Management Accounting: Exercise Solutions Report for Finance

This document presents solutions to a series of management accounting exercises. Exercise One outlines the budgeting process, detailing the steps involved and providing examples for each stage, such as updating assumptions, noting available funding, and preparing the budget. Exercise Two analyz...Read More

MANAGEMENT ACCOUNTING 1
EXERCISE ONE
The process of budgeting is a critical process in a number of ways for an organisation.
A proper budget enables an organisation to keep track of how much it has earned and how
much it has spent (Talib & Ismail, 2017). The comprehensive process involves a series of
steps as elaborated below for the consideration of the managers.
STEP 1: The first step of the budgeting process is to update the underlying assumptions of
the budget. The underlying assumptions may be related to the cost trends, sales trends, or
business environmental conditions. It is vital to review this assumptions and amend the same
if necessary. For instance, the objective of the budget to be prepared is having to purchase or
replace expense equipment.
STEP 2: The next step in the process is to note down the available funding as the availability
of investable funds will form the base for the commencement of viable projects. For instance,
the available funds for the same with an entity is $ 50000.
STEP 3: The costing for the business can be influenced by the certain factors in the business
environment and the same should be closely considered. It is imperative to identify these
factors beforehand which would facilitate the budget to be realistic. For instance, the
technology, number of experts with the entity can influence the said budget.
STEP 4: The next step is related to the budget package. In this step, previous standards
related to the budgeting process are considered in order to frame a budget for the current
period. The updating of the previous standards is done taking into account the environmental
conditions to enable the preparation of the outline of the budget. For instance, the mode of
loan was considered to finance the said budget last year, the interest rates would be evaluated.
STEP 5: The next step involves the obtaining the forecasts of the revenues, obtain the
departmental budgets, augmentation of the compensation of the various hierarchy levels, and
the incorporation of the capital expenditure plans. All of these are incorporated in the
budgets. For instance, the cash flows arising out of the said purchases would be evaluated.
STEP 6: The next step involves the preparation of the budget, presenting the same to the top
management and according the approval of it. For instance, the senior management may have
a choice of entity and that can influence the said budget.
STEP 7: The final step involves issuing the budget and implementing it after the approval for
the same is obtained.

MANAGEMENT ACCOUNTING 2
EXERCISE TWO
(a)
The “three E’s” of performance are referred to as the Effectiveness, Efficiency and
Economy. Managers of an entity are required to assess the efficiency, economy and
effectiveness of the input resources to complete a work. It is vital for the senior
management to establish their priorities which will further facilitate the most
appropriate measures to be used in an entity, and would thus lead to the best
effectiveness, efficiency and economy mix (Walter & Meier, 2016). In context of the
laundries an their cost structure as stated above, it is essential for the management to
evaluate the cost, efficiency and other incidental factors of each input to decide which
laundry service option is most suitable.
(b)
REVIEW OF LAUNDRY SERVICES
STATEMENT OF COMPARISON OF OPERATING COSTS OF DIFFERENT LAUNDRIES
RATE/
CHARGE
LAUNDRY A
($)
LAUNDR
Y B($)
LAUNDR
Y C ($)
COST OF ELECTRICITY 31,040 31,280 54,150
COST OF DETERGENT 3,840 7,820 8,550
MAINTENANCE & REPAIR 2,560 3,060 3,990
REMUNERATION:
LAUNDRY MANAGER 12,000 12,000 12,000
SUPERVISOR 0 10,000 10,000
FULL TIME ASSISTANT (7000 PER
PERSON,
PER YEAR)
21000 28000 21000
PART TIME ASSISTANT (3500 PER
PERSON,
PER YEAR)
3,500 0 10,500
OVERHEADS ON WAGES AT 12% 4380 6000 6420
CENTRAL ADMIN COST: 5 CENTS
PER BAG
1600 1700 2850
DEPRECIATION
BUILDING 40 YEARS 3000 750 1875

