1

Chapter 11
Standard Costing and Control Using Accounting Rules
Answer to End of Chapter Exercises

Q 11.1
20x6/7 20X7/8
Profitability ratios
R.O.C.E net profit 610 40.40 % 580 27.10 %
net capital 1510 2140
employed
net 610 25.42 % 580 20.14 %
profit margin 2400 2880

capital turnover 2400 1.59 2880 1.35

1510 2140

gross profit/sales 1200 50.00 % 1380 47.92 %

2400 2880

liquidity
current ratio 865 1.59 :1 1385 2.37 :1
545 585

liquid ratio 545 1.00 :1 940 1.61

545 585
Efficiency
Trade receivables (days) 2400 4.80 times 2880 3.06 times
500 940
76 days 119 days

Trade payables days 800 5.84 times 1050 5.38 times

137 195
63 days 68 days

Inventory days 1200 3.75 times 1500 3.37 times

320 445
97 days 108 days

Solvency
debt 300 19.87 % 740 34.58 %
Debt + equity 1510 2140

profit 610 12.20 580 7.25

interest 50 80

Purchases of raw materials were 800,000 in 20x6/7 and 1,050,000 in 20X7/8

Commentary
Profitability
In 20X7/8 Digiprintscan earned a 27% return on capital employed compared to 40% in 20X6/7.
This was due to a deterioration in net profit margin( reducing from 25% to 20% and an
reduction in capital turnover from 1.6X to 1.35X due to a significant increase in capital employed of
43% at a time when sales "only" increased by 20%

2008 John Wiley & Sons Ltd.

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Liquidity
There was an increase in both the current ratio (1.6:1 improving to 2.4:1) and in the liquid ratio
which improved from 1:1 to 1.6:1. Both ratios maybe higher than necessary in 2002 and
reasons for the increase should be investigated. A comparion v industry norms would be helpful.

Efficiency
Average time to collect debts days declined from 76 days to 119 days. Stock holding rose from
146 days to 155 days and time to pay creditors rose from 63 days to 68 days. The increase
in stock holdings in particular is significant and reasons should be identified.

Solvency
Gearing is still relatively low at approximately 50% in both years and the interest cover has improve
from 12.2 times to 14.5 times

Summary

The company has expanded fast this year with sales increasing
from 2.4 million to 2.88 million. However the increased investment in assets has led to a lower
return on capital employed. It needs to be investigated whether the investment will lead to increase
sales in the coming year.
To fund the expansion the company has issued some shares and some debt capital. This issue
of debt capital has meant that the gearing ratio of debt to equity has remained stationary and the
overall gearing is still relatively low. Interest cover has in fact improved.

Short term liquidity ratios have also improved although there has been a decline in the efficiency
ratios which should be addressed

2008 John Wiley & Sons Ltd.

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 3

Q 11.2 20X6/7 20X7/8

Anglesea PLC Anglesea PLC

Profitability

R.O.C.E. 852 46.3 % 754 24.9 %

(Net profit/ capital 1841 3024
employed)

net profit margin 852 29.6 % 754 20.1 %

2880 3744

capital turnover 2880 1.6 3744 1.2

1841 3024

gross profit margin 1560 54.2 % 1794 47.9 %

2880 3744

admin/sales 708 24.6 % 1040 27.8 %

2880 3744

liquidity
current ratio 1084 1.5 2070 2.4
705 846
liquid ratio 668 0.9 1403 1.7
705 846
Efficiency

Trade receivables days 2880 4.8 times 3744 2.7 times

600 1363
365 76.0 days 365 132.9 days
4.8 2.7
Trade payables days 650 4.31 times 950 3.74 times
151 254
365 85 days 365 97.6 days
4.31 3.74
Inventory days 1320 3.2 times 1950 2.9 times
416 667
365 114 days 365 124.8 days
3.2 2.9
Gearing
debt:
Debt + equity 500 0.27:1 1450 0.48:1
500+1341 1450 + 1574

times interest earned 852 17.0 754 7.2

50 105

Profitability
The return on capital employed of Anglesea PLC has reduced from 46% in 20X6/7 to 25% in 20X7/8. This
has been due to a reduction in both the operating profit margin and the capital turnover. Gross profit to
sales has reduced from 54% to 48% Admin costs as a percentage of sales have increased from 25% to
28%.

2008 John Wiley & Sons Ltd.

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 4

Liquidity
current ratio has increased from 1.5:1 from 2.4:1 in the year while liquid ratio has increased from0.9 to 1 to
1.7:1. Both ratios seem to be getting very high although a comparison v industry norm would be beneficial.
Efficiency
The adverse movement in some ratios is of particular concern. is the increase in trade receivables from
76 days to 133 days. Trade payables increased to just under 100 days.
Solvency The company issued loan capital during the year and the gearing rose to nearly 0.5 to 1. The
company is likely to find it difficult to raise further funds through issuing loans.
Summary The sales of the company have increased significantly during the year and the additional loans
and share capital have been used to purchase both free hold property and equipment. Liquidity and
efficiency ratios have increased substantially potentially giving worrying signs that the business is getting
overextended
Further information would like to obtain
Comment on further %ages further information on accounting standards - have there been any changes in
the year.
Future plans What have they purchased? Plans for these assets?
Need to investigate the deterioration in liquidity and efficiency.

Q 11.3
i) Profit 400,000
interest 30,000
370,000
tax 185,000
185,000

EPS 185,000 =18.5 pence

1,000,000
P.E. ratio 3.20 =17.3
0.185

Gearing
ii) ratio 500,000 = 15.2%
(2800000 + 500,000)

Interest
iii) cover 400,000 = 13.3x
30,000

185,000 = 1.85x
iv) div cover 100,000

2008 John Wiley & Sons Ltd.

www.wileyeurope.com/college/bowhill