Management Accounting
Sample Paper 1
Questions and Suggested Solutions
NOTES TO USERS ABOUT SAMPLE PAPERS
Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance
to students and their teachers regarding the style and type of question, and their suggested solutions, in
our examinations. They are not intended to provide an exhaustive list of all possible questions that may
be asked and both students and teachers alike are reminded to consult our published syllabus (see
www.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics.
There are often many possible approaches to the solution of questions in professional examinations. It
should not be assumed that the approach adopted in these solutions is the only correct approach,
particularly with discursive answers. Alternative answers will be marked on their own merits.
This publication is copyright 2013 and may not be reproduced without permission of Accounting
Technicians Ireland.
© Accounting Technicians Ireland, 2013.
2 INSTRUCTIONS TO CANDIDATES
In this examination paper the €/£ symbol may be understood and used by
candidates in Northern Ireland to indicate the UK pound sterling and by candidates
in the Republic of Ireland to indicate the Euro.
Answer FIVE questions.
Answer all three questions in Section A. Answer ANY Two of THREE questions in
Section B.
If more than the required number of questions is answered in Section B, then only
the requisite number, in the order filed, will be corrected.
Candidates should allocate their time carefully.
All figures should be labelled, as appropriate, e.g. €, £ / € ’s, units etc.
Answers should be illustrated with examples, where appropriate.
Question 1 begins on Page 4 overleaf.
3 SECTION A: Answer all Questions
Question 1
The following information relates to the only product manufactured and sold by Ash plc.
Selling price
Direct material cost
Direct labour cost
Variable production overhead
Variable sales & marketing overhead
€/£ per unit
70
25
20
5
2
The following levels of activity took place over the first three months of the products life:
September
October
November
Sales
Units
4,750
5,500
6,500
Production
Units
5,000
6,000
7,000
Additional information is as follows:
1.
Budgeted fixed production overhead was €/£300,000 per annum.
2.
Actual fixed production overhead for the period was €/£25,000 per month
3.
Sales and marketing overhead of €/£25,000 per month and administration overhead of €/£18,750
per month were in line with the budget for that period.
4.
All fixed overhead costs are budgeted on the basis of a projected volume of 75,000 units per
year and all costs are expected to be incurred at a constant rate throughout the year.
5.
The business does not expect to have any inventory at 1 September
Required:
a)
Prepare a profit statement for each month using each of the following bases:
i.
Absorption costing
ii.
Marginal costing
(14 Marks)
b) Calculate the (under)/over absorbed fixed production overhead for each month.
(3 Marks)
c)
Explain the reason for any difference in the reported profit under the two bases for each month.
(3 Marks)
Total: 20 Marks
4 Question 2
The following information relates to Lookin plc. a manufacturing company that has two manufacturing
departments and two service departments:
Allocated Overheads
Manufacturing
Dept. 1
€/£
32,400
Manufacturing
Dept. 2
€/£
29,200
Service
Dept. 1
€/£
12,400
Service
Dept. 2
€/£
12,850
General Overheads
Indirect Labour
Heat & Light
Repairs & Maintenance
Canteen Subsidy
Machine Depreciation
Machine Insurance
Total
€/£
86,850
32,000
48,600
34,700
5,100
10,400
6,250
223,900
The following additional information was extracted from the company’s management accounting
records.
Floor area sq. m
Direct labour hours
Indirect labour hours
Direct labour rate per hour £/€
Number of staff
Machine hours
Machine value £/€
Service Dept. overheads are to
be re-apportioned as follows
Service Dept. 1 overheads
Service Dept. 2 overheads
Manufacturing
Dept. 1
2,500
30,000
30,000
12
30
2,500
40,000
Manufacturing
Dept. 2
4,000
5,000
5,000
8
5
25,000
200,000
20%
50%
80%
50%
5 Service
Dept. 1
1,000
10,000
Service
Dept. 2
500
-
Data on two jobs being undertaken by the company is as follows:
Direct materials cost
Machine hours
Direct labour hours
- Manufacturing Dept. 1
- Manufacturing Dept. 2
Job Eng230
€/£ 240
5
Job Art490
€/£ 420
20
40
4
25
5
Required:
a)
Prepare a statement showing the overhead cost for each department (include the basis of
apportionment, where appropriate).
