Tag (SQ): Cost Management

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  • 20 Marks

SCS – L3 – Q42 – International Financial Management

Assess advantages and challenges of Ayasco Banking Group offshoring back-office operations to South Afrara.

(a) The Ayasco Banking Group recently reported that it was offshoring (moving) its back-office operations from Ghanara to South Afrara where it already has some significant operations. Centralizing most back-office operations in South Afrara is part of the Group’s plan to grow its international banking business. South Afrara is one of the fast-emerging economies.

According to an Ayasco Banking Group spokesperson, the move would involve cutting about 500 jobs from its operations in Ghanara, but generating a similar number of new jobs in South Afrara where it already employs 3,000 people.

Required:

(i) Critically assess the advantages and associated problems for Ayasco Banking Group of offshoring its back-office operations to an emerging country.

(b) Marketing activities within an organisation can be grouped broadly into four roles.

Explain TWO broad roles of marketing activities within an organization.

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  • 40 Marks

SCS – L3 – Q8 – Competitive forces

Assess the competitive forces affecting Transway Ltd in the haulage industry.

Case Study: Transway Limited
Background
Mr. Kofi Mensah is the Managing Director of Transway Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Mensah was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Transway Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks were acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and a varying number of part-time driver mates. The part-time staff work as and when required.

Mr. Mensah acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighborhood to disturbance and the local Radio Stations has at various times reflected this criticism.

In addition to the haulage business, the company also obtained a license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Transway Ltd.’s own garage facilities. It became clear to Mr. Mensah that the land on which the garage facility is built was inadequate for the needs of his growing business.

Acquisition of land
One year ago, Mr. Mensah entered into negotiations to lease some land which would be more than satisfactory for the company’s operations. The land is situated on an industrial estate five kilometers from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financial year, Transway Ltd occupied the land on which there were no buildings erected, or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied, and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Transway Ltd.

Accounting
Mr. Mensah recruited Mrs. Ama Nkrumah, a part-time accountant, four years ago. Prior to Mrs. Nkrumah’s arrival, Transway Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Transway Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.

Mrs. Nkrumah introduced some basic financial accounting procedures into the company. In addition to exercising some control on Transway Ltd expenditure, Mrs. Nkrumah has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.

The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale haulers. Transway Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.

One of its top clients, Prime Ltd, recently appointed a new transport manager. The new Manager of Prime Ltd. has begun to employ other haulers besides Transway Ltd. Over the last two months, the haulage work Transway Ltd has received from Prime Ltd has reduced by about a third.

In order to address the competition, Transway Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month (June), the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.

Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.

Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August 2016. The balance of cash at 31st May 2016 is planned to be GH¢30,000.

Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.

The accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).

Required:
(a) Assess the nature of competitive forces of Transway Ltd.

(b) Present a SWOT Analysis for Transway Ltd.

(c) Advise Mr. Mensah on the strategic management accounting information which should be provided to assist future decision making and cost control.

(d) Prepare a cash budget for Transway Ltd for the six months ending 30th November 2016, showing the planned cash position at the end of each month; on the basis of the original planned credit and inventory holding periods.

(e) Redraft your cash budget to reflect the suggested alterations to these planned periods.

(f) Suggest what other aspects Transway Ltd should consider solving the expected cash flow problem, should the suggested solution be unachievable.

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  • 15 Marks

MA – L2 – Q72 – Performance Analysis

Analyze Nexus Enterprises' financial performance using ratios and metrics for Years 1, 3, and 4 (forecast).

The financial performance of Nexus Enterprises is summarised below. ‘Now’ is the end of Year 3.

Year 1 Year 3 Year 4 (forecast)
Cost of sales/Sales 63% 70% 70%
Marketing costs/sales 9% 6% 5%
Distribution costs/sales 13% 8% 6%
Administration costs/sales 2% 2% 2%
Interest charges/Sales 0% 4% 8%
Operating profit/sales 13% 10% 9%
Loans/Sales revenue 0% 50% 67%
Inventory/Sales 10% 14% 18%
Sales/Non-current assets 4.7 times 1.9 times 1.2 times
Average sales per employee 600,000 1,032,000 686,000,000
Average sales per product 281,000 185,000 234,000
Average sales per supplier 750,000 726,000 651,000

Required:
Use this information to evaluate the financial performance of Nexus Enterprises.

