Seminar 1 - Financial and Non-Financial Performance Measures Scotia

Health Consultants Ltd

The directors of XYZ Plc have requested some information relating to financial
and non-financial performance measures for one of their subsidiary companies,
Scotia Health Consultants Ltd. Scotia Health Consultants Ltd provides advice to
clients in medical, dietary and fitness matters by offering consultation with
specialist staff. The budget information for the year ended 31 May is as follows:
i. Quantitative data as per Appendix.
ii. Clients are charged a fee per consultation at the rate of: medical 75;
dietary 50 and fitness 50.
iii. Health foods are recommended and provided only to dietary clients at an
average cost to the company of 10 per consultation. Clients are
charged for such health foods at cost plus 100 % mark up.
iv. Each customer enquiry incurs a variable cost of 3, whether or not it is
converted into a consultation.
v. Consultants are each paid a fixed annual salary as follows: medical
40,000; dietary 28,000; fitness 25,000.
vi. Sundry other fixed cost: 300,000.
Actual results for the year to 31 May incorporate the following additional
information:
i. Quantitative data as per Appendix.
ii. A reduction of 10% in health food costs to the company per consultation
was achieved through a rationalization of the range of foods made
available.
iii. Medical salary costs were altered through dispensing with the services of
two full-time consultants and sub-contracting outside specialists as
required. A total of 1900 consultations were sub-contracted to outside
specialists who were paid 50 per consultation.
iv. Fitness costs were increased by 80,000 through the hire of equipment to
allow sophisticated cardio-vascular testing of clients.
v. New computer software has been installed to provide detailed records and
scheduling of all client enquiries and consultations. This software has an
annual operating cost (including depreciation) of 50,000.
Required:
a. Prepare a statement showing the financial results for the year to 31 May in
tabular format. This should show:
i. The budget and actual gross margin for each type of consultation and for
the company.
ii. The actual net profit for the company.
iii. The budget and actual margin () per consultation for each type of
consultation. (Expenditure for each expense heading should be shown in (i)
and (ii) as relevant).
b. Suggest ways in which each of the undernoted performance measures (1
to 5) could be used to supplement the financial results calculated in (a).
You should include relevant quantitative analysis from the Appendix below
for each performance measure:

1. Competitiveness; 2. Flexibility; 3. Resource utilization; 4. Quality; 5. Innovation.

Appendix
Statistics relating to the year ended 31 May
Budget
Total Client Enquiries:
New Business
50 000
Repeat Business
30 000

Actual
80 000
20 000

Number of Client
Consultations:
New Business
Repeat Business

15 000
12 000

20 000
10 000

Mix of Client Consultations:

Medical
Dietary
Fitness

6 000
12 000
9 000

5 500 (Note 1)
10 000
14 500

Number of Consultants
Employed:
Medical
Dietary
Fitness

6
12
9

4 (Note 1)
12
12

Number of Client Complaints

270

600

Note 1 Client consultations includes those carried out by outside specialists.

There are now 4 full-time consultants carrying out the remainder of client
consultations.
Seminar 2- Limiting Key Factors-Measuring Relevant Cost and
RevenuesJDR Ltd manufactures four products using the same machinery. The following
details relate to its products:

Selling price
Direct material
Direct labour
Variable overhead
Fixed overhead *
Profit
Labour hours
Machine hours
Maximum demand per
week

Product A Product B Product

per unit per unit C
per
unit
28
30
45
5
6
8
4
4
8
3
3
6
8
8
16
8
9
7
1
1
2
4
3
4
Units
Units
Units
200
180
250

Product D
per unit
42
6
8
6
16
6
2
5
Units
100

*Absorbed based on budgeted labour hours of 1000 per week.

There is a maximum of 2000 machine hours available per week.
Requirement:
(a) Determine the production plan which will maximize the weekly profit of JDR Ltd and
prepare a profit statement showing the profit your plan will yield.

