Accounting for Executive (ACT0075)

May 2011

Assignment 3

INSTRUCTIONS:

  1. The assessment criteria are:

(a)Substance

(b)Originality of work

(c)Presentation

(d)Use of illustrations / examples, where appropriate

  1. Candidates who simply regurgitate their answers from the course manual may risk failing the assignment.
  1. Any similarities between individual assignments will result in a fail grade.
  1. Pages should be clearly numbered.
  1. The format of the assignment should be as follows:

(a)Front cover (i.e. title page), stating the:

  • Module name and code
  • Student’s full name and student number
  • Class code
  • Name of lecturer
  • Submission date

(b)Contents page, if any

(c)Main body of the assignment

(d)References, if applicable

  • Example: Kotler, P. 1997 Marketing Management – Analysis Planning, Implementation, and Control 9th ed. Prentice Hall International.
  1. Retain a photocopy of your course assignment.
  1. Complete your assignment and hand it in by: __May 2011__

Answer ALL FOUR questions (100%)

Question 1

Alpha Limited manufactures one product whose output level varies from month to month. No inventory is held. Budgets for its minimum and maximum monthly output levels are given below, together with actual figures for December 2010.

Cost Classification / Budgeted minimum / Budgeted maximum / Actual
Output / 20,000 units / 40,000 units / 35,000 units
$ / $ / $
Sales revenue / 400,000 / 800,000 / 735,000
Less:
Direct materials / Variable cost / 240,000 / 480,000 / 430,000
Direct labour / Variable cost / 50,000 / 100,000 / 80,000
Indirect labour / Semi-variable cost / 15,000 / 25,000 / 31,000
Indirect materials / Fixed cost / 6,000 / 6,000 / 6,500
89,000 / 189,000 / 187,500

Required:

(a)Prepare a flexed budget for an output level of 35,000 units.(14 marks)

(b)Calculate revenue, cost and profit variances for December 2010 using the actual figures given and the flexed budget you have prepared. (6 marks)

(c)Explain the meaning of the terms fixed budget and flexible budget and the importance of basing variance calculations on flexible budgeting principles.

(5 marks)

(Total 25 marks)

Question 2

Bright Limited incorporated as a limited company on 1 June 2010. The company only employed a part-time book-keeper to record all the transactions. The book-keeper is a university student, studying accounting and is sometimes not sure which account is to be opened. The company has its first year ended on 31 December 2010.

The following trial balance was prepared by the book-keeper on 31 December 2010.

Dr / Cr
$ / $
Cash received from issuing ordinary shares (Note 1 below) / 280,000
10% debentures, repayable 2015 / 100,000
Property, plant and equipment (Delivery vehicles transferred from one of shareholders)
– Cost / 180,500
– Accumulated depreciation at 1 June 2010 / 65,000
Bought 100,000 shares of a listed company / 125,000
Inventory transferred from shareholders / 41,000
Trade receivables / 52,000
Trade payables / 38,000
Bank and cash / 115,900
Purchases / 198,000
Sales / 297,000
Sales of delivery van (Note 2 below) / 5,000
Investment income / 15,000
Distribution costs / 14,600
General and office expenses / 73,000
800,000 / 800,000

The following information is to be taken into account:

1.Bright Limited issued 200,000 ordinary shares of $1 each at a premium of $0.40 each on 1 June 2010. The shares were all paid up and allotted equally to four shareholders.

2.A delivery van with cost of $70,000 and accumulated depreciation of $56,000 was sold for $5,000. The money received was included in the cash at bank.

3.The delivery vehicles are depreciated at 20% per annum, using the reducing balance method. A full year’s depreciation is to be charged in the year of acquisition but none in the year of disposal.

4.The 10% debentures were issued on 1 July 2010.

5.The 100,000 shares of a listed company were bought on 10 June 2010 with the intention to hold it for long-term. It is classified as “Available-for-sale financial assets”. There is no change in fair value for the “Available-for-sale financial assets” on 31 December 2010.

