AC2097 ZA

BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

FINANCE AND THE SOCIAL SCIENCES, THE DIPLOMA IN ECONOMICS AND
SOCIAL SCIENCES AND THE CERTIFICATE IN EDUCATION IN SOCIAL SCIENCES

Summer 2021 Online Assessment Instructions

AC2097 Management Accounting

Tuesday, 1 June 2021: 15:00 – 21:00 (BST)

The assessment will be an open-book take-home online assessment within a 6-

hour window. The requirements for this assessment remain the same as the closed-
book exam, with an expected time/effort of 3 hours and 15 minutes (inclusive of 15
minutes reading time).

Candidates should answer FIVE of the following EIGHT questions: FOUR from Section
A and ONE from Section B. All questions carry equal marks.

Please note that word limits have been added to some of the questions. Anything
beyond word limits will not be read.

Workings MUST BE submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.

You may use any calculator for any appropriate calculations, but you may not use any
computer software to obtain solutions. Credit will only be given if all workings are
shown.

You should complete this paper using word processing software (i.e. Microsoft Word).
This should be saved as a .doc or .docx file and then uploaded to the VLE as ONE
individual file including the coversheet. Each page should have your candidate
number in the header. Please do not write your name anywhere on any part of
your submission.

You may hand-write calculations, formulae, or diagrams, but these should be scanned
or copied and included as images in the Word document that you submit. Please
ensure that any images are inserted at the appropriate point of your document and
correctly aligned (i.e. markers will not need to rotate images to read them).

© University of London 2021

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You have until 21:00 (BST) on Tuesday 1 June to upload your file into the VLE
submission portal. However, you are advised not to leave your submission to the last
minute.

If you think there is any information missing or any error in any question, then you
should indicate this but proceed to answer the question stating any assumptions you
have made.

The assessment has been designed with a duration of 6 hours to provide a more
flexible window in which to complete the assessment and to appropriately test the
course learning outcomes. As an open-book exam, the expected amount of effort
required to complete all questions and upload your answers during this window is no
more than 3 hours and 15 minutes (inclusive of 15 minutes reading time). Organise
your time well.

You are assured that there will be no benefit in you going beyond the expected 3 hours
and 15 minutes of effort. Your assessment has been carefully designed to help you
show what you have learned in the hours allocated.

This is an open-book assessment and as such you may have access to additional
materials including but not limited to subject guides and any recommended reading. But
the work you submit is expected to be 100% your own. Therefore, unless instructed
otherwise, you must not collaborate or confer with anyone during the assessment. The
University of London will carry out checks to ensure the academic integrity of your work.
Many students that break the University of London’s assessment regulations did not
intend to cheat but did not properly understand the University of London’s regulations
on referencing and plagiarism. The University of London considers all forms of
plagiarism, whether deliberate or otherwise, a very serious matter and can apply severe
penalties that might impact on your award.

The University of London 2020-21 Procedure for the Consideration of Allegations of

Assessment Offences is available online at:

Assessment Offence Procedures - University of London

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1 “Luxurycare Ltd” is a small company, run by two sisters Helen and Jo, which makes two
hand cream products, hand cream and soft lotion aimed at the beauty salon market.
The production is automated and a JIT system is used, so there is no inventory of raw
materials or finished products. The production is monitored for quality throughout and
output per kilo jar is counted each week.
At present the company counts the quantity of 1 kilo jars it produces during the week
and lists the cost of ingredients for that week to calculate a cost per jar each week. The
company makes no effort to distinguish how much of the ingredients are used for each
product.

The recipe for the products requires the following ingredients per kilo of output:

Ingredient Hand cream Soft lotion Standard Price per kg

kg kg £
Water 0.3 0.25 0
Emulsifying wax 0.4 0 0.5
Shea butter 0 0.5 0.8
Olive oil 0.3 0.3 0.3
Essential oils 0.1 0.05 1.0
Total kg 1.1 1.1

For calculation purposes water should be ignored as it is free to use.

