SCHOOL OF CONTINUING EDUCATION
HONG KONG BAPTIST UNIVERSITY /______
Accounting for Executives
______
Subject Code –09ACT0075A
Final Examination Marking Scheme
Term: Autumn 08
Answer 1
(a)Sales budget
Product / Quantity / Price / Sales /Marks
P1 / 6,000 / $500 / $3,000,000 / [1.5]P2 / 4,800 / $1,000 / $4,800,000 / [1.5]
$7,800,000
(b)Production budget (in units)
P1 / P2 /Marks
Units / UnitsBudgeted sales / 6,000 / 4,800 / [1]
Budgeted stock increase (decrease) / 650 / (50) / [2]
6,650 / 4,750
5% loss on output (5/95) / 350 / 250 / [2]
Production budget / 7,000 / 5,000 / [1]
(c)Direct material purchase budget
M3 / M4 /Marks
Kg / Kg7,000 units of P1 / 70,000 / 35,000 / [1]
5,000 units of P2 / 30,000 / 40,000 / [1]
Direct material usage / 100,000 / 75,000
Increase/(decrease) in stock / (8,000) / 2,000 / [2]
Direct material purchases / 92,000 / 77,000
Price per kg / $10 / $12
Purchase costs / $920,000 / $924,000 / [2]
(d)Direct labour budget
Product / Hours / $ /Marks
P1 / (7,000 x 30/60) / 3,500 / At $120 / 420,000 / [2]P2 / (5,000 x 45/60) / 3,750 / At $120 / 450,000 / [2]
7,250 / 870,000
(e)Pre-determined factory overhead absorption rate:
Budgeted factory overheads / Budgeted direct labour hours
=$362,500 / 7,250 hours = $50 per hour [2 marks]
(f) and (g) Factory cost of goods produced and unit factory cost:
P1 / P2 /Marks
Direct materials / $ / $M3 / (70,000 x $10) / 700,000 / (30,000 x $10) / 300,000 / [2]
M4 / (35,000 x $12) / 420,000 / (40,000 x $12) / 480,000 / [2]
1,120,000 / 780,000
Direct labour / 420,000 / 450,000 / [1]
Factory overhead
(3,500 x $50) / 175,000 / (3,750 x $50) / 187,500 / [2]
Total factory cost / 1,715,000 / 1,417,500 / [1]
Good output units / 6,650 / 4,750
Unit factory cost / $258 / $298 / [2]
(h)Budgeted cost of goods sold:
P1 / P2 /Marks
$ / $Opening stock / 144,000 / 182,000 /
[1]
Production cost / 1,715,000 / 1,417,500 /[1]
1,859,000 / 1,599,500Less: Closing stock
(1,250 x $258) / (322,500) / (650 x $298) / (193,700) / [2]
Cost of goods sold / 1,536,500 / 1,405,800 / [1]
(f)The budgetary planning process usually starts with sales budget because a company is usually restricted from making and selling more of its products. Under this assumption, sales demand is the principal budget factor, in which it restricts the performance or level of activity of a company. [2 marks] The other limiting factors could be machine capacity, distribution and selling resources, the availability of key raw materials or labour. [1 mark] However, if the principal budget factor is the availability of labour, the first functional budget to prepare is the labour budget, in which a company needs to consider how the limited labour hours are assigned to the optimal mix of products to maximize its profit. [1 mark]
Answer 2
Abbas
Income statement for the year ended 30 June 2008
$ / $ / MarksSales / 260,500 / [0.5]
Less: Returns inwards / (1,500) / 259,000 / [1]
Less: Cost of goods sold
Opening stock / 20,050 / [0.5]
Add: Purchases / 155,500 / [0.5]
Add: wages and testing expenses / 5,000 / [2]
Add: Freight charges / 6,000 / [2]
Less: Closing stock / (24,300) / 162,250 / [0.5]
Gross profit / 96,750 / [0.5]
Add: Insurance claim on damaged stock / 4,000 / [2]
100,750
Less: Expenses
Rent / 10,500 / [0.5]
Salaries / 48,400 / [0.5]
Motor vehicle expenses / 6,450 / [0.5]
Depreciation on motor vehicle (60,000 x 20%) / 12,000 / [1.5]
Bad debts written off / 800 / [0.5]
Provision for doubtful debts ($8,000 x 5%) / 400 / 78,550 / [1.5]
Net profit / 22,200 / [0.5]
(Total – 15 marks)
Abbas
Balance Sheet as at 30 June 2008
$ / $ / $ / MarksFixed Assets
Motor vehicles / 60,000 / [0.5]
Less: Provision for depreciation
(13,500 + 12,000) / (25,500) / 34,500 / [1.5]
Current Assets
Stock / 24,300 / [0.5]
Accounts receivables / 7,200 / [0.5]
Less: Provision for doubtful debts(1) / (400) / 6,800 / [1.5]
Other receivables – insurance claim for damaged stock / 4,000 / [2]
Cash at bank / 6,750 / [0.5]
41,850
Current Liabilities
Accounts payables / 8,150 / [0.5]
Net Current Assets / 33,700 / [0.5]
68,200
Represented by:
Capital / 67,000 / [0.5]
Add: Net profit / 22,200 / [0.5]
89,200
Less: Drawings / (21,000) / [1]
68,200
(Total – 10 marks)
Answer 3
(a)
Problems of using ratio analysis in evaluating the performance of a company are:
(1)Comparisons of performance among different periods need to consider thechanges in economic climate and its impact on business or industry engagedby the entity. [1.5 marks]
(2)Since different types of industry will have different operations andenvironment, they should have different sets of performance indicators oryardsticks.