(10 Marks)
b) Calculate a suitable overhead absorption rate for each department, using a basis that you deem
suitable .
(4 Marks)
c) Show the total cost of Job Eng230 and the total cost of Job Art490.
(6 Marks)
Total: 20 Marks
6 Question 3
Oak plc. uses a standard costing system. The following information relates to the company’s Acorn
product for the month of May.
Standard data
Actual data
Sales
Sales Volume units
Selling Price per unit (€/£)
10,000
25.00
9,700
26.50
Production
Materials used per unit (kg)
Materials price per kg (€/£)
Labour hours per unit
Labour rate per hour (€/£)
1.50
8.00
0.50
10.20
1.80
8.30
0.75
11.50
Required:
a)
Prepare a statement showing the budgeted profit and the actual profit for May.
(4 Marks)
b) Calculate the following variances:
i.
Sales Price
ii.
Sales Volume
iii.
Materials Price
iv.
Materials Usage
v.
Labour Rate
vi.
Labour Efficiency
(12 Marks)
c)
Outline the key factors that should be considered before deciding whether or not a variance should
be investigated.
(4 Marks)
Total: 20 Marks
7 SECTION B
Answer any two of the following questions
Question 4
Timber plc. manufactures and sells only one type of product, the Lumber. The following information has
been projected for the first six months of 2013.
January
February
March
April
May
June
July
Sales
Volume
units
10,000
12,000
15,000
8,000
7,500
6,000
7,500
Administration expenses
€/£
12,500
12,500
12,500
10,000
10,000
10,000
Premises
costs
€/£
25,000
25,000
25,000
22,000
22,000
22,000
1.
Direct labour cost per unit is £/€2.
2.
The selling price is projected to be £ / € 15 per unit in January, February and March, rising by
10% on 1 April, and remaining at that level for May & June.
3.
The cost of direct materials is estimated to be £ / € 3 per unit.
4.
Variable production overhead is 50% of the direct labour cost per unit.
5.
Sales and marketing expenditure is projected at £ / € 3 per unit sold.
6.
Depreciation is calculated at the rate of 20% per year, using the straight-line method.
7.
Inventory of one-third of the following month’s projected sales volume is to be held at the end
of each month.
8.
Receivables at 30 June are estimated to be 10% of June sales revenue.
9.
Payables at 30 June are projected to total £ / € 12,000.
8 Statement of Financial Position at 1 January 2013
ASSETS
£/€
Non-current assets
Equipment
165,000
Current Assets
Inventory
Receivables
Bank
19,998
12,000
16,750
48,748
213,748
Total assets
EQUITY AND LIABILITIES
Equity
Payables
204,148
___9,600
Total Equity and Liabilities
213,748
Required:
Prepare a budgeted monthly Statement of Profit or Loss for the period 1 January 2013 to 30 June
2013.
(12 Marks)
b) Prepare a budgeted Statement of Financial Position as at 30 June 2013.
(5 Marks)
c) Outline the main aims of budgetary control.
(3 Marks)
a)
Total: 20 Marks
9 Question 5
You have recently been appointed as a management accountant in a company.
Required:
a)
Prepare a document for presentation to the company’s management team discussing the annual
financial budget in the context of:
i.
the process and role of planning;
ii.
levels of planning in an organisation;
iii.
Organisational control processes.
(14 Marks)
b) Outline the key elements of a Budget Manual.
(6 Marks)
Total: 20 Marks
10 Question 6
The following information relates to inventory holding and materials handling for a particular material in
a business’ warehouse.
