Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

Accounting Stage 1 June 2008 Solutions SECTION A (40 marks) Section A contains multiple choice questions, which are not made available to students. SECTION B Question B1 (a) cost of sales sales The ratio would go down. The ratio would be improved if: (i) they could increase their sales (eg. By raising prices) without increasing their cost of sales. (ii) they could reduce their cost of sales (eg. By cutting costs) without reducing their sales. (ii) they could achieve some combination of increased sales and reduced costs. (d) It tells us how many days, on average, a debtor takes to pay his or her invoice. The debtor days, the longer the credit period our company is allowing its debtors. The higher debtor days can serve as a guide to the efficiency of credit policy, though it is no substitute for a detailed review of individual debtors debtors x 365 credit sales (i) To help make sense of company accounts. (ii) To compare results with those of previous periods. (iii) To compare with industry averages. (iv) To forecast future results. (v) To compare with competitors' results. (a) Profitability ratios (b) Liquidity ratios (c) Efficiency ratios (d) Financial structure ratios

(b) (c)

(e)

(f)

(g)

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Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

(h)

(a) Measures whether the company is generating an acceptable return for its owners. (b) Measures whether there are sufficient resources available to meet the company's short term financial obligations. (c) Measures the effectiveness of the company's management of the components of working capital. (d) measures the manner in which a company is financed and the risks associated with investing in, or lending to, it.

(i)

The amount of money required to enable a company to conduct its business and meet its day-to-day obligations to its suppliers and employees.

(j)

The Current (or Working Capital) ratio Current assets Current liabilities The Quick Assets (or Acid Test) ratio Current assets - stock Current liabilities

(k)

A company's current assets are, usually, (i) stock of goods for sale, to (ii) customers (debtors) who will pay (iii) money for them, which the company will bank A company's current liabilities are, usually, (iv) suppliers (creditors) for goods and services to whom the company will pay (v) money for these, sometimes out of a bank overdraft The current ratio is a measure of the company's ability to meet its short term debts. By ignoring stock, the Quick Assets ratio concentrates on those current assets which are immediately available to pay the creditors as and when they fall due.

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Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

Question B2 Toddlers Ltd Profit and loss account for year ended 30 June 2008 '000 '000 Sales Cost of sales Gross profit Selling and distribution costs Administration costs Operating profit Finance costs Net profit Dividends Balance brought forward Balance carried forward 220 242 462 266 24 242 30 212 48 260

'000 1,440 712 728

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Heriot-Watt Management Programme

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Toddlers Ltd Balance sheet as at 30 June 2008 Fixed assets Cost or Aggregate Net book Valuation depreciation value 500 80 420 660 404 256 120 72 48 1,280 Current assets Stock Debtors Bank Current liabilities Creditors and accruals Proposed dividend 556 180 134 10 324 158 30 188 136 860 Long term liabilities Loan repayable in 2013 300 560 724

Buildings Plant and equipment Delivery vehicles

Share capital and reserves Share capital Profit and loss account

300 260 560

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Heriot-Watt Management Programme

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Workings 1. Depreciation: Total Buildings 4% x 500 Plant and equipment 20% x 660 Delivery vehicles 20% x 120 20 132 24 176

Allocation of charge Production Selling & Administration distribution 10 10 100 32 24 110 24 42

2. Loan interest 300 x 8% Per TB charged o/s at 30 June 2008 3. Debtors Per TB less : Bad debt w/o Less: Provision Doubtful debts provision Per TB Less: BD w/o P & L a/c- Bad debts

24 12 12

24

156 Dr 10 Cr 146 Dr 20 Cr 126 Dr 18 Cr 10 Dr 8 Cr 12 Cr 20 Cr

12

4. Unpaid Gas & electricity

Total

Allocation of charge Production Selling & Administration distribution 20 10 4 6

5. Buildings insurance premium For year ending 30 June 2008 Prepayment 50% 6. Cost of sales Per TB Add: W1 W4 W5 7. Selling and distribution Per TB Add : W1 W3 W4

16 8

600 110 10 -8

712

180 24 12 4

220

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Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

8. Administration Per TB Add: W1 W4 9. Creditors and accruals Per TB Add: W2 W4 10. Debtors W3 W5

194 42 6

242

126 12 20

158

126 8

134

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Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

SECTION C Question C1 (a) Factory overheads Direct material cost Overhead recovery rate = 15,600,000 2,600,000

15,600,000 2,600,000 x 100 = 600%

Product costs: Puffer 58.00 16.50 348.00 422.50 Panter 60.00 21.00 360.00 441.00 Gasper 95.00 27.50 570.00 692.50

Direct material Direct labour Overheads (@ 600% of direct material cost) Total (b)

Cost Centres Machine Shop 900,000 1,850,000 450,000 3,200,000 600,000 2,400,000 300,000 3,200,000 9,700,000 Absorption of overheads: Direct materials cost 5,000 units @ 50 10,000 units @ 56 18,000 units @ 80 Direct labourcost 5,000 units @ 10 10,000 units @ 19 18,000 units @ 20 Apportionment of overheads: Machine Shop (9,000,000/2,250,000) Assembly (6,600,000/600,000) Assembly 1,400,000 1,900,000 600,000 3,900,000 400,000 600,000 200,000 800,000 5,900,000

Allocation of overheads: Supervisor Depreciation Heat and light Apportionment of overheads: Depreciation - Factory building (60%/40%) Wages office (80%/20%) General Manager (60%/40%) Factory rent and rates (80%/20%)

250,000 560,000 1,440,000 2,250,000 50,000 190,000 360,000 600,000 431% 983%

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Heriot-Watt Management Programme

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Product costs Absorption of overheads: Direct materials Direct labour Overheads: Machine Shop Puffer: 431% x 50 Panter: 431% x 56 Gasper: 431% x 80 Overheads: Assembly Puffer: 983% x 10 Panter: 983% x 19 Gasper: 983% x 20 Puffer 58.00 16.50 215.50 241.36 344.80 98.30 186.77 388.30 509.13 196.60 663.90 Panter 60.00 21.00 Gasper 95.00 27.50

(c) 1 point per reasonable comment. Students would be expected to identify that the decrease in costs for Puffer and Gasper may allow the company to sell the products at a lower price, making them more attractive to the market; or could retain the existing price making a greater margin on those products compared to currently. However, the increase in costs in Panter may make it more difficult to sell..

