Accounting For Managers

Solutions to Revision Questions

Section A
1
Ownership - equity forms part of the ownership of the company, debt does not give any voting rights.
Financing - debt finance incurs an interest cost which must be paid. Ordinary dividends are not guaranteed
Time - debt finance is more likely to have be redeemed within a given time frame e.g. 10 year loan. Share capital is seldom redeemed.
Cost - theory suggest that debt finance is cheaper than equity finance for reasons of risk and taxation
plus other relevant points

2
increasing regulation
increasing demands by influential user groups, such as shareholders and financial analysts, for financial information relating to the company
increasing sophistication of influential user groups, such as financial analysts, to deal with financial information
increasing complexity of business operations requiring greater explanation
increasing recognition of the need for greater accountability towards certain user groups (such as employees and community groups)
requiring the need for additional reports, such as environmental reports and social reports.

3
(a)
600,000 ordinary shares of 50c 300,000 up by 100,000
Share premium account 0 come down by 70,000
Retained earnings 200,000 down by 30,000
Shareholders’ equity 500,000

The bonus issue is financed by the share premium account and $30,000 of retained earnings.
The shareholders’ equity is unchanged.

(b) on top of the bonus issue

800,000 ordinary shares of 50c 400,000 up to 100,000
Share premium account 50,000 200,000 new shares @ 25c (premium) because we issue them at 75c (75c-50c) 25c share premium
Retained earnings 200,000
Shareholders’ equity 650,000

The rights issue will have raised $150,000 in cash (200,000 x 75c) which is represented by the increase in shareholders’ equity.

4
Agency relationships exist when one or more persons, the principal(s), hire another person, the agent, to perform some task
on his (or their) behalf. The principal will delegate some decision-making authority to the agent. The problems of agency
relationships occur when there is a conflict of interest between the principal(s) and the agent.
Conflicts
Managers might not work industriously to maximise shareholder wealth if they feel that they will not fairly share
in the benefits of their labours.
There might be little incentive for managers to undertake significant creative activities, including looking for profitable new ventures or
developing new technology.
Managers might award themselves high salaries or ‘perks’.
Managers might take a more short-term view of the firm’s performance than the shareholders would wish.
Solutions
The threat of firing (including the board being ‘deposed’ by discontented shareholders), is suggested to be an incentive for efficient management
It has been suggested that the nature of the managerial labour market negates much of the agency problem.
Better corporate governance.
Broadly, most corporate governance codes try to reduce the power of directors through the following provisions:
• Inclusion on the board of a substantial number of non-executive directors.
• Separation of the role of chairman and chief executive officer.
• A nomination committee comprising non-executive directors to handle the nomination of new board members.
• A remuneration committee comprising non-executive directors to handle the remuneration of board members.
• An audit committee comprising non-executive directors to deal with the appointment and communication with external auditors.
5
Balanced scorecard
The balanced scorecard is a strategic management technique for communicating and evaluating the achievement of the
strategy and mission of an organisation. It comprises an integrated framework of financial and non-financial performance
measures that aim to clarify, communicate and manage strategy implementation. It translates an organisation’s strategy into
objectives and performance measurements for the following four perspectives:

Financial perspective
The financial perspective considers how the organisation appears to shareholders. How can it create value for its
shareholders?

Customer perspective
The customer perspective considers how the organisation appears to customers. The organisation should ask itself: ‘to achieve
our vision, how should we appear to our customers?’.

Internal perspective
The internal perspective requires the organisation to ask itself the question – ‘what must we excel at to achieve our financial
and customer objectives?’.

Learning and growth perspective

The learning and growth perspective requires the organisation to ask itself whether it can continue to improve and create
value.

