112 113 114 ON? MANAGING a, ORGANIsaT) : Sect! oBsective TEST QuesTIONS + ND CONTROLLING THE PERFORMANCE OF ONAL UNITS Transfer prices (ii) Level of invent (ili) Discret ‘ory in the division ‘nary fixed costs incurred in the division (iv) Apportioned head office costs (i), (ii), (iii) and (ivy (i), (i) and (iti) only {i) and (ii) only 90 @ > (i) only Withi ; ny decentralised organisations, there may be cost centres, investment centres and Profit centres. Which of the following statements is true? A Cost centres have a higher degree of autonomy than profit centres B Investment centres have the highest degree of autonomy and cost centres the lowest Cc Investment centres have the lowest degree of autonomy D Profit centres have the highest degree of autonomy and cost centres the lowest ‘A company makes three products xx, yy and zz. The following information is available Xx yv Zz $ $ $ Sales 18,000 40,000 68,000 Variable costs 10,000 35,000 48,000 Fixed costs 5,000 9,000 14,000 Profit/(Loss) 3,000 (4,000) 6,000 It is believed that a percentage of the fixed costs relating to product YY are avoidable. + be avoidable if the company is is ini ‘entage of fixed costs that must what the rou ( fate to the nearest whole percentage.) to cease producing product Y¥? (CalculSUBJEC coming period is 415 HULME pudgeted information for the forthe B 25 foloy, visions. BU as ont pivision pivision E an 000 $000 $000 $000 700 560 150 ae sales (550) (ao) (100) (1.050) Variable costs 50 = ib 150 120 : Contributior 450 Fixed costs (130) profit e 116 117 118 h division being split between T, 4 4. of the fixed costs are specific to eac! spectively. be kept open by Hulme given that their objective is to maxim, Eighty per cent in the ratio 3:4:1, 1 which divisions should profit? performance using @ number of key ratios. This incius. ¢ not to fall below a value of 2. ecasts to date predict that receivables will fluctuate between $135,000 and $142, 17,000 and $22,000. The company has no inventory. ed overdraft permitted if the company is to achieve it: A service company evaluates its the current ratio which is targete Fore and payables between $: What is the maximum budget target? n has a return on investment of 18% and an asset turnover of two times. What s the division’s net profit margin? fan organisation is divided into a number of divisions, each of which operates as 2 Po centre. Which of the following would be useful measures to monitor divisional performance! (i) Contribution (ii) Controllable profit (iii) Return on investment (iv) Residual income (v) Economic value added A (i)only B (i)and (ii) only c (iii), (iv) and (v) only D — Allof themis : SECTINN © a OBJECTIVE TEST QUESTION ‘os, This includes the 119A company evaluates its performance using a number of key ratios. This inc! Current ratio which is targeted not to fall below a value of 1.7. Forecasts for the elements . 19,600 of working capital are inventory $14,800, receivables $ and payables $144,000, What is the minimum bud te its igeted bank balance permitted if the company is to achieve it: target? $ 120 Adivision has a net profit margin of 16% and an asset turnover of 0.9 times. What is the division’s return on investment? 121A company has an asset turnover of 5 and a net profit margin of 4%. It has profits of $80,000. What is the value of its capital employed? $| 122 Extracts from 8's master budget for the latest period are as follows: Income statement $000 Revenue 5,440 Gross profit 2,730 Profit from operations 900 Balance sheet Non-current assets 1,850 Inventory 825 Receivables 710 Bank 50 Current liabilities 780 Calculate the following figures: The operating profit margin for the budget period | 1% 5 le: The total net asset turnover for the period | | times (2 d.p.) The budgeted current ratio | times (2 4.p.) The budgeted quick (acid test) ratio | times (2 d.p.)tee eee 423 DBHOLDINGS 1D ition of DB Holdings Ltd. You have | posi mment on the financia ie You have been asket ewo most recent sets of the company’s audited accounts which a obtained copies 0 summarised as follows _ void All figures in $000 400 2,200 Equipment net of depreciation ean aan Premises 60 1,080 Inventory 320 980 Receivables a 120 Cash/(Over sno a Payables 7 4,760 4,200 ee q 1,600 1,600 ch it / Share capital aang 1,400 Loan from Directors , os Cumulative retained profits 960 ? Capital 4,760 4,200 Revenue (sales) 4,800 5,800 Operating profit 320 420 80 180 Dividends paid You know that due to the nature of the company's business, purchases. The chairman of DB Holdings has recently quoted in the press: most of its business costs arz DB Holdings has always been a profitable company. However, we are following 2 growth strategy and this has put pressure on cash flow. We have a number of new