FINAL EXAMINATION FIRST TRIMESTER 2015/2016

GSM5301 ACCOUNTING FOR DECISON MAKING

INSTRUCTION: ANSWER ALL QUESTIONS

TIME: 8.00 PM - 11.10 PM

HOURS: 3 HOURS 10 MINUTES

SECTION A - CASE STUDY (30 marks)

Question 1 (30 marks)

Refer to the attached case study. See Appendix 1.

a) Advise Ruiz.

(30 marks)

SECTION B (70 marks)

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Question 1 (20 marks)

Presented below are summarised data from the Statement of

Financial Positions and Statement of Comprehensive Incomes of
Martial Berhad:

MARTIAL BERHAD
Condensed Statement of Financial Position
31 December, 2014, 2013, and 2012
(in millions)

2014 2013 2012

Current assets 677 891 736
Other assets 2,413 1,920 1,719
3,090 2,811 2,455
Current liabilities 562 803 710
Other liabilities 1,521 982 827
Stockholders equity 1,007 1,026 918
3,090 2,811 2,455

MARTIAL BERHAD.
Selected Statement of Comprehensive Income Data and Other Data
For the Years Ended 31 December, 2014 and 2013
(in millions)

Income statement data: 2014 2013

Sales 3,050 2,913
Operating income 296 310
Interest expense 84 65
Net income 192 187
Other data:
Average number of common shares 41.3 46.7
outstanding
Total dividends paid 50.0 52.3

Evaluate the profitability, solvency and liquidity of this company,

and state your opinion about its suitability as an investment for a
young, single professional with funds to invest in shares. Refer to
Appendix 2 for the list of ratios.

(20 marks)

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ANSWER
2014 2013
Profitability Ratios
Profit Margin = net income/revenue aka net
sales 6.30% 6.42%
Operating margin = operating income/net
sales aka
10.64
revenue 9.70% %
Return on assets = annual net
income/average total assets 6.51% 7.10%
Return on capital employed = net operating
profit/capital employed
Return on equity = annual net 18.89 19.24
income/average stockholders' equity % %
Earnings per share = (net income
-dividends on preferred shares)/weighted
average number of common shares 464.89 400.43
outstanding % %
Dividend payout ratio = dividends paid/net 26.04 27.97
income % %

Liquidity Ratios
Account receivable turnover= net credit
sales/average accounts receivable
Current ratio = current assets/current 1.2046 1.1095
liabilities 26 89
Quick ratio = (current assets-inventory-
prepayments)/current liabilities

Solvency Ratios
Total debt to total assets = (short term 0.6741 0.6350
debt+ long term debt)/total assets 1 05
Debt to equity ratio = total 2.0685 1.7397
liabilities/shareholders' equity 2 66
Times Interest earned = earning before 3.5238 4.7692
interest and tax/ interest expense 1 31

You have to calculate and explain each

ratio and give a conclusion as to whether
he should invest

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Generally the profitability and liquidity ratio
looks good, even though the outlook for
2014 is worse than year 2013. It depends
on the future plan and prospects of the
company. It might be a good time for the
young single professional to invest now.

2nd answer
Current Ratio is good although current assets have
decrease.
Current liabilities decreased but other liabilities (assume
long term) increased a bit. This Suggest that management
might be changing investment approach from aggressive to
moderate

Total Liabilities increased but non current assets are

increasing as well. It is a good move if companyis investing
in long term investment. However, depending on the
industry Martial Berhad is in, if it is IT related , fast
obsolete assets posses a risk.

Higher investment in assets contributed sales but operating

income in 2014 surprisingly dropped. This suggest that
management operating efficinecny has dropped. But it could
also be argues that acquisition of new assets for example
machinery, would required additional one-off staff training.
In long run, learning curve might decrease and thus
operating efficiency will increase.

Return on equity increased partly because equity has

decreased. This can be explained by the drop in average
outstanding share.

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Question 2 (20 marks)
You are the Finance Manager of two companies in the same industry.
However, the companies have different cost structures. The
operating incomes for the companies for the year 2015 are shown
below:

TRW Sdn JDT Sdn

Bhd Bhd
Revenue 100,000 100,000
Cost of goods 60,000 50,000
sold
Gross profit 40,000 50,000
Sales and 20,000 30,000
administration
expenses
Net Income 20,000 20,000

TRW Sdn Bhd sold 50 units whilst JDT Sdn Bhd sold 40 units in 2015.
You have been advised that both companies have fixed
manufacturing cost included in the Cost of Goods Sold that totaled
RM10,000 for TRW Sdn Bhd and RM8,000 for JDT Sdn Bhd. You have
also noted that the sales staffs are not incentivized with
commissions for higher sales and this is something management is
looking into at the moment.

a) Calculate the contribution margin for TRW Sdn Bhd and JDT
Sdn Bhd. Show all your working in arriving at the numbers.

