. Can you suggest a potential cost that could be built in at the
Although target costing seems effective, it has its problems. Can you suggest what these problems might be?
Which would be the more elastic of the following commodities?● A particular brand of chocolate bar● Mains electricity supply.
When we considered marginal costing in Chapter 9, we identified three problems with its use. Can you remember what these problems are?
● The possibility that spare capacity will be sold off cheaply when there is another potential customer who will offer a higher price, but who cannot be found before the capacity is fully
● The problem that selling the same product but at different prices could lead to a loss of customer goodwill. Would a ‘normal’ passenger be happy to be told by another passenger that the
● If the business is going to suffer continually from being unable to sell its full production potential at the ‘normal’ price, it might be better, in the long run, to reduce capacity and make
11.4 According to economic theory, at what point is profit maximised? Why is it at this point?
It appears from research evidence that a cost-plus approach influences pricing decisions in practice. What is meant by cost-plus pricing and what are the problems of using this approach?Kaplan plc
At present, the business derives the cost of each batch using a traditional job-costing approach. Recently, however, a new management accountant has been appointed who is advocating the use of
(b) Discuss the purposes to which the knowledge of the cost for each suitcase, deduced on a traditional basis, can be put and how valid the cost is for the purpose concerned.
(c) Explain how ABC could be applied to costing the suitcases, highlighting the differences between ABC and the traditional approach.
(d) Explain what advantages the new management accountant probably believes ABC to have over the traditional approach.
Comment critically on the following statements that you have overheard:(a) ‘To maximise profit you need to sell your output at the highest price.’(b) ‘Elasticity of demand deals with the extent
(d) ‘According to economic theory, profit is maximised where total cost equals total revenue.’(e) ‘Price skimming is charging low prices for the output until you have a good share of the
Explain clearly all technical terms.Comment critically on the following statements that you have overheard:(a) ‘Direct labour hours are the most appropriate basis to use to charge overheads to jobs
(b) ‘Activity-based costing is a means of more accurately accounting for direct labour cost.’
(c) ‘Activity-based costing cannot really be applied to the service sector because the “activities”that it seeks to analyse tend to be related to manufacturing.’
(d) ‘Kaizen costing is an approach where great efforts are made to reduce the costs of developing a new product and setting up its production processes.’
(e) ‘Benchmarking is an approach to job costing where each direct worker keeps a record of the time spent on each job on his or her workbench before it is passed on to the next direct worker or
The GB Company manufactures a variety of electric motors. The business is currently operating at about 70 per cent of capacity and is earning a satisfactory return on investment.International
(b) State clearly any assumptions contained in the analysis of (a) above and discuss any other organisational or strategic factors that GB should consider.
Sillycon Ltd is a business engaged in the development of new products in the electronics industry. Subtotals on the spreadsheet of planned overheads reveal:Electronics Testing Service department
(b) Explain and elaborate on the information prepared.
A business manufactures refrigerators for domestic use. There are three models: Lo, Mid and Hi. The models, their quality and their price are aimed at different markets.Product costs are computed on
(b) What are the implications of the two systems of costing in the situation given?
(c) What business/strategic options exist for the business in the light of the new information?
What do you think are the advantages and disadvantages of each form of budgeting?
The fourth point on the above list of the uses of budgets (control) implies that current management performance is compared with some yardstick. What is wrong with comparing actual performance with
The five identified uses of budgets can conflict with one another on occasions. Can you think of a possible conflict between the budget as a means of control and the budget as a system of
Why is it crucial that those responsible for the budget-setting process have real authority?
What are the advantages and disadvantages of each type of budgeting approach?
Can you think of any disadvantages of using ZBB? How might any disadvantages be partially overcome?
Other direct production expenses, including labour, are £6 per unit of production. These will be paid in the month concerned.Various production overheads, which during the period to 30 June had run
(b) The cash budget reveals a potential cash deficiency during October and November.Can you suggest any ways in which a modification of plans could overcome this problem?
12.4 What is a budget committee? What purpose does it serve?
Daniel Chu Ltd, a new business, will start production on 1 April, but sales will not start until 1 May. Planned sales for the next nine months are as follows:Sales Units May 500 June 600 July 700
A nursing home, which is linked to a large hospital, has been examining its budgetary control procedures, with particular reference to overhead costs.The level of activity in the facility is measured
(b) The home actually treated 3,800 patients during months 7 to 12, the actual variable overheads were £203,300, and the fixed overheads were £190,000. In summary form, examine how well the home
(c) Interpret your analysis and point out any limitations or assumptions.Linpet Ltd is to be incorporated on 1 June. The opening balance sheet of the business will then be as follows:Assets £Cash at
During June, the business intends to make payments of £40,000 for a leasehold property,£10,000 for equipment and £6,000 for a motor vehicle. The business will also purchase initial trading
3 Finished goods inventories. Inventories of finished goods are expected to be 40,000 units at 1 July. The business’s policy is that, in future, the inventories at the end of each month should
(b) Raw materials inventories budget (expressed in kilograms of the raw material) for the two months July and August.
(c) Cash budget for August and September.Newtake Records Ltd owns a chain of 14 shops selling DVDs and CDs. At the beginning of June the business had an overdraft of £35,000 and the bank had asked
The following plans were prepared for the business some months earlier:May June July Aug Sept Oct Nov£000 £000 £000 £000 £000 £000 £000 Sales revenue 180 230 320 250 140 120 110 Purchases 135
(b) Compute the inventories levels at the end of each month for the six months to 30 November.
(c) Prepare a budgeted income statement for the whole of the six months period ending 30 November. (A monthly breakdown of profit is not required.)
(d) What problems is Newtake Records Ltd likely to face in the next six months? Can you suggest how the business might deal with these problems?

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