The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large, manufacturing company. Whilst both divisions operate in almost identical markets, each division operates separately as an investment centre. Each month, operating statements must be prepared by each division and these are used as a basis for performance measurement for the divisions.<br>Last month, senior management decided to recharge head office costs to the divisions. Consequently, each division is now going to be required to deduct a share of head office costs in its operating statement before arriving at ‘net profit’, which is then used to calculate return on investment (ROI). Prior to this, ROI has been calculated using controllable profit only. The company’s target ROI, however, remains unchanged at 20% per annum. For each of the last three months, Divisions B and C have maintained ROIs of 22% per annum and 23% per annum respectively, resulting in healthy bonuses being awarded to staff. The company has a cost of capital of 10%.<br>The budgeted operating statement for the month of July is shown below:<br>Required<br>(a) Calculate the expected annualised Return on Investment (ROI) using the new method as preferred by senior management, based on the above budgeted operating statements, for each of the divisions. (2 marks)<br>(b) The divisional managing directors are unhappy about the results produced by your calculations in (a) and have heard that a performance measure called ‘residual income’ may provide more information. Calculate the annualised residual income (RI) for each of the divisions, based on the net profit figures for the month of July. (3 marks)<br>(c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and making any additional calculations deemed necessary. Conclude as to whether, in your opinion, the two divisions have performed well. (6 marks)<br>(d) Division B has now been offered an immediate opportunity to invest in new machinery at a cost of $2·12 million. The machinery is expected to have a useful economic life of four years, after which it could be sold for $200,000. Division B’s policy is to depreciate all of its machinery on a straight-line basis over the life of the asset. The machinery would be expected to expand Division B’s production capacity, resulting in an 8·5% increase in contribution per month.<br>Recalculate Division B’s expected annualised ROI and annualised RI, based on July’s budgeted operating statement after adjusting for the investment. State whether the managing director will be making a decision that is in the best interests of the company as a whole if ROI is used as the basis of the decision. (5 marks)<br>(e) Explain any behavioural problems that will result if the company’s senior management insist on using solely ROI, based on net profit rather than controllable profit, to assess divisional performance and reward staff. (4 marks)

Designit is a small company providing design consultancy to a limited number of large clients. The business is mature and fairly stable year on year. It has 30 employees and is privately owned by its founder. Designit prepares an annual fixed budget. The company’s accounts department consists of one part-qualified accountant who has a heavy workload. He prepares the budget using spreadsheets. The company has a November year end.<br>Designit pays each of its three sales managers an annual salary of $150,000, plus an individual bonus based on sales targets set at the beginning of the year. There are always two levels of bonus that can be earned, based on a lower and an upper level of fee income. For the year ended 30 November 2012, for example, each of the sales managers was given a lower target of securing $1·5m of fee income each, to be rewarded by an individual bonus equating to 20% of salary. If any of the managers secured a further $1·5m of fee income, their bonus would increase by 5% to the upper target of 25%. None of the managers achieved the upper target but all of them achieved the lower one.<br>This is the same every year and Designit finds that often the managers secure work from several major clients early in the year and reach the $1·5m target well before the year has ended. They then make little effort to secure extra fees for the company, knowing that it would be almost impossible to hit the second target. This, together with a few other problems that have arisen, has made the company consider whether its current budgeting process could be improved and whether the bonus scheme should also be changed.<br>Designit is now considering replacing the fixed budget with a monthly rolling budget, which Designit believes will make the budgeting process more relevant and timely and encourage managers to focus on the future rather than the past. It would also prevent the problem of targets being met too early on in the year by the sales managers because the targets would be set for monthly performance rather than annual performance. For example, a manager could be given a target of securing $200,000 fee income in the first month for a reward of 2% of salary. Then, depending on what is happening both within the business and in the economy as a whole, at the end of the first month, a different target fee income could be set for the second month.<br>Required:<br>(a) Explain what a monthly rolling budget is and how it would operate at Designit. (4 marks)<br>(b) Discuss the problems that may be encountered if Designit decides to introduce monthly rolling budgets together with a new bonus scheme, such as the one outlined above. (6 marks)<br>(c) Discuss the problems with the current bonus scheme and, assuming that the company decides against introducing rolling budgets, describe and justify an alternative, more effective bonus scheme that could be introduced. (6 marks)<br>(d) Discuss the risk of using the company accountant’s own spreadsheets for budgeting. (4 marks)

