Management Accounting Techniques as Aids in Decision-Making Questions and Answers
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The management of Midlands manufacturers ltd is considering a mutually exclusive capital project that requires an outlay of under $30 000. The firm has a choice between two machines whose cash flows are projected as follows:
|Machine A||Machine B|
|Year 1 Cash inflows||6||578||7||750|
|2 Cash inflows||6||500||7||000|
|3 Cash inflows||6||500||7||750|
|4 Cash inflows||6||500||7||000|
|5 Cash inflows||6||500||7||750|
|The risk free cost of capital is I 0,5%|
a)Calculate the expected net present value of the machines
b)What would be the Internal rate of return on Machine B
c)Measure and comment on the risk associated with the projected cash flows for the Machines under consideration.
d)Compare and contrast the decision rule in Net Present value approach with the Internal rate of Return approach.
e)State two assumptions underlying the Discounted cash flow approaches to capital investment appraisal.
Grey Construction ltd carries project network analysis using the Programme Evaluation and Review Techniques(PERT). The senior management accountant has tasked you to finish off relevant computations in respect of the project under consideration. The following is available:
The completion time is crucial since the company functions in a highly competitive market.
Each day by which the project completion time is reduced, increases income by an additional $500. The possible shortening of the completion time of the project with the consequences is estimated as follows:
a)Distinguish Critical path analysis from Programme evaluation and review techniques in Network analysis.
b)Draw up the network diagram for the project and establish the critical path.
c)Calculate the most profitable completion time and the benefits anticipated.
d)Draw up the network diagram based on the most profitable completion time.
e)Currently, one machine with a production capacity of 25 units per half hour is fully utilized for all activities. To reduce the completion time, management is considering replacing the machine with two smaller machines. These two machines have a production capacity of 30 units per hour. A normal working day is 9 hours. Advise management if taking up this decision is worthwhile.
Joyland ltd manufactures toys using the Standard Costing System. The following information was extracted from the March 2019 production and accounting records of the teddy bear manufacturing department:
|Budget (Unit)||Actual (Unit)|
|Direct labour hours||3000||3500|
|Selling & administrative expenses||2700||2950|
i)Besides finished goods, no other stocks are kept
ii)Inventories are valued at standard absorption cost basis.
iii)Overhead is allocated to production on machine hour basis.
iv)Budgeted fixed overhead for March amounted to $7 600 based on an annual standard recovery rate. The actual fixed overhead incurred during March amounted to $8 200.
v)According to the budget,35% of selling & administrative expenses are fixed. Individual departments are invoiced with the selling & administrative expenses on the basis of turnover in units. The fixed selling and administrative expenses expenditure variance for March amounts to $95 favourable.
a) Calculate all possible variances in respect of the following:
iii)Fixed selling & administrative expenses
iv)Variable selling & administrative expenses
b) Establish the value of final stock on 31 March 2019.
c)State the benefits of standard costing in an environment that is computerized.
The following is an abridged financial position statement for Gye manufacturer ltd on 31 December 2018
Statement of financial position as at 31 December 2018
|Ordinary shares of $1 each||$210,000|
|Non- current assets: Property,plant & equipment 130 000|
|Net current assets 127 000|
|-Current assets Inventory||80000|
|Less Current liabilities:|
|Trade payables||(32 000)|
|Dividends due||(15 000)|
|Direct materials||$192 000|
|Direct labour||96 000|
|Variable overheads||48 000|
|Fixed overheads||104 000|
iv)It is estimated that fixed costs will remain fixed whilst variable costs will vary in the same ratio to sales.
v)Non-current assets include depreciation at 10% on machinery whose original cost was $80 000. vi)The dividend will be paid during June 2019.
vi)The company plans extensions to the factory to the value of $30 000. The contractor will be paid an amount of $10 000 monthly until the work is completed on December 31, 2019. No depreciation will be charged against the extensions until the work has been completed.
vii)Experience has shown that amount due to trade payables is usually to two months purchases of direct materials whilst inventories and trade receivables should be equal to the value of two month sales.
Draft the following:
a)Budgeted statement of comprehensive income for each quarter of 2019 in columnar form
b)Budgeted statement of financial position on 31 December 2019.
a)State and explain by means of examples the four broad categories of quality costs. How justified are these costs.
b)’There is a commonality of approach to various short run decisions’. Explain by means of examples.
c)’Budgeting and budgetary control on one hand and Standard costing on the other are complementary tools’ To what extent is this assertion valid.
d) Customers are one of the factors influencing pricing decisions”. Discuss.