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AC3054 – QB3002 Management Accounting 3 Course Project This individual project counts 70% of the final course mark

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AC3054 – QB3002 Management Accounting 3

Course Project

This individual project counts 70% of the final course mark. Marks will be awarded for the appendix. Overall, 40% of the marks are available for the calculated parts of the case, with the remaining 60% for the analysis. The quality of the structure and presentation are important to the final outcome, so reflect on how best to present the information. 

 

Read the case carefully and carry out the associated tasks. When the work is complete you should present a report via the assignment submission page on the course’s MyAberdeen site. You should check MyAberdeen for the correct submission date and time. Submissions should be made in accordance with the Business School policies outlined in the course guide.  The text of the report should be 2000 words in length. This does not include any tables, charts or calculations that you wish to present with the report. 10% above or below the word count is acceptable. 

 

Along with the report you should present an appendix that shows in detail the calculations underlying the data and recommendations that you have presented in the report. The appendix should be organised in the same way as the tasks in the case. 

 

The report will require reflection on the particular circumstances of the business situation in the case. Reports that assume that their calculations automatically provide the ‘best’ answer will not score highly. The qualitative factors that are exhibited in the circumstances of the case are of particular importance and should be incorporated in the analysis. 

 

You may need to carry out some research on some aspects of the case and should bear in mind that wider reading is likely to provide you with insights that are deeper than those provided in the course materials alone. However, the case tasks are based on the topics and materials of the course and any submissions that have not substantively engaged with the course materials are likely to fail. 

 

We welcome engagement with the academic literature in management accounting. While it is possible to do well without such engagement, including references to research that supports or critiques aspects of practice that are included in the case will attract extra credit. Where academic research has been consulted it should be cited in the Harvard Style. Guidance on referencing can be found on the library website. The following two web pages provided by the University Library are particularly useful:

 

General introduction: https://www.abdn.ac.uk/library/documents/guides/qgcit001.pdf The Harvard Style: https://www.abdn.ac.uk/library/documents/guides/qgcit002.pdf

 

Please note also that plagiarism and/or collusion will not be tolerated. The submission must be your own work that has been done independently. Any cases of plagiarism or collusion will necessarily be referred to the Business School’s Academic Integrity Committee in line with University policy. A useful checklist for avoiding plagiarism can be found on university web page below:

 

https://www.abdn.ac.uk/students/academic-life/study-resources-3379.php#panel3956 If you decide to include references, a separate reference list should be compiled at the end of the report, before the appendix. References are not included in the word count. 

The Case: Binary Ltd.

 

 

Binary Ltd. is a private company owned and operated by husband and wife team Ken and Samantha Binary. The couple have managed to build the company into a sizeable business, with a turnover approaching £50m, although it lacks a clear mission and they tend to take on opportunities that they see rather than focusing their expertise and competence in one particular area. 

Recently, Ken and Samantha have disagreed more about how the organisation should move forward. They currently have 140 employees working on various projects, with around 60% of their turnover relating to the manufacture of bicycles, a business that has done well recently. The bicycles they make are very high quality and at the premium end of the market. The manufacture of the bicycles requires the use of expensive plant and machinery and needs a skilled workforce to operate it. Samantha is happiest with this element of the business and spends the majority of her time working on it. She would like to develop it further as she perceives great opportunities to increase their share of this expanding market in the years ahead.  Ken on the other hand is still very keen to take on a range of other projects, which span across retail, manufacturing and construction. He enjoys the entrepreneurial aspects of the business and tends to get bored working on the same thing for extended periods. He is well connected in the business community and through these connections is often offered opportunities for project-based contracts that have on occasion proved lucrative. Ken argues that the diversification of activity provided by the projects helps to reduce risk and gives them potential new areas of development. He points to some one-off project successes that they have had, which have been much more profitable than the bicycle business. 

Samantha acknowledges that the projects provide diversity and reduce the risk of concentrating on a single business, but feels strongly that the bicycle market is in a strong growth phase and the risk of focusing on it is currently very low. Further, she feels that taking on new projects now would be a distraction from the bicycle manufacturing that she argues is now their core business and should be their main focus for development. It is, she observes both their largest activity and the one that she thinks has most reliably helped them achieve good returns (currently they look for a minimum 12% rate of return across the company). She argues that while collectively the one-off projects have been successful and have delivered good returns, this has been because of the spectacular success of two projects that have disguised the much smaller returns seen on some other projects. 