clien signed up and believe the future is bright. Calculate the following business metrics for DB Holdings Ltd. in 2013 (first column) anc 2014 (second column) ROCE Profit margin on sales i cae — Receivables days Inventory days = . Payables days r _ Cash conversion period —125 126 127 : Na OBJECTIVE TEST QUESTIONS : SECTION 7 ongoing operations, The purchase of a new piece a een pro by a member of the a pi t pi es nr of equipment has been proposed ; estima investment of $855,009 4 that it will boost profits by $128,000 per annum for an Is the divisional manay er Til beneft or the dete Be fikcly t© accept or reject the investment? Will this be to the nt of the company? Accompany h ‘as seta target ROL of 14% for j 7 of capital, Or its divisions, this is based on the company’s cost Division D achieved an ROI of 8% ongoing operations. However, annum can be obtained by inve last year and is not expecting any major change from 2 manager has suggested that cost savings of $15,000 per sting $135,000 in upgrading a particular piece of equipment Is the divisional mana iger likely to accept or th tment? Will this be to thi Rem ermeteree Pt oF reject the investment? Will this e int of the company? ‘A company uses ROI to assess divisional performance, but it is considering switching to Ri The company’s cost of capital is 15%, Division C has an RO! of 21% which is not expected to change. An investment of $155,000 is available, which is expected to Yield profits of $28,000 per annum. 's the manager of division C likely to accept or reject the investment if ROI is used to assess performance? Would this change if RI was used? Division G of a large company is approaching its year end, The division is evaluated using ROI with a target rate of return of 15%. The division has control of all aspects of its operation except that all cash balances are centralised by the company and therefore left off divisional balance sheets. The divisional manager is considering the following options. (i) To delay payment of a supplier until next year, the potential prompt payment discount of 5% will be lost. The debt is for $27,500. (ii) To scrap a redundant asset with a book value of $147,000. The manager has been offered $15,000 as immediate scrap proceeds, whilst he is fairly confident that he could get $25,000 in an industry auction to be held at the start of the new year. Assume that the manager is very short-termist (i.e. only considers the implications for this year) and that the expected ROI for the year, before these options, is 18%. Which of the following represents the most likely combination that the manager will choose? (i) (i) Delay Scrap now Delay Scrap next year Donotdelay Scrap now Scrap next year SO wm > Do not delaySUBJECT P2: ADV! 128 A divisionalised 129 130 131 46 anced MANAGEMENT ee — pricing as part of its Management infor, divisional profit 3 of fixed cost is absorbed company uses transfer assessed on their tem. Each manag system nit for $10 variable cost and $: ; absorbs $4 ble cost and a ther $8 varial msn : ; ts and all fixed costs are un avoidable ein the short run Select ALL that apply of division Ais likely \y to produce the un to produce the units The manage manager of divisions B is likel , production should occur From the company’s perspectiv The transfer price is. goal congruent. Which of the following is NOT a method of transfer pricing? A Cost plus transfer price 8 _ Internal price c Market-based transfer price D Two part transfer price ernally to its subsidiary RM Ltd, 25 well asco ~ TM plc makes components which it sells int own external market. ‘The external market price is $24.00 per unit, which yields a contribution of 40% of sale external sales, variable costs include $1.50 per unit for distribution costs, which ficient capacity to meet all of the interna! incurred on internal sales. TM plc has sui external sales. In order to maximise group profit, at what unit price should the component be transferrec to RM Ltd? Division A makes alphas which are converted into betas by division B. A’s variable cos oe ee unit ae are $80 per unit. B sells completed betas for $290 each. There $ intermediate market for alphas with a price of $18 : Sea pr $180 which significantly exceeds the ¢3P3" (i) Assuming that B cannot buy from the market in alphas (but A can sell into t'’ market), what is the wi market) wh widest range of TP that encourages the divisions to trade W" $ to i $ fe market in alphas (but B can buy ff0™ es TP that now encourages the divisions to tral (ii) Assuming that A cannot sell into th market), what is the widest with each other? ‘ance of132 133 134 1 OBJECTIVE TEST QUESTIONS : SECTION One of the main reasons for adoptin, a a centralised organisati '& @ decentralised organisation in