Reference no: EM13793322
Question 1
Three companies manufacture and sell similar products and you have been asked to analyse and interpret the information of each company that was published recently.
Gold plc Silver plc Bronze plc
Sales - units 120000 90000 100000
£000 £000 £000
Sales revenue 1680 1620 1620
Cost of sales 1080 630 1120
Gross profit 600 990 500
Profit before interest and tax 280 590 140
Profit after tax 170 350 98
Ratios that were calculated using the attached formulae.
Gross margin 35.7% 61.1% 30.9%
Profit before interest and tax 16.7% 36.4% 8.8%
Profit after tax 10.1% 21.6% 6.0%
Return on Capital Employed 28.2% 17.3% 20.0%
Return on Shareholders' Funds 20.0% 12.5% 14.0%
Inventory - days 50.7 104.3 32.6
Receivable - days 43.5 74.4 38.3
Payables - days 33.8 52.4 26.1
Gearing 14.2% 18.1% None
Times interest earned 7 times 6.5 times None
REQUIRED
(a) Discuss the performance and financial position of the three companies and in your discussion highlight the possible causes of the differences between the three companies.
(b) Suggested strategies which could be adopted to improve the Return on Capital Employed for each of the companies.
Question 2
Company XZ manufactures two products in their factory. The details of the products, which use the same production facilities, are as follows:-
Product X Product Z
Budgeted sales in 2012/13 500 units 200 units
Material per unit £200 £300
Labour at £10 per hour in department 1 £120 £180
Labour at £13 per hour in department 2 £ 26 £ 65
There are also two service departments that are used by both departments and the budgeted overhead costs for the whole company for 2012/13 are:-
Department 1 Department 2 Service A Service B
£ £ £ £
Salaries 200000 80000 100000 60000
Depreciation 30000 6000 12000 20000
Other costs (fixed) 50000 14000 8000 20000
Usage of Service A 20% 80%
Usage of Service B 40% 60%
Required:-
(a) If each machine is treated as a separate cost centre, calculate the overhead recovery rate for each cost centre.
(b) Calculate the expected full cost of both products in 20012/13.
(c) (i) If Product X sells at £1200 per unit and Product Z at £2180 per unit, what is the expected operating profit for the year?
(ii) If only 180 units of each of the products were sold at the budgeted selling prices, what would be the effect on the operating profit if all costs were at the budgeted level?
(d) Explain Activity Based Costing (ABC) and discuss the benefits that are claimed for this method of apportioning overhead cost.
Question 3
Mentieth plc manufactures and sells three products and it is expected that the sales revenue, costs and quantity sold of each product will be:-
Product A B C D
£ £ £ £
Selling price per unit 80 65 30 28
Variable costs per unit 38 30 15 10
Apportioned fixed costs per unit 25 20 10 10
Total cost per unit 63 50 25 20
Profit per unit 17 15 5 8
Estimated sales - units 2000 3000 4000 5000
Estimated profit - £000 34 45 20 40
When the budget was prepared, the total fixed costs were estimated to be £200000 and the output was expected to be 20000 direct labour hours. An overhead recovery rate of £10 per Direct Labour Hours was, therefore, used to apportion the fixed costs to each of the products.
As a result of unforeseen circumstances, the capacity has been reduced to only 14000 direct labour hours but the total overhead cost of £200000 will remain unchanged.
Required
(a) What products should be produced and sold to maximise the company's profit and what will be the total profit of the company?
(b) As an alternative to turning away orders, it has been suggested that the selling price of all four products should be increased by 10 per cent. It is expected that this will reduce the demand for each product by 30 per cent. This would reduce the required direct labour hours below the 14000 hours that are now available. Would this result in a better outcome than that the one in the original budget for the period?
(c) What is the break-even of the COMPANY if the sales are sold in the ratio of 2A : 3B :1C and 1D.
Question 4
To really understand the accounting information presented in the financial statements, it is essential that the users are familiar with the conventions that are used in the preparation of the financial statements that appear in the Annual Reports of most companies.
(a) Explain each of the following and discuss the significance of each in the situation described :-
- Realisation convention in a company that undertakes large construction projects that often take three years to complete.
- Historical cost as the basis of asset valuation in a company that has a factory and plant that was bought over thirty years ago.
- The prudence convention in all companies.
(b) Discuss the nature of the accounting information that is provided in a typical Cash Flow Statement that is included in the Annual Report of most companies.
Question 5
(a) Explain the process by which most large companies produce the annual plan that forms the basis of most of the procedures used to exercise control within the organisation.
(b) Discuss the importance of preparing a cash budget and compare and contrast a typical cash budget with a Cash Flow Statement that is included in the Annual Report of most companies.
Question 6
Explain and discuss the usefulness of the following:-
(i) The Balanced Scorecard to report the performance of companies
(i) Economic Value Added (EVA) to measure the performance of companies.