Managerial Accounting and Finance - Desklib

This study material covers various topics in Managerial Accounting and Finance, including budgeting, costing, profit analysis, and investment appraisal. It includes practice questions and solutions, along with explanations of key concepts. The course code, course name, and college/university are not mentioned.

MANAGERIAL
ACCOUNTING AND
FINANCE

Contents
SECTION A.........................................................................................................................................4
Question A1 (2 marks)..........................................................................................................................4
Question A2 (2 marks)..........................................................................................................................4
Question A3 (2 marks)..........................................................................................................................4
Question A4 (2 marks)..........................................................................................................................4
Question A5 (2 marks)..........................................................................................................................5
Question A6 (2 marks)..........................................................................................................................5
Question A7 (2 marks)..........................................................................................................................5
Question A8 (2 marks)..........................................................................................................................5
Question A9 (2 marks)..........................................................................................................................6
Question A10 (2 marks)........................................................................................................................7
Question A11 (2 marks)........................................................................................................................7
Question A12 (3 marks)........................................................................................................................8
Question A13........................................................................................................................................8
Explain, with examples, the following terms:..................................................................................8
QUESTION B1.....................................................................................................................................9
A) Operating profit ..........................................................................................................................9
B) ABC Costing:..............................................................................................................................9
C) Calculation of Cost of each statement: -......................................................................................9
D) Distinction between the profit obtained....................................................................................10
QUESTION B2...................................................................................................................................10
Define and distinguish the terms ‘fixed costs’ and ‘variable costs’ and explain the importance
(relevance) of the distinction for short – term cost planning purposes...........................................10
b) Compute the following:..............................................................................................................11
QUESTION B3...................................................................................................................................11
a) Calculate the payback period for each of the projects. Based upon the payback criterion which
project should be chosen?...............................................................................................................11

(b) Calculate the net present value (NPV) of each project. Based upon the NPV criterion which
project should be chosen?...............................................................................................................12
(c) Based on your calculations in (a) and (b) above, what is the final decision concerning which
project should be chosen?...............................................................................................................12
(d) Discuss the advantages and disadvantages of the NPV and IRR methods of investment
appraisal..........................................................................................................................................12
REFERENCES...................................................................................................................................15

SECTION A
Question A1 (2 marks)
Financial accounting:
a. is required by regulatory bodies such as the SEC.
b. has its primary emphasis on the future.
c. provides data primarily for internal use by managers.
d. is concerned primarily with the performance of segments rather than with the
performance of the entire organization.
Question A2 (2 marks)
All of the following statements regarding budgeting is true except
a. Budgeting helps managers determine the resources needed to meet their goals and
objectives.
b. Budgeting is a key ingredient in good decision-making.
c. Budgeting is a bookkeeping task
d. The focus of budgeting is planning.
Question A3 (2 marks)
The main difference (or differences) between how traditional costing and activity-based
costing treat indirect manufacturing costs is (are) that:
a. traditional costing uses only production volume-based drivers while activity-
based costing uses only non-production volume based drivers.
b. traditional costing treats only unit level costs as variable, while ABC systems
treat unit level, batch level and product level costs as variable.
c. traditional cost allocations are usually based on a plant wide overhead rate,
while ABC systems use departmental overhead rates.
d. ‘a’ and ‘b’.
Question A4 (2 marks)
Select the response that represents the correct flow of costs in a job order costing
system
a. Raw materials, work in process, cost of goods sold, finished goods
b. Raw materials, work in process, finished goods, cost of goods sold
c. Raw materials, overhead, work in process
d. Direct material, finished goods, work in process

Question A5 (2 marks)
Epic Ltd can only produce one product because labour is limited. Demand for each
product is unlimited
Product A B C D
Sales price per unit £25 £35 £40 £50
Material cost per unit £4 £5 £8 £10
Labour cost per unit (at £2 per hour) £6 £10 £10 £20
Variable overhead cost per unit £4 £4 £8 £10
Fixed cost per unit £10 £12 £2 £6
Which product should Beta Ltd produce?
a. Product A
b. Product B
c. Product C
d. Product D
Question A6 (2 marks)
The managerial accounting reports of a company would be of most interest and benefit
to the company's:
a. bankers.
b. shareholders.
c. bondholders.
d. production manager.
Question A7 (2 marks)
If ethical standards are not adhered to:
a. it would have little impact on a typical management accountant.
b. there would be no undesirable consequences.
c. it would have little impact on advanced market economies.
d. there would be undesirable consequences.
Question A8 (2 marks)
Skincare Ltd has contribution margin per unit of £18 and a contribution margin ratio of
40%. What is the unit selling price?
a. £30.00
b. £45.00
c. £ 7.20
d. Cannot be determined

Question A9 (2 marks)