Minimum usage
Maximum usage
Average usage
Lead time
Ordering Cost
Purchase Cost
Holding cost
500 units per working week
3,000 units per working week
2,500 units per working week
10 - 20 days
£ / € 360 per order
£ / € 5 per unit
8% of purchase cost per year
The business works 5 days each week for 50 weeks each year.
Required:
a)
i.
ii.
iii.
iv.
Calculate the following inventory management ratios:
Inventory Re-Order Level
Minimum Inventory Level
Economic Order Quantity
Maximum Inventory Level
(16 Marks)
b) Outline the key advantages and disadvantages of using inventory management ratios to manage
inventory levels.
(4 Marks)
Total: 20 Marks
END OF PAPER
11 SUGGESTED SOLUTIONS
Solution 1
a) Profit Statement using Absorption Costing
Sales Revenue
September
£/€
332,500
October
£/€
385,000
November
£/€
455,000
0
125,000
100,000
25,000
20,000
(13,500)
256,500
76,000
13,500
150,000
120,000
30,000
24,000
(40,500)
297,000
88,000
40,500
175,000
140,000
35,000
28,000
(67,500)
351,000
104,000
9,500
25,000
18,750
5,000
11,000
25,000
18,750
1,000
13,000
25,000
18,750
(3,000)
59,250
17,750
55,750
32,250
53,750
50,250
Production costs
Opening Inventory
Direct Materials
Direct Labour
Variable Production Overhead
Fixed Production Overhead
Closing Inventory
Gross profit
Non production Costs
Variable Sales & Marketing Overhead
Fixed Sales & Marketing Overhead
Fixed Administration Overhead
Under-absorbed / Over-absorbed fixed
production overhead
Net Profit
12 b) Profit Statement using Marginal Costing
Sales Revenue
September
£/€
332,500
October
£/€
385,000
November
£/€
455,000
0
125,000
100,000
25,000
(12,500)
237,500
9,500
247,000
85,500
12,500
150,000
120,000
30,000
(37,500)
275,000
11,000
286,000
99,000
37,500
175,000
140,000
35,000
(62,500)
325,000
13,000
338,000
117,000
25,000
25,000
18,750
68,750
25,000
25,000
18,750
68,750
25,000
25,000
18,750
68,750
16,750
30,250
48,250
Production costs
Opening Inventory
Direct Materials
Direct Labour
Variable Production Overhead
Closing Inventory
Variable Sales & Marketing Overhead
Contribution
Fixed overheads
Fixed production overheads
Fixed Sales & Marketing Overhead
Fixed Administration Overhead
Net Profit
c)
Difference between reported profits
Absorption Costing Profit
Marginal Costing Profit
Difference
September
£/€
17,750
16,750
1,000
October
£/€
32,250
30,250
2,000
November
£/€
50,250
48,250
2,000
Total
£/€
100,250
95,250
5,000
September
£/€
nil
250
250
€/£1,000
October
£/€
250
750
500
€/£2,000
November
£/€
750
1,250
500
€/£2,000
Total
£/€
nil
1,250
1,250
€/£ 5,000
Analysis of the difference
Opening Inventory
Closing Inventory
Difference
Difference x €/£ 4
The absorption costing figures are driven by production volume and include fixed
production overhead as part of the cost of production. This fixed production overhead is
included at the pre-determined overhead absorption rate of €/£ 4 per unit. Therefore this
fixed overhead rate is included in the inventory valuation at the end of each month. This
results in a higher net profit each month when using absorption costing because
production volume exceeds sales volume each month.
The total difference in calculated profits of £/€ 5,000 is represented by the difference in
the inventory valuation at the end of November (£/ €67,500 using absorption costing - £/
€62,500 using marginal costing).
The marginal costing figures exclude the fixed production overhead element in
inventory valuations and hence net profits each month are lower. Profit is recognised
only when sales are recorded.
