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Assignment Briefs 12-16-2022

Identify the transfer price if marginal costing is used and explain why the manager of division Alpha may consider it unfair and suggest any amendments that may be required to make the transfer price a fair price for division Alpha

MSc Accounting & Finance

Coursework

ACC7043 ADVANCED MANAGEMENT ACCOUNTING

MODULE TITLE: ADVANCED MANAGEMENT ACCOUNTING

MODULE CODE: ACC7043

Assessment Method:   Individual Online coursework with 100% weight.

Workload restrictionWhere relevant, e.g. heavily discursive assessments, the  maximum word count is 2000 words +/- 10%

Instructions to Candidates:

  • Answer all questions in section A and all questions in Section B
  • Answer all questions in the assessment paper as indicated
  • Section A is worth a total of 40 marks. The marks per question in section A are clearly indicated.
  • Section B is worth a total of 60 marks
  • The use of non-programmable calculators is permitted.
  • Candidates should ensure that all workings are shown clearly.

 

Materials Provided:

  • Present value and annuity tables are included for reference.
  • IRR Formate.

 

Instructions for submitting assessment:

  • In order to complete the Coursework satisfactory you will be required to research/review the appropriate academic materials/journals etc. relating to the areas that you consider to be important. The following link will inform you about the layout of referencing: Harvard referencing
  • The coursework must be completed in WORD, and correctly referenced so sources and any technical information can be verified as required. If you wish you can undertake calculations in Excel and copy and paste into the exam paper or you may insert an Excel spreadsheet into the assessment (coursework paper).
  • Your answers should be entered into the assessment (coursework) paper in the space indicated. Note the size of the answer space is NOT indicative of the length of the answer required, you can expand/reduce the space available as necessary
  • You MUST show all your workings as marks are allocated to the workings.
  • The assignment requires a report format, which implies the use of formal business English.
  • You should use Font Arial 11 and 1.5 line spacing.

 

 

 

 

 

 

 

 

Present Value Table

 

 

 

 

 

Present value of 1 i.e. (1 + r)n

 

 

 

 

 

 

 

 

Where

r = discount rate

 

 

 

 

 

 

 

 

 

 

n = number of periods until payment

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate (r)

 

 

 

 

 

Periods

 

 

 

 

 

 

 

 

 

 

 

(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

 

 

 

 

 

 

 

 

 

 

 

 

 

1

0·990

0·980

0·971

0·962

0·952

0·943

0·935

0·926

0·917

0·909

1

2

0·980

0·961

0·943

0·925

0·907

0·890

0·873

0·857

0·842

0·826

2

3

0·971

0·942

0·915

0·889

0·864

0·840

0·816

0·794

0·772

0·751

3

4

0·961

0·924

0·888

0·855

0·823

0·792

0·763

0·735

0·708

0·683

4

5

0·951

0·906

0·863

0·822

0·784

0·747

0·713

0·681

0·650

0·621

5

6

0·942

0·888

0·837

0·790

0·746

0·705

0·666

0·630

0·596

0·564

6

7

0·933

0·871

0·813

0·760

0·711

0·665

0·623

0·583

0·547

0·513

7

8

0·923

0·853

0·789

0·731

0·677

0·627

0·582

0·540

0·502

0·467

8

9

0·914

0·837

0·766

0·703

0·645

0·592

0·544

0·500

0·460

0·424

9

10

0·905

0·820

0·744

0·676

0·614

0·558

0·508

0·463

0·422

0·386

10

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

1

0·901

0·893

0·885

0·877

0·870

0·862

0·855

0·847

0·840

0·833

1

2

0·812

0·797

0·783

0·769

0·756

0·743

0·731

0·718

0·706

0·694

2

3

0·731

0·712

0·693

0·675

0·658

0·641

0·624

0·609

0·593

0·579

3

4

0·659

0·636

0·613

0·592

0·572

0·552

0·534

0·516

0·499

0·482

4

5

0·593

0·567

0·543

0·519

0·497

0·476

0·456

0·437

0·419

0·402

5

6

0·535

0·507

0·480

0·456

0·432

0·410

0·390

0·370

0·352

0·335

6

7

0·482

0·452

0·425

0·400

0·376

0·354

0·333

0·314

0·296

0·279

7

8

0·434

0·404

0·376

0·351

0·327

0·305

0·285

0·266

0·249

0·233

8

9

0·391

0·361

0·333

0·308

0·284

0·263

0·243

0·225

0·209

0·194

9

10

0·352

0·322

0·295

0·270

0·247

0·227

0·208

0·191

0·176

0·162

10

 

Annuity  Table

Present value of an annuity of 1 i.e. 1 – (1 + r)n

————––

r

 

Where

r = discount rate

 

 

 

 

 

 

 

 

 

 

n = number of periods

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate (r)

 

 

 

 

 

Periods

 

 

 

 

 

 

 

 

 

 

 

(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

 

 

 

 

 

 

 

 

 

 

 

 

 