preference to 'on structure is the: A improved goal cor : NBruence between the Is als of the organisatine ween the divisional manager's goals and the 80: availability of tes. Y of less subjective measures of performance C improve: ‘4 communication of information among the organisation’s managers ° rapid response of 1 pid resp f management to environmental changes A company has the following balance sheet totals at the end of its most recent financial year: $million Non-current assets 3.64 Current assets 0.42 Share capital and reserves* 2.69 Long-term debt 1.00 Current liabilities 0.37 * Includes retained profit for the year of $320,000 after deducting: Ordinary share dividends $200,000 Interest on long-term debt $100,000 Taxation $70,000 Calculate, to 1 d.p., the Return On Investment (ROI) of the company for the year (using end-year balance sheet values for investment). % A division of a company has capital employed of $2m and its return on capital is 12%. it is considering a new project requiring capital of $500,000 and is expected to yield profits of $90,000 per annum. The company’s interest rate is 10%, if the new project is accepted, the residual income of the division will be: A $40,000 B $80,000 Cc $30,000 D $330,0002; ADVANCED SUBJECT P: fi | yea its in the last financial year the following rest! 135 Division M has produce or 360 ae Non-current assets 1,500 100 136 ed ane Net current assets al assets are valued at original cost For evaluation purposes all division ic considering a project which will increase anrual net Profit by $25 op There is an 18% apital charge on investments. criteria of Return on Investment (gc, Given these circumstances, will the evaluation (RI) motivate Division M manat i Residual Income gement to accept this project? Ro) RI A Yes Yes sp Yes No c No Yes No No summary financial statements are given below for one division of a large divisior. company. summary divisional financial statements for the year to 31 December Balance sheet Income statement $000 $000 Non-current assets 1,500 Revenue 4,000 Current assets 600 Operating costs 3,600 Total assets 2,100 Operating profit 400 —— ___ Interest paid 70 Divisional equity 1,000 Profit before tax 330 Long-term borrowings 700 = Current liabilities 400 Total equity and liabilities 2,100 The cost 7 ; the re Ms eee is estimated at 12% each year. Annual rate of interes 5. All decish a : taken by central management. decisions concerning the division's capital structue ** 7 “en Return on Investment (ROI) for the year ended 31 December is: B 19.4% C 23.5% D = 33.0%137. Summary financial statement. cae S are given below for one division of a large divisionalised OBJECTIVE TEST QUESTIONS : SECTION 2 Balance sheet Income statement Nom-current assets oe sooo Current assets - Poem see 600 Operating costs. 3,600 Total assets . 2,100 Operating profit 400 — Interest paid 70 Divisional equity 1,000 a ooo Profit before tax 330 Current liabilities 400 _ Total equity and liabilities 2,100 The cost of capital for the division is estimated at 12% each year. Annual rate of interest on the long-term loans is 10%, nea i rene All decisions concerning the division's capital structure are taken by central management The divisional Residual Income (RI) for the year ended 31 December is: A $160,000 B $196,000 C $230,000 D $330,000 138 A division has net assets of $420,000. The profit statement for the division for the latest period is as follows: $ Revenue 630,000 Variable costs 390,000 Contribution 240,000 Attributable fixed costs 180,000 Allocated central costs 25,000 5, Divisional profit aoa ting in a machine costing $50,000. The machine tof capital is idering inves 0 cone eration, of $5,500. The company’s COs The divisional manager is fter depreciati would earn annual profits, 3 10%.UNTING SUBJECT p2; JANAGEMENT ACCO ADVANCED M tment, without the NeW Machine, wes! : 139 140 in Calculate the division’s controllable return 0” % +, with the new machine: n investment, Calculate the division’s controllable return 7 division with the new machine: e th Calculate the controllable residual income for division without the new machine: e Calculate the controllable residual income for the $ 5,000, after charging historic An investment centre has earned an accounting profit of ae doubtful debts by $8,092 cost depreciation of $22,000 and increasing the provision Jacement cost the depreciatig, $12,000. If the non-current assets had been valued at repla or charge would have been $41,000. a ind the repl. nent The net book value of the investment centre's net assets is $420,000 a placemen cost is estimated to be $660,000. The organisation’s risk eee of capital is 14% bus it has a large bank loan which incurs annual interest charges of 10%. Ignoring taxation, the