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  • 20 Marks

MA – L2 – Q70 – Performance analysis

Calculate the impact of three strategies on annual profit for Kumasi Ventures Ltd, each implemented independently.

Kumasi Ventures Ltd manufactures and sells a single product. Its budget for the next financial year is as follows:

Sales (80,000 units at GH₵600 per unit) GH₵000
48,000
Production costs: materials and labour 16,000
Other production costs 8,000
Marketing and distribution costs 12,000
Administration costs 10,000
Total costs 46,000
Profit 2,000

Materials and labour costs in production are 100% variable, and 25% of other production costs are variable. All administration costs are fixed costs and two-thirds of marketing and distribution costs are also fixed.

The directors of Kumasi Ventures Ltd are dissatisfied with the budgeted profit, and believe that annual profits should be at least double the size of the budgeted profit.

Three strategies have been proposed to improve profitability.

(1) Strategy 1. Increase sales by opening a new sales office in a neighbouring country. It is expected that this would increase annual sales by 5,000 units, but would add GH₵1.2 million to annual fixed costs.

(2) Strategy 2. Re-design the product by adding several additional features that should add value for the customer. This would have no effect on annual sales volume in units, but the company would be able to raise the sales price to GH₵625. The additional costs of producing the new product design would be GH₵1.5 million each year (all fixed costs).

(3) Strategy 3. Implement a cost reduction exercise throughout the company. It is expected that the planned exercise would reduce all variable costs by 20%, but would add to annual fixed costs by GH₵3.5 million.

Required:
(a) Calculate the effect of each individual strategy on annual profit, assuming that the strategy is implemented on its own, without the other two strategies.

(b) Show whether the three strategies, if they are all introduced together, will close the profit gap between the budgeted profit and the target profit that the directors would like to achieve.

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  • 10 Marks

MA – L2 – Q51 – Decision Making Techniques

Determine the optimal plant hire contract for Terra Works Ltd using expected value based on sales probabilities.

Terra Works Limited is a company that is engaged in site clearance and site preparation work. Information about its operations is as follows:
(1) It is Terra Works Limited’s policy to hire all the plant and machinery it needs rather than to purchase its own plant and machinery.
(2) Terra Works Limited will enter into an advance hire agreement contract for the coming year at one of three levels – high, medium, or low – which correspond to the requirements of a high, medium, or low level of orders obtained.
(3) The level of orders obtained will not be known when the advance hire agreement contract is entered into. Probabilities have been estimated by management as to the likelihood of the orders being at a high, medium, or low level.
(4) Where the advance hire agreement entered into is lower than that required for the level of orders actually obtained, a premium rate must be paid to obtain the additional plant and machinery required.
(5) No refund is obtainable where the advance hire agreement for plant and machinery is at a level in excess of that required to satisfy the site clearance and preparation orders actually obtained.
A summary of the information relating to the above points is as follows:

Level of Sales orders Probability Revenue GH¢000 Variable costs GH¢000 Plant and machinery hire costs
Advance GH¢000 Conversion GH¢000
High 0.25 15,000 10,500 2,300 1,500
Medium 0.45 8,500 5,950 1,500 850
Low 0.30 4,000 2,800 1,000 –
Low to medium 850
Medium to high 1,300
Low to high 2,150

Required:
(a) Prepare a table showing the outcomes for each decision and outcome combination.
(b) Prepare a pay-off matrix and determine the advance hire contract that maximizes the expected value.

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  • 20 Marks

MA – L2 – Q10 – Performance analysis

Explain benchmarking and its benefits, describe its implementation in a purchasing department, and discuss potential implementation challenges.

AMINU COMPANY

AMINU Company manufactures and distributes generic paper-based products and currently has an annual turnover of GH¢10 million.

At present, the management of AMINU Company are uncertain whether the purchasing department is maximising its potential in terms of purchasing efficiency and effectiveness.

The management are currently considering the introduction of a system of benchmarking to measure the performance of the purchasing department.

Required:

(a) Explain the term ‘benchmarking’ and briefly discuss the potential benefits that can be obtained as a result of undertaking a successful programme of benchmarking.

(b) Describe how a system of benchmarking could be introduced to measure the performance of the purchasing department.

