Faculty of Business and Law

BA Business Management and BA Accounting and Financial

Management

Module APC 309 Strategic Management Accounting

Seminar Activity Pack (Term 1 2015/16)

Prepared by Francis Kuagbela

Module Leader.

1
Introduction to APC 309 Strategic Management Accounting

Firstly, welcome to the APC 309 Strategic Management Accounting Module. Our team hopes you
find the module interesting, challenging, and stimulating and would actively promote that all
students participate within all Seminars, and ask any relevant questions when necessary.

XYZ Plc. is a large multinational corporation comprising of a variety of different companies,

operating within a number of different industries. The business has been operating relatively
successfully, but due to the recent resignation of a Senior Management Accountant, a number of
management accounting issues have subsequently been neglected. The senior directors of XYZ
Plc. want to rectify this issue as soon as possible to ensure the management accounting function
is operating correctly and efficiently. The directors have prepared a report (this Seminar activity
pack) highlighting nine key areas of concern within the business that need to be addressed with
immediate effect. Over the following 9 weeks a number of case studies, reports, and questions
will be analysed and investigated, to gain further understanding of the key concerns of the
directors associated with the Strategic Management Accounting function of XYZ Plc.

Over the next 9 weeks there may be some additional activities/ issues introduced into the
Seminars for you to resolve.

Seminar Activity Plan

Week beginning Activity to be undertaken in the Seminar

Monday
25th January
Seminar 1 Scotia Health Consultants Ltd
1st February Seminar 2 JDR Ltd.
8th February Seminar 3 Trimake Ltd
15th February Seminar 4 BIL Motor Components Ltd.
22nd February Seminar 5 D Ltd.
29th February Seminar 6 CJ Ltd
7th March Seminar 7 XYZ Plc., JB Ltd
14th March Seminar 8 Boswell Enterprises Ltd.
21st March Seminar 9 B Ltd.
28th March Revision

In advance of each Seminar, students are asked to read through the appropriate activity and start
to prepare the answers. Please bring your answers to the Seminar.

Information contained in the relevant unit of the module pack and the relevant chapter of the
core text book will help you formulate your answer (please see next page for details).

2
APC309 Strategic Management Accounting

Weekly Plan of Lectures (which precede relevant Seminars)

Week Number and Title of the Unit in the The chapter(s) in the core textbook
Number: Module Study Pack covered: (Drury 5th edition) which link in with the
unit number and title in the left hand
column is:
1 1. An Introduction to Strategic 14 & 15
Management Accounting
2 2. Relevant Costs for Decision 4
Making
3 3. Activity Based Costing 8
4 4. Pricing Decisions 5
5 5. Budgets 9
6 6. Management Control systems 10 & 12
and Performance management
7 7. Standard Costing and Variance 11
Analysis
8 8. Working Capital Management See P Atrill and E McLaney
(Sunspace resources list) Chapter 11
9 9. Transfer Pricing 13

3
Seminar 1 - Financial and Non-Financial Performance Measures Scotia Health 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.

4
Appendix

Statistics relating to the year ended 31 May

Budget Actual
Total Client Enquiries:
New Business 50 000 80 000
Repeat Business 30 000 20 000

Number of Client Consultations:

New Business 15 000 20 000
Repeat Business 12 000 10 000

Mix of Client Consultations:

Medical 6 000 5 500 (Note 1)
Dietary 12 000 10 000
Fitness 9 000 14 500

Number of Consultants Employed:

Medical 6 4 (Note 1)
Dietary 12 12
Fitness 9 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.

5
Seminar 2- Limiting Key Factors-Measuring Relevant Cost and Revenues-

JDR plc manufactures four products using the same machinery. The following details relate to its
products:

Product A Product B Product C Product D

per unit per unit per unit per unit
Selling price 28 30 45 42
Direct material 5 6 8 6
Direct labour 4 4 8 8
Variable overhead 3 3 6 6
Fixed overhead * 8 8 16 16
Profit 8 9 7 6
Labour hours 1 1 2 2
Machine hours 4 3 4 5
Units Units Units Units
Maximum demand per week 200 180 250 100

*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 plc and prepare a profit
statement showing the profit your plan will yield.

(b) The marketing director of JDR plc is concerned at the companys 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.

6
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

Hours per Unit
Labour Hours Machine Unit Materials per Unit Volume Units
Product X 0.5 1.5 20 750
Product Y 1.5 1 12 1250
Product Z 1 3 25 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 Number of Number of Inspections
movement of
materials
Product X 75 12 150
Product Y 115 21 180
Product Z 480 87 670
Totals 670 120 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)

7
Seminar 4 Minimum selling price and optimum price from price-demand 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 TD463s standard costs are as follows:

Component TD463 Batch size 200 units

Machine Group Machine Group Machine Group Assembly ()
1 () 7 () 29 ()
Materials (per Unit) 26.00 17.00 0 3.00
Labour (per Unit) 2.00 1.60 0.75 1.20
Variable Overheads 0.65 0.72 0.80 0.36
(per Unit)
Fixed Overheads (per 3.00 2.50 1.50 0.84
Unit)
Total 31.65 21.82 3.05 5.40
Setting-up costs per 10.00 6.00 4.00 0.00
batch of 200 Units

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:

Standard Cost per Box ()

Variable Cost 6.20
Fixed Cost 1.60
Total 7.80

Market research forecast of demand:

Selling Price 13 12 11 10 9
()
Demand 5,000 6,000 7,200 11,200 13,400
(Boxes)

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.

8
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:

Sales Volume
Quarter 1 40 000
Quarter 2 50 000
Quarter 3 30 000
Quarter 4 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 8.00 each

Component T 5.00 each
Shell S 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 quarters 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.

9
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.

10
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 Limiteds 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 60 60 60
Net cash inflow year 1 21 25 10
Net cash inflow year 2 21 20 20
Net cash inflow year 3 21 20 30
Net cash inflow year 4 21 15 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.

11
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
Product J 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 442 650
Direct labour: 17 800 hours 223 000
Variable production overhead incurred 58 800
Fixed production overhead incurred 104 000
828 450

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.

12
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.

13
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:

Wholesale Retail
Variable cost per tonne 70 60
Fixed cost per month 100,000 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.

14