Variance Analysis Calculations - Management Accounting and Finance - Exam, Exams of Management Accounting

Download Variance Analysis Calculations - Management Accounting and Finance - Exam and more Exams Management Accounting in PDF only on Docsity! Ollscoil na hÉireann, Gaillimh National University of Ireland, Galway Summer Examinations 2009 Exam Code 1AY1 Exam Master of Accounting Degree Module Code AY516 Module Management Accounting and Finance Paper Number Paper 1: Management Accounting External Examiner Professor P. Weetman Internal Examiners Professor S. Collins Mr. J. Currie Mr. H. McBride Instructions Answer any 3 questions Duration 2½ Hours No. of Pages 8 Department Accountancy and Finance Course Co-ordinator John Currie Requirements: MCQ Handout Statistical Tables Graph Paper Log Graph Paper Other Material Page 2 Question 1: Vancouver Ltd. manufactures specialised agricultural fertilisers. The fertilisers are sold in three grades (X, Y and Z), and the following data is taken from the company’s budget for 2008: X Y Z Budgeted selling price, per ton €102 €72 €64 Variable cost, per ton €52 €40 €28 Budgeted sales quantities (tons) 14,000 13,000 13,000 The budget also included fixed overheads of €700,000 which are not dependent on the mix or quantity of products sold. It was noted that Vancouver’s budgeted total sales (in tons) amounted to 40% of the estimated total market for specialised agricultural fertilisers. Early in 2008, the managing director of Vancouver Ltd. decided that the best way for the company to improve profitability was to increase market share, and that an increase in market share could best be brought about by changing the sales mix in favour of the two lowest-priced products (Y and Z). Consequently, the selling prices of Y and Z were decreased while the price of X was increased, and field sales staff were encouraged to emphasise sales of Y and Z in particular. Increased advertising expenditure in support of this new sales strategy increased the company’s total fixed overheads for the year to €780,000. Actual variable costs per unit of each product were the same as budgeted. The actual total market for specialised agricultural fertilisers in 2008 amounted to 110,000 tons, and Vancouver Ltd.’s actual sales for the year were as follows: X Y Z Actual selling price, per ton €104 €70 €61 Actual sales quantities (ton) 14,500 18,000 17,500 Required: (a) Calculate the budgeted and actual profits of Vancouver Ltd. for 2008. (4 marks) (b) Prepare variance analysis calculations in as much detail as is possible from the information provided. (19 marks) (c) Using the results of your answer to part (b) as appropriate, prepare a financial evaluation of the decision to change the sales mix. (5 marks) (d) Respond to the following comments from the managing director, using the results of your answers to part (b) and (c) to support your answers:  “The fact that sales of all three products (including Product X) increased seems to indicate that my instructions to change the sales mix in favour of Products Y and Z were ignored”.  “Actual profit was higher than budgeted profit, but this seems to have been mainly due to factors outside of the company’s control rather than to good managerial decision-making”. (5 ⅓ marks) (Total: 33 ⅓ Marks) Page 5 Question 3: N.B.: IF YOU SELECT THIS QUESTION, ANSWER BOTH PART (A) AND PART (B) PART (A): Norway Ltd., which was formed on 1st January 2007, consists of two autonomous divisions. The cost of capital in each divisions is 8%, and the company’s accounting system provided the following data for the most recent financial year (2008): Division A Division B Profit for year ended 31st December 2008 €100,000 €200,000 Capital employed at 31st December 2008 €800,000 €900,000 Last year (i.e., in 2007), Division B made a major investment in new production equipment at a cost of €200,000. In accordance with the company’s normal accounting policies, the cost of this investment is being depreciated on a straight-line basis over a four-year life. However, because the equipment is expected to physically deteriorate somewhat more quickly in the early years of its life than in later years, a more realistic economic estimate of depreciation is 30% per annum on a diminishing balance basis. Both divisions spent significant amounts on research and development (R & D) in the first two years of the company’s life, as follows: Division A Division B R & D expenditure in 2007 €150,000 €50,000 R & D expenditure in 