6.On 3 January 2011, the company received an invoice dated 30 December 2010 from a courier for distribution costs of $3,000.

7.There were general and office expenses prepaid of $4,000 as at 31 December 2010.

8.A provision for audit fee of $5,000 should be made as at 31 December 2010.

9.Inventory at 31 December 2010 was $39,000.

Required:

(a)Prepare the statement of comprehensive income for Bright Limited for theyear ended 31 December 2010. (12marks)

(b)Prepare the statement of financial position for Bright Limited as at 31 December 2010. (13 marks)

(Total 25 marks)

Question 3

You are an accountant in a large limited company which is going to take over one of the following companies. The director asks you to compare and comment on the performance of these companies. Their latest statement of financial position and statement of comprehensive income are shown as follows:

Statement of financial position as at 31 December 2010

Esco Ltd / Model Ltd
Assets / $000 / $000
Non-current assets
Premises / 2,000 / 2,500
Plant and machinery / 1,600 / 1,900
Vehicles / 560 / 1,015
4,160 / 5,415
Current assets
Inventory / 775 / 1,000
Accounts receivable / 600 / 1,750
Bank / 675 / -
2,050 / 2,750
Total assets / 6,210 / 8,165
Capital and reserves
Ordinary shares of $1 each / 2,585 / 3,190
Share premium / 250 / 500
Retained profits / 875 / 800
3,710 / 4,490
Non-current liabilities
Debentures / 1,500 / 1,000
Current liabilities
Accounts payables / 650 / 550
Tax payable / 350 / 435
Bank overdraft / - / 1,690
1,000 / 2,675
Total equity and liabilities / 6,210 / 8,165

Statement of comprehensive income for the year ended 31 December 2010

Esco Ltd / Model Ltd
$000 / $000
Sales / 6,000 / 6,750
Less: Cost of goods sold / (3,000) / (3,600)
Gross profit / 3,000 / 3,150
Less: Operating expenses / (1,875) / (2,370)
Profit before interest and tax / 1,125 / 780
Finance cost / (225) / (100)
Profit before tax / 900 / 680
Taxation / 350 / 420
Profit for the year / 550 / 260

Notes:

(1)All purchases and sales are on credit.

Required:

(a)analyze the figures with reference to the following ratios:

(i)Current ratio

(ii)Inventory turnover period (in months)

(iii)Accounts receivable collection period (in months)

(iv)Gross profit margin

(v)Net profit margin (before interest and tax)

(vi)Return on all long-term capital

Note: Your answers should be rounded up to 2 decimal points.

(12 marks)

(b)On the basis of the conclusions you have reached in your answer to (b) above, comment and compare the performance of the two companies.

(7 marks)

(c)Discuss the limitations of using ratio analysis as a tool for investors.

(6 marks)

(Total 25 marks)

Question 4

The operating statement relating to the last financial year of ABC Manufacturing Limited is as follows:

$000 / $000
Sales (22,000 units) / 3,300
Direct materials / 726
Direct labour / 374
Production overheads / 798
1,898
Gross profit / 1,402
Selling overheads / 1,042
Net profit / 360

The variable production overheads were $9 per unit while the variable selling overheads were $11 per unit.

Required:

(a)Calculate the contribution margin per unit and the margin of safety in unitsfor the last financial year. (5 marks)

(b)The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year and two courses of action for the coming year were proposed in the recent management meeting.

(i)The sales manager believed that unit volume would increase by 30% with the incurrence of $200,000 on advertising.

(ii)The general manager considered that full capacity could be reached if the selling price was cut by 10%. In addition, the direct material cost would be reduced by 5% following a minor modification of the specification of the product.

Prepare the budgeted operating statement for the coming year in columnar format, using a contribution margin approach, under each alternative.

(14 marks)

(c)State any FOUR limitations of breakeven analysis.(6 marks)

(Total 25 marks)

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