1

0·990

0·980

0·971

0·962

0·952

0·943

0·935

0·926

0·917

0·909

1

2

1·970

1·942

1·913

1·886

1·859

1·833

1·808

1·783

1·759

1·736

2

3

2·941

2·884

2·829

2·775

2·723

2·673

2·624

2·577

2·531

2·487

3

4

3·902

3·808

3·717

3·630

3·546

3·465

3·387

3·312

3·240

3·170

4

5

4·853

4·713

4·580

4·452

4·329

4·212

4·100

3·993

3·890

3·791

5

6

5·795

5·601

5·417

5·242

5·076

4·917

4·767

4·623

4·486

4·355

6

7

6·728

6·472

6·230

6·002

5·786

5·582

5·389

5·206

5·033

4·868

7

8

7·652

7·325

7·020

6·733

6·463

6·210

5·971

5·747

5·535

5·335

8

9

8·566

8·162

7·786

7·435

7·108

6·802

6·515

6·247

5·995

5·759

9

10

9·471

8·983

8·530

8·111

7·722

7·360

7·024

6·710

6·418

6·145

10

(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

1

0·901

0·893

0·885

0·877

0·870

0·862

0·855

0·847

0·840

0·833

1

2

1·713

1·690

1·668

1·647

1·626

1·605

1·585

1·566

1·547

1·528

2

3

2·444

2·402

2·361

2·322

2·283

2·246

2·210

2·174

2·140

2·106

3

4

3·102

3·037

2·974

2·914

2·855

2·798

2·743

2·690

2·639

2·589

4

5

3·696

3·605

3·517

3·433

3·352

3·274

3·199

3·127

3·058

2·991

5

6

4·231

4·111

3·998

3·889

3·784

3·685

3·589

3·498

3·410

3·326

6

7

4·712

4·564

4·423

4·288

4·160

4·039

3·922

3·812

3·706

3·605

7

8

5·146

4·968

4·799

4·639

4·487

4·344

4·207

4·078

3·954

3·837

8

9

5·537

5·328

5·132

4·946

4·772

4·607

4·451

4·303

4·163

4·031

9

10

5·889

5·650

5·426

5·216

5·019

4·833

4·659

4·494

4·339

4·192

10

 

Formulae

Internal Rate of Return

SECTION A – ANSWER ALL QUESTIONS

 

Question 1 

SM Ltd has two divisions, Division Alpha and Division Gama. Division Alpha manufactures component A, of which variable cost is £20 per unit. The annual capacity of Division Alpha is 2000 units and are transferred all to division Gama. Division Gama incurs extra cost of £20 to transform component A into component C, which is sold to the external market for £70 each.  

Required:

I. Identify the transfer price if marginal costing is used and explain why the manager of division Alpha may consider it unfair and suggest any amendments that may be required to make the transfer price a fair price for division Alpha.

II. In the case that there is an external demand for 1000 units of component A at a market price of £40, what price could Division Alpha argue should be used as the transfer price and why? (7 marks)

ANSWER:

 

Question 2 

Ash Ltd. Currently manufacture 3 products, M, K and H. The relevant production information is as follows:

 

M

K

H

Production (units)

300 units

240 units

400 units

Batch size

30 units

20 units

50 units

Machine set-up per batch

2 set-ups

1 set-up

2 set-ups

Processing time per unit

1 minute

2 minutes

1.5 minutes

 

Fixed overhead costs amount to a total of £13,590 and have been analysed as follows:

Machine set up costs       £6000

Processing costs              £7590

 

Required:

Using Activity Based Costing, calculate the fixed overhead cost per unit of product K. (Total 6 marks)

ANSWER:

 

Question 3  

MCN is a manufacturing company and uses Return on Investment (ROI) to assess the performance of its divisional managers. Its current target of ROI is 12% which is equivalent to its cost of capital. One of MCN divisions is division C, which had achieved a ROI of 8% last year.

The purchase of new machine has been proposed by a member of staff working in division C. It is estimated that the new machine would generate a profit of 60,000 per anuum for an investment of 600,000. 

Required:

I.  Using ROI as the current method of performance assessment, advise whether the manager of Division C is likely to accept or reject purchase of the new machine. 

II. Will this decision be a benefit to or detrimental to the company?

III. Would the manager’s decision remain the same if the performance was assessed on Residue Income (RI). (7 marks)

ANSWER:

 

 

 

Question 4  XY Ltd are introducing a new smart watch onto the market. The watch provides new and innovative features which people are not familiar with yet. Meanwhile, XY Ltd does not expect competitors to introduce a similar product in the near future.

Required:

Advise XY Ltd, with reasoning, as to whether they should use market skimming or market penetration as their pricing strategy. (7 marks)

ANSWER

 

Question 5

At a selling price of £500, KLD can sell 2,000 units of its new product Z in one month. The demand for the product is expected to fall to 1600 units, if the selling price increases to £540. The variable cost of product Z is £230.

