Managerial Accounting Exam

SECTION A

A and B are two divisions of a large company that operate in similar markets.  The divisions are treated as investment centres and every month they each prepare an operating statement to be submitted to the parent company.  Operating statements for these two divisions for May are shown below:


Operating statements for May

 

               A

                 B

 

£000

£000

Sales revenue

900

555

Less variable costs

345

312

 

––––

––––

Contribution

555

243

Less controllable fixed costs (includes depreciation on divisional assets)

 

95

 

42

 

––––

––––

Controllable income

460

201

Less apportioned central costs

338

180

 

––––

––––

Net income before tax

122

21

 

 

 

Total divisional net assets

£9.76m

£1.26m

 

 

 

The company currently has a target return on capital of 12% per annum.  However, the company believes its cost of capital is likely to rise and is considering increasing the target return on capital.  At present the performance of each division and the divisional management are assessed primarily on the basis of Return on Investment (ROI). 
Required:
(a)Calculate the annualised Return on Investment (ROI) for divisions A and B, and discuss the relative performance of the two divisions using the ROI data and other information given above.

(b)     Calculate the annualised Residual Income (RI) for divisions A and B, and explain the implications of this information for the evaluation of the divisions’ performance.

(c)Discuss the strengths and weaknesses of ROI and RI as methods of assessing the performance of divisions.  Explain two further methods of assessment of divisional performance that could be used in addition to ROI or RI.

(d)     Discuss the advantages and disadvantages of allowing the managers to participate actively in the setting of the budgets for their divisions. (15 marks)
(e)   Discuss the problems a company may have by looking at short term profit as a measure of performance.

Q2)

  1. Describe the advantages and disadvantages that an organisation might experience if it adopts a decentralised structure.

 

  1. Explain the term ‘transfer price’ and identify the different methods that an organisation could use to determine the price it uses to transfer goods or services from one division to another.
  1. Discuss the problems that arise specifically when determining transfer prices where divisions are located in different countries
  2. Discuss five purposes of budgets, Explain the difference between participative and non-participative budgeting, the advantages and disadvantages

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Q3
1.  Many firms still focus on profitability as their main measure of performance, despite increasing evidence that non-financial measures are often more important.
Required:
(a)     Explain the arguments for using the profit measure as the all-encompassing measure of the performance of a business.                                                                                                         
(b)     Explain the limitations of this profit-measurement approach and of undue dependence on the profit measure.                                                                                                                 
(c)     Explain the problems of using a broad range of non-financial measures for the short- and long-term control of a business.                                                                                             

 

2 . Holden plc is a large multinational organisation.

  1. Explain the term ‘decentralised structure’ and  the advantages and disadvantages that Holden plc might experience if it adopts a decentralised structure                                                                                        
  1. Explain the term ‘transfer price’.  What are  the different methods that Holden could use to determine the price it uses to transfer goods or services from one division to another                            

 

  1. Discuss the problems that arise specifically when determining transfer prices where divisions are located in different countries                           


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