[1.5 marks]
(3)The accounting policies and financing policies may vary widely amongcompanies. Thus, the variations of the accounting and financing policiesselected by companies may add difficulties to the comparison among differentcompanies. [1.5 marks]
(4)Conglomerates, which have multiple lines of business, are often difficult tocategorise into industry segments for the purpose of performingcross-sectional comparison. [1.5 marks]
(5)A single ratio provides only limited information for comparison. An overallpicture of the performance of a company can only be obtained throughanalysing a group of related ratios. [1.5 marks]
(6)The result of ratio analysis lies with the quality of its underlying financialinformation. In this connection, unreliable financial information can only leadto misleading or poor quality analysis and evaluation of financial performanceof a company. [1.5 marks]
(7)The reliance on ratios exclusively for evaluating the financial performance ofa company may lose sight of information in the underlying financialstatements. Certain information reported in the financial statements is alsoessential in assessing a company’s financial performance. [1.5 marks]
(Any 6 points above, or any other relevant points, maximum 9 marks)
(b)
Other information to be considered in analyzing the operating results and financial position of the companies include:
(i)Comments in the Chairman’s and the Directors’ reports;
(ii)Comments in the Auditors’ reports with special attention paid to any qualified opinion;
(iii)Accounting policies adopted by the companies in the preparation of financial statements;
(iv)Other noticeable information included in the reports and accounts of the companies such as post balance sheet events, contingent liabilities and taxation positions of the companies;
(v)Current and future developments in the companies’ markets, at home and overseas; and
(vi)Any other relevant points.
(Any 3 points above, maximum 6 marks)
(c)
Based on the information given in question, the performance of Super Limited canbe analysed in the following aspects:
(i)Management efficiency
Super Limited’s overall performance can be measured by the ROCE (10% for2008; 35% for 2007), which indicates that it has deteriorated significantly. ROCEcan be analyzed into:
Net profit margin, which has fallen from 7% in 2007 to 2% in 2008, mayindicate that the expansion has caused a significant increase in operatingexpenses without a corresponding increase in sales level.
Asset turnover, which has declined from three times in 2007 to two times in2008, may indicate that it takes time for the investment in new operations togenerate additional sales and, thus, this situation can be improved in futureyears.
The significant decline in gross profit margin from 19% to 9% when comparedwith 2007 may indicate decline in economic climate, increasing marketcompetition, and changes in customer preferences, etc. The expansion ofoperations may not be a suitable action because the decline in gross profitmargin may be an indication of economic recession.
[8 marks]
(ii)Liquidity and gearing
Super Limited’s liquidity position has not changed from year 2007 to 2008 and thecurrent ratio for both years are 0.7. It is not easy to evaluate retail business usingcurrent ratio because liquidity ratio will be affected by the proportion of sales on cashand on credit.
The gearing ratio of Super Limited has increased from 15% in 2007 to 30% in2008. This indicates that the expansion of its operations is financed by increasingthe amount of long-term loans. Nevertheless, the level of 30% gearing ratio isfinancially healthy in terms of the solvency of a company.
[4 marks]
(iii)Returns to shareholders
The returns to shareholders can be reflected in the dividend cover and ROCE. TheROCE, which indicates the overall performance of a company, has declinedsignificantly (by 25%) from 2007 to 2008. Shareholders may feel that theperformance of management is not satisfactory.
[2 marks]
(iv)Working capital management
The inventory holding period has increased significantly from 30 days in 2007 to 60days in the current year. This may indicate that Super Limited would like toincrease the inventory level, since the company expects an increase in sales. But,this may also indicate that there are slow-moving and obsolete inventory.
The accounts payable period has increased from 45 days in 2007 to 60 days in thecurrent year. This may indicate that the company is unable to pay the debts whenthey fall due because of the tight liquidity position.
It is noted that the current ratio is 0.7 for both 2007 and 2008. Despite the fact thatcurrent ratio remains the same, there are negative trends in gross profit ratio, netprofit ratio and inventory turnover. It is unlikely that the current ratio can beimproved in the near future.
[6 marks]
P. 1