ACCN08008 ACCOUNTANCY 1B 2022
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ACCOUNTANCY 1B
ACCN08008
2022
QUESTION 1 - Obligatory
Edinburgh Homewares Ltd. operates a furniture business with current total annual sales of £30 million. Sales have increased dramatically during the pandemic due to the growth in online orders and associated deliveries, and the company now wishes to reassess where things are at for its business, and to make a decision on a number of matters for the future, one of which relates to delivery options.
The company currently operates a fleet of 10 vans which distribute from a central depot to regional customers, and also for deliveries to an international courier agency for orders which have come from outside the country
The van fleet is now due for replacement, and this gives the company the opportunity to consider two alternatives in respect of the future operation of its activities:
Replace the ten vans, so that the company itself may continue with its own
delivery service for a further four years;
or
Contract out the delivery activities to an independent service provider for a
contract period of four years.
The following information is available:
(1) New vans cost £30,000 each, with a trade-in value of £50,000 in total on the existing vans against the purchase cost of a new fleet. The new vans would be expected to realise £10,000 each at the end of their four-year useful lives. If the company decides instead to contract out the delivery activities it would sell the existing delivery vans on the open market but would only expect to receive £40,000 in total for them in this way.
(2) The annual operating cost of each van is the driver’s salary cost of £25,000, and other costs per van (excluding depreciation) of £8,000.
(3) Straight-line depreciation is allowed on the vans over four years, based on original cost less expected residual value.
(4) Rapid Logistics Ltd. is a collection and delivery service provider. It has quoted a fixed fee of £500,000 per year to carry out the deliveries required by Edinburgh Homewares Ltd over a contract period of four years The first payment would be paid upfront immediately, and the further three payments made at the end of each of the following three years.
(5) In the event of the delivery services being undertaken by an outside contractor, the ten van drivers would be made redundant with an expected average redundancy payment to each driver of £10,000. This would happen as soon as the contract with Rapid Logistics began.
(6) The relevant cost of capital is 15%. Ignore taxation charges.
QUESTION 1 Requirement:
(a) Calculate the present value of the total cash outflows to Edinburgh
Homewares Ltd. of replacing the ten vans and the cost of directly
operating the collection and delivery service over the next four years. (16 Marks)
(b) Calculate the present value of the total cash outflows to Edinburgh
Homewares Ltd. of contracting with Rapid Logistics for the provision of collection and delivery services for the same four-year period.
(16 Marks)
(c) Considering the present value costs of the alternatives and relevant qualitative factors, discuss which of the two alternatives may be the more advantageous for Edinburgh Homewares and for the company’s shareholders.
(18 Marks)
QUESTION 2 – OBLIGATORY. ANSWER BOTH PARTS (A) & (B)
QUESTION 2 (A) (25 marks)
Andrew and Annie Baird operate a number of gift shops, Baird Gifts, in Scotland selling a range of products which are attractive to tourists. Some of these products are manufactured at their own production facility and some are bought in as finished product. They are now planning to offer a new range of luxury cashmere scarfs which they will purchase from a manufacturer in Aberdeen. The details for the expected sales and costs for this range of scarfs for the next four months are as follows:
(1) Budgeted sales in units:
MAY
150
JUNE
200
JULY
300
AUG
400
(2) Each scarf will sell for £160. On the basis of past experience 30% of sales will be for cash and 70% by card. The proceeds from sales by card are received from the card company in the month after sale.
(3) Each scarf will cost £80 per unit. The business will keep a stock of 50% of the following month’s requirements . Sales in Sept are expected to be the same as August. The full requirement for May will be purchased in that month. Suppliers will be paid in the month following purchase.
(4) The business will employ a new part-time marketing assistant to build up the profile of the new product and increase sales over time both in the shops and online. This salary for this person will be £2,500 per month.
(5) The business will receive a grant of £3,000 in June from the Local Enterprise Board who are tasked with promoting local businesses.
QUESTION 2 (A) Requirement:
(a) For the first 4 months of trading prepare the following for Baird Gifts for the new product of the cashmere scarfs:
(i) A Sales/Receivable budget
(ii) A Purchases/Payables budget
(iii) A Cash budget for the 4 months and in total. (15 marks)
(b) For the manufacturing side of their business Andrew and Annie are
finding that their budgets have not been very accurate in that the differences between the figures budgeted and the actual figures have been quite significant, however they are unsure as to what these variances mean. Explain briefly to Andrew and Annie five variances which may have arisen in their production operations and what each variance represents.
(10 marks)
QUESTION 2 (B) (25 marks). Answer both parts (i) and (ii)
Part (i)
(a) Caliban LLC. is a software company with 50 employees based in
Dundee. The company has three Business Units (BU), one focused on game development, one on educational software and one on Custom Software Development (CSD) contracts, providing tailored solutions to clients with specific software demands. The company has a sales and aftersales team that services the three BUs. The company has been measuring the performance of its three BU managers based on profitability measures. The sales department’s costs are assigned to the three BUs proportionate to their revenues. During the last two years, with rapid growth of the company, there have been increasing challenges with the performance measurement system . Employee turnover has increased and some clients have raised flags regarding the decreasing quality of the company’s service.
How can narrow reliance on financial targets for
evaluation/compensation in the company’s performance management system lead to the above issues? Identify three side effects of “financial myopia” or narrow reliance on financial measures in performance
evaluation. (3 marks)
(b) In addition, there has been increasing conflict among BU managers. The
manager responsible for the CSD BU thinks the sales team does not put enough effort to get new custom software contracts and that it is unfair that she loses her bonus as a result. What is this problem called: when a manager’s performance is evaluated based on performance measures
over which they do not have sufficient control? (2 marks)
(c) To address this problem the CEO has decided to change its
performance measurement system to a combination of financial and non-financial measures over which BU managers have more control. They have decided to implement a balanced scorecard (BSC). For the CSD BU, the company’s strategy is to improve its same account sales (new sales to existing clients) by increasing customer satisfaction, and by improving speed of product delivery and quality of aftersales services. Please mention the four perspectives of BSC. Mention at least one objective per BSC perspective that would help the CSD BU achieve its strategy. For each objective suggest one measure, target and initiative to
achieve it. (10 marks)
(d) Why do you think your proposed non-financial measures are effective? Please mention three features of an effective non-financial measure.
(3 marks)
(e) Mention on which basis you would set your targets for performance
measures (at least two sources). (2 marks)
Part (ii)
Clean Ltd. is a producer of electric bicycle batteries. Recently there has been an increase in battery related fires at client sites – leading to a major fine and product recall for the company. Furthermore, the company’s batteries are more costly to recycle compared to competition. Measurement of managerial performance is currently based on profitability. Environmental costs / fines are treated as indirect costs, and allocated to different products proportionate to their revenues. What method can the company use to convert these costs to direct costs for each product, so that BU managers would focus more on improving each product’s safety and environmental footprint? How can estimated costs related to future product accidents be included in their cost analysis?
(5 marks)
2022-08-16