Learning Outcome 1: Explain the use of planning tools used in management accounting
Learning Outcome 2: Compare ways in which organisations could use management accounting to respond to financial problems.
Assignment Brief and Guidance:
Case Scenario
XYZ Company manufactures and sells two different brands of electronic products, known as ‘Pebble 101' and ‘Stone 101'. ‘'Pebble 101'is produced in department 1 and ‘Stone 101' in department 2. The business has a capital investment of more than RO 700,000, with 450 employees working in manufacturing and administrative units of the company. The financial statements of last two years (FY 2019 & FY 2018) of XYZ Company has revealed an overall decline in sales, profitability and liquidity position. The directors of XYZ Company are concerned about this sudden decline in the performance and prospects of the Company.
You have recently joined as a trainee management Accountant in XYZ Company and are now a part of the Management Accounting team.
Directors want company's management accounting team to prepare functional & master budgets for the Financial year 2020, calculate relevant financial ratios considering benchmarks, key performance indicators and budgetary targets, identify variances for last two financial years , apply relevant strategic planning tools , financial governance to monitor strategy, management accounting skill sets and effective strategies and systems and compare the ways in which Company can respond to financial problems effectively and efficiently.
XYZ Company's budgeted information (FY 2020) & financial statements of last two years (FY 2019 & FY 2018) are given below: -
A. Sales Budget information for FY 2020.
Finished product
'Pebble 101' 'Stone 101'
|
Forecasted Sales (Units)
|
9,500
|
2600
|
|
Selling price per unit in RO
|
400
|
300
|
|
Ending inventory required (units)
|
2,870
|
100
|
|
Beginning inventory (unit)
|
270
|
95
|
B. Information for the FY 2020 of Standard material cost per unit and labour cost per hour:
|
|
RO
|
|
Material 'A'
|
2.8
|
|
Material 'B'
|
5
|
|
Direct labour
|
4
|
|
Overhead is recovered on a direct labour hour basis.
|
C. Information for the FY 2020 of the standard material and labour usage for each product is as follows:
|
|
Finished product
|
|
|
'Pebble 101'
|
'Stone 101'
|
|
Material 'A' in Units
|
20
|
9
|
|
Material 'B' in units
|
6
|
10
|
|
Direct labour in hours
|
20
|
25
|
D.
|
Information for the FY 2020 of Direct Material
|
Material 'A'
|
Material 'B'
|
|
Beginning inventory (unit)
|
9,500
|
9,000
|
|
Ending inventory required (unit)
|
20,200
|
2,700
|
E. Factory overhead budget information for the FY 2020
|
|
Department 1
|
Department 2
|
|
|
RO
|
RO
|
|
Budgeted variable overheads rates
(Per direct labour hours)
|
|
|
|
Indirect materials
|
0.4
|
0.3
|
|
Indirect Labour
|
0.4
|
0.4
|
|
Power (Variable Portion)
|
0.25
|
0.2
|
|
Maintenance (Variable Portion)
|
0.06
|
0.2
|
|
|
|
|
|
Budgeted fixed overheads
|
|
|
|
Depreciation
|
35,000
|
30,000
|
|
Supervision
|
35,000
|
20,000
|
|
Power (fixed portion)
|
20,000
|
600
|
|
Maintenance (Fixed portion)
|
21,400
|
899
|
F. Non-manufacturing overheads budgeted Information for the FY 2020:
|
Information of Estimated non-manufacturing overheads:
|
RO
|
|
Stationary etc. (Administration)
|
2,000
|
|
Salaries sales
|
28,500
|
|
Salaries office
|
8,000
|
|
Commissions
|
25,000
|
|
Car expenses (Sales)
|
6,500
|
|
Advertising
|
30,000
|
|
Miscellaneous (Office)
|
4,000
|
|
TOTAL
|
104,000
|
G. Opening cash balance is RO 9500 for the financial year 2020
H. Cash flows Budgeted Information for the FY 2020 are as follows:
|
|
Quarter 1
|
Quarter 2
|
Quarter 3
|
Quarter 4
|
|
|
RO
|
RO
|
RO
|
RO
|
|
Receipts from customers
|
650,000
|
700,000
|
880,000
|
846,250
|
|
Payments:
|
|
|
|
|
|
Materials
|
300,000
|
320,000
|
250,000
|
336,996
|
|
Payment for wages
|
303,406
|
330,000
|
360,000
|
235,094
|
|
Other costs and expenses
|
30,000
|
25,000
|
218,004
|
333,409
|
I.
