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business
management accounting

Questions and Answers of Management Accounting

=+(d) Give reasoned arguments to help the manager decide which machine to sub mit in his formal capital budget.Show all caIeulations. State your answers to the nearest f 1000.Ignore taxation and
=+9. Cathode pIe has 2 divisions. The managing director has told the divisional managers that a bonus will be paid to the more profitable division. However, absolute profit as conventionally
=+(a) Which method for computing profitability do you think each manager chose to show that his results were the best?Briefly state to which manager you would award the bonus and give your reasons.
=+(b) Each divisional manager is actively contemplating a project with the following cash flows:Investment of 00000 now, giving expected net cash inflows beginning in one year's time of f4000 per
=+(i) What will be the likely investment decision each manager will make when appraising this separate project?Will each manager's decision be consistent with the company's best interest? (You are
=+(ii) Under which set of conditions may residual income measures lead to corporately acceptable investment decisions?
=+(c) Why is it important that in the multidivisional company the short-term performance measure coincides with the longterm planning model to evaluate capital projects?
=+10. Oklahoma Chemicals Inc is contemplating changing the method of measuring divisional performance. At present, rate of return on investment (RO!) is used. Each division's return is calculated by
=+The proposed RI measure will also use straight-line depreciation and the net book value of the asset at the beginning of the year.Assurne that the net cash flow is equal to net income before
=+(a) Provide the information requested by Dr Nathy and also advise hirn as to what to do in the company's best interests.Why may he not accept your advice?
=+(b) Show hirn how the RI computation can be adapted to give a decision consistent with the company's view, and list the conditions under which it will hold.
=+(c) Demonstrate how Gregory's leased payment scheme would achieve equivalence with NPV.
=+(d) The discretion which investment centre managers have over the capital budgeting process makes the choice of short-term performance measures by which they are evaluated of paramount importance.
=+(e) Evaluate the suggestion of Henderson and Dearden (1966)that an integrated cash flow budget would overcome many of the defects of accrual income performance measures.
=+11. (a) Why do companies divisionalize?(b) What advantages, if any, does the multidivisional structure possess as opposed to the unitary or functional structure?
=+(c) Peter James is an investment centre manager in the divisionalized company named the T. Tilling Co. Peter has an opportunity to invest f60000 now in machinery that will genera te the following
=+(a) Show whether the present short-term performance measure (RO!) will lead Peter to take an investment decision that is consistent with the company's best longterm interests.
=+(b) Provide an alternative analysis that will bring the longterm planning and short-term control models into coincidence. Make clear the assumptions under which this solution applies.
Goliath plc is a food wholesaler. The most recent financial statements of the business are as follows:Income statement for the year to 31 May£000 £000 Sales revenue 2,400.0 Cost of sales Opening
Boswell Enterprises Ltd is reviewing its trade credit policy. The business, which sells all of its goods on credit, has estimated that sales revenue for the forthcoming year will be£3 million under
Mayo Computers Ltd has annual sales of £20 million. Bad debts amount to £100,000 a year. All sales made by the business are on credit and, at present, credit terms are negotiable by the customer.
Delphi plc has recently decided to enter the expanding market for digital radios. The business will manufacture the radios and sell them to small TV and hi-fi specialists, medium sized music stores
Your superior, the general manager of Plastics Manufacturers Limited, has recently been talking to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young children.
