Management Accounting & Applied

Finance (2) 2014 (MAAF)

Supplementary
exam
17 November 2014

Time allowed Three hours

(plus 15 minutes reading time)
This open-book exam contains four (4) short-answer questions
toa total of 80 marks

This paper contains 12 pages (including this page) (over to page 2)

The Institute of Chartered Accountants in Australia, 2014

Chartered Accountants Program

Management Accounting & Applied Finance

Question 1 (20 marks)

Background information
Handie Hardware Limited
Handie Hardware Limited (HH) is owned by James Handie and his family. HH currently
owns and operates five hardware and building superstores in western Sydney (Blacktown,
Campbelltown, Liverpool, Parramatta and Penrith). HH was started by Jamess father in 1963,
with a view to providing hardware to tradespeople (builders, plumbers, electricians, etc.). Since
opening, the business has grown steadily and, subsequent to 2010, it has also sold directly to the
public (consumer sales).
HH categorises its products into seven major categories (timber, tools and equipment, building
supplies, gardening tools, paint supplies and equipment, plumbing and other).

New business opportunity

The manager of the Penrith store has recently received some research data on residential
renovations. This data shows a high demand for a range of low-cost kitchens. From the research
data the manager estimates orders of 1,000 units per annum, with the expectation that kitchen
units can be delivered within 30 days of the order being placed. The kitchens would be supplied
by a local manufacturer (Kitsch Kitchens), and require on-site assembly by HH. While the
kitchens are manufactured locally, 85% of the components are sourced from China. This would
be the first time HH will have dealt with Kitsch Kitchens. It would also be the first time HH has
offered assembly services outside of its own premises.
The research data identifies a maximum selling price to the consumer from HH of $1,500 per
unit (excluding GST).
The store manager has been able to collate the following additional information (all details are
per kitchen and exclude GST, unless otherwise stated):
Purchase price

$750.00

Freight inwards

$45.00

Assembly
Hours

5.00

Rate per hour

$45.00

Variable overheads assembly

$75.00

Fixed overheads assembly

$50.00

Selling costs and administration

Delivery costs to customers (percentage of sales)

$125.00
6.00%

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Chartered Accountants Program

Management Accounting & Applied Finance

Question 1 (cont.)
Part A (10 marks)
James has asked for your help in analysing the low-cost kitchen proposal from the Penrith store
manager. He has specifically asked you for the following:

Required
(a) Calculate the annual gross and net profit margin percentages for the
low-cost kitchen proposal (based on absorption costing). Show all workings.
Determine if the proposal meets HH targets for gross profit margin (35%)
and net profit margin (25%).

(4 marks)

(b) Describe two (2) practical options HH could explore to reduce the cost of the
low-cost kitchens.

(2 marks)

(c) Describe two (2) key qualitative issues that HH should consider in evaluating
the low-cost kitchen proposal.

(2 marks)

(d) Recommend whether HH should proceed with the low-cost kitchen

proposal. Justify your recommendation.

(2 marks)
10 marks

Part B (10 marks)

James has been reviewing the August sales results from the three main product categories for
the Parramatta store. He is concerned that the total result may be hiding something and has
asked for your help in analysing the sales result in more depth.
James has provided you with the following information:
Budgeted August sales
Category

Tools and
equipment

Timber

Building
supplies

Average unit price

$50.00

$5.50

$7.50

Unit sales

22,000

55,000

33,000

$1,100,000

$302,500

$247,500

$1,650,000

Tools and
equipment

Timber

Building
supplies

Total

Average unit price

$47.50

$5.75

$7.25

Unit sales

30,000

54,000

36,000

$1,425,000

$310,500

$261,000

Total budgeted sales

Total

Actual August sales

Category

Total actual sales

$1,996,500

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Chartered Accountants Program

Management Accounting & Applied Finance

Question 1 (cont.)
Required
(a) In respect of the Parramatta store for the month of August, calculate the
selling price variance, sales mix variance, sales quantity variance and total
variance for the tools and equipment product category. Show all workings.

(8 marks)

(b) Describe two (2) key reasons for the variances in the tools and equipment
category in (a) above.