Workings
Working 1:
Fixed production overhead absorption rate per unit
Budgeted fixed production overheads
Budgeted production
£/€300,000
75,000 units
Fixed production overhead absorption rate per unit = £/€300,000/75,000 = £/€4 per unit.
Working 2:
Production cost per unit
£/€
Direct Materials cost
Direct Labour cost
Variable Production Overhead
Unit value for Marginal Costing
Fixed Production Overhead
Unit value for Absorption Costing
25
20
5
50 (variable cost per unit)
4
54 (variable and fixed cost per unit)
Working 3:
Inventory valuation
Opening Inventory
Production
Sales
Closing Inventory
Marginal Costing Valuation (@ £/€50 per
unit)
Absorption Costing Valuation (@ £/€54 per
unit)
September
units
0
5,000
4,750
250
October
units
250
6,000
5,500
750
November
units
750
7,000
6,500
1,250
£/€
12,500
£/€
37,500
£/€
62,500
13,500
40,500
67,500
Working 4:
Under / Over-absorbed Fixed Production head
Production units
Fixed Production OAR per unit
Absorbed Fixed Production Overhead
Actual Fixed Production Overhead
14 September
5,000
October
6,000
November
7,000
£/€
4
20,000
25,000
£/€
4
24,000
25,000
£/€
4
28,000
25,000
Fixed Production Overhead Under/ Over absorbed
Basis of
Apportionment
Dept. 1
£/€
Solution 2
a)
5,000
under-absorbed
Overheads cost by Department
15 Dept. 2
£/€
1,000
under-absorbed
Service 1
£/€
3,000
over-absorbed
Service 2
£/€
Total
£/€
Allocated Overheads
Apportioned Overheads
Indirect Labour
Heat & Light
Repairs & Maintenance
Canteen Subsidy
Machine depreciation
Machine Insurance
Re-Apportioned Overheads
Re-Apportion Service 1
Re-Apportion Service 2
Total Overheads
Indirect Labour Hours
Floor Area
Floor Area
Number of Staff
Machine Value
Machine Value
20% / 80%
50% / 50%
16 32,400
29,200
27,429
15,188
10,844
4,371
1,664
1,000
92,896
4,571
24,300
17,350
729
8,320
5,000
89,470
4,696
9,028
106,620
18,783
9,027
117,280
12,400
12,850
6,075
4,338
3,037
2,168
416
250
23,479
18,055
32,000
48,600
34,700
5,100
10,400
6,250
223,900
(18,055)
0
0
0
223,900
(23,479)
0
86,850
b)
Overhead Absorption Rate for each Department
Department 1
Overhead absorption rate based on labour hours as this department is labour intensive
£ / € 106,620
30,000 labour hours
= £ / € 3.55 per direct labour hour
Department 2
Overhead absorption rate based on machine hours as this department is machine intensive
£ / € 117,280
25,000 machine hours
c)
= £ / € 4.69 per machine hour
Job Costs
Job Eng230
Direct Materials
Direct Labour
- Dept. 1
- Dept. 2
Overhead
- Dept. 1
- Dept. 2
£/€
240.00
40 hours x £ / € 12 per hour
4 hours x £ / € 8 per hour
480.00
32.00
40 DLH x £ / € 3.55 per DLH
5 MH x £ / € 4.69 per MH
142.00
23.45
917.45
Total Cost
Job Art490
Direct Materials
Direct Labour
- Dept. 1
- Dept. 2
Overhead
- Dept. 1
- Dept. 2
£/€
420.00
25 hours x £ / € 12 per hour
5 hours x £ / € 8 per hour
25 DLH x £ / € 3.55 per DLH
20 MH x £ / € 4.69 per MH
300.00
40.00
88.75
93.80
942.55
Total Cost
17 18 Solution 3
a) Budgeted Profit
£/€
Sales Revenue
(10,000 x £/€25)
Cost of Sales