economic value added (EVA) for the investment centre is: A $29,920 B $31,040 Cc $31,600 D $56,800 Division G has reported annual operating profits of $20.2 million. This was after charging $3 million for the full cost of launching a new product that is expected to last three years. Division G has a risk adjusted cost of capital of 11% and is paying interest on a substantial bank loan at 8%. The historical cost of the assets in Division G, as shown on its balance sheet, is $60 million, and the replacement cost has been estimated at $84 million Ignore the effects of taxation. What would be the EVA for Division G? A $15.4 million B $11.48 million C $10.6 million D $12.74 milliona OBJECTIVE (Eo) Me tar The following data hav © been extracted from a company’s year-end accounts Turnover $ Gross profit 7,055,016 Operating profit 4,938,511 Non-current assets 3,629,156 Cash at bank 4,582,000 Short term borrowings 4,619,582 Trade receivables 949,339 Trade payables 442,043 464,692 calculate the following four performance measures: (i) Operating profit margin (ii) Return on capital employed (ii) Trade receivable days (debtors days) (iv) Current (Liquidity) ratio. 142 Which of the following best describes an investment centre? ‘A Acentre for which managers are accountable only for costs. e form of B A centre for which managers are accountable only for financial outputs in th generating sales revenue. c Acentre for which managers are accountable for profit. D Acentre for which managers are accountable for profit and current and non-current assets. Centre 1 and Centre 2. Centre 1 transfers one third of its output 143 ABC has two profit centres, mainder on the external market for $28 per unit. The transfers to Centre 2 and sells the re! to Centre 2 are at a transfer price of cost plus 20%, the transferred unit, which is then sold te costs are $20 per unit and the budgeted s for either profit Centre 2 incurs costs of $8 per unit in converting external customers for $40 per unit, Centre 1 output for period 6 is 450 units. There is no budgeted change in inventorie: centre. The budgeted results for Centre 1 and Centre 2 for period 6 will be: Centre 1 Centre 2 A $1,800 profit $2,400 profit 3 $3,000 profit $1,200 profit C $3,000 profit $4,800 profit D $3,900 profit $2,400 profitSUBJECT Per AU VEN eee” 144 145 yr prices are correct? Which of the following statements about market-based transfer pI the item is likely to be indifferent between buying externally (i) A profit centre buying it and buying the item from within the business. ge profit centres buying the item ‘A transfer price at market value might not encoural (ii) to utilise spare capacity A {ijonly B (ii) only C Both (i) and (ii) D Neither (i) nor (ii) X plc, a manufacturing company, has two divisions: Division A and Division B. Division 4 it transfers to Division B and also sells produces one type of product, ProdX, which externally. Division B has been approached by another company which has offered to supply 2,500 units of ProdX for $35 each. The following details for Division A are available: $ sales revenue Sales to Division 8 @ $40 per unit 400,000 External sales @ $45 per unit 270,000 Less: Variable cost @ $22 per unit 352,000 Fixed costs 100,000 Profit 218,000 External sales of Prod X cannot be increased, and division B decides to buy from the other company. The annual (increase/reduction)* in divisional profit for Division A amounts to: sl The annual (increase/reduction)* in profit for Company X amounts to: s[ (*) Delete as appropriateOBJECTIVE TEST QUESTIONS : SECTION 2 146 X and Y are two divisions 147 of Newtyh i production cost and market price shes ies X manufactures one product, Alpha. Unit S follows Direct materials Direct labour Fixed overhead Prevailing market price $16 product Alpha is sold Outside the company in a perfectly competitive market and also t petitive market and also to Division Y. If sold outside the compan which are not incurred on internal ele incurs variable selling costs of $2 per unit If the total dem and for Alpha were more than sufficient for Division X to manufacture to capacity, at what price would aren the company prefer Division X to transfer Alpha to A $10 B $11 c $14 D «$16 Division A transfers 100,000 units of a component to Division B each year. The market price of the component is $25 per unit. Division A's variable cost is $15 per unit. Its fixed costs are $500,000 each year. What price per unit would be credited to Division A for each component that it transfers to Division B under marginal cost pricing and under two-part tariff pricing (where the Divisions have agreed that the fixed fee will be $200,000)? Marginal cost Two-part tariff pricing pricing A $15 $15 B $25 $15 c $15 $25 D $25 $25r, The market price ‘h yeal onent to Division T eac! : Horne tonnet gan Den os varhoble cost Is $28 per unit. Division S's fixed costs of the component is $40. Division S' are $380,000 each year. hat it tr What price would be credited to Division $ for each component thai ransfers to Division T under. (a) Two-part tariff pricing (where the Divisions have agreed that the fixed fee will be $160,000)? (b) Dual pricing (based on marginal cost and market price)? Two-port tariff D Dual pricing A $28 c $40 c $28 a0 D $33 $28 149 CD Globes transferred 11,000 units of product N from its manufacturing division in Canada to its selling division in the UK during the year just ended. The manufacturing cost of each unit of product N was $120 (75% of which was variable cost). The market price for each unit of product N in Canada was $300. The Canada division's profit after tax for its sales to the UK division for the year ended was $1,100,000 The UK division incurred marketing and distribution costs of £40 for each unit of Product N and sold the product for £250 a unit. The UK tax rate was 25%. (Exchange rate: £1 = $1.50) If product N had been transferred at the Canadian market price, the tax rate in Canada must have been (to the nearest percentage point): A 32% B 36% Cc 40% D 44% 150 CD Globes transferred 11,000 units of product N from its manufacturing division in Canada to its selling division in the UK during the year just ended, The manufacturing cost of each unit of Product N was $120 (75% of which was variable cost). The market price for each unit of product N in Canada was $300. The Canada division's profit after tax for its sales to the UK division for the year ended was $1,100,000. The UK division incurred marketing and distribution costs of £40 for each unit of product N and sold the product for £250 a unit. The UK tax rate was 25%. (Exchange rate: £1 = $1.50) If the transfers had been made at variable cost, the UK division's profit after tax would have been: A £950,000 B £987,500 © £1,050,000 D £1,237,500 54OBJECTIVE TEST QUESTIONS = MW Ltd is wi h to ae oa holding company with an overseas subsidiary, The directors of CMW Ltd wis! er Profits from the UK to the overseas company. e consideri They are considering changing the level of transfer prices charged on goods shipped from the overseas subsidiary to ¢ toits subsidiary © CMW Ltd and the size of the royalty payments paid by CMW Ltd In order to transfer profi CMW Ltd should: Profit from CMW Ltd to the overseas subsidiary, the directors of Increase both the tran A ase both the transfer prices and royalty payments. B _ Increase the transfer prices but decrease royalty payments Decrease the transfer prices but increase royalty payments 0D Decrease both the transfer prices and royalty payments 's two divisions, Y and Z. The following budgeted information is available 152. W Division Y manufactures motors and budgets to transfer 60,000 motors to Division Z and to sell 40,000 motors to external customers, Division Z assembles food mixers and uses one motor for each food mixer produced. The standard cost information per motor for Division Y is as follows: Direct materials 5 Direct labour 2 Variable production overhead 10 Fixed production overhead 40 Fixed selling and administration overhead 10 150 Total standard cost In order to set the external selling price the company uses a 33.33% mark up on total standard cost. Calculate: The budgeted profit/(loss) for Division ¥ ifthe transfer price is set at marginal cost: $ The budgeted profit/(loss) for Division ¥ if the transfer price is set at the total production cost:SUBJECT P2: ADVANCED MANAGEMENT ACCOUNTING a re 153 The KL Company provides legal and secretarial services to small businesses. KL has two divisions. Secretarial Division This division provides secretarial services to external clients and to the Legal Division, |t charges all its clients, including the Legal Division, at a rate of $40 per hour. The marginal cost of one hour of secretarial services is $20. Legal Division The Legal Division provides legal services, One service, called L&5, involves a combination of legal and secretarial services. Each hour of L&S charged to clients involves one hour of legal services and one hour of secretarial services. The secretarial element of this service is purchased from the Secretarial Division. The likely demand for L&S at different prices is as follows. Demand (hours) Price per hour ($) 0 100 1,000 90 2,000 80 3,000 70 4,000 60 5,000 50 The marginal cost of one hour of legal services is $25. Calculate the level of sales (hours) and total contribution of L&S that would maximise the Profit from this service FOR THE LEGAL DIVISION. Assume the Legal Division pays the Secretarial Division at a rate of $40 per hour for