Required

Calculate the selling price and quantity that would maximise profits. (6 marks)

 

ANSWER:

 

 

Question 6

ABC is a manufacturing company. It is currently reviewing its performance in respect of quality costs. Extracts from the company’s records from each of the previous years are as follows:

 

2021

(£000)

2020

(£000)

Warranty repairs

1,700

3,500

Quality training

4,600

3,300

Inspection of raw materials

3,600

2,800

Reinspecting previously faulty products

4,200

8,500

Finished goods inspections

5,700

4,200

Scrap cost of internally detected faulty products

2,900

6,000

Preventative machine maintenance

6,400

5,000

Forgone contribution from loss of sales

   900

1,300

 

Required: 

I. Considering each of the two years, produce a cost of quality report using the four recognized headings.

II. Discuss the outcome of the report and show how the improvement/deterioration in ABC’s performance can affect the long-term reputation and financial outcomes of the company. (7 marks) (Total 40 marks)

ANSWER:

  

END OF SECTION A

 

SECTION B – ANSWER ALL QUESTIONS

Tudor Ltd are a very successful company that has been operating in Birmingham for a number of years. The company have been producing mainly designer shoes and sells throughout UK and Europe.

From its establishment, Tudor Ltd has dealt with XY company as the main supplier for the leather they use to produce their designer shoes. XY company is located in Scotland and is amongst the best raw and processed leather suppliers in the UK. However, XY company occasionally faces stockouts and when this occurs Tudor Ltd is forced to buy the leather from other suppliers at higher prices.

The Directors of Tudor Ltd have held their positions for several years and have contributed to the success of the company. During that time, they have being managing from the top down, being reluctant to involve or consult staff in any decisions.

The directors are now considering the production of safety boots, a shoe that has a protective reinforcement in the toe which protects the foot from falling objects or compression. Meanwhile, they intend to continue with XY company for supplying the leather they will use to produce the new boots.

The production of the safety boots requires Tudor to buy a new machine. The new machine requires an immediate investment of £200,000, while its useful life is expected to be 4 years. It is also expected that the machine can be sold for £15,000 at the end of its useful life.

The machine is expected to produce 5000 pairs of boots each year. The selling price and variable cost are expected to be £60 and £33 per pair of boots respectively. The fixed cost, comprising mainly of the maintenance cost is expected to be £40,000 per year. Considering this information and that Tudor Ltd uses a discount factor of 10%, a decision needs to be made whether to invest in this machine.   

Required:

a) Calculate and comment on the Net Present Value (NPV) of the project and the usefulness of NPV as an appraisal method. (8 marks)

ANSWER:

b) Define Big Data and discuss how it can be employed to enhance the appraisal of the new project (Investing in the machine) when NPV is used. (10 marks)

c) Evaluate the sensitivity of the project’s net present value to a change in following, then discuss the use of sensitivity analysis in the decision to invest in the machine and identifying any areas of concern.

                      I.  Sales price

                    II.  Variable cost

                   III  Fixed cost (10 marks)

ANSWER:

 

Prior to the investment progressing, further research has been undertaken and it has been identified that the market for the product is uncertain and is affected by the reaction from competitors. Given this uncertainty, there is a need for reconsidering the selling price. The research suggested three possible selling prices for the pair of boots and forecast profit for each price considering the different possible reactions from competitors. This information is presented as follows: 

Competitors reaction

Selling prices and forecast profit

£60

£57

£54

Strong

£50,000

£55,000

£65,000

Medium

£70,000

£77,000

£65,000

Weak

£95,000

£85,000

£65,000

Required:

d) Identify the expected selling price using the minimax regret method and discuss its effect on viability of the project considering the sensitivity of the project’s NPV to the change in the selling price. (10 marks)

 

ANSWER:

 

Recently, the Finance Director has attended a workshop about life-cycle and target costing and she suggested the use of these techniques before making the final decision about the project. So, the management accountant was asked to conduct further research and provide the additional information required for applying these techniques. Doing so, the management accountant has come with the following information:

Forecasted number of pairs of boots to be made and sold:

Year 1             4,500

Year 2             4,750

Year 3             5,000

The suggested selling price is to be £60 per pair of boots in the first year, rising in line with inflation which is currently expected to be 4% per annum. 

Variable production costs are expected to be £33 per pair of boots in year 1 and this consists of £20 cost of material, £8 cost of labour and £5 other variable costs, however, these types of costs are expected to increase by 4%, 3% and 2% respectively per annum.

For the first year, fixed costs of maintenance are correctly forecast at £40,000 and other production overheads are expected to be £35,000 with both these costs being subject to inflation at 2% per annum.

The marketing cost is estimated to be £10,000 in the first year, falling by £3,000 per annum in each of the next 2 years.

The profit margin on safety boot is at 30% and Tudor Ltd would expect the profit margin to be achieved by the third year of production 

Required:

e) Using the additional information provided by the accountant only, calculate the cost gap per unit for each of the first three years of the products life and discuss the implication of this on the ability to achieve the required profit margin of 30%. (7 marks)

f) Define the Business Process Re-engineering and explain how it can help Tudor Ltd with cost reduction and meeting the target cost relating to the new production under consideration. (8 marks)

g) If a decision was made to proceed with the product, advise how Kaizen costing would help to achieve the required 30% margin (7 marks) (Total 60 marks)

ANSWER:

 

 

 

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