These differing views on the projects are strongly held, but neither party has a clear understanding of what the comparative position between Binary Bikes and the projects really is. The pair have recently been very busy and disagreements over what should be taken on have increased. Ken has identified a range of new project options, but is struggling to get Samantha to spend time considering them. Samantha on the other hand is fully occupied in growing the bicycle business and finds Ken’s demands to look at the project-based work is taking valuable time from her that she would rather not lose. Matters have come to a head and the disagreements are affecting their work and personal lives to the point where the continued success of both the business and their marriage is at risk. 

Having decided that they need independent advice, they have employed you as an external consultant to help them decide on the way forward. They have asked you to report on range of issues including the following:

 

 

 

 

 

Task 1: 15 marks

 

Binary Bicycles, has a subunit that makes the bicycle frames. It is called Frame. Samantha and Ken would like to understand more about how Frame performed in relation to the last periods budget. They have supplied you with the following data:

The company uses a standard costing system which is based on production and sales of 2,500 high performance bicycle frames each month. The standard cost card for one high performance bicycle frame is shown below.

 

	£
Direct material: 10 metres of aluminium at £2.50 per metre	25.00
Direct labour: 3 hours at £10 per hour	30.00
Fixed overhead	15.00

 

Standard cost of one high performance bicycle frame        70.00

Standard selling price of one high performance bicycle frame          

Standard profit 

 

 

 

During the month of June, the following results were recorded:

• 2,700 high performance bicycle frames were produced and sold at a price of £98 each.
• 26,890 metres of aluminium were used at a total cost of £69,914.
• 8,000 labour hours were worked at a total cost of £84,000.
• Fixed overheads for the month totalled up to £38,000.
• The actual profit for the month was £72,686.

 

At the beginning, and end of the month, Frame had no inventory of any material, work-inprogress or finished product.

 

Required:

 

1. Calculate the following variances for the month of June for Frame:
   1. 1. Direct materials total, price and usage variances
      2. Direct labour total, rate and efficiency variances
      3. Fixed overhead expenditure variance
      4. Sales price and volume variances
2. Prepare a Variances Summary Statement in tabular form which summarises the variances for the month of June and reconciles the expected profit for the month to the actual profit for the month.
3. Discuss the variances that you have calculated, suggesting reasons why they might have occurred.

 

 

             

Task 2: 8 marks

Ken and Samantha also want you to help construct Frame’s budget for the next period. In the three months of October, November and December, Frame makes the following forecasts for sales, costs, and other payments made in cash. 

 

Unit Costs:	Frame A  £	Frame B       Frame C
		£	£
Selling Price	300.00	400.00	500.00
Materials: Metal Costs	46.00	44.00	48.00
Materials: Other Costs	20.00	25.00	28.00
Direct Labour Costs	14.20	10.80	18.00
Sales Budget	October	November	December	Total
	£	£	£	£
Frame A	180,000	240,000	291,000	711,000
Frame B	200,000	240,000	320,000	760,000
Frame C	500,000	600,000	800,000	1,900,000
Total	880,000	1,080,000	1,411,000	3,371,000
Direct Labour Budget	January	February	March	Total
	£	£	£	£
Frame A	8,517	11,356	13,769	33,642
Frame B	5,400	6,480	8,640	20,520
Frame C	18,000	21,600	28,800	68,400
Total	31,917	39,436	51,209	122,562
Direct Materials Budget: Metal	October	November	December	Total
	£	£	£	£
Frame A	27,600	36,800	44,620	109,020
Frame B	22,000	26,400	35,200	83,600
Frame C	48,000	57,600	76,800	182,400
Total	97,600	120,800	156,620	375,020
	Timing of Cash Receipts From Sales		Timing of Cash Payments to Suppliers of Metal
In the Month of Sale/use	50%		20%
In the Following Month After Two Months	50%		30% 50%
Direct Materials Budget: Other Costs	October       November		December       Total
	£             £		£ £
Frame A	12,000                16,000		19,400                47,400
Frame B	12,500                15,000		20,000                47,500
Frame C	25,000                33,600		44,800              103,400
Total	49,500                64,600		84,200              198,300

 

Notes:

1. 1. Fixed costs in the income statement: £250,000 per month for October, November, and December.
   2. Forecast cash payments for rent, machinery and tools, electricity, rates, insurance, and drawings have been 70,000 in October, 50,000 in November and 20,000 in December.
   3. Cash introduced by the business in October has been: £120,000

 

Required:

 

1. Prepare the Income Statement Budget for the three-month period.
2. Prepare the Cash Flow Statement Forecast for the three-month period. (c) Comment on the budgeted profitability and liquidity of Frame.