International Electric plc at present offers its customers 30 days’ credit. Half of the customers, by value, pay on time. The other half takes an average of 70 days to pay. The business is
Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent income statement and statement of financial position of the business are as
The chief executive officer of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year:Income statements for years ended 30 September
Evidence tends to show that most businesses are less effective than the best ones in their industry in controlling their working capital. Can you think of some reasons why this might be the
In the solution to Activity°12.16, one of the three reasons for holding cash was to exploit opportunities. The example was given of the acquisition of a competitor business.What other types of
discuss the purpose of working capital, it’s scale and the nature of the working capital cycle;AppendixLO1
AB Ltd operates retail stores throughout the country. The business is divisionalised.Included in its business are Divisions A and B. A centralised and automated warehouse that replenishes inventories
The University of Devonport consists of six faculties and an administration unit. Under the university’s management philosophy, each faculty is treated, as far as is reasonable, as an independent
Glasnost plc is a large business organised on divisional lines. Two typical divisions are East and West. They are engaged in broadly similar activities and, therefore, central management compares
The following information applies to the budgeted operations of the Goodman division of the Telling Company:£Sales revenue (50,000 units at £8) 400,000 Variable cost (50,000 units at £6)
The following information applies to the planned operations of Division A of ABC Corporation for next year:£Sales revenue (100,000 units at £12) 1,200,000 Variable cost (100,000 units at £8)
You have recently taken a management post in a large divisionalised business. A substantial proportion of the business of your division is undertaken through inter-divisional transfers.Required:(a)
Measures are required to assess the performance of divisions and of divisional managers.Three financial measures are: contribution; controllable profit; and return on investment (ROI).Required:(a)
‘In divisionalised organisations, complete autonomy of action is impossible when a substantial level of inter-divisional transfers take place.’Required:(a) In this context, explain what is meant
A UK survey of decentralised businesses revealed that negotiated prices are the most popular form of transfer pricing method.Is this necessarily the best approach in theory? Why?AppendixLO1
Jerry 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
Westcott Supplies Ltd has an operating division that produces a single product. In addition to the conventional RI and ROI measures, central management wishes to use other methods of measuring
What problems might be encountered when a business attempts to incorporate nonfinancial measures into its management reports?AppendixLO1
explain the increasing importance of non-financial measures in managing a business and how they may be used for decision-making purposes.AppendixLO1
describe the problems of determining transfer prices between divisions, and outline the methods used in practice; and AppendixLO1
identify the major methods of measuring the performance of operating divisions and divisional managers and assess the usefulness of such methods;AppendixLO1
discuss the potential advantages and disadvantages for a business of adopting a divisional structure;AppendixLO1
discuss the issues to be considered when setting the long-term direction of a business;AppendixLO1
explain the role of management accounting within a business and describe the key principles upon which management accounting rests;AppendixLO1
explain the changes that have occurred over time in both the role of the management accountant and the kind of information provided by management accounting systems.AppendixLO1
Accounting is sometimes described as ‘the language of business’. Why do you think this is the case? Is this an apt description of what accounting is?AppendixLO1
‘Management accounting information should be understandable. As some managers have a poor knowledge of accounting, we should produce simplified financial reports to help them.’ To what extent do
You have been speaking to a friend who owns a small business, and she has said that she has read something about strategic management and that no modern business can afford not to get involved with
identify and quantify the costs and benefits that are relevant to a particular decision;AppendixLO1
use relevant costs and benefits to make decisions; and AppendixLO1
set out relevant costs and benefits analysis in a logical form so that the results can be clearly communicated to managers.AppendixLO1
How are opportunity costs different from other costs mentioned in the chapter? Can you see any problems with using opportunity costs when making management decisions? What role does opportunity cost
Historic costs should never be used when deciding what costs are relevant to a decision.Despite this, historic costs are the principal inputs for preparing the main financial accounting statements
A bus company is concerned about one of its routes, which serves a rural community. The management has decided to undertake a cost–benefit analysis to see whether it is worthwhile continuing with
What practical problems may be encountered when carrying out cost–benefit analysis involving a choice between two possible accounting systems for a business?AppendixLO1
Lombard Ltd has been offered a contract for which there is available production capacity.The contract is for 20,000 identical items, manufactured by an intricate assembly operation, to be produced
Andrews and Co. Ltd has been invited to tender for a contract. It is to produce 10,000 metres of an electrical cable in which the business specialises. The estimating department of the business has
