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SUGGESTED SOLUTION MAF551 : DEC 2016 (revised)QUESTION 1a. PINEWELL BHD REVISED MONTHLY SELLING EXPENSE REPORT FOR DECEMBER 2016 √Unit salesFlexible budget 155,Actual 155,Variance 0AdvertisingRM3 300 000RM3 320 000RM20 000 (A) √Staff salaries 250 000 250 000 0 Sales salaries(w1) 230 400 230 800 400 ...

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SUGGESTED SOLUTION MAF551 : DEC 2016

AC/DEC 2016/MAF551

(revised)

QUESTION 1 a.

PINEWELL BHD REVISED MONTHLY SELLING EXPENSE REPORT FOR DECEMBER

Unit sales Advertising Staff salaries Sales salaries(w1) Commissions(w2) Daily travel allowance(w3) Office expenses(w4) Shipping expenses(w5) Total expenses

Flexible budget 155,000 RM 3 300 000 250 000 230 400 496 000 316 800 640 000 1 055 000 6 288 200

Actual 155,000 RM 3 320 000 250 000 230 800 496 000 325 200 600 800 1 023 000 6,245,800

2016√ Variance 0 RM 20 000 (A) √ 0 400 (A) √ 0 8 400 (A) √ 39 200 (F) √ 32 000 (F) √ $42 400 (F) √

Supporting calculations: (w1)

Monthly salary for salesperson RM216,000  90 = RM2,400√ Budgeted amount RM2,400  96 = RM230 400√

(w2)

Budgeted commission : (RM80 x 155,000) √  0.04 = RM496,000√ (w3)

Daily travelling allowance per day (RM297 000  90√)  15 days = RM220 per day√ Budgeted amount RM220  15 days  96√ = RM316,800√ (w4)

Office expense (RM630,000 – 500 000√)  3,250 = RM40 per order√ Budgeted amount 500,000 + (RM40  3,500) = RM640,000√ (w5) Shipping expenses Fixed expenses =[RM965,000 – (RM6  140,000)] = RM125 000√ Budgeted amount RM125 000 + (RM6  155,000) = RM1,055,000√ (20√ x ½ = 10 marks) © Hak Cipta Universiti Teknologi MARA

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AC/DEC 2016/MAF551

ALTERNATIVE SOLUTIONS a.

PINEWELL BHD REVISED MONTHLY SELLING EXPENSE REPORT FOR DECEMBER

Unit sales Advertising Staff salaries Sales salaries(w1) Commissions(w2) Daily travel allowance(w3) Office expenses(w4) Shipping expenses(w5) Total expenses

Flexible budget 155,000 RM 3 300 000 250 000 230 400 496 0000 316 800 640 000 1 055 000 10,752,200

Actual 155,000 RM 3 320 000 250 000 230 800 496 000 325 200 600 800 1 023 000 6,245,800

2016√ Variance 0 RM 20 000 (A) √ 0 400 (A) √ 4,464,000F 8 400 (A) √ 39 200 (F) √ 32 000 (F) √ $4,506,400 (F) √

Supporting calculations: (w1)

Monthly salary for salesperson RM216,000  90 = RM2,400√

Budgeted amount RM2,400  96 = RM230 400√ (w2)

Budgeted commission : (RM80 x 155,000) √  0.4 = RM4,960,000√ (w3)

Daily travelling allowance per day (RM297 000  90√)  15 days = RM220 per day√ Budgeted amount RM220  15 days  96√ = RM316,800√ (w4)

Office expense (RM630,000 – 500 000√)  3,250 = RM40 per order√ Budgeted amount 500,000 + (RM40  3,500) = RM640,000√ (w5) Shipping expenses Fixed expenses =[RM965,000 – (RM6  140,000)] = RM125 000√ Budgeted amount RM125 000 + (RM6  155,000) = RM1,055,000√ (20√ x ½ = 10 marks) © Hak Cipta Universiti Teknologi MARA

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b.