MANAGEMENT ACCOUNTING 3
STRAIGHT
LINE
EQUIPMENT 10 YEARS
STRAIGHT
LINE
1100 1300 1700
TOTAL COSTS 84,020 1,01,910 1,33,035
COST PER LOAD (1 LOAD = 10
KG BAGS)
8402 10191 13303.5
COST PER BAG 2.63 3.00 2.33
ASSUMPTION:
1) THE SALARY OF SUPERVISORS
AND ASSISSTANTS IS ASSUMED TO
BE PER PERSON PER YEAR
2)THE SALARY OF PART TIME
STAFF IS ASSUMED TO BE HALF
THE RATE OF FULL TIME
ASSISSTANT
As per the assessment of the laundry services option as conducted above, following
points are noteworthy. In terms of the direct expenses namely the cost of electricity,
detergents and maintenance and repair, the laundry service A is most feasible. Further, it
must also be noted that remuneration of the personnel in the laundry service A is also the
lowest of each category of the workers except the part time assistants, because of the
employment of more part time assistants than the laundry service B. Nevertheless it is
significant to note that the depreciation charge is maximum in the Laundry service A that is
the $ 4100 annually, as compared to the Laundry service B and Laundry service C. The total
annual cost for the Laundry service A was computed to be the least to other in comparison,
and was worked out to be the $ 84020. However, it is significant to note, in terms of
efficiency and effectiveness, the operating costs of the Laundry service C was most efficient
and feasible, which amounted to approximately $ 2.33 per bag. Hence, Laundry C is most
efficient taking into consideration the units of bags washed.
EXERCISE THREE

MANAGEMENT ACCOUNTING 4
(a)
CASH BUDGET
DEC JAN FEB MAR APR MAY
ADULT 1800 2000 2000 2500 2500 2500
Children 1500 2250 1800 2000 2250 2700
ADULT TOTAL FEES 18000 20000 20000 25000 25000 25000
Grands receivable 15000
TOTAL COLLECTION 18000 20000 20000 25000 25000 25000
cost of exhibition 30000
Advertising campaign 25000 5000 5000 5000 5000 5000
Heating light and general 1500 1500 1500 1500 1500 1500
Entry of mining exhibition 3240 3600 3600 4500 4500 4500
15 part time staff 400 400 400 400 400 400
manager 1500 1500 1500 1500 1500 1500
total expenses 31640 12000 12000 12900 12900 12900
Net movements -13640 8000 8000 12100 12100 12100
Cash balance at the beginning 10000 -3640 4360 12360 24460 36560
cash balance at the end -3640 4360 12360 24460 36560 48660
(b)
The three recommendations for the ensuring of the financial independence are stated
as follows. Firstly, it is recommended to invest in the advertisement expensed on a monthly
basis to defer the amount of expenses to other months as well, rather the imposing of the
burden in a single month. Further, it is recommended for the centre to charge more for the
fees in the months when the exhibition is organised to efficiently set off the cost of the
exhibition against the receipts. In addition, it is recommended for the business plan of the
centre to invest more in the activities concerning children to ensure that the collection based
on the said group does not fluctuates much, thereby maintain the overall receipts.
EXERCISE FOUR
The rights issue provides a way of raising new share capital by the means of proposal
of an offer to the existing shareholders, which is in proportion to their existing holdings
(Brigham & Houston, 2012). The invitation is extended to them to subscribe cash for new
shares. The advantage of the said issue for the entity would be that Equity share capital has

MANAGEMENT ACCOUNTING 5
no maturity date, no fixed charges attached and which means there would be no obligation to
redeem. Further, the said means of financing involves has the obligation to pay dividends and
the equity shareholders enjoy full voting right and participate in the management of the
company. In contrast to this, the retained profits are the cheapest method of raising capital,
and does not require any pledge, mortgage and likewise. The disadvantage can be stated to be
that share price may come down in the market because of low dividend rate because of the
said financing and may also lead to over-capitalisation because of capitalisation of profits
(Higgins, 2012). The finance can also be raised from availing long term loans from the
financial institutions, the benefit of the same can be stated out to be that these are secured
borrowings and can be opted either in the form of finance for investment in the form of fixed
assets and also in the form of working capital needed for new project. Further, the payment of
interests reduces the tax charge on the profits of an entity, with no role in management
process by the lenders (Pilbeam, 2018). Nevertheless, the disadvantage is that the loans are
secured and are raised against assets, which means the instalments must be paid timely.

MANAGEMENT ACCOUNTING 6
References
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. United
States: Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. UK: McGraw-Hill/Irwin.
Pilbeam, K. (2018). Finance & financial markets. UK: Macmillan International Higher
Education.
Talib, N. F. M., & Ismail, R. A. M. (2017). Effect of Financial Management on Budget and
Budgeting Process. International Journal of Business and Management, 1(1), 18-21.
Walter, S., & Meier, B. (2016). The impact of absolute importance and processing overlaps
on prospective memory performance. Applied cognitive psychology, 30(2), 170-177.