(4 marks)

Contribution Margin per Unit = Revenue per Unit - Variable

Expenses per Unit
Contribution Margin per Unit

Break Even Point in unit = Fixed Expenses per year /contribution

margin per unit

b) Calculate the break-even volume in units for TRW Sdn Bhd and
JDT Sdn Bhd.

(4 marks)

Contribution Margin per Unit = Revenue per Unit -

Variable Expenses per Unit

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Contribution Margin per Unit

Break Even Point in unit = Fixed Expenses per

year /contribution margin per unit

c) What would be the impact to Net Income if volumes for both

TRW Sdn Bhd and JDT Sdn Bhd increased by 10% for 2016 due
to increased demand from a growing economy. Compare
profitability of both companies and explain the outcome.

(6 marks)

d) You are also interested to know the worst case scenario if sales
volume were to decrease by 20% for both TRW Sdn Bhd and
JDT Sdn Bhd due to external shocks impacting the economy.
What would be the impact to Net Income in this case. Compare
profitability of both companies and explain the outcome.

(6 marks)

TRW JDT

a) Revenue 100,000 100,000

- Variable Expenses 50,000 42,000

Contribution Margin 50,000 58,000

Contribution Margin Per Unit 1,000 1,450

b) Fixed Expenses per year 30,000 38,000

/Contribution Margin per unit 1,000 1,450

Break even volume in units 30 26

c) Volume in year 2015 50 40

Volume in year 2016 55 44

Revenue per unit 2,000 2,500

Revenue 110,000 110,000

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 Variable Expenses per unit 1,000 1,050

Variable Expenses 55,000 46,200

Fixed Expenses 30,000 38,000

Net income 25,000 25,800

@

Contribution Margin per unit 1,000 1,450

Contribution Margin 55,000 63,800

Fixed Expenses 30,000 38,000

Net income 25,000 25,800

% increase in net income 25.0% 29.0%
Profit Margin 22.7% 23.5%

The net income for TRW increases by 25% while JDT's income increases by
29%
JDT is more profitable than TRW after the increase in sales volume because the
profit margin for JKD is 23.5%, 0.8% higher than TRW.
This is because the contribution margin per unit of TRW is RM1000 per unit
while JDT is RM1450 per unit.
After the fixed costs are covered, each unit of sales in JDT will increase the net
income by RM1450 whereas for TRW, each unit of sale will increases its net
income by RM1,000.

d) Volume in year 2015 50 40

Volume in year 2016 40 32

Contribution Margin per unit 1,000 1,450

Contribution Margin 40,000 46,400

Fixed Expenses 30,000 38,000

Net income 10,000 8,400

Revenue 80,000 80,000

% increase in net income -50.0% -58.0%
Profit Margin 12.5% 10.5%

The net income for TRW drops by 50% while for JDT, its net income slumps by
58%.
TRW with profit margin of 12.5% become more profitable than JDT, with a
profit margin of 10.5%.
However, the net income of both companies are the same in term of figure.

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Question 3 (20 marks)

RH Sdn Bhd has recently switched its method of applying

manufacturing overhead from a single predetermined overhead rate
based on direct labour hours to activity-based costing (ABC)
approach. Assume that the direct labour rate is RM18.00 per hour
and there were no beginning inventories. The following cost drivers
and rates have been developed for allocating manufacturing
overhead costs:

Activity Cost Driver Rate

Material handling Number of parts used RM2.00 per part

Assembly and Number of direct RM25.00 per direct

inspection labour hours labour hour

Testing Number of units tested RM5.00 per unit

The following production, costs, and activities occurred during the

month of August:

Units Direct Number of Direct Labour

Produced Material Cost Parts Used Hours

6,400 RM208,600 142,000 26,480

Last year overhead coat was RM12,800,000 and total direct labour
hour was 320,000 hours.

a) Calculate the total manufacturing cost and the cost per unit for
the month of August.

(8 marks)

b) Assume instead that RH Sdn Bhd applies manufacturing

overhead based on direct labor hours (rather than the ABC
method). Calculate the total manufacturing cost and the cost
per unit applied for the month of August.

