Suggested solution for the past exam (2 hours)

Question 1 (6*6=36):

1. Relevance relates fundamentally to ‘bearing upon’ the decision at hand in either a confirmation or  prediction  capacity  (or  mentioned  decision  usefulness).  Reliability  relates  to  ‘faithfully representing ’ what it purports to represent, and is a link to the dual ideas of objectively and neutrality (or mentioned free from error).

The possible conflict relates to obtaining the appropriate balance between the two as relevance is often inversely related to the passage of time, while reliability is positively related to the passage of time (or keywords: one related to historical data, another involves future prediction)

2. Profit is calculated based on accrual accounting. It is likely that the profit is considered in this year's calculation but the cash will only be received in the future or may never be received.

Management choices: depreciation method

Estimations: useful life, provision for doubtful debts

3. Internal: manager, owner, employee, or director External: government, supplier, competitor,           customer, lender, community (if other answer makes sense, please give the credit). With indication of internal or external.

4. While a policy of ignoring fixed costs is theoretically not correct, it will result in correct decisions much of the time. In many situations, this policy will result in the correct disregarding of the fixed costs because the fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term.

The correct method is to consider whether or not the ‘fixed costs’ will change with the decision being made. If a cost change will result because of the decision, the costs are relevant and should be considered.

5. Two ways are commonly used in practice:

1)   The shareholders may insist on closely monitoring the actions of the directors and the way in which they use the resources of the company (mark by keywords)

2)   The shareholders may introduce incentive plans for directors that link their pay to the shared performance of the company. In this way, the interests of the directors and shareholders will become more closely aligned (mark by keywords).

6. answer must be composed of: (i) selling price per unit, (ii) cost price per unit, and (iii) fixed costs:

Potential Answers include addressing the following sub-questions as follows:

•   Is it possible to increase theprice charged per room? This may involve some changes in fixed costs and variable costs as well if a price increase is only possible by improving the facilities or the service. Alternatively, it may involve  additional  marketing,  or  alignment  with  other  accommodation groups to boost sales.

•   Is it possible to reduce the variable cost per room? This could involve direct staff costs (service, cleaning, commissions, laundry), direct material costs (towels, toiletries, water, paper etc.) and other direct costs (gas, electricity).

•   Is it possible to reduce the fixed costs in the longer term? Possible options may include converting some rooms into other income-generating facilities (offices,  shops,  restaurants,  gymnasium)  or  reducing  other  fixed  costs (utilities,     depreciation,    refurbishments,     insurance,     administration, marketing, cleaning etc.).

Question 2 (13 marks)

1.   Straight-line: (14,500-1,500)/4=$3,250

Reduce-balance: First year: 14,500*43%=$6,235; (6 marks)

Second year: (14,500-6,235)*43%=$3,554

Unit of production(14,500- 1,500)/20,000*3,800=$2,470 (6 marks)

2.   Income statement: Operating exp - → Profit

3.   Balance sheet: Accumulated depreciation → total assets Depreciation exp is not cash.

Question 3 (13 marks)

1.   (8 marks)

Based on the data analysis, the company should reject the offer and should continue to produce the carburettors internally.

2. (5 marks)

With the consideration of opportunity cost, the company should accept the offer and purchase the carburettors from the outside supplier.

Question 4 (20 marks)

Sales budget  8 marks

Expected cash collections: 12 marks