2008 €200,000 €40,000 On grounds of prudence R & D expenditure was written off to divisional profit and loss accounts in the year of expenditure. However, the chief executive of Norway Ltd. is confident that the R & D expenditures by Division A will result in commercial benefits to the division over an 8-year period beginning in the year after the expenditure takes place. Also, the chief executive is confident that the R & D expenditures by Division B will result in commercial benefits to that division over a 4-year period beginning in the year when the expenditure is made. In each case, benefits can be assumed to occur evenly over the period concerned. Required: (i) Calculate the residual income and economic value added (EVA™) of each division for 2008. (14 marks) (ii) Explain briefly why economic value added (EVA™) may be considered superior to residual income as a measure of divisional performance, using the case of Norway Ltd. to illustrate your answer. (3 marks) (Total for Part (A): 17 marks) . . . / Continued Page 6 Question 3 (Continued): PART (B): Sweden Ltd consists of several autonomous divisions. The cost of capital is the same for all divisions (7%) and each divisional manager is expected to achieve a return on investment (ROI) of at least two percentage points higher than this cost of capital. However, the actual ROI figures reported by divisions have varied between 5% and 15% in recent years. From informal observation, the directors of Sweden Ltd. have formed the opinion that divisional managers do not always take decisions which are in shareholders’ best interests. The directors believe that the ROI-based performance evaluation system may be to blame, and have asked for your assistance in assessing the likelihood of dysfunctional decision-making by division managers. For illustrative purposes, they have provided you with the following data about four hypothetical investment proposals which divisional managers could add to their existing activities: Proposal No.: 1 2 3 4 Annual profit generated €12,000 €9,000 €20,000 €16,000 Capital investment required €200,000 €50,000 €250,000 €400,000 Required: (i) Taking each proposal in turn, identify the circumstances in which the company’s divisional managers are likely to make investment decisions which are contrary to shareholders’ best interests. Your answer should include appropriate calculations. (10 marks) (ii) To what extent would the use of residual income rather than ROI reduce the danger of dysfunctional decision-making in this case? Show calculations to support your answer. (6 ⅓ marks) (Total for Part (B): 16 ⅓ marks) [Total for Part (A) and Part (B): 33 ⅓ Marks] Page 7 Question 4: Bonaparte SA is a major French clothing retailer, which expanded its operations into Ireland at the beginning of 2008. Controversy arose between the company and the Irish Consumer Advocacy Group (ICAG) when a press article revealed that the prices charged for identical items differed considerably as between the company’s French and Irish stores. For example, a jumper which the company purchases for €27.30 sells for €78 in its French stores and for €91 in its Irish stores. Bonaparte and ICAG agree that this example is representative of the percentage margins on the company’s product range as a whole. Bonaparte argues that its higher prices in Ireland are justified by significant inter-country differences in overhead costs and other factors, but ICAG rejects this argument. You have been commissioned to write an evaluation of this case for a reputable financial newspaper. So far, you have established the following facts: 1. Bonaparte has 40 stores in France, averaging 5,000 square metres in size. The company’s 20 Irish stores have an average size of 3,000 square metres. 2. Because of longer store opening hours, annual turnover per square metre of floor space is higher in Bonaparte’s Irish stores (€900) than in its French stores (€800). 3. Annual fixed costs which arise at store level (such as rent and the wages of permanent staff) are €400,000 per store in France and €350,000 per store in Ireland. 4. Variable costs (excluding the cost of purchasing goods for resale) are 15% of sales in France and 19% of sales in Ireland. 5. Many important functions (e.g., corporate-level marketing and supply chain management) are carried out at Bonaparte’s headquarters in France. The expansion into Ireland increased the costs incurred at headquarters from €20,000,000 to €21,640,000 per annum. . . . / Continued