MODULE CODE: ABF300 TITLE OF PAPER: Advanced Management Accounting. REVISION AND STUDY QUESTIONS

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Question 1 DN.plc experiences difficulty in its budgeting process because it finds it necessary to quantify the learning effect as new products are introduced. Substantial product changes occur and... result in the need for retraining. An order for 40 units of a new product has been received by DN.plc. So far, 15 have been completed; the first unit required 50 direct labour hours and a total of 565 direct labour hours has been recorded for the 15 units. The production manager expects a 93% learning effect for this type of work. The company uses standard absorption costing. The direct costs attributed to the centre in which the unit is manufactured and its direct costs are as follows: There are 30 direct employees working a five-day week, eight hours per day, in the centre in which the unit is manufactured. No other product is made in this centre. Personal and other downtime account for 20% of the total available time. Fixed overhead costs are recovered on the basis of labour hours worked. The company has an advertised policy that orders, once accepted by the company, will always be delivered within one week. You are required to: A) determine whether the assumption of a 93% learning effect is a reasonable one in this case, by using the standard formula y = axb (4 per cent) B) calculate the number of direct labour hours likely to be required for the outstanding 25 units of the order. (4 per cent) C) use the cost data given above to produce an estimated product cost for the 40 units on order, mentioning briefly the problems which may be created for budgeting by the presence of the learning effect. (8 per cent) D) discuss whether the order for 40 units should have been accepted by DN.plc for £45,000 and the implications of accepting this order. Trainers Ltd is a provider of language tuition for students who are preparing for their language examinations. For many years it has provided Tuition courses, during which students are taught the syllabus using workbooks written by Trainers Ltd, and also Exam preparation courses. The Tuition courses introduce the material to the students and provide some practice tests. The Exam courses consist of revision sessions and two mock examinations, which are written by Trainers Ltd. Last year Trainers Ltd decided to diversify into providing bespoke training courses for individual students. Because the bespoke courses are developed specifically for each student, Trainers Ltd have decided to charge £150 per student, instead of £100, which is the charge per student on the normal language courses. Trainers Ltd has a policy of charging the same per student whether they are taking a Tuition course or an Examination course. Trainers Ltd have always dealt with overheads for their products by using the Direct Labour Hours that are incurred for each type of course. The managing director is unsure which courses are profitable, and has asked you to look at the courses sold using activity based costing, a method that he has heard about, but has never used before. You have found that the overhead costs were determined by cost drivers as follows: You are to write a memo to the managing director, which is to cover: A) an explanation and calculation of the overhead costs per course using: 1) direct labour hours as an allocation method 2) an activity based costing approach You are to advise the managing director on the implications of these findings for the marketing of the courses currently sold. (20 per cent) B) your advice regarding whether a marginal costing approach or an activity based costing approach would result in better decisions being made by Trainers Ltd when approached by individual students asking Trainers Ltd to provide courses specifically for them. Explain clearly the terms used Mowers Ltd, a manufacturer of lawn mowers, is unsure of whether to purchase an automated metal cutting machine to speed up its building of the bodywork for its lawn mowers. The machine would cost £300,000, which would have to be borrowed at an overdraft rate of 8% per annum, but would reduce variable costs from the current level of £39.00 per lawn mower to £35.50 per lawn mower. At present Mowers Ltd has fixed costs of £600,000 per annum. A consultant has been commissioned by Mowers Ltd to help establish its demand function, and it has been found that demand increases at a constant rate of 1,660 lawn mowers for every £1 decrease in price and that there will be no sales at a price of £76.00. Mowers Ltd seeks to maximise profits. Ignore taxation. If purchased, the metal cutting machine would be acquired on the first day of Mowers’ accounting year. Since the machine will last for many years its depreciation should be ignored. Requirement: A) If the company does not purchase the metal cutting machine calculate the selling price required to maximise profit, the quantity sold, and the corresponding total revenue and profit at that selling price, using differential calculus techniques. Bogus 999 calls were made by Surrey Police to itself to boost its speed of response figures, it was claimed (and reported in The Times on 1st July 2005). When targets were missed one night, an operator for the force was told to improve response rates by making emergency calls on his mobile. These would be answered quickly by the response team, thereby improving the speed of response figures so that the target would be met. Discuss the above allegation with reference to your studies of the behavioural aspects of management accounting. (25 per cent [Show More]

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