Seminar 1 - Financial and Non-Financial Performance Measures – ScotiaHealth 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 company’s 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 TD463’s 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 9 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 quarter’s 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 Limited’s 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