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Heriot-Watt Management Programme

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Question C2 (a) (i) Material price variance: (Standard Price - Actual Price) x Actual Quantity Wood: (3 - 63,550/20,500 kg) x 20,500 kg = 2,050 A Heating system: (5 -9,504/1,980 kg) x 1,980 = 396 F (ii) Material usage variance: (Standard Quantity - Actual Quantity) x Standard Price Wood: (200 kg*100 20,500 kg) x 3 per kg = 1,500 A Heating system: (20 kg*100 1,980 kg) x 5 per kg = 100 F (iii)Labour rate variance: (Standard Rate - Actual Rate) x Actual Hours Assembly (25.00 - 24.50) x 1,600 hours = 800 F Fitting (30.00- 31.00) x 900 hours = 900 A (iv) Labour efficiency variance: (Standard Hours - Actual Hours) x Standard Rate Assembly (15 hours*110 1,600 hours) x 25.00 per hour = 1,250 F Fitting (10 hours*110 900 hours) x 30.00 per hour = 6,000 F (v) Selling price variance: (Standard Selling Price - Actual Selling Price) x Actual Sales (2,000 - 2,100) x 110 = 11,000 F (vi) Sales volume variance: (Budgeted Sales - Actual Sales) x Standard Gross Profit per Unit (100 110) x 250 = 2,500 F

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Heriot-Watt Management Programme

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(b) Possible reasons for the variances might be: Favourable Adverse Materials price variance: Discounts received that were not expected when budget was prepared; Price increase; Unexpected changes in suppliers of wood and heating system; Poor purchasing; Material usage variance: Change in the standard of materials; Higher quality material used; Changes in method of production;

Change in the standard of materials; Poor quality materials; Changes in method of production; Theft; Abnormal waste;

Labour rate variance: Use of lower skilled workers; High quality materials lead to improvements in production; Labour efficiency variance: Longer runs than were foreseen at the time of making the budget; Purchase of more efficient machines; Use of different grade labour; Selling price variance: Unexpected increase in market demand; Sales volume variance: Exit of a competitor from the market;

Wage rate increase not foreseen; Poor quality material requiring rework;

Machine breakdowns; Use of different grade labour;

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Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

SECTION D Question D1 (a) Talent Ltd Reconciliation of Operating Profit to Net Cash Flow from Operating Activities. for the year ended 30 June 2008 Operating profit 1,014 Depreciation Loss on disposal of fixed assets Increase in stock Increase in debtors Increase in creditors Decrease in cash (b) Talent Ltd Cash Flow Statement for year ended 30 June 2008 Net cash inflow from operating activities Returns on investment and servicing of finance Interest paid Taxation Capital expenditure and financial investment Payments made to acquire fixed assets Receipts from sale of fixed assets 330 (444) 36 (64) (294) 82 330 W1

(78) (291) W2

(2,000) 144 (1,856)

Equity dividends paid Management of liquid resources Financing Issue of ordinary share capital Share premium arising on above Additional Loans

(83)

W3

500 500 300 1,300

Decrease in cash

678

W4

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Heriot-Watt Management Programme

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W1 Depreciation for year Balance at 30 June 2007 Purchases Disposals Balance at 30 June 2008 Depreciation for the year W2 Taxation Liability at 30 June 2007 P&L charge for year Liability at 30 June 2008 Tax paid W3 Equity dividends paid Liability at 30 June 2007 P&L charge for year Liability at 30 June 2008 Dividends paid W4 Increase in cash Current assets - bank at 30 June 2008 Current assets - bank at 30 June 2007 Current liabilities - bank overdraft at 30 June 2008 Current liabilities - bank overdraft at 30 June 2007 Decrease in cash (c) 1. These are two key dimensions of financial performance and both can be important, as companies apparently profitable can go bankrupt because of cash flow problems. 2. Profit is not equal to cash flow and is more subjective e.g., in areas such as stock and depreciation, than cash flow and so can be more easily manipulated in the short/medium term. 3. A reconciliation of the two measures shows why there is a difference and provides insight into the management of working capital. Sources of difference are changes in the levels of stock, debtors, creditors, accruals and prepayments and the amounts of depreciation and profit /losses on sale of fixed assets. 4. It is very useful to check the 'quality' of profits in terms of cash backing. 5. The ability to self-finance can be assessed from cash flow.

2,444 2,000 (180) 4,264 4,708 (444)

68 281 349 58 291

104 59 163 80 83

0 454 (454) 224 0 (224) (678)

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Heriot-Watt Management Programme

Accounting June 2008 Web Version Solutions

Question D2 (a) Technique Inspection

Examples
Reviewing or examining records, documents or tangible

assets. Observation Enquiry

Observing a stock count or a wages payout. Seeking information formally or informally, orally or in

writing.
Interviewing the financial director.

Computation

Checking totals in accounting records. Computing accounting ratios. Comparing actual results with budget or with past

Analytical review

results. Analysis of ratios

(b) Module text ref:

Ch 3.6.3

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