Tablet Co makes two types of tablet computer, the Xeno (X) and the Yong (Y). X currently generates a contribution of $30 per unit and Y generates a contribution of $40 per unit. There are three main stages of production: the build stage, the program stage and the test stage. Each of these stages requires the use of skilled labour which, due to a huge increase in demand for tablet computers over recent months, is now in short supply. The following information is available for the two products:<br>Tablet Co is now preparing its detailed production plans for the next quarter. During this period it expects that the skilled labour available will be 30,000 hours (1,800,000 minutes) for the build stage, 28,000 hours (1,680,000 minutes) for the program stage and 12,000 hours (720,000 minutes) for the test stage. The maximum demand for X and Y over the three-month period is expected to be 85,000 units and 66,000 units respectively. Fixed costs are $650,000 per month.<br>Due to rapid technological change, the company holds no inventory of finished goods.<br>Required:<br>(a) On the graph paper provided, use linear programming to calculate the optimum number of each product which Tablet Co should make in the next quarter assuming it wishes to maximise contribution. Calculate the total profit for the quarter. (14 marks)<br>(b) Calculate the amount of any slack resources arising as a result of the optimum production plan and explain the implications of these amounts for decision-making within Tablet Co. (6 marks)

Cardio Co manufactures three types of fitness equipment: treadmills (T), cross trainers (C) and rowing machines (R). The budgeted sales prices and volumes for the next year are as follows:<br>Labour costs are 60% fixed and 40% variable. General fixed overheads excluding any fixed labour costs are expected to be $55,000 for the next year.<br>Required:<br>(a) Calculate the weighted average contribution to sales ratio for Cardio Co. (4 marks)<br>(b) Calculate the margin of safety in $ revenue for Cardio Co. (3 marks)<br>(c) Using the graph paper provided and assuming that the products are sold in a CONSTANT MIX, draw a multi-product breakeven chart for Cardio Co. Label fully both axes, any lines drawn on the graph and the breakeven point. (6 marks)<br>(d) Explain what would happen to the breakeven point if the products were sold in order of the most profitable products first.<br>Note: You are NOT required to demonstrate this on the graph drawn in part (c). (2 marks)

A company makes two products using the same type of materials and skilled workers. The following information is available:<br>Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is the volume of material purchased.<br>General fixed costs, absorbed on the basis of labour hours, amount to $180,000.<br>Using activity-based costing, what is the total fixed overhead amount to be absorbed into each unit of product B (to the nearest whole $)？

A. $113
B. $120
C. $40
D. $105

Due to recent government incentives to encourage recycling, the standard price of recycled plastic was expected to reduce to $0·40 per kg. The actual price paid by the company was $0·42 per kg and 100,000 baskets were manufactured using 20,000 kg of recycled plastic.<br>What is the materials operational price variance？

A. $2,000 favourable
B. $1,600 favourable
C. $400 adverse
D. $320 adverse

A jewellery company makes rings (R) and necklaces (N).<br>The resources available to the company have been analysed and two constraints have been identified:<br>Labour time 3R + 2N ≤ 2,400 hours<br>Machine time 0·5R + 0·4N ≤ 410 hours<br>The management accountant has used linear programming to determine that R = 500 and N = 400.<br>Which of the following is/are slack resources？<br>(1) Labour time available<br>(2) Machine time available

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

Which of the following statements is true？

A. The target cost will decrease and the cost gap will increase
B. The target cost will increase and the cost gap will decrease
C. The target cost will remain the same and the cost gap will increase
D. The target cost will remain the same and the cost gap will decrease

(i) Inventory levels should be kept to a minimum<br>(ii) All machines within a factory should be 100% efficient, with no idle time<br>Which of the above statements is/are correct？

A. (i) only
B. (ii) only
C. Both (i) and (ii)
D. Neither (i) nor (ii)

(i) A transaction processing system collects and records the transactions of an organisation<br>(ii) An executive information system is a way of integrating the data from all operations within the organisation into a single system<br>Which of the above statements is/are true？

A. (i) only
B. (ii) only
C. Both (i) and (ii)
D. Neither (i) nor (ii)