SJ Services Ltd has been asked to quote a price for a special contract to render a service that will take the business one week to complete. Information relating to labour for the contract is as
A business in the food industry is currently holding 2,000 tonnes of material in bulk storage.This material deteriorates with time. In the near future, it will, therefore, be necessary for it to be
Rob Otics Ltd, a small business that specialises in manufacturing electronic-control equipment, has just received an enquiry from a potential customer for eight identical robotic units. These would
distinguish between fixed cost and variable cost and use this distinction to explain the relationship between cost, volume of activity and profit;AppendixLO1
discuss the weaknesses of break-even analysis; and AppendixLO1
Is it always reasonable to assume linear relationships between volume and sales revenue/variable cost, even where the activity is within a fairly narrow range?AppendixLO1
Modern businesses tend to have higher levels of operating gearing than businesses had, say, 50 years ago.Why would this be the case?AppendixLO1
One approach to break-even analysis can produce more than one break-even point. Why is this?AppendixLO1
Motormusic Ltd makes a standard model of car radio, which it sells to car manufacturers for £60 each. Next year the business plans to make and sell 20,000 radios. The business’s costs are as
Lannion and Co. is engaged in providing and marketing a standard advice service. Summarised results for the past two months reveal the following:October November Sales (units of the service) 200 300
Gandhi Ltd renders a promotional service to small retailing businesses. There are three levels of service: the ‘Basic’, the ‘Standard’ and the ‘Comprehensive’. The business plans next
The management of a business is concerned about its inability to obtain enough fully trained labour to enable it to meet its present budget projection, which is as follows:Service: Alpha Beta Gamma
A hotel group prepares financial statements on a quarterly basis. The senior management is reviewing the performance of one hotel and making plans for next year.The managers have in front of them the
Darmor Ltd has three products, which require the same production facilities. Information about the production cost for one unit of its products is as follows:Product X Y Z£ £ £Labour: Skilled 6 9
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 products of the
deduce the full (absorption) cost of a cost unit in a single-product and a multi-product environment;AppendixLO1
discuss the usefulness of full (absorption) cost information to managers; and AppendixLO1
compare and contrast the full costing and variable costing approaches.AppendixLO1
Consider the following businesses: a cutlery manufacturer; a satellite manufacturer; an advertising agency; a cereal maker; a courier; a lumber producer; a bottling plant for mineral water; a
At the beginning of the chapter, one of the uses to which managers might put full cost information was identified as in determining selling prices. Does this mean that businesses can add a profit
In Real World4.4 it was mentioned that some small and medium size businesses do not attempt to assign overhead costs to products. What practical problems might managers encounter when trying to
We saw in the chapter that full costing information can be useful for making various types of decisions. It has also been argued, however, that it can help in directing managers’ attention.Can you
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 indirect cost
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
Many businesses charge overheads to jobs on a cost centre basis.Required:(a) What is the advantage that is claimed for charging overheads to jobs on a cost centre basis and why is it claimed?(b) What
Shown below is an extract from next year’s plans for a business manufacturing three products, A, B and C, in three product cost centres.A B C Production 4,000 units 3,000 units 6,000 units Direct
discuss the principles and practical aspects of activity-based costing;AppendixLO1
describe the methods that may be used to manage costs over the life cycle of a product;AppendixLO1
explain the role of value chain analysis and benchmarking in managing costs; AppendixLO1
explain the importance of total quality management in the modern environment and identify the main types of quality costs that may be incurred.AppendixLO1
How does activity-based costing (ABC) differ from the traditional approach? What is the underlying difference between their philosophies?AppendixLO1
What behavioural problems may arise when attempting to implement target costing?AppendixLO1
What problems may arise when attempting to implement benchmarking as a means of assessing and improving performance?AppendixLO1
Real World°5.5 shows that the total life-cycle costing approach is not very much used by businesses. Suggest some reasons why this might be the case.AppendixLO1
Comment critically on the following statements that you have overheard:(a) ‘Achieving quality involves additional costs. If you want to improve the quality of products manufactured, you have to
Describe the main similarities and differences in approach between target costing and kaizen costing.AppendixLO1
Saxos plc is an engineering business that adopts TQM. The managers are concerned that the appraisal costs associated with managing product quality are very high.Required:(a) Identify four different
Comment critically on the following statements that you have overheard:(a) ‘Direct labour hours are the most appropriate basis to use to charge indirect cost(overheads) to jobs in the modern
Moleskin Ltd manufactures a range of products used in the building industry. Manufacturing is undertaken using one of two processes: the Alpha Process and the Omega process. All of the products are
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

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