(b) The marketing director of JDR Ltd is concerned at the companys inability to meet
the quantity demanded by its customers. One consideration is to overcome this is
to increase the number of hours worked using the existing machinery by
working overtime. Such overtime would be paid at a premium of 50%
above normal labour rates, and variable overhead costs would be
expected to increase in proportion to labour costs.
Requirement:
Critically evaluate this strategy and, as management accountant, prepare a
discussion document for the marketing director, stating your findings
(quantitative and qualitative) as to the expected increase in contribution (if
any) and any issues that could arise and would need to be resolved.

(c) Where production capacity (machine hours) is the limiting factor, critically
explain ways (in addition to overtime working) in which management can
increase it without having to acquire more plant and machinery.
Seminar 3 ABC Product costs and a discussion of the usefulness of
ABC Trimake Ltd
The directors of XYZ Plc. have some concern over the costing methods
currently being used within one of their businesses, Trimake Ltd. Trimake Ltd.
currently makes three main products, using broadly the same production
methods and equipment for each. A conventional product costing system is
used at present, although the directors are considering switching to an
activity-based costing (ABC) system. Details of the three products for a typical
period are:
Hours per Unit

Product X
Product Y
Product Z

Hours per Unit

Labour
Machine
Hours
Unit
0.5
1.5
1.5
1
1
3

Materials per
Unit
20
12
25

Volume
Units
750
1250
7000

Direct Labour costs 6 per hour and production overheads are absorbed on a
machine hour basis. The rate for the period is 28 per machine hour.
You are required:
a) to calculate the cost per unit for each product using conventional
methods.

Further analysis shows that the total of production overheads can be

divided as follows:
%
Costs relating to Set-Ups
35
Costs relating to Machinery
20
Costs relating to Materials Handling
15
Costs relating to Inspection
30
Total Production Overhead
100%
The following activity volumes are associated with the product line for the
period as a whole.
Total activities for the period:
Number of set-ups
Product X
Product Y
Product Z
Totals

Number of
movement of
materials
12
21
87
120

75
115
480
670

Number of
Inspections
150
180
670
1000

You are required:

b) to calculate the cost per unit for each product using ABC principles
c) to comment on the reasons for any differences in the costs in your answers
to (a) and (b)
Seminar 4 Minimum selling price and optimum price from pricedemand relationships. BIL Motor Components Ltd
The directors of XYZ Plc. have been analyzing the performance of one of its
subsidiary companies BIL Motor Components Ltd. In an attempt to win over
key customers in the motor industry and to increase its market share, BIL has
decided to charge a price lower than its normal price for component TD463
when selling to the key customers who are being targeted. Details of
component TD463s standard costs are as follows:

Materials (per
Unit)
Labour (per Unit)
Variable
Overheads (per
Unit)
Fixed Overheads
(per Unit)
Total
Setting-up costs
per batch of 200
Units

Component TD463 Batch size 200 units

Machine
Machine
Machine
Assembly ()
Group 1 ()
Group 7 ()
Group 29 ()
26.00
17.00
0
3.00
2.00
0.65

1.60
0.72

0.75
0.80

1.20
0.36

3.00

2.50

1.50

0.84

31.65
10.00

21.82
6.00

3.05
4.00

5.40
0.00

Required:
(a) Compute the lowest selling price at which one batch of 200 units could
be offered, and critically evaluate the adoption of such a pricing policy.
(b) The company is also considering the launch of a new product,
component TDX 489, and has provided you with the following
information:
Variable Cost
Fixed Cost
Total

Standard Cost per Box ()

6.20
1.60
7.80

Market research forecast of demand:

Selling
13
12
11
Price ()
Demand
5,000
6,000
7,200
(Boxes)

10

11,200

13,400

The company only has enough production capacity to make 7000 boxes.
However, it would be possible to purchase product TDX 489 from a
subcontractor at 7.75 per box for orders up to 5000 boxes and 7 per box if
the orders exceed 5000 boxes.
Required:
Prepare and present a computation which illustrates what price should be
selected in order to maximize profits.

(c) Where production capacity is the limiting factor, and outsourcing a

product or one of its major components is one option under
consideration to overcome this problem critically evaluate the
advantages and disadvantages of such a policy.

Seminar 5 Budget Preparation & Discussion D Ltd.