secretarial services. hours (level of sales) _ ] contribution Calculate the level of sales (hours) and total contribution that would maximise the profit from L&S FOR THE KL COMPANY AS A WHOLE. | hours (level of sales) | contribution154 155 sales revenue Less variable costs Less fixed costs Less depreciation Net in Assets The cost of capital is 13% per annum, tribution come closest to: A 4.84% B 4.74% cC 5.77% D 6.07% i) oBsective TEST QUESTIONS 4 The annual operating statement for a company is shown below: sooo 800 390 410 90 20 300 $6.75m, The return on investment (RO!) for the company is The annual operating statement for a company is shown below: Sales revenue Less variable costs Contril Less fixed costs Less depreciation bution Net income Assets The cost of capital is 13% per annum. $000 800 390 410 90 20 300 $6.75m The residual income (Rl) for the company is closest to (in $000): A B c D (467) (487) (557) (577)156 157 158 the year of $89.2m after cha... “ Sree Demi that is expected to last forte {of capital is 139% per annum. The balance share st of $120m. A note to the bal, assets at the beginning of the ‘A company has reported annu $9.6m for the full development costs of current year and two further years Mee capitals for the company shows fixed assets with a hist oe net estimates that the replacement cost of these fix Pane The assets have been depreciated at 20% per year is $168m, The assets lance. Year The company has a working capital of $27.2m. ignore the effects of taxation. The Economic Value Added’ (EVA) of the company ir closest to: A $64.16) 8 $70.56m c $83.36m D — $100.96m 2P plc operates two subsidiaries, X and Y. X is a component-manufacturing subsidiary ang y is an assembly and final product subsidiary. Both subsidiaries produce one type of outpy. only. Subsidiary Y needs one component from subsidiary X for every unit of Product y, produced. Subsidiary X transfers to Subsidiary Y all of the components needed to produce Product W. Subsidiary X also sells components on the external market. The following budgeted information is available for each subsidiary: x y Market price per component $800 Market price per unit of W $1,200 Production costs per component $600 Assembly costs per unit of W $400 Non production fixed costs $1.5m $1.3m External demand 10,000 units 12,000 units Capacity 22,000 units Taxation rates 25% 30% The production cost per component is 60% variable. The fi i - The fixed osts ate absorbed based on budgeted output. Production ¢ X sets a transfer price at marginal cost plus 70%. Calculate the post-tax profit generated by each subsidiary. Investment appraisal: Itis an absolute measure of increase in shareholder wealth Itis commonly used and understood Ituses objective profits instead Of subjective cash fl lows It leads to goal congruent decisions It cannot be manipulated O0O0000 It can be used to compare projects of different si izes459 160 161 acion X" OBJECTIVE TEST QUESTIONS : SECTION 2 pivision X's performance is - eons eT controllable by the division, on the following figures: based on ret Calculare, eer" 0" investment (RO!) calculated using figures ‘© 2 decimal places, the RO! % for division X based Net profit $675,000; Capital employed $1 Om Included in net profit are Depreciation on division X's assets of $200.0 ,000 Depreciation on head office assets of $250 04 450,000 Financing costs of $100 »,000 to represent division x's sh company to restructure its financing structy are ol a oan ater out oy Me ire The following statements ha ve been i measure. made with regards to the Return On investment Select ALL that apply: () Projects with a return on inv estment that beat: i capital shoul Sa eeeenie 's the company's cost of capital should (i) Return on investment is a useful tool for evaluating profit centres (iii) Return on investment is best calculated using profit after tax (iv) Return on investment can be broken down into secondary measures of performance A divisional manager currently earning a return on investment (RO!) of 18% is offered a project with the following cash flows: Purchase of machinery: $600,000 Revenue: $20000 per month Variable costs: $5,000 per month Life of project: 5 years Sale of machinery at end of project: $100,000 to improve ROI. Based on the ROI the manager The manager is evaluated on their ability OI th assuming all other divisional activities carry on will achieve after 1 year of the project ( generating a ROI of 18%), should the project be accepted? Select the correct answer below: A Yes, because the project return is greater than the company's cost of capital Yes, because the project ROI is 36%, which is greater than the current return profit over its life B C Yes, because the project makes a his lower than the current return D