(c) Discuss the problems that the management of AMINU Company might encounter in implementing a system of benchmarking and recommend how such problems should be successfully addressed.

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  • 10 Marks

MA – L2 – Q9 – Models of evaluation Quality

Distinguish between cost control and cost reduction, and discuss the emphasis on cost reduction in management accounting training.

It has been suggested that much of the training of management accountants is concerned with cost control whereas the major emphasis should be on cost reduction.

Required:
(a) Distinguish between cost control and cost reduction;
(b) Discuss the proposition contained in the statement.

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  • 20 Marks

MA – L2 – Q8 – Total Quality Management

Calculate production units, material purchases, machine hours, and profit/loss before and after TQM for Akwasi Company.

Akwasi Company makes and sells a single product from its base in Kumasi. The existing product specifications are as follows:

| Material X | 8 square metres at GH₵4 per square metre | | Machine time | 0.6 running hours | | Other machine costs | GH₵40/hour | | Selling price | GH₵100 |

Akwasi Company needs to fulfil orders for 5,000 units per period. There will be no change in inventory level during the period.
The following information is available about performance before the introduction of a TQM programme:
(1) 5% of incoming material from suppliers is scrapped due to poor receipt and storage.
(2) 4% of material input to the machine process is wasted in process.
(3) Inspection and storage of material cost GH₵0.10 per metre.
(4) Inspection during the cycle costs GH₵25,000 per period.
(5) Production is increased to allow for the downgrading of 12.5% of units at the final inspection phase. Downgraded units are sold as ‘second quality’ units at a discount of 30% of the final selling price.
(6) Production is increased to allow for returns from customers. These are replaced free of charge. Returns are due to specification failure and account for 5% of units initially delivered to customers. Replacement units incur a delivery cost of GH₵8 per unit. 80% of the returns from customers are rectified using 0.2 hours of machine running time and are resold as ‘third quality’ products at a discount of 50% on the standard selling price. The remaining returned units are sold as scrap for GH₵5 per unit.
(7) Product liability claims are estimated at 3% of sales revenue from standard product sales.
(8) Machine idle time is 20% of gross machine hours used.
(9) Sundry costs of administration, selling and distribution total GH₵60,000 per period.
(10) Akwasi Company is aware of these excess costs and currently spends GH₵20,000 per period to prevent them from happening.

Akwasi Company is planning a quality management programme that will increase its cost prevention expenditure from GH₵20,000 to GH₵60,000 per period. The estimates of performance levels after the TQM programme are as follows:
(1) A reduction in stores losses of material to 3%.
(2) A reduction in the downgrading of products inspected to 7.5%.
(3) A reduction in material losses in the process to 2.5% of input to the machine process.
(4) A reduction in returns of products from customers to 2.5% delivered.
(5) A reduction in machine idle time to 12.5% of gross hours used.
(6) A reduction in product liability claims to 1% of sales revenue.
(7) A reduction in inspection checks by 40% of the existing figure.
(8) A reduction in sundry administration, selling and distribution costs by 10% of the existing figure.
(9) A reduction in machine running time per unit of product to 0.5 hours.

Required:
(a) Prepare summaries showing total units, purchases of material and gross machine hours:
(i) before implementation of the TQM programme, and
(ii) after implementation of the TQM programme.
(b) Prepare statements of profit or loss for the period both before and after implementation of the TQM programme.

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  • 10 Marks

MA – L2 – Q7 – Models of Evaluation Quality

Explain how TQM, ABC, balanced scorecard, JIT, and value analysis analyze cost and quality relationships.

7 COST AND QUALITY

Explain briefly how each of the following management accounting techniques can be used to analyse the relationship between cost and quality:

(1) Total Quality Management (TQM)

(2) Activity Based Costing (ABC)

(3) Balanced scorecard

(4) Just in Time management (JIT)

(5) Value analysis

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  • 20 Marks

MA – L2 – Q6 – Total Quality Management

List key aspects of TQM, explain quality-related costs, describe JIT management, and explain activity-based management.

6 TOTAL QUALITY

(a) List the key aspects of Total Quality Management (TQM).

(b) What are quality-related costs? What is the TQM approach to quality-related costs, and how does this differ from the more traditional approach to these costs? (6 marks)

(c) List the key aspects of just-in-time (JIT) management.

(d) Briefly explain the nature of activity based management (ABM).

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