D Limited, a manufacturing business owned by XYZ Plc. is preparing its annual
budgets for the year to 31 December 2016. It manufactures and sells one
product, which has a selling price of 150. The marketing director of D Ltd.
believes that the price can be increased to 160 with effect from 1 July 2016
and that at this price the sales volume for each quarter of 2016 will be as
follows:
Quarter
Quarter
Quarter
Quarter

1
2
3
4

Sales Volume
40 000
50 000
30 000
45 000

Sales for each quarter of 2017 are expected to be 40 000 units.

Each unit of the finished product which is manufactured requires four units of
Component R and three units of Component T, together with a Body Shell S.
These items are purchased from an outside supplier. Currently prices are:

Component R
Component T
Shell S

8.00 each
5.00 each
30.00 each

The components are expected to increase in price by 10% with effect from
April 1 2016; no change is expected in the price of the shell.
Assembly of the shell and components into the finished product requires 6
labour hours: labour is currently paid at 5.00 per hour. A 4% increase in wage
costs is anticipated to take effect from 1 October 2016.
Variable overhead costs are expected to be 10 per unit for the whole of 2016;
fixed production overhead costs are expected to be 240,000 for the year, and
are absorbed on a per unit basis. Stocks on 31 December 2015 are expected
to be as follows:
Finished Units

9000 Units

Closing stocks at the end of each quarter are to be as follows:

Finished Units

10% of next quarters sales

Required:
(a) Prepare the following budgets for the year ending 31 December 2016,
showing values for each quarter and the year in total:
(i)
Sales Budget (in s and Units)
(ii)
Production Budget (in Units)
(iii)
Material Usage Budget (in Units)
(iv)
Production Cost Budget (in s)
(b) Sales are often considered to be the principal budget factor of an
organisation.
Required:
Explain the meaning of the principal budget factor and, assuming that it is
sales, explain how sales may be forecast making appropriate reference to the
use of statistical techniques and the use of microcomputers.
Seminar 6 Divisional Financial Performance Measures CJ Limited.
This seminar will look at calculation of NPV, ROI and RI and a discussion as
whether goal congruence exists plus a further discussion relating to resolving
the conflict between decision-making and performance evaluation models.
CJ Limiteds business is organized into divisions. For operating purposes, each
division is regarded as an investment centre, with divisional managers
enjoying substantial autonomy in their selection of investment projects.
Divisional managers are rewarded via a remuneration package which is linked
to a Return on Investment (ROI) performance measure. The ROI calculation is
based on the net book value of assets at the beginning of the year. Although
there is a high degree of autonomy in investment selection, approval to go
ahead has to be obtained from group managers at the head office in order to

release the finance.

Division X is currently investigating three independent investment proposals.
If they appear acceptable, it wishes to assign each a priority in the event
funds may not be available to cover all three. Group finance staff assessed the
cost of capital to the company at 15%.
The details of the three proposals are:
Project A
Project B

Project C
(000)

(000)
000)
Initial cash outlay on fixed assets
Net cash inflow year 1
Net cash inflow year 2
Net cash inflow year 3
Net cash inflow year 4

60
21
21
21
21

60
25
20
20
15

60
10
20
30
40

Ignore taxation and residual values.

Depreciation is straight line over asset life, which is four years in each case.
You are required
(a) To give an appraisal of the three investment proposals from a divisional
and from a company point of view. The appraisal is to include the
calculation of NPV ROI and RI from the information given with a
summary discussion of the outcomes.
(b) To critically evaluate any divergence between these two points of view
and to demonstrate techniques by which the views of both divisions and
the company can be brought into line.
Seminar 7 XYZ Plc, JB Ltd Standard Costing, Flexible Budgets &
Variance Analysis
JB Ltd. a construction business, currently owned by XYZ Plc., operates a
standard marginal cost accounting system. Information relating to Product J,
which is made in one of the company departments is given below:
Standard Marginal
Product J
Product Cost
Unit ()
Direct Material
6 kilograms at 4 per kg
24
Direct Labour
1 hour at 12 per hour
12
Variable Production Overhead *
3
Total
39
* Variable production overhead varies with units produced.
Budgeted fixed production overhead, per month: 100,000.

Budgeted production for Product J: 20 000 units per month.