Materials Cost
Labour Cost
(10,000 x 1.50 kg x £/€8)
(10,000 x 0.5 x £/€10.20)
£/€
250,000
120,000
51,000
171,000
79,000
Budgeted Profit (£/€ 7.9 per unit)
Actual Profit
£/€
Sales Revenue
(9,700 x £/€26.50)
Cost of Sales
Materials Cost
Labour Cost
(9,700 x 1.80 kg x £/€8.30)
(9,700 x 0.75 x £/€11.50)
£/€
257,050
144,918
83,662
228,580
28,470
Actual Profit
b) Variances
i. Sales Price Variance
9,700 units generated revenue of 9,700 units x £/€26.50
9,700 units should have generated revenue of 9,700 units x £ / € 25.00 per unit
£/€
257,050
242,500
14,550 F
or
(Actual Sales Volume x Actual Selling Price) – (Actual Sales Volume x Standard Selling
Price)
(9,700 units x £ / € 26.50 per unit) - (9,700 units x £ / € 25.00 per unit)
£ / € 257,050 - £ / € 242,500 = £ / € 14,550 favourable
ii. Sales Volume Variance
units
Oak plc. actually sold
9,700
Oak plc. should have sold
10,000
300 A
19 x standard contribution per unit ( £/€ 7.9)
£/€2,370 A
or
Budgeted Sales Volume – Actual Sales Volume = -300
-300 @ £/ €7.90 = £/€2,370 adverse
iii. Material price Variance
£/€
17,460 kg of materials actually cost (17,460 x £/€8.30)
144,918
17,460 kg of materials should have cost (17,460 x £/€8)
139,680
5,238 A
or
(Actual Quantity of Inputs x Actual Price) – (Actual Quantity of Inputs x Standard Price)
(17,460 kg x £ / € 8.30 per kg) - (17,460 kg x £ / € 8.00 per kg)
£ / € 144,918 - £ / € 139,680= £ / € 5,238 adverse
iv. Materials Usage Variance
kg
Oak plc. actually used (9,700 x 1.8 kg)
17,460
Oak plc. should have used (9,700 x 1.50 kg)
14,550
2,910A
£/€23,280 A
x standard cost per kg ( £/€ 8.00)
or
(Actual Quantity of Inputs x Standard Price) – (Flexed Quantity of Inputs x Standard Price)
(17,460 kg x £ / € 8 per kg) - ((9,700 units x 1.5 kg per unit) x £ / € 8 per kg)
£ / € 139,680 - £ / € 116,400 = £ / € 23,280 adverse
v. Labour Rate Variance
£/€
7,275 labour hours actually cost (7,275 x £/€11.50)
83,662
7,275 labour hours should have cost (7,275 x £/€10.20)
74,205
9,457A
or
(Actual Labour Hours x Actual Pay Rate) – (Actual Labour Hours x Standard Pay Rate)
(7,275hours x £ / € 11.50 per hour) - (7,275 hours x £ / € 10.20 per hour)
£ / € 83,662 - £ / € 74,205 = £ / € 9,457adverse
20 vi. Labour Efficiency Variance
hours
Oak plc. actually used (9,700 x 0.75 hours)
7,275
Oak plc. should have used (9,700 x 0.50 hours)
4,850
2,425A
x standard cost per hour ( £/€10.20)
£/€24,735A
or
(Actual Labour Hours x Standard Rate) – (Flexed Labour Hours x Standard Rate)
(7,275 hours x £ / € 10.20 per hour) - ((9,700 units x 0.5 hours per unit) x £ / € 10.20 per
hour)
£ / € 74,205 - £ / €49,470 = £ / € 24,735 adverse
c)
Factors to be considered before deciding whether or not to investigate a variance
i. The size of the variance and whether the impact on profitability is positive or
negative.
ii. The likelihood of the variance being controllable / uncontrollable.
iii. Investigation costs.
iv. Benefits to be gained from the investigation
v. The likelihood of the variance re-occurring.
