Describe any non-financial factors which need to be considered before finally deciding to abandon such a research project

Discuss the use of breakeven analysis to a company such as Digipics

 

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Section A (attempt at least ONE question from this section but no more than TWO)

1. Total Quality Management (TQM) is seen to be at the forefront of modern business success where the elimination of waste and error has become a primary objective of most business organisations.

Evaluate the ways by which management accounting could assist in this process with special emphasis on the “Cost of Quality” issues. The use of numerical examples is expected within your discussion.

 

2. The need to link financial and non-financial performance measures …….provided the impetus for Kaplan and Norton (1992) to devise the “Balanced Scorecard”. (Drury 1998)

Evaluate the statement and appraise the effectiveness of the Balanced Scorecard with specific examples of possible measures for each of the four perspectives for an organisation of your choice.

 

3. “…the complexity of the operations of large companies….often sees separate, self-contained segments or divisions being formed but this often leads to its own dangers”. (Drury 1998)

Evaluate this statement with reference to the benefits of divisionalisation, its dangers and briefly appraise the types of performance measures specifically designed for divisions.

 

Section B (attempt at least ONE question from this section but no more than TWO)

4. Digipics Ltd manufactures digital photo frames for wholesale purposes, selling to retailers at a price of £40 per frame. The retailers sell these frames onto end consumers at a price of £64 each.

There are many manufacturers in this sector and one of the retailers who purchases from Digipics has demanded a discount off the existing price, threatening to take its business to another supplier if this demand is not met. The directors of Digipics are worried that they may have to offer discounts to all customers to keep their business, and so have decided to employ the services of a market research firm.

The market research consultants have charged a fee of £8,000 for their work. They have suggested that Digipics needs to reduce the price that it charges to retailers by 16% to retain its existing customers. They have also advised the company, however, that they may be able to obtain a reduction in variable costs by stronger negotiations with their suppliers. An estimated saving in material cost per frame is 10%.

 

Digipics current costs are as follows:

£/frame

Direct materials                6.40

Direct labour                     4.00

Total variable costs          10.40

Fixed cost                           19.20

(based on budgeted

annual output of

320,000 frames)

Total cost                             29.60

 

Required:

a) Based on Digipics current selling price and costs (ignoring the consultancy fee), calculate:

i) The breakeven point in units (frames) and revenue,

ii) Digipics’ margin of safety, expressed as a percentage.

 

b) Construct a profit/volume chart for Digipics, based on current selling price and costs. Show clearly profit and loss on this chart.

 

c) Digipics takes the advice of the consultants, incurs the consultancy fee, reduces its selling prices and negotiates improved material costs from its suppliers. Calculate the following:

i) The revised breakeven point in units (frames),

ii) The revised margin of safety, expressed as a percentage.

 

d) Discuss the use of breakeven analysis to a company such as Digipics. Your discussion should include the limitations of this analysis and refer to the specific situation of Digipics.

 

e) Digipics has estimated a budgeted output of 320,000 frames. During the course of the next year this budgeted output will be compared with actual results following a feedback control model. Using a diagram if necessary, describe how a feedback control system works and outline any problems with such a system.

 

5. Arctic Laboratories is a scientific research company undertaking exploration projects for clients interested in natural resource extraction around the North Pole.

A research project undertaken on behalf of a client has already incurred costs of £320,000. It is estimated that a further £448,000 will be charged to the project before its completion in one year’s time.

You have been asked to review the project because the project’s total estimated costs of £768,000 exceed the contracted value of £560,000 for the completed research (to be received upon completion).

If the project is abandoned the clients will receive £240,000 as compensation. You have been provided with the following information regarding the further costs:

£                            Notes

Materials                             160,000                          1

Staff costs                             96,000                           2

Overheads                           192,000                          3, 4

 

In addition to the plant and equipment costs, there is an allocation of general overheads incurred by the business based on 80% of material costs.

Notes:

i) Materials: Contracts for materials have already been exchanged for the purchase of £160,000 of materials. The material is highly specialised and has no alternative use on other projects. It is a toxic substance, and so if not used on this project it would have to be disposed of, incurring costs of £24,000.

ii) Staffing: Two highly skilled researchers working on this project each receive a salary of £24,000 per annum. If the project is abandoned, the researchers would be declared redundant, each receiving £16,000 in compensation. The other £48,000 of staff costs is an allocation of part of the salary of a senior research scientist who is in overall charge of several projects.

iii) Overheads: Plant and equipment costing £128,000 was bought at the commencement of the project, and a second year’s depreciation charge of £64,000 is included in the estimated costs.

iv) Overheads: The plant and equipment is highly specialised and has no other use. If it were scrapped now it is estimated that Arctic Laboratories would receive £16,000 for it, falling to £6,400 if scrapped in one year’s time.

 

Required:

a) Using an opportunity cost approach, recommend on financial grounds, whether the project should be continued or abandoned.

Your calculations must be supported by clear workings and explanations of the reasons why a particular figure is included or excluded, and of any assumptions your make.

b) Describe any non-financial factors which need to be considered before finally deciding to abandon such a research project.

c) Comment on the use of opportunity cost for decision making purposes

 

6. a) Explain the factors a management accountant should consider when deciding whether or not to undertake a variance investigation in a standard costing system.

 

b) Describe the use of FOUR types of cost investigation model that may be helpful in carrying out variance investigations

 

c) Discuss the problems concerning the control of operations that a manufacturing company may experience in using a standard costing system during periods of rapid inflation, and suggest how the company could try to overcome these problems.

 

Section C (attempt at least ONE question from this section but no more than TWO)

7.Drucker (1974) proposes that constant communication between managers and subordinates is essential to properly motivate a team of workers.

Appraise THREE theories of motivation which you feel are appropriate to a public sector organisation and evaluate how a management accountant , by the use of various performance measurement approaches, can assist the manager to motivate his/her subordinates.

 

8. The service sector raises a series of problems for effective performance measurement.

Evaluate the specific problems for performance measurement within the service sector and review how the approach by Fitzgerald can be used to address the problems.

 

9. The ability to predict cost behaviour is often seen as an art rather than a science, despite its importance in strategic management.

Evaluate THREE commonly used methods to predict future costs and critically review each to identify the strengths and weaknesses of each. The use of simple numerical examples is expected within your discussion.

 

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