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AC/DEC 2016/MAF551

Five (5) advantages of rolling budgeting are: 1. Budgets are more realistic and achievable since they are continuously revised to reflect changing circumstances/ 2. The annual disruption associated with the preparation of annual budget is removed/ 3. The pressures or stress placed on managers to achieve unrealistic budget targets are eased/ 4. Variance feedback is more meaningful/ 5. It tends to reduce budgetary bias/ 6. It reduces the rigidity of the budget system and builds contingency and innovation into the preparation/feedback stages of the control system 7. Realistic budgets are likely to have a better motivational influence on managers. (Any 5 points x 1 mark = 5 marks)

c.

Two types of budget setting approah are: Top-down approach:/ O Budget are set at corporate level and imposed down to all levels// O Normally senior manager impose budget targets on more junior managers// O It involves little participation. Therefore, senior manager may have less knowledge and it may result in lack of commitment of middle and junior manager Bottom-up approach:/  Budget collects at lowest level responsibility centers//  Real participation of managers in preparing their own budgets creates a sense of pride and commitment. Each manager will be responsible in setting their own objective. This will motivate managers to act in the interest of the company//  Emphasize that the reports are meant to help management do a good job and not to find fault. However, it is time consuming and expensive. It also increase the risk of creating budgetary slack (10/ x 0.5 marks = 5 marks) (Total: 20 marks)

QUESTION 2 (a) i.

DMMV = (AQu – AQs) x SP R = (40k*30k/40k~ 40k*3/4.5) 0.4 = (30 000 – 26 667) x 0.40 = RM1 333.20 A M = (40k*7k/40k~ 40k*1/4.5) 0.3 = (7 000 – 8 889) x 0.30

= RM566.70 F

S = (40k*3k/40k~ 40k*0.5/4.5) 1 = (3 000 – 4 444) x 1.00

= RM1 444 F

DMYV = (AY – SY) x SC = (8k ~ 40k/4.5)(1.2+0.3+0.5) =(8 000 – 8 889) x RM2 = RM1 778A

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ii.

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AC/DEC 2016/MAF551

MPPV (Material R) = (OSP – RSP) x RSQ = (0.4 ~ 0.4-0.15)* 3kg *8k = (0.40 – 0.25) x 24 000 kg = RM3 600 F MPOV (Material R) = (AP - RSP) x AQ = (0.60 – 0.25) x 30 000 kg = RM10 500 A

iii.

LRPV = (4.5 ~ 4.5*1.2)* 0.9*0.5*8000 = (4.5– 5.4) x 3 600 = RM3240 A LROV = (5.4 – 4.75) x 1850 = RM1202.5 F (20 x 0.5 = 10 marks)

(b)

Purposes of standard costing:  Predict or estimate costs.  A challenging target to motivate the employees’ performance.  Encourage analysis of methods or operations for improvement.  Simplify recording or keeping costs in inventory valuation.  Set prices  Facilitate management by exception. ( Any 2 points with explanation x 2.5 marks = 5 marks) (Total: 15 marks)

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AC/DEC 2016/MAF551

QUESTION 3 a.

cost saving or incremental cost

Variable cost per unit Direct material (700,000/50,000) Direct labour- skilled (450,000/50,000) Direct labour- semi skilled (300,000/50,000) Variable manufacturing cost (2.50 x 3) Cost to manufacture Direct material Direct labour- skilled Direct labour- semi skilled Variable manufacturing cost Total variable cost Rental on factory space Lease of equipment Other fixed manufacturing cost Total manufacturing cost Cost to purchase Purchase cost Transportation cost Lease of equipment Other fixed manufacturing cost Total purchasing cost Incremental cost

RM14 x 110% ((RM9/3) +4) x 2.5hour

RM46.40 x 200,000√ 500,000 - (7.50 x 50,000)

RM50 x 200,000 200,000 /50,000 x RM25,000 78,000/12 x 3 years

RM 14 9 6 7.50 RM 15.40√√ 17.5√√√ 6√ 7.50√√ 46.40 9,280,000 86,400√ 78,000√ 125,000√√√ 9,569,400 RM 10,000,000√√ 100,000√√√ 19,500√√√ 125,000√ 10,244,500 675,100√ (24√ x 1/2 mark = 12 marks)

b)

MAA Division should continue to manufacture W222 √ as the cost will be increased by RM675,100 √ OF if the component is to be purchased outside.√ (3√ x 1 mark = 3 marks)

c)