21 Solution 4
Workings
Working 1:
Inventory movement
Dec
units
Sales volume
Closing inventory
Less opening inventory
Production requirement
Jan
units
10,000
4,000
(3,333)
10,667
3,333
Feb
units
12,000
5,000
(4,000)
13,000
Mar
units
15,000
2,667
(5,000)
12,667
Apr
units
8,000
2,500
( 2,667)
7,833
May
units
7,500
2,000
(2,500)
7,000
June
units
6,000
2,500
(2,000)
6,500
Working 2:
Cost per unit of production
Direct labour
Direct material
Variable overhead
(£/€2.00 x 50%)
£/€
2.00
3.00
1.00
6.00
Working 3:
Inventory Valuation & Production Costs
Closing inventory value
@ £/€ 6.00 per unit
Direct Materials @ € / £ 3 per unit
Direct labour @ £/€2 per unit
Variable overhead @ £/€1 per unit
Depreciation
Sales and marketing expenditure
Dec
£/€
19,998
Jan
€/£
24,000
Feb
€/£
30,000
Mar
€/£
16,000
Apr
€/£
15,000
May
€/£
12,000
32,000
21,333
10,667
2,750
30,000
39,000
26,000
13,000
2,750
36,000
38,000
25,333
12,667
2,750
45,000
23,500
15,667
7,833
2,750
24,000
21,000
14,000
7,000
2,750
22,500
Apr
€/£
May
€/£
Working 4:
Sales Revenue
Jan
€/£
Feb
€/£
Mar
€/£
22 Jun
€/£
J
Sales price per unit
Total sales revenue
15.00
150,000
15.00
180,000
15.00
225,000
16.50
132,000
16.50
123,750
16.50
99,000
a) Budgeted Statement of Profit or Loss 1 January 2013 to 30 June 2013
Sales Revenue
Jan
£/€
150,000
Feb
£/€
180,000
Mar
£/€
225,000
Apr
£/€
132,000
May
£/€
123,750
Jun
£/€
99,000
Total
£/€
909,750
Cost of Sales
Opening Inventory
Direct Materials
Direct Labour
Variable Production O/head
Less closing inventory
Cost of sales
Gross Profit
19,998
32,000
21,333
10,667
(24,000)
59,998
90,002
24,000
39,000
26,000
13,000
(30,000)
72,000
108,000
30,000
38,000
25,333
12,667
(16,000)
90,000
135,000
16,000
23,500
15,667
7,833
(15,000)
48,000
84,000
15,000
21,000
14,000
7,000
(12,000)
45,000
78,750
12,000
19,500
13,000
6,500
(15,000)
36,000
63,000
19,998
173,000
115,333
57,667
(15,000)
350,998
558,752
30,000
12,500
25,000
2,750
70,250
19,752
36,000
12,500
25,000
2,750
76,250
31,750
45,000
12,500
25,000
2,750
85,250
49,750
24,000
10,000
22,000
2,750
58,750
25,250
22,500
10,000
22,000
2,750
57,250
21,500
18,000
10,000
22,000
2,750
52,750
10,250
175,500
67,500
141,000
16,500
400,500
158,252
Overheads
Sales & marketing
Administration
Premises costs
Depreciation
Net Profit / (Loss)
23 b) Budgeted Statement of Financial Position as at 30 June 2013
ASSETS
£/€
Non-current Assets
Equipment
£/€
148,500
Current Assets
Inventory
Receivables (10% of June Sales Revenue)
Bank account
15,000
9,900
201,000
225,900
374,400
Total Assets
EQUITY AND LIABILITIES
Payables
Equity
Total Equity and liabilities
c)
12,000
362,400
374,400
Main Aims of Budgetary Control
•
•
•
To provide a formal basis for monitoring the progress of an organisation, and individual sections
within the organisation, towards the achievement of the financial objectives, as specified in the
budget.