Clark Ltd has established the following information regarding fixed overhead for the
coming month:
Budgeted information:
Fixed overheads £180,000
Labour hours £3,000
Machine hours £10,000
Units of production £5,000
Actual fixed costs for the last month were £160,000.
Clark Ltd produces many different products using highly automated manufacturing
processes and absorbs overheads on the most appropriate basis.
What will be the predetermined overhead absorption rate?
a. £16
b. £18
c. £36
d. £60
Question A10 (2 marks)
A company requires £850,000 in sales to meet its target net profit. Its contribution margin
is 30%, and fixed costs are £150,000. What is the target net profit?
a. £255,000
b. £195,000
c. £350,000
d. £105,000
Question A11 (2 marks)
Candor Company uses a predetermined overhead rate based on the machine hours to
apply manufacturing overhead to jobs. Candor Company has provided the following
estimated costs for the next year.
Direct materials £20,000
Direct Labour 60,000
Sales commissions 80,000
Salary of production supervisor 40,000
Indirect materials 8,000
Advertising expense 16,000
Rent on factory equipment 20,000
Candor Company estimates that 10,000 direct Labour hours and 16,000 machine hours
will be worked during the year. The predetermined overhead rate per hour will be:
a. £4.25.
b. £8.00.
c. £9.00.
d. £10.25.

Question A12 (3 marks)
Quad Ltd makes and sells product A and product B. Twice as many units of
product B are made and sold as that of product A. Each unit of product A makes
a contribution of
£10 and each unit of product B makes a contribution of £4. Fixed costs are
£90,000. What is the total number of units which must be made and sold to
make a profit of
£45,000?
a. 2,000
b. 22,500
c. 15,000
d. 16,875
e. Cannot be determined
Question A13
Explain, with examples, the following terms:
a) Relevant Costs: With independent direction as the ultimate goal, the costs are arranged into
two sets, in particular Applicable and non-essential costs. Significant costs are considered at
the time of production specific choice. Applicable costs are the costs on which to compare
from one situation to the next The idea of making a choice. The idea is an important decision-
making tool various situations. In any case, it should be used with caution. Then there's the
cost of oil
If a choice is to be made between reaching one goal or exploiting the other, the applicable
The mode of transportation is like train. If one were to evaluate a unique cost to send a
request, the significant cost would be the additional factor cost, Any additional time or other
merchandise-related charges. The applicable advantages will be trade grants and driving
force.
b) Opportunity Costs: The cost of opening is addressed by forgoing the expected benefits of
the best dismissed game plan. In door-opening costs, we want to distinguish the value of
giving up an advantage as a consequence of choosing one particular game plan in favour of
another.
organizations by leveraging their own structures rather than renting them out and Previous
leases it may have acquired are examples of opportunity fees. Another example of
opportunity costing considered even for older material coming out A very long time.

Whenever it is seen as helpful for a new position, even scrap, the transaction value of the
material Acceptance as a new position involves the cost of opening the door for the material.
QUESTION B1
A) Operating profit
Selling price – 40
Less:
Direct materials – 8
Direct Labour – 15
Overhead cost – 12
Profit per unit - 5
Profit under traditional system = 5 * 30000 = 150000
B) ABC Costing:
Determination of cost drivers of each activity and the absorption rate: -
Cost Pool / Activity Cost driver
Overheads Activity Absorption
rate
£ units £
Setup cost No of Setup 465500 95 4900
Inspection Cost No of Inspection Setup 405000 2700 150
C) Calculation of Cost of each statement: -
 ABC costing
Product x
Units Price/cost (£) £
Direct material 30000 8 240000
Direct labour 30000 15 450000
Setup costs 30 4900 147000
Inspection costs 900 150 135000
Units produced 30000 972000
Cost per unit 32.4
 Absorption Costing:
Calculation of recovery rate along with statement showing cost per unit:

Production overhead = £870500 / 2795 = £ 311 per machine hour
Particular Product X
Direct Material 240000
Direct Labour 450000
Prime Cost 690000
Add: Recovered Overhead 373200
Total Cost 1063200
Total Units 30000
Cost per unit 35.44 per UNIT
D) Distinction between the profit obtained
The unit cost under ABC costing is less than the traditional costing which is absorption
costing. It is recommended to the business that it should follow ABC costing as it considers
the different cost pool and how the costs have incurred. It gives a better estimate about the
cost and the profitability of the business.
QUESTION B2
Define and distinguish the terms ‘fixed costs’ and ‘variable costs’ and explain the importance
(relevance) of the distinction for short – term cost planning purposes.
Variable expenses are any costs that vary based on the volume created and sold by the
organization. This means that variable cost increases as creation increases and decreases as
creation falls. Perhaps the most well-known variable expenses include work, utility costs,
commissions, and unrefined components.
For example, it should be possible to calculate the variable fee by multiplying the result
volume by the variable fee per unit of result. Suppose ABC Company makes art mugs for $2
a cup. Assuming the organization produces 500 units, its variable expense will be $1,000.
Still, if the organization doesn't deliver any units, it doesn't have any factor cost to make the
cups. Also, assuming the organization produces 1,000 units, the cost will rise to $2,000.
The fixed costs are any costs that continue to exist as before, no matter how much the
organization produces. These fees are usually independent of the specific business activities
of the organization and include elements such as leases, local charges, conservation and
deterioration.