The budgeted and actual production for week ending April 30 th was:
Hand cream 4,000 kilos
Soft lotion 6,000 kilos

Ingredients bought and used:

Actual Usage Actual cost
kg £
Emulsifying wax 1,580 805
Shea butter 3,110 2,460
Olive oil 3,240 980
Essential oils 660 600

Required:

a) Calculate the price and quantity variances for each ingredient. (8 marks)

b) Calculate the mix and yield variances for the week. (4 marks)

c) Explain the results you have provided in parts a) & b) in a way that helps Helen and
Jo to be able to run their business better. (4 marks)

d) Explain to Helen and Jo how they could use additional records and analysis to
obtain more information for monitoring and managing their costs and efficiency in
order to run their operation better. (4 marks)

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2. Electroboom Ltd produces and sells the ELB speaker with three models in the range,
the ELB50, ELB100 and ELB150. In the UK Electroboom Ltd sells via its own stores
located in all major cities, as well as to the electronics superstore “Tech World”. To
encourage “Tech World” to stock the speakers a substantial trade discount has been
agreed.
In addition, Electroboom Ltd sells the speakers directly to customers online of which
75% of these sales relate to the UK with the remainder sold overseas.

The latest income statements for Electroboom Ltd are detailed below.

ELB50 ELB100 ELB15 Total

0
£’000 £’000 £’000 £’000
Sales Revenue 3,474 5,790 2,316 11,580
Variable Manufacturing Costs 1,060 1,810 2,444 5,314
Trade Discounts 50 50 50 150
Salesforce commission costs 43 72 29 144
Contribution 2,321 3,858 (207) 5,972
Fixed manufacturing costs 370 604 764 1,738
Sales and marketing costs 464
Administration costs 370
Net profit 1,951 3,254 (971) 3,400

Electroboom Ltd want to understand the profitability of their products when sold via the
different routes to market, particularly as the ELB150 has a negative contribution and
have provided the following information relating to sales:
i) 30% of the total company’s sales relate to the ELB50, 50% to the ELB100
with the balance relating to the ELB150.
ii) The company’s own stores account for 60% of the total sales revenue and
these are split between the ELB50, ELB100 and the ELB150 in the
proportions 2:5:2.
iii) Tech World are a growing source of income and now account for 25% of the
total sales revenue. They sell £1,463,200 of the ELB50, and £1,200,200 of
the ELB10. The balance of their sales relates to the ELB150.
iv) The online UK sales are split between ELB50, ELB100 and ELB150 in the
same breakdown as seen in their own stores.
v) The balance of sales by product relates to the online overseas customers.
In addition:
vi) The price of each product is the same for all customers.
vii) Variable costs can be allocated to products in the same percentage per
product as shown in the income statement.
viii) Sales commission is 1.25% of selling price.
ix) Fixed manufacturing costs should be allocated to customers based on sales
value of each product.
x) Sales and marketing costs as well as administration costs should be
allocated to Home Stores, Tech World, UK online and Overseas online in the
proportion 3:1:2:1.

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Question continues on next page

2. continued

Required:

a) Prepare a detailed customer profitability analysis for Electroboom Ltd by

customer group.
(14 marks)

b) Analyse the results provided for Electroboom Ltd as well as your own results
calculated in part a). Include any advice that you think might be important for
Electroboom Ltd to consider. (6 marks)

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3. Raj and Sons Ltd. manufacture three products, the Dubble, Grubble and Mubble with
the following selling prices and costs:
Dubble Grubble Mubble
£ £ £
Selling price per unit 70 60 110
Variable cost per unit 28 24 60
Contribution per unit 42 36 50

Joint fixed costs per day £180

Production is restricted by limited supplies of the three materials used in the following
ways:

Kg per unit required Total kg

Materials Dubble Grubble Mubble available per
day
P 15 15 37.5 300
Q 20 24 30 320
R 3 6 5 80

The maximum demand per day: Dubble: 6 units

Grubble: 10 units
Mubble: 12 units

Accepting the material shortages, the finance director wishes production and sales to
be at the level which maximises net income.