(2 marks)
10 marks

End of Question 1
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Chartered Accountants Program

Management Accounting & Applied Finance

Question 2 (20 marks)

Background information
You are a chartered accountant working in a management accounting role at Eagle Legal
Limited (Eagle Legal), a law firm listed on the Australian Securities Exchange. Eagle Legal
specialises in personal injury claims and has offices around Australia. Its ambition is to make
legal services available to everyone, not only the wealthy.
The outlook for FY 20X5 is as follows:
The personal injury claims market has grown in recent years, with clients becoming
more willing to take legal action. Attracting potentially successful claimants is therefore
considered key to Eagle Legals financial performance. A major advertising campaign is
planned to attract potential clients.
The majority of work undertaken is to be billed to clients on an hourly basis. The firm will
minimise the number of cases undertaken on a success fee basis (i.e. Eagle Legal will only be
paid if it wins the case).
The market for Eagle Legals most basic personal injury services has been buoyant, but there
has been a slowdown in the more complex personal injury work. To help offset this, Eagle
Legal is looking to grow its specialised litigation services. This work would be performed
by staff with experience in this area.
Competition from newly established law firms has seen demand for junior legal staff
increase, and Eagle Legal is expecting to make significant concessions in order to retain its
high performers.
The growth that the advertising campaign is expected to generate will see a dramatic
increase in staff numbers. This, in turn, is expected to place significant pressure on cash
flow.

Part A (8 marks)
Required
Develop two (2) appropriate key performance indicators (KPIs) to be included in
each perspective of a balanced scorecard that the Eagle Legal board of directors
can use to monitor FY 20X5 performance.
8 marks

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Management Accounting & Applied Finance

Question 2 (cont.)
Part B (4 marks)
It is nearing the end of FY 20X5, and the calculation of bonus payments for partners is
underway. All bonus payments are based on the achievement of specific measures agreed on
each partners individual balanced scorecard. You are responsible for providing the financial
results for each partner to include in their balanced scorecard.
You have been approached by one of the firms partners who is concerned that he may not
receive his bonus. He explains that the hours charged to a particular client are significantly in
excess of the budget agreed with that client. He is currently investigating what has happened,
but the hours charged appear to be legitimate. He has asked you to defer writing off the
potentially unrecoverable hours for a few weeks until after the bonuses are calculated and paid.

Required
(a) Based on the information provided, identify the key fundamental ethical
principle at risk, in accordance with the International Ethics Standards
Board of Accountants 2013 Handbook of the Code of Ethics for Professional
Accountants (IESBA Code). Justify your response.

(2 marks)

(b) Describe how the company can ensure that ethical principles are maintained
in respect of payments for partner bonuses.

(2 marks)
4 marks

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Chartered Accountants Program

Management Accounting & Applied Finance

Question 2 (cont.)
Part C (8 marks)
Eagle Legal is interested in acquiring another law firm that also specialises in personal injury
claims. You have been asked to provide the analysis and you have started to compile the
relevant information for Eagle Legal, as follows:
Bank borrowings of $15 million, being an interest-only, five-year bank term loan at a fixed
7% interest rate until maturity.
Beta of 0.55.
Market risk premium of 6.0%.
Risk-free rate of 4.5%.
Company tax rate of 30%.
Shareholders equity of $175 million (book value).
Number of shares on issue 102,450,000.
Share trading: yesterday close $2.40; high $2.42; low $2.40.

Required
(a) Calculate Eagle Legals weighted average cost of capital (WACC). Show all
workings.

(6 marks)

(b) Explain whether you would use the WACC calculated in (a) above in your
evaluation of the proposed law firm acquisition.

(2 marks)
8 marks

End of Question 2
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Chartered Accountants Program

Management Accounting & Applied Finance

Question 3 (20 marks)

Background information
You are the management accountant for CT a private family company incorporated in Australia.
CT is a manufacturer of plumbing supplies. You have been asked to analyse the operations of
CT for the board of directors.
They have asked you to assess the various trends and ratios for the business over this period
and, in particular, cash usage and the increasing levels of working capital requirements being
experienced.
You have prepared the following information to support your analysis.
Extract of balance sheet

2011
$000

2012
$000

2013
$000

2014
$000

Total inventory

87,000

97,000

104,000

113,000

Trade and other receivables

49,000

54,000

60,000

65,000

Trade and other payables

(42,500)

(40,000)

(42,500)

(45,000)

Working capital

93,500

111,000

121,500

133,000

386,000

426,000

389,000

478,000

2012
$000

2013
$000

2014
$000

650,000

665,000

700,000

2.31%

5.26%

318,000

341,000

9.66%

7.23%

Total assets
Extract from income statement
Sales
Increase year on year
Cost of sales calculation

290,000

Increase year on year

Gross profit

360,000

347,000

359,000

Gross profit %

55.38%

52.18%

51.29%

(3.61%)

3.46%

(3,000)

9,000

(130.00%)

400.00%

Increase year on year

Earnings before interest and tax (EBIT)

10,000

Increase year on year

Working capital ratios for CT

2012

2013

2014

Debtor days

28.9

31.3

32.6

Creditor days

50.2

46.3

45.6

Inventory days

115.8

115.4

116.1

Industry average working capital ratios

2012

2013

2014

Debtor days

30.0

30.0

30.0

Creditor days

45.0

45.0

45.0

Inventory days

90.0

90.0

90.0

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Management Accounting & Applied Finance

Question 3 (cont.)
Part A (14 marks)
Required
(a) Analyse each of the working capital items, including their impact on
the overall working capital requirements of CT by outlining six (6) key
observations.