For example, to illustrate, it should use a similar model from higher up. For this case, assume
that ABC Company has an appropriate monthly fee of $10,000 to rent the machine it uses to
deliver the cups. If the organization did not make any cups this month, it would actually have
to pay $10,000 to rent the machines. In any case, its normal expenses continue as before,
whether it makes 1,000,000 mugs or not. In this model, variable costs go from zero to $2
million.
b) Compute the following:
1. The contribution / sales ratio (C/S %):
= (16.5 / 30) * 100
= 55 %
2. The product break – even point (in units and £s sales)
Fixed Costs / Contribution
= 28000 / 16.5 = 1696.97 Units.
3. The production capacity (in units)
= Current level of activity / Activity level Capacity
= 2000 / 80% = 2500 units per months
So, 30000 units the organisation has the production capacity of.
QUESTION B3
a) Calculate the payback period for each of the projects. Based upon the payback criterion
which project should be chosen?
Project A
Year Annual
Cash flow
Cumulative Cash
flows Annual Cash flow Cumulative
Cash flows
0 -500 -500 -1000 -1000
1 400 -100 500 -500
2 200 100 400 -100
3 100 200 500 400
Payback Period = Number of years completed + (Total amount invested – cash flow received
cumulatively) / cash inflow in that year
Project A = 1 + (100 / 200)

= 1 + 0.5 = 1.5 Years
Project B = 2 + (100 / 500)
= 2 + 0.2 = 2.2 Years
Upon the above calculations, both the investment amount in both the project were
different. This is the reason that there is difficulty in choosing one project. But, assesses the
above figures, it can be said that project A will be beneficial as it will give a return on about
1.5 years.
(b) Calculate the net present value (NPV) of each project. Based upon the NPV criterion
which project should be chosen?
Project A
Years
Net
Cash
flows
Discounting @
10%
PV of Cash
Inflows
Net
Cash
flows
Discounting
@ 10%
PV of
Cash
Inflow
s
0 -500 1 -500 -1000 1 -1000
1 400 0.909 363.6 500 0.909 454.5
2 200 0.826 165.2 400 0.826 330.4
3 100 0.751 75.1 500 0.751 375.5
Net Present
Value 103.9 160.4
From the above computation of NPV, it can be assessed that the Project B should be
selected as it has more value with 160.4 in project B and 103.9 in Project A. So, according to
this method Project B should be selected.
(c) Based on your calculations in (a) and (b) above, what is the final decision concerning
which project should be chosen?
From the above both the calculations of Payback period and NPV, mostly organisation prefer
to choose the method of NPV. So, according to NPV project B is selected as it has more
present value in comparison from project A. The NPV of project B is 160.4.
(d) Discuss the advantages and disadvantages of the NPV and IRR methods of investment
appraisal.
Pros and cons of NPV and IRR:
NPV IRR
Advantages  The essential
advantage of using
NPV is that it takes
 The benefit is that
income plans for all
future years are

into account the idea
of time value cash.
Calculations under
NPV take into
account the limited
net income of
speculation to
determine its
justification.
 NPV technology
empowers
organizations to
interact dynamically.
In addition to the fact
that businesses of
similar size are
evaluated, it also
helps to identify
whether a particular
business is beneficial
or disadvantageous.
considered, and along
these lines, each
income is given an
equal burden by
utilizing the time
value of cash.
 IRR is a simple
calculation that
provides a basic way
to look at the value of
different ventures.
The IRR provides
any entrepreneur with
a quick description of
which capital
businesses will bring
the best potential
income. It can also be
used for planning, for
example, to quickly
preview the expected
value or investment
capital of buying new
hardware rather than
repairing old
equipment.
Disadvantages  The entire calculation
of NPV is based on
using the expected
rate of return to limit
future income to its
current value. Still,
there are no rules
about guaranteeing
this rate. This ratio
respects the prudence
passed on to the
organization, and
there may be cases
where NPV is wrong
due to incorrect profit
velocity.
 Contrastive tasks of
all scales are not
available. NPV is a
flat number, not a
ratio. Subsequently,
the NPV of larger
enterprises will
inevitably be higher
 When comparing
tasks, it does not
represent task size.
Income is only
contrasted with the
capital expenditures
that create those
incomes. This can be
inconvenient when
two activities require
a fundamentally
unique measure of
the cost of capital,
but more modest
businesses return
higher IRRs.
 The IRR technique
focuses only on
projected revenue
generated by capital
injections and ignores
potential future costs
that could affect
earnings.

than that of smaller
tasks. Smaller
businesses may be
more profitable than
their venture capital,
but may have lower
NPV values overall.

REFERENCES
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