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MANG6026 W1

MANAGEMENT ACCOUNTING 1

SEMESTER 1 TIMED INDIVIDUAL ASSESSMENT 2021-2022

Question One

Linux Optical Products Ltd manufactures highly specialised optical equipment for surveillance purposes. There is a high demand for their products, but the company operates under the constraint of a shortage of specialist labour which is available at 700 hours a year. The production team is currently formulating a production plan for the company’s two principal products, G and H, for 2021 and wishes to determine the optimal product mix.

Details of the two products are as follows:

(a) Calculate the contribution per unit of limiting factor for products G and H. [10 marks]

(b) Advise the production team on the plan they should follow for 2021. [10 marks]

Question Two

Velos Ltd is a manufacturer of high-end tools for the engineering industry. The mission statement of the company declares that it is dedicated to maximising the value of its shareholders and, since it was formed, the company has grown rapidly. Recently, the company has developed a new type of hammer and the management team is now considering whether this hammer should be manufactured and sold. The following information is available to help evaluate the viability of the new product:

(i) Costs incurred in designing and developing the new hammer, which have all been paid, were £210,000. These costs are to be written off in equal instalments against profits generated over the new product’s expected life of four years.

(ii) Sales are expected to be 17,500 hammers per year over the next four years. The selling price of each hammer will be £40 in the first three years and £35 in the final year.

(iii) Variable costs are estimated to be £16 for each hammer.

(iv) Additional fixed costs are expected to be £297,000 per year. This includes a charge for depreciation of equipment used in the manufacture of the hammers of £82,000 per year and

(v) Equipment that originally cost £800,000 and which has a written down value of £450,000 will be used to produce the activity centres. If the new hammer is not manufactured, the equipment will be sold immediately for £440,000 as it cannot be used for any other purpose. If, however, the hammer is manufactured, the equipment will be sold at the end of four years for £106,000.

(iv) Additional working capital of £130,000 will be required immediately to support the manufacture of the new product. This will be released at the end of the life of the new product.

The company uses the net present value method and the discounted payback method to evaluate new investment opportunities. When applying these methods, the company uses a cost of capital of 11 % and adopts a maximum discounted payback of 2 years.

Ignore taxation.

Required:

(a) Calculate the incremental cash flows arising from a decision to produce the new hammer. [15 marks]

(b) Calculate:

(i) the net present value (NPV), and [10 marks]

(ii) the discounted payback period (that is, based on the discounted cash flows rather than the undiscounted cash flows) [5 marks]

of the new hammer.

(c) Evaluate the investment criteria adopted by the business and state, with reasons, whether the new hammer should be produced. [10 marks]

Question Three

ManCon Limited makes three main products, using similar production methods and equipment. Details of the three products for a typical period are:

Direct labour costs £16 per hour and product overheads are absorbed on a machine hour basis. The rate for the period is £26 per machine hour.

Further analysis shows that the total of production overheads can be divided as follows:

The following activity volumes are associated with the product line for the period as a whole:

Required:

(a) Calculate the cost per unit for each product using traditional methods. [10 marks]

(b) Calculate the cost per unit for each product using Activity-based Costing. [15 marks]

(c) Applying contingency theory approach to discuss how a firm should choose between traditional costing and Activity-based costing methods. [15 marks]