OUM BUSINESS SCHOOL

ASSIGNMENT SUBMISSION AND ASSESSMENT

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BMAC5203
ACCOUNTING FOR BUSINESS DECISION MAKING
MAY 2016
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INSTRUCTIONS TO STUDENTS

1. This assignment contains question that is set in English.

2. Answer in English only.

3. Your assignment should be typed using 12 point Times New Roman font and 1.5 line spacing.

4. You must submit your hardcopy assignment to your Facilitator according to the due date.

5. Your assignment should be prepared individually. You should not copy another person’s assignment.
You should also not plagiarise another person’s work as your own.

EVALUATION
This assignment accounts for 60% of the total marks for the course.
 ASSIGNMENT QUESTION

Master Budgeting – Cash crisis at a start up company to plan for profit

TASK 1
and cost control

To be able to prepare the cash budget, profit statement and balance sheet
Objective
for decision making.

Marks allocated 35 marks

Azmi Sdn. Bhd. was formed on 1 July 2014 with a paid up share capital of $400,000. $240,000 of this
capital was immediately invested into fixed assets, leaving $160,000 cash.

The fixed assets, it is estimated, have a ten-year life, and will have no value at the end of ten years. The
company have decided to depreciate these assets using the straight-line method. Therefore, the
depreciation charge per year will be $240,000/10 years = $24,000 or expressed in monthly terms
$24,000/12 months = $2,000.

Prior to starting, business plans have been formulated for the first six months of the first year of
operations. These plans are set out below:

Sales for the six months are estimated to be $6,000,000. However, the company operates in a seasonal
market and will also be allowing some of its customers to take credit. The company anticipates the
following receipts of cash over the six-month period from sales:

Sales Receipts
$
July 400,000
August 500,000
September 500,000
October 700,000
November 1,200,000
December 1,700,000
5,000,000
From this breakdown of the anticipated cash received over the six-month period, it is apparent that at
the end of the period there will be receivables of $6,000,000 – $5,000,000 = $100,000.

The materials required to meet the demand for sales are estimated to be $2,400,000. To enable the
company to maintain an inventory (to ensure against any shortages), $2,600,000 worth of materials will
be purchased in the period. However, because of the production cycle and the credit that the company
will be obtaining from its suppliers the pattern and amount paid to suppliers will be as follows:

Payment to suppliers
for materials
$
July 600,000
August 600,000
September 200,000
October 200,000
November 200,000
December 200,000
2,000,000

At the end of the six month period, the company have purchased materials costing $2,600,000 but have
only paid $2,000,000 for them. Thus, the company will have payables of $600,000 at the end of
December 2014.

The estimated labour cost that will be incurred over the six months will be $1,800,000. In addition, the
firm anticipates that overheads (excluding depreciation) of $1,380,000 will also be incurred over this
period. Overheads and wages will be paid evenly over the six month period.

Any cash deficits are financed by bank overdraft.

You are required, for the year ending 31 December 2014, to:

a) Prepare the cash budget on a monthly basis from July to December.

(22 marks)

b) Prepare the budgeted profit and loss account and balance sheet at the end of the period.

(8 marks)

c) Explain the usefulness of the above statements to management of the company.

(5 marks)
 TASK 2 Investment appraisal

To be able to evaluate and make choices between different projects in

Objective
which to invest.

Marks allocated 35 marks

Hasheel Catering Enterprise Sdn. Bhd. is considering tendering for a local authority contract to supply
school snacks. If they decide to tender and are successful, this will be their first contract in the public
sector. The contract is for a period of five years.

The company has spent $2,500 on a feasibility study related to this contract. From this study, they have
obtained the following estimates of costs, revenues and volumes.

1. The initial cost of the investment for the necessary cooking equipment will be $30,000. This sum
will be payable at the beginning of the contract.
2. Selling price of snacks: $1.00 per snack for the first three years, than $1.20 for years four and five.
3. Cost of snacks: $0.60 per snack for the first three years, than $0.70 for years four and five.
4. Rent of premises is estimated to be $2,000 per year.
5. Forecast of the number of meals to be sold:

Year No. of meals

1 30,000
2 32,000
3 32,000
4 33,000
5 33,000

6. Transport costs: $2,000 per year.

7. The company uses straight-line depreciation and intends to charge $1.500.
8. The company’s cost of capital is 14%.
9. The company expects a payback within four years and its target accounting rate of return is 25%.

You are required to evaluate the investment using the following appraisal methods: net present value,
internal rate of return, payback period (undiscounted and discounted) and the accounting rate of return.
For each appraisal method, state with reasons whether the project should be accepted or rejected.

(35 marks)
 TASK 3 Short term decision making

To be able to identify the relevant and irrelevant costs and benefits

Objectives associated with each feasible alternative with the greatest overall net
benefit to aid decision making.

Marks allocated 30 marks

The Men’s department of Khaki Sdn. Bhd. manufactures a style of bermuda shorts that it sold last year
at $18 a pair. The cost specifications for these shorts were as follows:

Variable costs per pair of bermuda shorts $

Materials 6.50
Labour 3.50
Fixed overheads per month 26,400.00

Khaki Sdn. Bhd made a profit of $11,040 each month.

Required:

a) How many pairs of bermuda shorts did Khaki Sdn. Bhd. sell each month?
(5 marks)

b) Khaki Sdn. Bhd. is now planning next year’s operations. The sales director is proposing to boost
sales by reducing the selling price to $17 and spending an additional $3000 per month on
advertising. He estimates that these actions will enable the company to sell 5800 pairs of
bermuda shorts each month. Evaluate the sales director’s proposals taking into account their
expected impact on profits and on the breakeven point. State any assumptions you need to
make.
(18 marks)

c) If the managing director of Khaki Sdn. Bhd. were to require that next year’s profit show a 15%
increase over last year’s performance, how many pairs of bermuda shorts would have to be sold
each month, (i) assuming that the sales director’s policies were adopted and (ii) assuming that
they were not.

(7 marks)