To provide targets for goal congruence between organisational and individual objectives encouraging motivation and participation.
To provide a tool for performance measurement this may be developed into a reward / incentive
scheme.
24 Workings
Working 1:
Inventory movement
Dec
units
Sales volume
Closing inventory
Less opening inventory
Production requirement
Jan
units
10,000
4,000
(3,333)
10,667
3,333
Feb
units
12,000
5,000
(4,000)
13,000
Mar
units
15,000
2,667
(5,000)
12,667
Apr
units
8,000
2,500
( 2,667)
7,833
May
units
7,500
2,000
(2,500)
7,000
June
units
6,000
2,500
(2,000)
6,500
Working 2:
Cost per unit of production
Direct labour
Direct material
Variable overhead
(£/€2.00 x 50%)
£/€
2.00
3.00
1.00
6.00
Working 3:
Inventory Valuation & Production Costs
Closing inventory value
@ £/€ 6.00 per unit
Direct Materials @ € / £ 3 per unit
Direct labour @ £/€2 per unit
Variable overhead @ £/€1 per unit
Depreciation
Sales and marketing expenditure
Dec
£/€
19,998
Jan
€/£
24,000
Feb
€/£
30,000
Mar
€/£
16,000
Apr
€/£
15,000
May
€/£
12,000
June
€/£
15,000
32,000
21,333
10,667
2,750
30,000
39,000
26,000
13,000
2,750
36,000
38,000
25,333
12,667
2,750
45,000
23,500
15,667
7,833
2,750
24,000
21,000
14,000
7,000
2,750
22,500
19,500
13,000
6,500
2,750
18,000
25 Working 4:
Sales Revenue
Sales price per unit
Total sales revenue
Jan
€/£
15.00
150,000
Feb
€/£
15.00
180,000
Mar
€/£
15.00
225,000
Apr
€/£
16.50
132,000
Working 5:
Equity at 30 June
Equity @ 1 January
Projected Profit / Loss (per Budgeted Statement of Profit or Loss)
Projected Equity at 30 June
204,148
158,252
362,400
Working 6:
Bank Account at 30 June
Opening Bank balance
Net Profit
Reduction in inventory
Reduction in receivables
Increase in payables
Depreciation (Non-Cash)
Closing bank balance
16,750
158,252
4,998
2,100
2,400
16,500
184,250
201,000
or
Opening bank balance
Receipts
December receivables
Sales January to June
Receivables at 30 June
16,750
12,000
909,750
(9,900)
911,850
Payments
December payables
Expenses January to June
Expenses January to June
Payables at 30 June
(9,600)
(384,000)
(346,000)
12,000
(727,600)
26 May
€/£
16.50
123,750
Jun
€/£
16.50
99,000
Closing bank balance
201,000
Solution 5
a) Document Re Annual Financial Budget
To: Management Team
From: Management Accountant
Date: X/ X/ XX
Re: Budgetary Processes - Planning and Control
Process and role of planning
The planning and control cycle Formulating Plans (Planning) Comparing actual & planned performance (Controlling) DECISION MAKING Implementing Plans Measuring Performance (Controlling) The process of planning, control and its link with decision-making processes is illustrated in the diagram
above. Planning can be defined as ‘The establishment of objectives, the formulation, evaluation and
selection of policies, strategies, tactics and action required to achieve these objectives. Planning
comprises long-term strategic planning and short-term operational planning’
Planning is a key function of management which precedes control and feedback to assist in the effective
running of an organisation.
Levels of planning
There are a number of different types of planning:
• Long-term, strategic planning normally covers a period of 3, 5 or 10 years and is an involved
process including assessment of internal and external environments, opportunities and
expectations. Once objectives are established, options are evaluated and appraised to formulate
the long-term corporate plan.
