EXAMINATIONS 2011

TRIMESTER 2

ACCY 223 MANAGEMENT ACCOUNTING

Time allowed: TWO HOURS Instructions: This is a CLOSED book examination. Answer BOTH questions Question One Question Two Total Marks 50 Marks 50 Marks 100 MARKS

Write all answers neatly in the answer book provided. Show all your workings/calculations. Begin your answer to each question on a new page.

Material Permitted: Non-programmable calculator, and Non-electronic, foreign language dictionary.

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QUESTION ONE Karen Buffet has had 15 years experience working for large investment companies. Last year, Karen set herself up as a self-employed, independent financial adviser helping private individuals with their financial planning and investment decisions. Karen charges her clients no fees for her advice. She instead receives commission direct from investment companies based on the investment products her clients purchase as a result of her recommendations. Karens business incurs a monthly fixed cost of $2,000 but has no variable costs. Karen charges no salary to the business and hence, the commission received less fixed costs represents business profit and Karens pre-tax income. Over the past year, Karen has established a reputation as a personable and competent investment adviser. This reputation and the success of Karens business now present her with a problem. Karen wants to restore a sensible work-life balance and restrict her working hours to 160 per month. However, satisfied clients have recommended Karen to their friends and Karen now has more potential business than she can handle. She estimates that she would need 210 hours to deal with the estimated demand for next month. She believes that this level of demand is likely to continue for the foreseeable future. Karen keeps a careful record of the time spent helping each client and has established that her clients fall into one of the three groups: MSP clients are mature, successful professionals who are active investors. MSP clients are keen to hear Karens new recommendations and have sufficient funds to make sizeable investments each month. SMM clients are stable middle managers who will also invest regularly, but generally in smaller amounts than MSP clients. ECP clients are early career professionals who currently have limited funds for investment and invest in the products which yield the lowest commission rates for Karen. However, Karen does not want to lose her ECP clients because she recognises that they are the ones likely to develop into MSP clients in the future.

Table 1 contains details of expected client activity for next month. The hours required per client per month include direct contact with clients, related product research and follow-up processing time. Table 1 Average monthly client spend on investment products Average commission percentage (payable to Karen) Hours required per client per month Current number of clients Client Group MSP SMM ECP $1,800 6% 3 20 $1,200 5% 1.5 60 $400 4% 0.5 120

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Karen has talked about her capacity problem with an ex-colleague, Geraldine Gekko, who she respects. Geraldine is now looking for part-time work. Karen is sure that, under her guidance, Geraldine would be capable of advising many of Karens established clients. However, Karen does not really want the added burden of employing and supervising staff, and she is unsure how established clients will react to being passed over to Geraldine instead of getting Karens personal attention. She is worried this might adversely affect her business reputation. Karen is aware of your management accounting expertise and has asked for your advice on the business problems she is currently facing. You agree to advise her, for a small fee. You establish that the monthly cost of employing Geraldine, on a part-time basis, for up to 50 hours per month is $1,100 and Geraldine is willing and able to undertake this work.

Required: Prepare a report to Karen Buffet containing suitable advice on the business problems outlined above. (3 marks for report style) Your report should: (a) Outline the client mix that will maximise Karens pre-tax income next month if she remains on her own (i.e. does not employ Geraldine Gekko) and limits her total working hours to 160. In addition, calculate Karens expected pre-tax monthly income if this client mix is accepted. (16 marks) Discuss any reservations Karen may have about accepting this planned client mix, and give your opinion on the effect choosing this planned client mix will have on Karens business reputation. (10 marks) Outline the likely advantages and disadvantages of Karen employing Geraldine Gekko from next month onwards, and calculate the expected effect this will have on Karens pre-tax income. (16 marks) Make final recommendations to Karen, stating the key reasons in support of your advice. (5 marks)

(b)

(c)

(d)

[TOTAL OF 50 MARKS]

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QUESTION TWO Based in Hawkes Bay, Grazie Nonna Ltd produces and sells a range of jams and fruit concentrates. For a number of years this small, family-run firm had been reasonably profitable. However, the young production manager, Tom Venturi, believes the company needs to diversify its product range in order to grow and remain profitable. Tom has proposed that the company launches a new product based on a newly developed fruit, kiwiberry. He has arranged for two local growers of kiwiberries to supply the fruit and has developed and trialled a manufacturing specification for Kiwiberry Syrup. The standard costs for producing one barrel of this new product are as follows: $ per barrel Standard selling price Standard variable costs: Direct materials Direct labour Variable Production Overhead Standard Contribution $ per barrel 120

11 kg at 2.00 per kg 5 hours at $12 per hour 5 hours at $2 per hour

22 60 10 92 28

The variable production overhead is incurred in direct proportion to the direct labour hours worked. Tom has suggested to his directors that although the contribution provided by the new product is not high, the fruit is harvested and available to the factory in July, when most other fruits are unavailable and hence there is spare production capacity. Production and sales for Kiwiberry Syrup in July was 250 barrels less than budgeted. A comparison of budgeted and actual results is as follows: Budget Sales (in barrels) Sales revenue Variable cost: Direct materials Direct labour Variable production overheads Contribution 2,000 $ $ 218,750 240,000 44,000 120,000 20,000 184,000 56,000 $ Actual 1,750 $ 218,750

41,034 120,625 26,166 187,825 30,925

The first batch of fruit was delivered to Grazie Nonna in late July. However, the quality of the fruit was not as high as expected and, due to delivery delays, some fruit was bruised and overripe. Consequently, extra time was spent sorting out the bad fruit before the good fruit could be used in production. Following the celebrity chef Al Whites use of the product on his television programme, there was strong demand for Kiwiberry Syrup, with the result that the expected initial discounts on the sales price were not necessary.

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Details of actual resource usage for July are as follows: Direct materials Direct labour 19,540 kg purchased and used 9,650 hours

Toms directors are nervous about the company continuing to produce Kiwiberry and have asked Tom to prepare a report explaining the results of the first production run of the new product. Tom has asked for your help.

Required: Prepare a report to the directors of Grazie Nonna analysing the performance of the new product. (3 marks for report style) Your report should include: (a) A flexible budget, for the actual level of production, using a standard marginal costing approach. (10 marks) A reconciliation of Kiwiberrys budgeted and actual contribution for July, that includes: the sales volume and price variances direct materials price and usage variances labour rate and efficiency variances, and variable overhead expenditure and efficiency variances. (20 marks) An explanation of the principle of management by exception, and your suggestions as to how this principle might be applied in respect of the above reconciliation. (5 mark)

(b)

(c)

(d)

An explanation for the sales, direct materials and direct labour variances. (12 marks)

[Total 50 marks]

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