|
Budgeted balance sheet for the previous year ended 2019 was as follows:
|
RO
|
RO
|
RO
|
|
Non-current assets:
|
|
|
|
|
Land
|
|
262,772
|
|
|
Building and equipment
|
523,000
|
|
|
|
Less: Depreciation
|
63,750
|
459,250
|
722,022
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Stock of finished goods
|
136,500
|
|
|
|
Stock of Raw materials
|
71,600
|
|
|
|
Debtors
|
82,250
|
|
|
|
Cash
|
9,500
|
299,850
|
|
|
|
|
|
|
|
Less current liabilities
|
|
|
|
|
Creditors
|
|
72,200
|
227,650
|
|
Net assets
|
|
|
949,672
|
|
|
|
|
|
|
Equity: Represented by shareholder's interest:
|
|
|
|
|
700,000 ordinary shares of RO 1 each
|
|
|
700,000
|
|
Reserves
|
|
|
249,672
|
|
Equity
|
|
|
949,672
|
J. Actual Statements of financial position as at 31st Dec
|
Amt in RO
|
2019
|
2018
|
|
Non•current assets (carrying value)
|
390,000
|
360,000
|
|
Current assets
|
|
|
|
Inventory
|
90,000
|
63,000
|
|
Receivable
|
102,000
|
53,200
|
|
Cash
|
65,000
|
70,000
|
|
Total Assets
|
647,000
|
546,200
|
|
|
|
|
|
Equity and Liabilities
|
|
|
|
Ordinary share capital ($100 per share)
|
389,000
|
356,000
|
|
Reserves
|
60,000
|
66,600
|
|
|
|
|
|
Non•current liabilities
|
|
|
|
10% Loan notes
|
120,000
|
60,000
|
|
Current liabilities
|
|
|
|
Accruals
|
42,000
|
33,600
|
|
Trade payables
|
36,000
|
30,000
|
|
Total Equity and liabilities
|
647,000
|
546,200
|
I. Amt in RO
|
Actual Statements of profit or loss for the year ended 30th Dec
|
2019
|
2018
|
|
Sales
|
320,000
|
224,000
|
|
Cost of sales
|
204,800
|
140,000
|
|
Gross profit
|
115,200
|
84,000
|
|
Administration expenses
|
48,960
|
24,640
|
|
Distribution costs
|
7,600
|
5,440
|
|
Operating profit
|
58,640
|
53,920
|
|
Interest
|
8,000
|
4,000
|
|
Profit before taxation
|
50,640
|
49,920
|
|
Taxation
|
2,200
|
1,000
|
|
Profit after taxation
|
48,440
|
48,920
|
Other relevant information:
J. Benchmarks - Average data for companies similar to XYZ Company
|
Ratios for financial year ended 31st Dec
|
Benchmark
|
|
Gross profit ratio
|
38%
|
|
Operating profit margin
|
15%
|
|
Return on Capital Employed (ROCE)
|
13%
|
|
Current ratio
|
2.2:1
|
|
Quick ratio
|
1.5:1
|
|
Inventory days
|
40 days
|
|
Receivables days
|
45 days
|
|
Payable days
|
50 days
|
|
Gearing ratio
|
30%
|
K. XYZ Company - Budgeted information for the financial year 2019 & 2018, no change in actual units & budgeted units produced and sold:
Amt in RO
|
|
2019
|
2018
|
|
Sales revenue
|
310,000
|
230,000
|
|
Cost of sales
|
204,900
|
100,000
|
|
Administration expenses
|
48,600
|
24,540
|
|
Distribution costs
|
7,400
|
5,600
|
|
Interest
|
8,200
|
4,100
|
As a member of Management accounting team of XYZ Company, you are required to evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organization to sustainable success.
Attachment:- Planning tools used in management accounting.rar