 

Task 3: 14 marks

Ken and Samantha are concerned about the manager of Frame. They feel he is not fully committed to price control and that as all of his product is passed on within the company to the assembly subunit which is called Bolt. The manager of Bolt has complained that for one frame type in particular she can source frames of similar quality on the open market for £75 per unit, but that she is being charged an internal standard sale price of £100 per unit from Frame. Her other material and assembly costs are £350 and the typical final sale price for this specific bike is £490. Ken and Samantha also wonder why the manager of Frame is not able to produce at a cost where they would also be able to sell onto the open market. This would be particularly attractive as frame is currently not operating at full capacity.    

 

Required:

 

Discuss ways in which Ken and Samantha could set policies that will encourage both subunit managers to work to increase the overall profit of Binary. Support your arguments with calculations. 

 

Task 4: 29 marks

Ken wants to buy a factory unit that belonged to a now bankrupt company called Camtech Ltd. The unit has machinery inside that was used to make parts for the automotive industry and Ken believes he can resurrect the business. The unit has not been in use for two years, but an engineering inspection suggests that, although all the equipment in it is ten years old and dates back to Camtech’s foundation, it is in working order. Ken’s main motivation is that the unit has been on the market for over a year without a buyer and he has been able to negotiate a price that he feels confident will allow profits to be made. His plan is to rebuild the business over a five-year period and then to sell it on as a profitable entity for £2,000,000. Ken supplies the following details about the unit:

1. The purchase price of the unit is £480,000 and includes everything that is inside including all machinery, some raw materials and a considerable amount of rubbish including scrap parts, old computers and office furniture.
2. The machinery makes camshafts which are a key component of internal combustion engines and Ken’s research shows that the bankrupt company was well regarded by car manufacturers and that they had a good order book before the accountant ran off with the bank balance, having not paid their suppliers for many months. 
3. Camshafts sell for £30 each and the unit has the capacity to make up to 120,000 units per year, based on 12 months continuous operation. Ken’s initial research suggests he can get orders for 12,000 units in year one, doubling each year for each of the subsequent three years and reaching capacity in year five. Ken expects sales to rise steadily through each year until capacity is reached. 
4. The cost of raw materials is £10/camshaft. Ken is confident that this is stable and not subject to change in at least the first three years, although he concedes that it is probably sensible to allow a 10% increase in raw material costs in years four and five.  
5. The process is known to require the use of significant amounts of electricity, although the details are not clear. Ken has found old bills that show the last two years before closure had production volumes of 84,320 units and 102,180 units respectively and that the electricity bills in those years were £572,707 and £687,904 respectively. Imminent rises in the cost of electricity are not expected. 
6. Ken has also found bills relating to staffing and maintenance of the machinery. 
   1. The company had an office staff of 8 people that cost £400,000, but Ken observes that £100,000 of this was the managing director’s salary and he intends to fill that role himself, at least in the short run. He says he won’t draw a salary for the first two years while the company is restarting, but after that he thinks a new MD will need to be appointed. He also believes a smaller office team will be required in the first instance and that £120,000 will satisfy the salary bill for years one and two, rising to £180,000 in year three (not including the MD appointment), £240,000 in year four and £300,000 in year five. 
   2. The maintenance bills suggest that the machinery was expensive to keep going. A local company called Smooth Running Ltd. was contracted to run regular maintenance on the machines and the contract for running maintenance and repair cost £45,000 per year. In addition, a two-year overhaul cycle was required to ensure that the machines were properly calibrated to ensure the camshafts were made to the appropriate degree of precision. These overhauls cost £50,000 and require production to cease for one calendar month while it takes place. Ken has checked and Smooth Running is willing to resume the contract under the same terms. There was an overhaul in the last year of Camtech’s operation and Smooth running think that the machines will be ok if there is an initial overhaul at the end of year one.
7. Some immediate repairs are required to the fabric of the building including the roof and interior walls, particularly in the office space. These repairs will take two months and have been estimated to cost £130,000. Once repairs are completed the contractor has offered a maintenance contract for the building at £5,000 per year if Ken pays the repair costs up front. Ken is not sure if the repair contract is necessary.
8. The machines require a skilled staff to run them. The capacity of 120,000 units per year is based upon a single shift pattern delivering a maximum of 10,000 units per month. At lower volumes (below 24,000 units per year) the production line can be operated by three engineers, but between 24,000 and 48,000 units four engineers are required and above 48,000 units five engineers are required. The requirements are laid out in the table below:

 

Production level up to (units)	24,000	48,000	Above 48,000
Technician level engineers	2	2	3
Graduate level engineers	1	2	2

  

Technicians are paid £24,000 per year, but graduates are paid £36,000 per year. It is expected that the general tidying up and cleaning of the premises and other odd jobs can be done by a janitor who will be paid £14,000 per year. 

9. Local taxes on the unit amount to £54,000 per year and other utility cost (non-electricity related) amount to £22,000 per year. 
10. Working capital of £50,000 is required to operate the plant.

 

Required:

 

Analyse the data for Ken’s plan to resurrect Camtech and advise him on the viability of the project. Your advice should include commentary on the qualitative aspects of the project as well as any assumptions that you have made, or limitations that you perceive due to limitations in the available information. 

 

Task 5: 16 marks

Ken and Samantha are always interested in making their company more successful but are not very clear at any point in time how well it is doing. They have heard from friends in the business community that the balanced scorecard is an excellent tool for understanding business performance and are interested to know more. 

 

Required:                                                                                                          

Briefly report on the company performance measurement options available to Ken and Samantha highlighting the strengths and weaknesses of the alternatives. You should also prepare a schedule of information that would be required in order to effectively undertake the analysis using the techniques that you outline.  

 

Final task: 18 marks

Present the responses to these tasks in a report and further comment on how Binary should move forward in the future. You should recommend support for the approach of either Ken, or Samantha, or perhaps some middle way. In any case your analysis should include reflection on the future of the companies’ activities on the basis of the limited information that you have. 

             

This form will be used for feedback

Assignment Feedback Form

This form is designed to provide specific feedback on your written coursework.  The scale below is not used in any mechanistic way to calculate your mark, it merely presents a structured overview of the strengths and weaknesses of your work.  Additional comments are provided at the bottom of the page.

Assessment:       AC3054-QB3002 Management Accounting 3	Session:	2020/21
Student:	Mark:	%

 

STRUCTURE

 

Clearly stated and relevant objectives ? ? ? ? ?           Poorly stated and/or irrelevant objectives

Clear indication of report structure ? ? ? ? ?            No indication of report structure

Good use of headings and sections ? ? ? ? ?            Poor use of headings and sections

Conclusion supports the content ? ? ? ? ?           Conclusion does not support the content

CONTENT

Answers the set question ? ? ? ? ?            Does not answer the set question

Accurate presentation of evidence ? ? ? ? ? Inaccurate or questionable  evidence

Logically developed argument ? ? ? ? ?         Rambling and illogical argument

Original and creative thought ? ? ? ? ? Little evidence of originality Depth of coverage of issues ? ? ? ? ? Superficial of coverage of issues

Critical evaluation of material ? ? ? ? ?         No attempt to evaluate material

Adequate acknowledgement of sources ? ? ? ? ?           Inadequate acknowledgement of sources

Evidence of reading, research and analysis ? ? ? ? ?           Little evidence of reading, research and analysis STYLE

Fluent writing ? ? ? ? ?             Disjointed and lacking in continuity

Succinct and to the point ? ? ? ? ?            Unnecessarily repetitive

Good paragraph structure ? ? ? ? ?                 Paragraphs too long or short

Good sentence structure (i.e. low fog index) ? ? ? ? ?   Poor sentence structure (i.e. high fog index) TECHNICAL SKILLS

Correct spelling throughout ? ? ? ? ?            Many spelling errors throughout

Grammatically correct ? ? ? ? ?     Many grammatical errors

Effective use of figures and tables ? ? ? ? ?             Figures and tables add little to argument 

Effective use of appendices ? ? ? ? ?            Poor use of appendices

Correct citation of references ? ? ? ? ?            Incorrect referencing

PRESENTATION

Well planned and tidy ? ? ? ? ?            Careless, untidy, looks like last minute rush 

Within the word limit ? ? ? ? ?             Noticeably over or under the specified length