Tutorial MBF 2014

Question 1:

Vincent Company operates a public bus service in a large city. Recently its bus service has been
criticised for its poor level of efficiency. The managers of Vincent Company have decided to
undertake a benchmarking exercise to assess the efficiency of the bus service and have
collected the following information.

Bus Operators Industry average statistics for the year ended 31 December 2012

Return on capital employed 12%
Return on sales 8%
Asset turnover 15 times
Average maximum capacity per bus 55 seats
Average bus occupancy (% of maximum capacity) 70% of capacity
Average bus km travelled per litre of fuel 525 km/litre
Average fuel consumption per passenger kilometre* 0005 litres per passenger km
Average number of fatalities per million passenger kilometres* 0035 fatalities per million
passenger kilometres
*A passenger kilometre equals one kilometre travelled by one passenger.

The management accountant of Vincent Company has collected the following information for
the year ending 31 December 2012.

Vincent Company operating data for the year ended 31 December 2012

Capital employed $4,000,000
Operating profit $600,000
Sales revenue $3,600,000
Number of buses in operation 40 buses
Total number of passenger seats available 1,920 seats
Total number of passenger kilometres travelled 39,000,000 passenger kilometres
Total bus kilometres travelled 3,250,000 kilometres
Fatalities 1
Total fuel consumed 764,705 litres
Required:
(a) Calculate the following ratios and other statistics for Vin Co for the year ended 31
December 2012.
(i) Return on capital employed;
(ii) Return on sales;
(iii) Asset turnover;
(iv) Average maximum capacity per bus;
(v) Average bus occupancy as a percentage of maximum capacity;
(vi) Average bus km travelled per litre of fuel;
(vii) Average fuel consumption in litres per passenger kilometre;
(viii)Average number of fatalities per million passenger kilometres. (10 marks)

(b) Give two reasons apparent from your analysis why Vincent Cos fuel consumption per
passenger kilometre is higher than that of the industry average. (2 marks)

(c) Using the industry average information and your answer to part (a), discuss the
performance of Holson in the year ending 30 November 2011 under the four balanced
scorecard headings of:
(i) financial success;
(ii) customer satisfaction;
(iii) process efficiency; and
(iv) organisational learning and growth.
Note: state any assumptions that you make. (13 marks)

Question 2:

Crispy Ltd is considering whether to supply its products a special CD branded Protect It All to
the University of Technology. The contract is for one academic year and the details are as
follows:
Material: Rs
X (in stock) 150,000
Y (on order on contract) 180,000
Z (to be ordered) 300,000
Labour:
Skilled 540,000
Unskilled 200,000
Supervisory 100,000
General overheads (200% of skilled labour) 1,080,000
Total cost 2,550,000
Contract price 2,300,000

Net Loss 250,000

Should the contract be accepted if the following additional information is available:
(a) Material X is an obsolete material and can only be used on another product, the
material for which would cost Rs135,000; material X requires some adaptation to be
used and costs Rs27,000.
(b) Material Y is ordered for some other product which is no longer required. It now has a
residual value of Rs210,000.
(c) Skilled labour can work on other contracts, which are presently operated by semi-skilled
at a cost of Rs570,000.
(d) Unskilled labour are specifically employed for this contract.
(e) Supervisory staff will remain whether or not the contract is accepted.
(f) Overheads are charged at 200% of skilled labour. Only Rs125,000 would be avoidable if
the contract is not accepted.

Required:
a) Calculate the minimum contract price that Crispy Ltd could accept to breakeven using
relevant costing principles. (17 marks)
b) What are the main principles of relevant cost and revenue determination?
Illustrate your answer with applications of each principle. (3 marks)


Question 3:
Polo Limited is preparing its activity-based budgets for the coming year. As the cost accountant
you have established that the total budgeted production overheads for the coming year to be
Rs 2 million. Based on last years results you have decided that this total should be apportioned
to the following activities in the percentages listed.
Inspection 10%
Materials handling 10%
Materials procurement 15%
Machining 30%
Assembly 30%
Dispatch 5%

You have also budgeted for the following level of activity in relation
to each of the companys three products:

A B C
Inspections 300 300 200
Times material handled 4,000 4,000 2,000
No. of purchase orders 300 300 300
Machine hours 30,000 18,000 2,000
Assembly labour hours 10,000 6,000 4,000
Sales orders dispatched 600 600 400
Budgeted units 20,000 20,000 5,000
Direct material per unit (Rs) 50 40 50
Direct labour costs per unit (Rs) 50 60 40

Required:
(a) Calculate the total budgeted production cost per unit of each product if total overheads are
absorbed on the basis of machine hours. (6 Marks)
(b) Calculate the total budgeted production cost per unit of each product if total overheads are
absorbed using the activity based costing method. (12 Marks)
(c) Comment on your results and state any implications that the adoption of the ABC system
may have. (8 marks)

Question 3
(a) Explain the reasons why companies create autonomous divisions (5 marks)
(b) Identify and explain the relative merits of return on investment (ROI) and residual
income (RI) as indicators of divisional performance. (10 marks)
(c) Discuss the dangers of over reliance by senior management on financial measures of
divisional performance and briefly describe the advantages and limitations of the
balanced scorecard approach. (10 marks)

Question 3
Wargrin designs, develops and sells many PC games. Games have a short lifecycle lasting
around three years only.
Performance of the games is measured by reference to the profits made in each of the
expected three years of popularity. Wargrin accepts a net profit of 35% of turnover as
reasonable. A rate of contribution (sales price less variable cost) of 75% is also considered
acceptable.
Wargrin has a large centralised development department which carries out all the design work
before it passes the completed game to the sales and distribution department to market and
distribute the product.
Wargrin has developed a brand new game called Stealth and this has the following budgeted
performance figures.
The selling price of Stealth will be a constant $30 per game. Analysis of the costs show that at a
volume of 10,000 units a total cost of $130,000 is expected. However at a volume of 14,000
units a total cost of $150,000 is expected. If volumes exceed 15,000 units the fixed costs will
increase by 50%.
Stealths budgeted volumes are as follows:
Year 1 Year 2 Year 3
Sales volume 8,000 units 16,000 units 4,000 units
In addition, marketing costs for Stealth will be $60,000 in year one and $40,000 in year two.
Design and development costs are all incurred before the game is launched and has cost
$300,000 for Stealth. These costs are written off to the income statement as incurred (i.e.
before year 1 above).
Required:
(a) Explain the principles behind lifecycle costing and briefly state why Wargrin in particular
should consider these lifecycle principles. (4 marks)
(b) Produce the budgeted results for the game Stealth and briefly assess the games expected
performance, taking into account the whole lifecycle of the game. (9 marks)
(c) Explain why incremental budgeting is a common method of budgeting and outline the main
problems with such an approach. (6 marks)
(d) Discuss the extent to which a meaningful standard cost can be set for games produced by
Wargrin. You should consider each of the cost classifications mentioned above. (6 marks)