(6 marks)

(b) Explain two (2) practical ways that CT could improve inventory days.

(2 marks)

(c) Analyse the income statement data to assess the financial performance
of CT (exclude any comments regarding working capital management)
by outlining six (6) key observations.

(6 marks)

14 marks

Part B (6 marks)
CTs board of directors has been exploring expansion opportunities to further add value to
the business and have decided to expand into New Zealand to achieve this objective. Funding
requirements have been set at A$50 million. Given that CT wishes to remain a private company,
the board of directors have sought your advice about the following matters pertaining to
long-term debt and equity sources.

Required
(a) For both long-term debt and equity funding sources, outline two (2)
appropriate methods of obtaining the required funds.

(4 marks)

(b) Describe two (2) key reasons why an equity raising would not be the most
appropriate funding source for CT.

(2 marks)
6 marks

End of Question 3
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Chartered Accountants Program

Management Accounting & Applied Finance

Question 4 (20 marks)

Background information
YouCoal Limited (YC) is an Australian-owned, publicly listed coal miner, with its flagship
thermal coal mine, MeMine (MM), located in the Hunter Valley region of New South Wales.
The company aims to maximise shareholder value through efficient organic growth and
acquisitions, while maintaining the highest safety standards for all YC employees and
contractors. There is also a strategic focus on advanced coal mining technology and investing in
cleaner coal production techniques.
MMs customers include one local and two overseas electricity generators, from Korea and
China.
The following financial information is for the year ended 30 June 2014:
Year ended 30 June 2014

Local

Korea

China

Sales revenue (A$ million)

153

240

288

Cost of production (A$ million)

(69)

(115)

(138)

Gross profit (A$ million)

84

125

150

54.90%

52.08%

52.08%

1,800,000

3,000,000

3,600,000

Gross profit %
Tonnes sold
Costs

Local

Korea

China

Logistic
Road transport
Port costs

A$10/tonne
N/A

A$20/tonne
A$10/tonne

A$20/tonne
N/A

Sales and marketing

Domestic market
International markets

A$300,000
N/A

N/A
A$200,000

N/A
A$200,000

Ordering
Orders processed and reviews of
contracts

25 interactions
per year

3 interactions per
year

2 interactions per
year

(All shipping costs from port to

customer destination are the
responsibility of customer)

Cost pool for ordering team (Total for the three (3) customers) A$300,000.
Additional processing
Depreciation
Labour

A$200,000 per
annum
A$2/tonne

The sales contract for the Chinese customer is up for renewal in late 2014. With continued
downward pressure on the market price of thermal coal due to oversupply, YCs management
is uncertain about whether it can maintain the current pricing level to them.
The local customer obtains almost 100% of its coal input from YC; however, new government
legislation setting targets for clean energy production to be achieved within five years means
that there may be pressure on current volumes in favour of renewable energy sources such as
solar and wind power.
For the purposes of this question, ignore GST.

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Management Accounting & Applied Finance

Question 4 (cont.)
Part A (8 marks)
Required
(a) Using the information provided for the year ended 30 June 2014, prepare a
customer profitability analysis for YC.

(6 marks)

(b) Based on the information provided and your analysis in (a) above, identify
and explain two (2) key issues requiring YCs attention for 2015 and beyond.

(2 marks)
8 marks

Part B (8 marks)
The thermal coal pricing pressure and the negative impact this is expected to have on cash flows
has encouraged YC to analyse the companys value and supply chains to identify opportunities
to improve competitive advantage and profitability.

Required
Identify two (2) operations and two (2) outbound logistics activities for YC and
explain why each activity is core to the business.
You may wish to present your answer in the following format:
Activity
Operations

Why core to business

(1)
(2)

Outbound logistics

(1)
(2)
8 marks

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Management Accounting & Applied Finance

Question 4 (cont.)
Part C (4 marks)
YC has identified some local acquisition opportunities. One company in particular, CoalTech,
has some innovative technology that YC would like to acquire. As a first step in assessing
whether the acquisition is viable, YC wants you to perform a high-level valuation of what the
company could potentially be worth.
CoalTech is a listed entity with a market capitalisation of A$28 million. According to its halfyearly report, it has current half-year losses of A$1.4 million and earnings before interest,
tax, depreciation and amortisation (EBITDA) of A$3 million (positive). A recent acquisition
for a company of similar size and in a similar location was sold for a multiple of five times
normalised earnings (EBITDA).

Required
(a) Determine, using a market based approach, the enterprise value of CoalTech.

(2 marks)

(b) Discuss two key limitations of using this market-based measure to value the
CoalTech business.

(2 marks)
4 marks

End of Question 4

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