Actual production and costs for month 6 are as follows:
Units of J Produced
18 500
Direct materials purchased and used: 113 500kg
Direct labour: 17 800 hours
Variable production overhead incurred
Fixed production overhead incurred

()
442
223
58
104
828

650
000
800
000
450

Required:
(a) Prepare a columnar statement showing, by element of cost, the:
(i)
Original Budget;
(ii)
Flexed Budget;
(iii)
Actual;
(iv)
Total Variances

(b)

Subdivide the variances for direct material and direct labour shown in
your answers to (a) (i) (iv) above to be more informative for managerial
purposes.

(c)

Explain the meaning of a rolling forecast.

Seminar 8 Trade Credit Policy Boswell Enterprises Ltd.

The senior directors within XYZ Plc. have received the following information,
and are reviewing the implications of adopting differing trade credit policies
within one of their companies, Boswell Enterprises Ltd.
The business, which sells all of its goods on credit, has estimated that sales
revenue for the forthcoming year will be 3m under the existing policy. Credit
customers representing 30% of trade receivables are expected to pay one
month after being invoiced and 70% are expected to pay two months after
being invoiced. These estimates are in line with previous years figures.
At present, no cash discounts are offered to customers. However, to
encourage prompt payment, the business is considering giving a 2.5% cash
discount to credit customers who pay one month less. Given this incentive,
the business expects credit customers accounting for 60% of trade receivables
to pay one month after being invoiced and those accounting for 40% of trade
receivables to pay two months after being invoiced. The business believes
that the introduction of a cash discount policy will prove attractive to some
customers and will lead to a 5% increase in total sales revenue.
Irrespective of the trade credit policy adopted, the gross profit margin of the
business will be 20% for the forthcoming year and three months inventories
will be held. Fixed monthly expenses of 15,000 and variable expenses
(excluding discounts) equivalent to 10% of sales revenue will be incurred and
will be paid one month in arrears. Trade payables will be paid in arrears and
will be equal to two months cost of sales. The business will hold a fixed cash
balance of 140,000 throughout the year, whichever trade credit policy is
adopted. Ignore taxation.

Required
(a) Calculate the investment in working capital at the end of the forthcoming
year under:
(i) the existing policy;
(ii) the proposed policy.
(b) Calculate the expected profit in the forthcoming year under:
(i) the existing policy;
(ii) the proposed policy.
(c) Advise the business as to whether it should implement the proposed
policy.
(Hint: The investment in working capital will be made up of inventories, trade
receivables and cash, less trade payables and any unpaid expenses at the
year end.
Seminar 9 Transfer Pricing B Limited
B Limited, a recently acquired business by XYZ Plc. produces a range of
minerals and is organized into two trading groups: one handles wholesale
business and the other sales to retailers.
One of its products is a moulding clay. The wholesale group extracts the clay
and sells it to external wholesale customers as well as to the retail group. The
production capacity is 2000 tonnes per month but at present sales are limited
to 1000 tonnes wholesale and 600 tonnes retail.
The transfer price was agreed at 200 per tonne in line with the external
wholesale trade price at 1 July, which was the beginning of the budget year. As
from 1 December, however, competitive pressure has forced the wholesale
trade price down to 180 per tonne. The members of the retail group contend
that the transfer price to them should be the same as for outside customers.
The wholesale group refutes the argument on the basis that the original
budget established the price for the whole budget year.
The retail group produces 100 bags of refined clay from each tonne of
moulding clay which it sells at 4 a bag. It would sell a further 40 000 bags if
the retail trade price were reduced to 3.20 a bag.
Other data relevant to the operation are:
Variable cost per tonne
Fixed cost per month

Wholesale
70
100,000

Retail
60
40,000

Required:
(a) Prepare estimated profit statements for the month of December for each
group and for B Limited as a whole based on transfer prices of 200 per
tonne and of 180 per tonne when producing at:

(i) 80% capacity

(ii) 100% capacity utilizing the extra sales to supply the retail trade;
(b) Comment on the results achieved under (a) and the effect of the change
in the transfer price;
(c)
Propose an alternative transfer price for the retail sales which would
provide greater
incentive for increasing sales, detailing any problems that might be
encountered