No, because the project ROI is 16% whic!MANAGEMEN! ©” ct p2: ADVANCED - ar ‘SUBJE! its first ye 162. Anew division has the following figures in relation to “Annual cash flows: $20,000 Assets invested at start of Yea" $50,000 Residual value $5,000 tion policy for assets straight line over 9 years sion as at the end of its first year y, 0 Deprecia t earned by the divi Calculate the return on investmen the nearest whole % come as a performance measure for a | ‘ree 163. Pick TWO strengths of using Residual I organisation/group: A Itbrings home the sed and understood ad of subjective © cost of financing to the divisional manager B _Itiscommonly v ash flows CC Ituses objective profits inste troften leads to goal congruent decisions vision within a D E It cannot be manipulated F sions of different sizes within the di It can be used to compare divi avestment (ROI) of 20% on its investment base 164 A division currently has an annual return on | of $1,200,000. The following additional projects are being considered: Project Investment outlay, in Annual profit in ROI% $000 $000 A 300 100 33 B 700 210 30 c 500 130 26 D 200 44 2 whi vnati “tl mani ae a ae investments wi maximise the division’s return on investment, A Allfour projects 8 A,B andConly C — Aand Bonly D — Aonly 165 winch of the following statements correctl i faces capital rationing? ¥ explains the situation where 2 comps"! A Investment funds are unlimited B Funds are available le to undertake i eee ee € all beneficial projects but a minimum target retU C Insufficient f i lunds are available to undertake all benefi eneficial projects D No further funds are available for capital e her fund: lable f ital di xpenditure167 168 a ES TIVE TEST QUESTIONS ¢ SEG TION 2 yisional Manager a divisional Ber currently earn) r with the following cash flows: MM a return On investment of 15% is offered a project purchase of machinery: $100,099 variable costs: $4,900 per month Revenue: $7,500 per month cle of machinery ert of project: $10 0 Life of project: 5 years 000 she divisional manager's bonus i bes Depreciation method: straight line and is senior enough to influence the 12% Would the manager accept this project? ed on the Resi idual Income wa dual Income achieved by the division ager’ 'Rer's decisions. the company's cost of capital is 10, because the pi AON Project has a negative Residual Income B Yes, because the project has a positive Residual income c Yes, because the pri F Project makes a profit over its life ° No, because the Return on Investment is 13.2% and is less th sth Return on Investment ce ee oa ee The following statements have been made in relation to ROI and RI. Select ALL that apply: ) Residual income will ah in i id Ways increase when investment: 's earnin higher than the cost of capital is undertaken, ad ( turn on inv i (i) Retu estment will always increase when investments earning a return higher than the cost of capital are undertaken. (iii) Using residual income as a performance measure allows easy comparison between divisions. Return on investment will artificially increase over time if net book values of assets tiv) are included in the calculation of capital employed. Calculate the controllable Residual Income (to the nearest $000) of division J (an investment centre) based on the following figures in ($'000): Gross profit 1,000 Operating expenses 600 (see note 1) Net profit 400 Interest 50 (see note 2) Profit before tax 350 Tax 25 (see note 2) Profit after tax 325 head office expenses, i Juded $250,000 as a share o! ee ea Seerenecl $100,000 and depreciation of $150,000 made up of an administration rec! calculated at company level and apportioned appropriately e Note 2: Both interest and tax art to the divisions Capital employed by J: Net assets 3,000 vision J office (which is an ian J factory, worth sm, and the seespmpany is 20% Net assets comprise the division J RE he cost of capital of the company °° ) wor 61 allocated floor of head office!2: ADVANCED MANAGENEN suBJECT P ts: ager is offered 2 projec e effi 169 Adivisional m3 ager is 0 de production machinery ‘0 be mor icient. The ade p ; invest $50,000 to UBT 61 million. Project A: Invent ofthe machinery is 91 current net book value © thy 20% from its current level of $100,000 per annum, . srned should increase by 20° ntributic c sjter which the machinery will be scrapped for $0 ang de will last for 4 years @ ed with new machinery ae replaced to buy a patent that will allow an upgraded version of the 5 million to buy a Pe e Project B: Invest HH per annum will increase from $1M per annum tg fuct to be sold, Re current product ¢ ts will be 60% of revenue. Company policy 15 to a Pao and Vara eos ite traight line basis over their useful lives. The patent will lapse afte depreciate them