6
Quantity Price
(units) $
100,000 50
200,000 45
400,000 40

$ %
Selling price 40 100
Margin 8 20
Target cost 32 80

7
£
A Purch x AP Price variance
37,500 x 3.27 122,500 10,000
Adverse
A Purch x SP
37,500 x 3.00 112,500 Stock movement
0
A Usage x SP
37,500 x 3.00 112,500 Usage
4,500
Std Usage x SP Adverse
36,000 x 3.00 108,000

4kgs x 9,000 units Total

14,500
Adverse

8
—The fixed budget is a budget based on a planned level of output set before the actual work has been done (ex ante)
Example - fixed overheads
—The flexible budget is a budget used for control purposes that has been revised to bring it into line with the actual level of output (ex post)
Example - materials, direct labour
Q11
(a)
Statement of Profit or Loss for the year ended 31 October 20X7
$000
Revenue 11,720
Cost of sales 10,300
Gross profit 1,420
Selling, distribution and administrative costs 700
Net profit 720

Statement of Financial Position as at 31 October 20X7

$000 $000
Non-current assets 3,072
Current assets
Inventory 804
Trade receivables 768
Bank 348
1,920
4,992 Assets

Capital and reserves 3,312 Net asset??

Non-current liabilites 888
Trade payables 672 Liabilities
Other short-term liabilities 120
4,992

Target Budget
i Return on capital employed % 18.0 17.1 720/(3,312+888) not up to the requirement of the business Net profit / (non-current liabilites + equity)
ii Profit/sales ratio % 7.0 6.1 720/11,730 not up to the requirement of the business Net profit / revenue (sales)
iii Net asset turnover times 5.0 3.5 11,720/3,312 not up to the requirement of the business Net profit / net assets (equity)
iv Non-current asset turnover times 5.5 3.8 11,720/3,072 not up to the requirement of the business Revenue / non-current asset
v Current ratio times 2.0 2.4 1,920/792 meet the expectation Current asset / current liabitlies
vi Quick or acid test ratio times 1.5 1.4 1,116/792 not up to the requirement of the business Asset, excluding inventory

(b)

ROCE
Reduce the level of net assets without affecting sales (since profit margins are acceptable)

Profit/sales ratio
Improve margins, prices up if possible, better cost control on
Cost of Sales for gross margin, on overheads for net margin

Net asset turnover

Opportunities for increasing sales without the need for further investment in net assets should be investigated.

Non-current asset turnover

Investigate whether the asset base is being used effectively.

Current ratio
Too high, wasteful use of resources
Inventory levels appear high (quick ratio is acceptable)

Acid Test Ratio

Slightly below target, improve receivables collection, manage payments to suppliers better
Q13
(a)
Original Revised Variance
Plan £ Plan £ £
Sales
Materials
Labour
Contribution

(b) £
Original budget contribution
Planning variances
Sales price
Materials price
Labour rate
Revised contribution
Sales variance
Price
Materials variance
Price
Usage
Labour variance
Rate
Efficiency
Actual contribution

(c)
Op. Variances should be a measure of the performance of op managers.
Unfair to 'penalise' op managers for mistakes at the planning stage.
Revisions to budget necessary to give variances meaning
Distinction between senior and operational management and level of responsibility
Credit use of an example from the case study
e.g. The purchasing manager has bought materials for £1.04 per kg
Q14
(a)

Original standard 7,800 0.08 14 8,736

Revised standard 7,800 0.08 16 9,984
Price planning variance - 1,248 A

Operational price variance (640 x $0.21875) 140 F

Operational usage variance (16 x $16) 256 A

(b)
The use of planning and operational variances enables management to draw a distinction between variances caused
by factors extraneous to the business and planning errors (planning variances) and variances caused by factors that are
are within the control of management (operational variances).
Less time is spent on investigating variances that are uncontrollable and the de-motivational effect of staff being held
responsible for factors that they cannot influence is avoided e.g. - 1,248 A
Operational managers’ performance can be compared with the adjusted standards that reflect the conditions the
manager actually operated under during the reporting period. If planning and operational variances are not
distinguished, there is potential for dysfunctional behaviour especially where the manager has been operating
efficiently and effectively and is being judged by factors he cannot control.
The use of planning variances allows management to assess how effective the company’s planning process has been.
Answer is longer than expected from students. It is included like this for tutorial purposes (only 3 required) max

Q15
(a) Original Revised Variance