Required:

a) Given the material constraints, calculate the optimum production plan sold and the
net income which can be achieved assuming a policy of net income maximisation.

You should use the linear programming graphical approach where necessary.
(12 marks)

b i) Raj and Sons Ltd cannot expand due to the limited materials. They are exploring
whether another supplier could provide more of one of the materials at the same
price as they currently pay. There is only room in their premises for more of one
material. Using the information from the graph, identify the one material that the
company should try to source from elsewhere in order to expand production and
earn more net income.
(1 mark)

ii) If the constraint for that material were lifted, and cost of the ingredients remains the
same, calculate how much more net income could be made. (3 marks)

c) Identify the types of industry which are most likely to use linear programming on a
regular basis and briefly explain when it is used. (4 marks)

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4. You have recently been appointed as management accountant to Beacon Ltd.
The company manufactures three types of laptops. The company currently absorbs
overheads on the basis of machine hours.

The following details relate to the three products for the production month of June 2021.
Product Dv1 Dv2 Dv3
Output in units 1,200 1,000 1,200
Total direct material cost £48,000 £50,000 £72,000
Total direct labour cost £33,600 £21,000 £25,200
Machine hours per unit 8 6 6

The total production overheads for the month were £260,000. The calculation per
product using absorption costing is:

Dv1 Dv2 Dv3

£ £ £
Material 48,000 50,000 72,000
Labour 33,600 21,000 25,200
Overhead * 109,440 68,400 82,080
Total cost 191,040 139,400 179,280
Cost per 159.20 139.40 149.40
unit
260,000.0
*OAR Total production overheads 0 = 11.40 per machine hour
Total Machine Hours 22,800.00

You are considering the introduction activity based costing and the following analysis
has been conducted:

Each product passes through two machines. The time on each machine is detailed
below:
Dv1 Dv2 Dv3
Minute Minutes Minutes
s
Machine X 290 280 200
Machine Y 190 80 160
The Total minutes 480 360 360 production overheads are
already captured by each cost
centre. An analysis of the £260,000 by the percentage attributable to each department
is detailed below. You determine the associated cost drivers for each department and
their use by each product, which are also included in the tables below.

Cost type Percentage of Cost Driver

Total
Overhead Cost (%)
Machine X 32 Machine time
Machine Y 44 Machine time
Set up 10 Number of set ups
Quality Inspection 14 Number of inspections
Total 100

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Question continues on next page
4. Continued

The activity level for set ups and inspections for each product is as follows:

Dv1 Dv2 Dv3 Total

Number of set ups 9,60 8,400 3,800 21,800
0
Number of inspections 2,20 3,300 1,300 6,800
0

Required:

a) Calculate the cost per unit of each product using Activity-Based Costing.
(10 marks)

b) In addition, given that Beacon Ltd aim to achieve a 15% sales margin, calculate
the selling prices per unit using both the traditional and ABC costing systems and
comment on the results.
(3 marks)

c) The company has an opportunity to lease a machine (machine A) that would

serve the same purpose as Machine X. Machine X was originally purchased for
£2,000,000 five and a half years ago. At the time of purchase the assumption was
that the machine had an estimated useful life of six years with nil residual value
and would be depreciated using the straight line method. Depreciation is charged
monthly. The machine could be sold for £200,000. The lease costs of the new
machine would be £40,000 per month. Recalculate the cost per unit of each
product assuming that the company decides to lease machine X. Assume the
number of units sold, the selling price per unit calculated using ABC and the time
taken on each machine remain the same.
(4 marks)

d) Analyse the impact on Beacon Ltd of leasing machine A.

(3 marks)

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5. Bazaar plc has a range of products which are in regular demand, but it needs to introduce
new products from time to time to maintain profitability. The following shows the forecast
Income statement for the next 6 years before introducing new products.

Bazaar plc Forecast Income statement

2022 2023 2024 2025 2026 2027
£M £M £M £M £M £
Sales 600 570 540 450 380 300
Cost of sales 300 285 270 225 190 150
Contribution 300 285 270 225 190 150
Marketing 12 13.5 12 9 8 6
Fixed expenses 120 105 90 90 90 90
Net Income 168 166.5 168 126 92 54

The company has an active Research and Development department and has one product
ready for launch (the Spellbinder) in 2022 and another (The Wizard) being prepared for
launch in 2024.