Five (5) qualitative factors to be considered by Delta Bhd whether to manufacture or purchase the component from outside supplier. 1. Consider whether there is any long-term contract with supplier that supplies direct material for W222 if manufacturing of W222 will be discontinued.√ 2. Consider the welfare of the employees that may have to be make redundant due to the closure of manufacturing W222.√ 3. The quality of W222 that will be supplied by Manukan Bhd must be the same or better than W222 that is manufactured by MAA Division.√ 4. Manukan Bhd must be able to provide timely delivery on W222 to provide any interruption since the component is used for the production of Delta Bhd’s final product.√ 5. Manukan Bhd should be able to provide continuous supply as the component is used for the production of final product. √ (5√ x 1 mark = 5 marks)

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d)

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AC/DEC 2016/MAF551

Suggest two (2) alternatives for Delta Bhd if the company decides to accept the order from Indiamart Bhd and the effects of such altenatives.

1. Outsource the production of the customised product to the outside supplier. √ Alternatively, Delta Bhd can also outsource the normal production √hence the capacity available can be used to produce the customised product demanded by Indiamart Bhd.√ Effects: It is important for Delta Bhd to ensure that the quality of the customised or normal product is of the same as manufactured by them or even better √ because it may not be possible for Delta Bhd to control the quality of the product produced by the outside supplier.√ (5 √ x 1/2 mark = 2.5 marks) 2. Delta Bhd may sacrificed some units of normal production√ therefore the capacity available can be used to manufacture the customised product demanded by Indiamart Bhd.√ Effects: There will be an opportunity cost due to some contribution from the normal production will have to be forgone.√ Therefore, Delta Bhd must ensure that the contribution forgone will be covered by higher profit from the acceptance of the special order.√ The normal customer also might no be satisfied since their demand is not fulfilled.√ (5 √ x 1/2 mark = 2.5 marks) (Total: 25 marks) QUESTION 4 a) Current ROI ROI = RM97,500 RM700,000 = 13.9% i.

ii.

Purchased Return On Investment = = Leased Return On Investment = =

b)

RM97,500 + RM60,000 +RM36,000 RM700,000 + RM225,000 193,500/925,000=20.9%  RM97,500+RM60,000 RM700,000 157,500/700,000= 22.5% 

Based on the above calculation, lease is the best investment opportunity (10 X ½ marks = 5 marks) Differentiate ROI and RI i. Purchased Residual Income

ii. Leased Residual Income

= =

RM193,500 – (10% x 925,000) RM101,000

= =

RM157,500 – (10% x 700,000) RM87,500

The old ROI for the company without the new project was 13.9%. This percentage is higher than the required rate set by the company.  © Hak Cipta Universiti Teknologi MARA

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AC/DEC 2016/MAF551

With the new project, the ROI are higher than without new project for both options, to purchase or to lease.  However, when comparing between to purchase and to lease, the ROI to lease is higher than to purchase by 1.6% (22.5-20.9). Residual Income for both options results positive value, which indicates both investment proposals are profitable. . However Chun Lee opts to lease because this option will give higher ROI than to purchase it. Higher ROI indicates better performance, therefore he will be rewarded. Furthermore, this options reduced net assets (from 925k to 700k).  c)

(10 X ½ marks = 5 marks)

Write a memo MEMO To: From: Date: Re:

the Controller the Management Accountant xx December 2016 RESIDUAL INCOME AS PERFORMANCE MEASURE

(Format)

The Residual Income is a better performance measure than ROI and other measures. This is because ROI ignores the company’s cost of raising investment capital.  Residual Income is a dollar amount, not a ratio like ROI. It is the amount of an investment center’s profit that remains (as a residual) after substracting an imputed interest charge. The term imputed means that the interest charge is estimated by the managerial accountant. This charge reflects the company’s minimum required rate of return on invested capital. In some company, the imputed interest rate depends on the riskiness of the investment for which the funds will be used. Thus, divisions that have different level of risk sometimes are assigned different imputed interest rates. Therefore, it is better for our company to use Residual Income (RI) in addition to Return on Investment (ROI). This can ensure that correct decision is made for any option when using a suitable performance measure. Thank you. (The Management Accountant)

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(Format)

1 mark for format 4 x 1 mark = 4 marks for explanation (Any relevant answers) (5 marks) CONFIDENTIAL