27 •
•
Tactical planning is the process of developing specific strategies or tactics relevant to prevailing
circumstances (e.g.; a new marketing strategy) in the context of the long-term strategic plan.
Short-term planning usually involves the deployment of resources to effectively achieve specific
objectives and normally covers a period up to one year.
Organisational control processes
Organisational control is concerned with the efficient use of resources to achieve a plan. Control involves
the measurement of activity, comparison with plans and identification of performance issues. Control will
provide information on corrective action required to alter performance so as to conform to plan or to
modify original plans.
The key elements of control include a specification, measurement of actual performance, comparison
between specification and actual performance, feedback on performance, action to control performance,
on-going feedback. Control actions must be appropriately timed - otherwise the action may have a
detrimental effect.
Control is exercised in organisational systems by feedback loops which gather information on
performance from the output of the system.
The annual budget
The detailed annual budget is set in the context of long-term financial objectives (E.g.: achieve a 10%
market share; achieve a 20% profit increase).
• The annual budget is an example of a short-term tactical plan. It sets out a financial plan for the
organisation to ensure that resources are appropriately deployed.
• The annual budget provides clarity of roles and responsibilities and provides a target for coordination purposes
• Control is exercised through the measurement and comparison of actual results against planned /
budgeted performance.
• Feedback from variance analysis reports should result in corrective action aimed at addressing
adverse variances and promoting favourable variances.
• Decision-making activities may include for example the decision to change supplier to improve
an adverse materials price variance
• There may be a number of budgetary revisions throughout a year to implement tactical plans
b) Key Elements of a Budget Manual
A Budget Manual is an important tool for the communication of the budgetary process, providing
information about budget-setting, budgetary control procedures and the general operation of the budget.
The main contents of a Budget Manual should include:
• Explanation of the budgetary process
• Organisational structures and responsibilities
• Main budgets and inter-relationship between them
• Budget development
• Accounting procedures
28 Solution 6
Workings
Minimum usage per day
500 units per working week / 5 working days = 100 units per working day
Maximum usage per day
3,000 units per working week / 5 working days = 600 units per working day
Average usage per day
2,500 units per working week / 5 working days = 500 units per working day
Average usage per year
2,500 units per working week x 50 working weeks = 125,000 units per year
a)
i. Inventory Re-Order Level
Re-order level = Maximum usage per day x maximum lead time (in days)
600 units per day x 20 days = 12,000 units
ii. Minimum Inventory Level
= Re-order level – (average usage (per day) x average lead time (in days))
12,000 units - (500 units per day x 15 days) = 4,500 units
iii Economic Order Quantity
.
2 Co D
Cc
=
Co
D
Hc
Cost per order
Demand per year
Holding Cost per year
=
2 x £ / € 360 x 125,000 units
(£ / € 5 x 8%)
15,000 units
iv. Maximum Inventory Level
(Re-Order Level + Economic Order Quantity) – (Minimum Usage Rate x Minimum Lead Time)
12,000 units + 15,000 units - (100 units per day x 10 days) = 26,000 units
29 b)
Advantages & disadvantages of calculating inventory management ratios to manage
inventory levels
Advantages of using inventory management ratios include:
1. On average, lower inventory levels resulting in cost savings;
2. Efficiency savings due to economic order quantities;
3. More responsive to inventory demand fluctuations;
4. Avoid costs and losses associated with running out of inventory;
5. Applicable for a wide range of inventory.
Disadvantages of such a system include:
1. As there is no sequence to re-ordering, the system can involve variations – with many
orders at one time and few at other times;
2. Economic order quantity assumptions may not always be valid and may not suit all
circumstances;
3. Resources are required to collect data and perform calculations.
In general it is recommended that a re-ordering system should be implemented in conjunction with
‘pareto analysis’ (i.e. with a concentration on high-value / high-activity inventory items)
END OF SOLUTIONS
30