Development Costs relating to all products, whether they proceed to market or not are
charged in the year incurred and included in fixed expenses. But each successful product
is allocated a share of the R & D budget. Disposal costs are charged in the year of
disposal.

The products have the following estimates:

Spellbinder Wizard
Allocated R & D £105 Million £30M
Estimated sales price per unit
2022 £120
2023 £100
2024 £85 £90
2025 £60 £75
2026 £75
2027 £70

Estimated variable costs £45 per unit £25 per unit

Marketing 2% sales value 2% sales value

Estimated unit sales 2022 800,000 units

2023 1,200,000 units
2024 600,000 units
2025 300,000 units

Disposal costs end of year 2025 £300.000 No disposal costs

The lifecycle revenue less costs is expected to provide at least 10% return on sales taking
the sales of the life cycle as a whole.

Question continues on next page

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5. Continued

Required:

a) Define lifecycle costing and explain how the information provided by the method is used.
(4 marks)

b i) Calculate the year by year lifecycle of the Spellbinder product and comment on your
calculations. (5 marks)

ii) Show the net income for each year assuming that the Spellbinder product goes ahead
(you are not required to show all the changes in each line item).
(3 marks)

c i) Assuming that Wizard has a four year life and Bazaar plc wishes to maintain the
same profit as the year 2022 and assume that the Spellbinder product goes ahead.
Using the information in the table above, show the level of sales units which Wizard
must achieve in each specific year to meet the target.
(5 marks)

ii) Comment on your calculations and advise Bazaar plc concerning their future product
developments. (3 marks)
.

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6. Kingdom Products plc has several divisions making and selling products in different
markets.

Divisions act autonomously on a day to day basis. They are appraised, and bonuses
awarded based on Return on Investment (ROI) calculated on assets at the end of the
year.
Management reviews the future of the company by requiring each division to provide 3
year future plans. Divisions are asked to provide details of expected Net Income before
Interest and tax and the Net Assets at the end of the year. Management are concerned
about the poor forecast from Minehead Division as follows.

Minehead Division - 3 year plan Year1 Year 2 Year 3

£M £M £M
Profit before interest and tax 6.0 5.4 5.0
Asset base at end of the year 45 48 54

Management have requested the submissions of plans to improve ROI which will pay for
themselves within 3 years. The plans are required to earn a positive Net Present Value
(NPV) based on a discount rate of 10%. (see discount table below).

The following two alternative plans have been put forward:

Minehead Division - alternatives Year1 Year 2 Year 3
£M £M £M
a) Purchase and install a special purpose
machine with a life of 3 years, to improve
efficiency
Asset purchase -1.2
Efficiency improvement +0.1 +0.6 +1.8

b) increase advertising to improve brand

awareness
Initial outlay -0.6
Benefit +0.2 +0.6 +1.0

The purchase of the machine or the increased advertising will occur at the beginning of
year 1 and benefits will be experienced throughout each year.

Assume the machine is purchased at the beginning of year 1 and depreciated using the
straight-line depreciation method.

Required
a) Calculate the NPV of each of the above projects and recommend which is preferred.
(3 marks)

b) i) Calculate the ROI for the existing forecast performance of Minehead Division and
using the existing and new Investment and net income calculate the ROI for
Minehead Division for each of the alternative plans. (3 marks)

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Question continues on next page