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AC/DEC 2016/MAF551

(Total 15 marks) QUESTION 5 a. Problems may arise from the directive transfer prices are:  Inconsistency with the philosophy of decentralization √ - Under decentralized unit, transfer pric commonly effective since each division is treated as a separate unit and have the decision in setting the best transfer price for the benefit of the division as well as in achieving goal congruence. √  Loss of divisional autonomy power √ - Divisional managers are no longer being given the choice of to supply or who to purchase from. This could lead to the issue of motivational behavior of the divisi managers since the buying division is being forced to accept the higher transfer price which c resulted to reduce in profit. √  Conflict between divisional manager and top management √ - Directive transfer price may cre dysfunctional behavior among the division managers and could discourage the division to achieve congruence.√ Or any relevant po (6√ x 1 mark = 6 ma b. Sales

i. TP at MP: ES IS

30,000*33 10,000*33

Veggie 990,000 330,000 1,320,000

Cattie 1,500,000 1,500,000

√ 10,000*150 √

√

Fussie 2,490,000 330,000 2,820,000

Production cost VC (Prime cost)

40,000*21

10,000* (33+ 8+10+11)

(840,000) √

Fixed cost

(30,000)

Other FC Net profit

(15,000) 435,000

(620,000) √√

(1,460,000

(15,000) √

(8,000) 857,000

(45,000 √

(23,000 1,292,000

ii. TP at VC: ES IS

Sales

Production cost VC (Prime cost)

30,000*33 10,000*21

Veggie 990,000 210,000 √ 1,200,000

40,000*21

(840,000)

Fixed cost Other FC Net profit

Changes in profit if the company is using MP instead of VC

(30,000) (15,000) 315,000 √ 120,000 Increase

10,000*150

10,000* (21+8+10+11)

Cattie 1,500,000 1,500,000 (500,000) (15,000) (8,000) 977,000 √ (120,000) Decrease

Fussie 2,490,000 210,000 2,700,000 √√

(1,340,000) (45,000) (23,000) 1,292,000 No change

(14√ x 0.5 mark = 7 marks) © Hak Cipta Universiti Teknologi MARA

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AC/DEC 2016/MAF551

Alternative solution for Question 5 (b)(ii) Transfer price at Variable cost (VC) Veggie Division Different in Transfer price (TP) between Market Price (MP = RM33) and Variable cost (VC = RM21) Different in Selling price = RM33√ – RM21√ = RM12 Hence, 10,000 units x RM12√ = RM120,000 (Revenue reduce by RM120,000) Therefore, Veggie division net profit will be RM315,000 √ [RM435,000 - RM120,000]. Cattie Division Cost of production will reduce by RM12 from the MP (RM33) Hence, 10,000 units x RM12 = RM120,000 (Cost of production reduce by RM120,000) Therefore, Cattie division net profit will be RM977,000 √ [RM857,000 + RM120,000] (5 √ x ½ = 2 ½ m)

c.

MM buy from outside:

Sales ES 30,000*33 Production cost: 30,000*21 VC (Prime cost) Fixed cost Other FC Net profit

Veggie 990,000 (630,000)

√√

10,000*150

Cattie 1,500,000

10,000*

(540,000)

Fussie 2,490,000 √√

(1,170,000)

(25+8+10+11)

(30,000) (15,000) 315,000

(15,000) (8,000) 937,000

(45,000) (23,000) 1,252,000√

Cattie Division buy from Veggie Division, the company's profit is RM1,292,000 Advice: Cattie Division should buy from Veggie Division √ since the company's profit is higher√ by RM40,000. (7√ x 1 mark = 7 marks)

d.    

The range of transfer price should be between RM21 to RM25.√ If Veggie Division will not sell less than RM21, because it would not cover the variable cost. √ If Veggie sells at market price (RM33), Cattie would decline the transfer since it could buy from external supplier√ at much lower price (RM25). When Cattie bought from outsider, the profit of the company as a whole will be slightly reduced. √

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

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AC/DEC 2016/MAF551

At the same time, Veggie has idle capacity and which will remain unused √ if Cattie did not agree to the internal transfer. This will result in less efficient management of FC (Fixed OH will be absorbed to much lower units of production). (5√ points x 1 mark = 5 marks) (Total: 25 marks)

END OF SOLUTION

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