BE211/4 – Introduction to Managerial Accounting

Arab Open University
BE211/4 – Introduction to Managerial Accounting
TMA – First Semester 2016 - 2017
Cut-Off Date: Week 11 (8th December 2016)

About TMA:
The TMA covers the management accounting concepts and practices in the businesses. It is marked out of 100 and is worth 20% of the overall assessment component. It is intended to assess students’ understanding of some of the learning points within chapters 16, 20, 22 and 24. This TMA requires you to apply the course concepts. The TMA is intended to:
 Assess students’ understanding of key learning points within chapters 16, 20, 22 and 24.
 Increase the students’ knowledge about the reality of the cost and management accounting as a profession.
 Develop students’ communication skills, such as essay writing, analysis and presentation of material.
 Develop the ability to understand and interact with the nature of the managerial accounting tools in reality.

The TMA:
The TMA requires you to:
1- Review various study chapters of ’Financial & Managerial Accounting’ Book and apply some of the concepts within it.
2- Conduct a simple information search using the internet.
3- Present your findings in not more than 1,200 words (800 words for Part A and 400 words for Part B). The word count excludes headings, references, title page, and diagrams.
4- You should use a Microsoft Office Word and Times New Roman Font of 12 points.
5- You should read and follow the instructions below carefully. Each part of the process will carry marks for the assignment.

Criteria for Grade Distribution:
Criteria Content Referencing Structure and Presentation of ideas Total marks
Part A Part B
Managerial Accounting for Pearson Company Budgeting for Atkinson Processing Company
Marks 60 40 (5) (5) 100





Part A
Managerial Accounting for Pearson Company

Pearson Company is one of the leading automobile manufacturing companies in Middle East region. The company has been known for providing best quality products and highest standards of service level for the possible selling price. Pearon’s products have been most liked by customers who are in different age groups say 18 – 55 years. The Company has been trying its best to sustain its competitive edge through its products and pricing structure.

This company has three major divisions and each division has a top accountant called the controller, and the management accounting that is done in these divisions comes under the leadership of the controller. On the other hand, the controller usually reports to the vice president of finance for the division who, in turn, reports to the division’s president and/or overall chief financial officer (CFO). All of these individuals are responsible for the flow of good accounting information that supports the planning, control, and evaluation work that takes place within the organization.

The need for Management Accountant

The company’s top executives always felt that they need a management accountant in particular in order to fetch good accounting reports and data for making good decisions and to have good planning about the activities to be implemented.

Divisions of Pearson Company

The Pearson Company has three divisions operating. They are termed as Merchandise, Manufacturing and Service divisions. The sales and cost details of these three divisions for the month September 2016 are as given below:
Information Service Division Merchandising Division Manufacturing Division
Sales (no of services/ units) 380 services 190 units 495 units
Selling price $ 20 per service done $ 80 per unit $ 40 per unit
Expenses
Salaries Expense $ 1,900
Rent Expense $ 500
Utilities Expense $ 200
Selling & Administrative Expense ---- $ 3,200 $ 3,200
Inventory Details
Beginning Inventory $ 4,000 $ 4,000
Purchases & Freight $ 7,600
Cost of goods manufactured $ 15,200
Ending Inventory $4,400 $ 6,600





Products of Pearson’s Subsidiary Company (Elsevier Company)

Elsevier Company is a subsidiary of Pearson Company. Elsevier manufactures two products namely A and B. The cost details of products A and B are given as under:

Information A B
Sales price per unit $ 60 $ 180
Variable Cost per unit $ 30 $ 60

Elsevier expects to sell two products of A for every four products of B. The total fixed costs of Elsevier amount to $ 270,000

Cost structure of Company X and Company Y (Two associates of Pearson)

The cost structure of Company X and Y (associates of Pearson Company) are given below:

Information Company X Company Y
Sales price per unit $ 125 $125
Variable Cost per unit $ 25 $ 75
Sales Units 2500 2500
Fixed Costs $ 30,000 $ 5,000

The CEO of Pearson wants to know more about cost and leverage details of both Companies X and Y respectively

Required

(1) Pearson Company is in need of a Management Accountant. The CEO of Pearson has read widely that management accounting systems provide information, both financial and non-financial to managers and employees inside an organization.

In the above context, explain management accounting and explain how management accounting helps organizations in planning, decision making and controlling functions (20 marks)

(2) Prepare Income statement respectively for three divisions of Pearson Company.
(note: service and merchandising companies differences need to be considered) (15 marks)


(3) For Elsevier Company, (given above), calculate the following:

(a) Break Even point and show the proof that at BEP level of sales, company achieves zero profit. (10 marks)
(b) Estimate the sales (units) & (in money value) required to earn a target profit of $ 270,000
(5 marks)

(4) For Companies X and Y (Associates of Pearson), calculate the operating leverage and comment on the results. (10 marks)


PART B

Budgeting for Atkinson Processing Company

Atkinson Processing Group needs a cash budget for October. The cash balance at the beginning of October is $9,000. The actual sales for August and September and expected sales for October are:
Information August ($) September ($) October ($)
Cash Sales 13,000 10,500 14,800
Sales on Account 40,000 60,000 80,000
Total Sales 53,000 70,500 98,800

Sales on account are collected over a three-month period in the following ratio:
10% in the month of sale,
70% in the month following sale
18% in the second month following sale
2% remaining are uncollectible.
Additional information includes:
(a) Purchases of inventory will total $ 50,000 for October; 20% will be paid for in October. Accounts payable from September's inventory purchases is $ 32,000, all of which will be paid in October.
(b) Selling and administrative expenses are budgeted at $ 26,000 for October; of which $ 8,000 is for depreciation.
(c) Equipment costing $ 36,000 will be purchased for cash during October, and other miscellaneous cash expenses of $ 6,000 will be paid during October.

Required

(1) Prepare a Cash Budget for October. Show all working clearly (20 marks)

(2) One of the divisions of Atkinson Processing Company provides following information pertaining to October 2016:
Information Amount ($)
Operating Income 2,900,000
Average Total Assets 32,200,000
Net Sales 53,000,000

Required: Compute Profit Margin Ratio, Asset Turnover Ratio and ROI for this division of Atkinson Company (12 marks)

(3) Discuss briefly about some of the advantages and disadvantages of ROI as a measure of divisional performance (8 marks)


END OF TMA QUESTIONS