6 continued

ii) Bonuses each year are calculated partly based on the percentage Return on
Investment (ROI) above 10%. Nothing is paid (or charged) if the percentage ROI is
below 10%. The bonus is calculated as £5,000 if 10% ROI is achieved. Of the
percentage earned above 10%, a bonus of £1,000 multiplied by the % above 10%
is also awarded. Calculate the total bonus for the original plan and the proposed
plans. Comment on the results and indicate which proposal the manager of
Minehead would prefer.
(3 marks)

c) i) Since the bonus system is based on exceeding 10% Return on Investment,

Kingdom Products plc is considering changing their Divisional performance to
Residual Income (RI) instead for their appraisal and bonus awards. Using a cost of
capital of 10%, calculate the Residual Income for the original plan and the two
proposed plans.
(4 marks)

ii) Assuming that the bonus would be paid if a positive Residual Income is earned
and nothing would be paid if the Residual Income is negative. Indicate how a
bonus should be awarded based on the level of RI earned. The method should as
far as possible, compensate managers to the same extent as the previous
scheme.
(3 marks)

d) Since, in most large organisations, the decisions on major investments are made
centrally, not by Divisional Managers, discuss ways in which the levels of ROI or
RI are relevant to a Divisional Manager’s decision making. Briefly discuss whether
different measures of Divisional performance should be adopted. (4 marks)

Discount table 10%

Year
0 1.00
1 0.909
2 0.826
3 0.751

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Section B Answer ONE question from this section.

7. Describe the following pricing methods. Identify the type of company which would use
each method and explain why the method is suitable for that type of company:

Note, this question is not about transfer pricing

a) Market based pricing

b) Full cost plus pricing
c) Differential pricing
d) Peak load pricing
e) Marginal cost pricing

(5 marks per method)

Note: only the first four answers provided will be marked, if you answer more you
should indicate which answers you would like to be marked by crossing out
those you do not wish to be marked. The word limit for each answer is 200 words.

8. (Note: This question has a choice of two topics; only one should to be answered)

EITHER

a) Fresh Cuts is a chain of hairdressers, which has its salons in cities in the north of
England. It started as a single salon in 1980, and its original owner Aurora Rossi was
both a good hairdresser and a good businessperson, and by 2010 the single salon had
been expanded to a chain of 50 salons. However, in 2010 Aurora retired and handed
her business over to her daughter Giulia. Unfortunately, Giulia was not such a good
businessperson and by 2015 the chain was in major financial trouble. In 2015, Giulia
sold the chain to Cuts for Style a large chain of salons based largely in the south east of
the UK. Cuts for Style saw this acquisition as a way of entering the northern market.
Cuts for Style has a good brand name in its existing markets, but is not well known in
the north. Its prices are about 25% higher that Fresh Cuts. Because of these
differences, the owners of Cuts for Style decided to set up Fresh Cuts as a separate
division and appointed Prisha Singh to manage the division. Prisha has been tasked
with improving the financial performance of the Fresh Cuts division, but has not been
given any finance for new capital investment. If she wishes to open any new salons,
she will need to do this from the operating cash flows of Fresh Cuts division.
Before Prisha can improve the financial performance of the Fresh Cuts division, she
needs to evaluate the results of the division so that she can uncover the key issues.
Prisha is considering using Value Chain Analysis.

Question continues on next page

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8 a) continued

Required:
a) Analyse Value Chain Analysis as a suitable technique to assist Prisha to
evaluate the results of the Fresh Cuts division.
(8 marks)
b) Identify the main components of the value chain for Fresh Cuts.
(8 marks)
c) Consider how the Value Chain may be used to improve the results of the
division.
(4 marks)
Note: Examiners value the use of your own words. The word limit is 800 words.
OR

b) Cost management is an important part of ensuring that an organization runs a tight

ship:

Bhimani et al suggest that, “If an organization wants to manage its costs, it must
make the cost information accessible to managers who can understand this
information irrespective of their functional training. This is because it takes more
than cost information to manage costs. What is essential for any firm that
contemplates altering its management accounting information is that the change
should increase managerial insight, learning and adaptation.”

(Bhimani A., Horngren C.T., Datar S.M, Rajan M.V. “Management and Cost
Accounting, 7th Edition, 2019, p. 717)

Discuss the above statement, giving examples of how obtaining information provided
by managers to accompanying accounting data could help both accountants and
managers understand better how costs could be managed. 20 marks

Note: Examiners value the use of your own words. The word limit is 800 words.

END OF PAPER

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