BE131 Resit moderated Final PDF

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BE131-6-AU/R/1

UNIVERSITY OF ESSEX

THIRD YEAR EXAMINATION 2014 (RESIT)

________________________________________________________________________________

ADVANCED MANAGEMENT ACCOUNTING ________________________________________________________________________________

Time allowed: 2 Hours

The paper consists of FOUR questions.

Candidates must answer TWO questions.

ONE question from Section A and ONE question from Section B

All questions carry equal weight. Statistical Tables attached (see page 6)

Candidates are permitted to bring into the examination room: Calculators (hand held, containing no textual information)

Please do not leave your seat unless you are given permission by an Invigilator. Do not communicate in any way with any other candidate in the examination room. Do not open the question paper until told to do so. All answers must be written in the answer book(s) provided. All rough work must be written in the answer book(s) provided. A line should be drawn through any rough work to indicate to the examiner that it is not part of the work to be marked. At the end of the examination, remain seated until your answer book(s) have been collected and you have been told you may leave.

BE131-6-AU/R/2

SECTION A You must answer ONE question from Section A.

Question 1 Maria Berry operates a factory that produces cakes. The factory operates for 350 days each year. One of the main ingredients that she uses to make the cakes is organic maize. Each finished cake normally contains 0.4 kilogram of maize. The following information is also available:

Cost per kilogram of organic maize Estimated annual cost of carrying one kilogram of maize in stock Estimated cost of ordering and receiving inventory (per order) Expected steady quarterly volume of sales

£2.20 £0.80 £6.00 15,000 cakes

Required: a) Calculate the minimum annual cost of ordering and stocking the item. [20 marks] b) Maria Berry was offered a quantity discount of 5% of the purchase price for orders in excess of 1,000 kilogram. Should she order in batches of 1,000 kilogram and take advantage of quantity discounts? [20 marks] c) Maria Berry has recently heard of just-in-time (JIT) purchasing and wonders if she should be using it in her business. However, she is very concerned that the cost of placing many frequent orders will be too high. Describe the advantages and disadvantages of JIT purchasing, and specifically address her concerns about cost. [10 marks]

[TOTAL 50 MARKS] END OF QUESTION ONE

BE131-6-AU/R/3

Question 2 Twinkle Ltd is an internet business that has enjoyed great success in recent years. Up until now, Twinkle has been using the service of an outside carriage provider to deliver the products to customers. Following their latest strategic review meeting, Twinkle’s management is considering whether to renew their contract with the outside carriage provider for another five years, or to invest in its own transport fleet that will have the same length of useful life. If the contract is renewed, the carriage provider will receive a fixed fee of £300,000 in the first year. This fee will then increase by 10% per cent per annum over the contract period. The transport fleet, on the other hand, will require an initial investment of £800,000. It is also estimated that the following costs would be incurred over the next five years:

Year 1 Year 2 Year 3 Year 4 Year 5

Driver’s Costs (£000)

Repairs & Maintenance (£000)

Other costs – including depreciation (£000)

40 42 45 48 51

12 15 18 20 25

140 165 170 185 210

Additional information:  All fees and costs (i.e., other than the initial investment) would be incurred at the end of each relevant year.  The amount initially invested on the transport fleet will be used to purchase vehicles and other equipment. These assets will be depreciated on a straight-line basis. At the end of year 5, they would be sold for £175,000.  Twinkle’s current cost of capital is 10%.  The company defines accounting rate of return (ARR) as ‘average annual profit divided by average investment’.  If Twinkle decides to renew the carriage provider’s contract, the money that would have been initially invested to set-up the transport fleet can instead be invested in an alternative project. This alternative project, which one of the directors believes would increase the company’s risk profile by some degree, has the following projected returns: Payback period Accounting rate of return (ARR) Net present value

= 3 years = 35% = £185,000

Required: (Note: Taxation and inflation can be ignored) a) Prepare a table showing the net cash savings (annually and in total) to be made by Twinkle over the life of the transport fleet project. [10 marks] Continued…..

BE131-6-AU/R/4

b) Calculate, for the transport fleet project: i. Payback period ii. Accounting rate of return iii. Net present value [30 marks] c) Advise Twinkle’s management on whether investment should be committed to the transport fleet or the alternative project outlined. Explain the reason(s) for your recommendation – including any other factor that the management must also consider. [10 marks]

[TOTAL 50 MARKS]

END OF QUESTION TWO

END OF SECTION A

BE131-6-AU/R/5

SECTION B You must answer ONE question from Section B.

Question 3 “What you measure is what you get.” (Drury, 2005: 308) Required: By referring to the relevant literature: a) Describe three different types of control mechanisms used by companies. [30 marks] b) Critically discuss why it is important to design management accounting and control systems that are consistent and take into consideration the behavioural consequences of their application. [20 marks]

[TOTAL 50 MARKS] END OF QUESTION THREE

Question 4 Required: Describe and critically discuss the THREE main approaches to transfer pricing. [TOTAL 50 MARKS]

END OF QUESTION FOUR END OF SECTION B

END OF EXAMINATION

BE131-6-AU/R/6...