o' aie! aaa he divisional manager tak an i ivisi Ber The company cost of capital is 13%. What decision will the ce if divisional evaluated based on residual income? A Accept both projects B Reject both projects C Accept A and reject B D Accept B and reject A 170 Why would a company want to encourage the use of non-financial performance pi indicators? A To encourage short-termism B To look at the fuller picture of the business c To enable results to be easily manipulated to the benefit of the manager D To prevent goal congruence 171 Complete the following text f issi 1B by selecting the missing words and Phrases (the same word may be used more than once): a - = — all rofitability ] ti ust! — ___ Profitability - cost returning customers ome from new 5 ation and rcome fi | non-financial customer innovation an Produ | - satisfaction | learning efficiency internal busin, | siness financial | fl survival The balanced scorecard aj 7 - IPProach is ‘idii i involves the inclusion of ror towing information to management whch ———___ infor ide fi ‘Mation alongside financial information. It emphasises the need t ‘0 — caer ie “ser with a set of information which addresses ————_ Performance in an objective and ibs enon172 173 OBJECTIVE TEST QUESTIONS ¢ SECTION 1 although the specific measures us following measures ed may vary, a scorecard would normally include the . ~ the financial perspective . the customer perspective |. innovation ~ the perspective « _ internal efficiency ~ the perspective gy providing all this information in a single report, mat Pl , management is able to assess the impact sfparticular actions on a e of on all perspectives of the c company’s activitis Inds any's activities. Under each perspective, 3 company should state its aims and specify measures of perf asures of performance for example: Aims Measure 1 Financial perspective 2 Customer perspective satisfaction “_— 3 _ Internal business perspective Throughput rates 4 Innovation and learning New products - Which ONE of the following is not a perspective that is monitored by the Balanced Scorecard approach to performance measurement? A Financial B Customer c Supplier D Innovation and learning The following statements have been made about performance measures. Select ALL that apply: (i) fa company uses a balanced scorecard approach to provide information, use ROI or Residual Income as divisional performance measures. it will not investments earning above the cost of (ii) The residual income will always increase when i capital are undertaken. card approach to the (ii) The internal business perspective of the Balanced Score ation of internal provision of information is concerned only with the determin: transfer prices that will encourage goal congruent decisions. (iv) An advantage of the residual income performance measure is that it facifitates entres. comparisons between investmentSYRTECT SE ADVANCED MANAGEMENT ACCOUNTING ws product A and Product g \ ut lV are two divisions of a company. A makes two produc to Division 8, ions of jucts, ai ly sold hata “ili is Commercialised outside the company. Product B is 0”! MIC Transfer price of $176, Unit costs for Product B are as follows: $ Variable materials 60 Variable labour 40 Variable overheads 40 Fixed overheads 20 160 ly a substitute for Product Division B has received an offer from another company to SUPPLY 8 for $152 per unit. Aas it can produce and the uni, Assuming Division A can sell as much of Product be the effects on profits if Division g profitability of Products A and B are equal, what will accepts the offer? rofit would decrease A Profit in Division A would not change and the overall company P a fit. Id not change, Profit in Division A would decrease and the overall company profit wou! change B c_ profit in Division A would not change and the overall company profit would increase D profit in Division A would increase and the overall company profit would not change 175 UPLC U plc uses Return on Investment (ROI) to assess its divisional performance. U ple estim: that the net cash flows associated with a new piece of machinery will be equal in each o' the five years of the asset's life, but the company’s figures for capital employed ano accounting profit have come under scrutiny, Which methods of stating these two components of ROI will provide figures which are constant from year to year over the five year life of this new asset? Capital employed Accounting profit A Gross book value Profit after charging depreciation on a reducing balance basis BG it f ross book value Profit after charging depreciation on a straight line basis C Net book val value Profit after charging depreciation on a straight line basis D Net book value prof after charging depreciation on a reducing balance is