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 (8 marks)

c) Based on your answers in (a) and (b), explain to the CEO of RH

Sdn Bhd what is the implication of changing method of
allocating overhead to the overall profit of the company and
the pricing structure of the products of RH Sdn Bhd.

(4 marks)

(a) Direct Materials

208,600.00
Direct Labour
476,640.00
Overhead
Material Handling
284,000.00
Assemby and inspection
662,000.00
Testing
32,000.00
978,000.00
Total Manufacturing Cost
1,663,240.00
Manufacturing Cost per unit
259.88
b)
Direct Materials
208,600.00
Direct Labour
476,640.00
Overhead
1,059,200.00
Total Manufacturing Cost
1,744,440.00
Manufacturing Cost per unit
272.57

(c)The manufacturing cost under ABT method is RM259.88 per unit whereas the
DL method is RM272.57 unit. By changing the method of determining the
manufacturing overhead cost, the overall profit of RH will increase as the cost
has come down. ABC method allows more accurate cost information which can
leads to better decisions, including the pricing structure of the products. It also
increases the knowledge on production activities which in turn, results in process
improvement and reduced costs.

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Question 4 (10 marks)

The following budgeted income statements relate to the second

quarter of 2015 for HG Sdn. Bhd.

APRIL MAY JUNE

Sales RM224,000 RM272,000 RM304,000

Cost of goods sold* 153,600 182,400 201,600

Gross profit RM70,400 RM89,600 RM102,400

Operating 35,200 40,000 43,200

expenses^
Operating income RM35,200 RM49,600 RM59,200

*includes all product costs i.e. direct materials, direct labour and manufacturing
overhead
^includes all period costs i.e. selling, general and administrative expenses.

Additional information:
1. 40% of sales are cash sales.
2. 65% of credit sales will be collected in the first month after the sales,
the 30% in the second month after the sales. The remaining will be bad
debt.
3. Depreciation represents RM12,800 of the estimated monthly operating
expenses.
4. Cost of goods sold and operating expenses are paid in the month
incurred.
5. Cash at April 1 2015 is RM22,400 and accounts receivable RM239,680
(RM168,000 from March credit sales and RM71,680 from February
credit sales).
6. RM75,000 tax will be paid in May.
7. Capital expenditure of RM30,000 is expected to be made in April.

Required:

Prepare a Cash Budget for the months of April, May and June 2015
and comment on the usefulness of preparing such a report for
management based on the information revealed in your cash
budget.
(10 marks)

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ANSWER

CASH BUDGET FOR THE MONTH OF JULY

75,000.
Opening Cash Balance 00
Add receipts

40,000.
Collections from accounts receivable 00
Less disbursements

Payment for accounts payable and 48,000.

accrued expenses 00

67,000.
Closing Cash Balance 00

Advice to management
- Collection from customers (60% in the month after sale) is slower than the
payment of inventory purchases and expenses (in the month of purchases).
Therefore, cash on hand for Dysoft Global Sdn. Bhd. will be tied down with the
delayed payments of customers. Dysoft Global will need to rethink of their
collections policy from the customers and try to collect on the month of sales.
Alternatively, they can negotiate to pay for inventory purchases on the month
after sales.
- Dysoft Global can negotiate for overdraft from bank so that in the event of
negative cash flow, there will be enough cash on hand to make payments.
-Dysoft Global can also slow down on purchases of inventory as the budgeted
income statement shows that the ending inventory is building up. With that, the
payment for inventory purchase can be reduced

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HG SDN. BHD.
CASH BUDGET FOR THE MONTH OF APRIL, MAY AND
JUNE 2015
APRIL MAY JUNE

Opening Cash Balance 22,400 36,704 (1,336)

Add receipts

Cash Sales 89,600 108,800 121,600

130,70
Collection from customers 4 137,760 146,400

220,30
Total receipts 4 246,560 268,000
Less disbursements

Operating Expenses 22,400 27,200 30,400

Tax 75,000

Capital Expenditure 30,000

153,60
Payments to Accounts Payable 0 182,400 201,600

206,00
Total disbursements 0 284,600 232,000

Closing Cash Balance 36,704 (1,336) 34,664

eg.
enable the management to determine
if the cash balances remain sufficient
to fulfill regular obligations. For
example, there is negative cash
balance at the end of may. The
companies might need to ask for
overdraft from bank or borrow from
bank to avoid liquidity issues for the
company. Alternatively, the company
can opt to expense off their cash in
capital expenditure in June to avoid
negative cash balance in May. In other
words, it allows the company to
identify each component of cash
disbursement and receipts and enable
the managemnet to make better
decisions.
If the company needs to borrow
money from bank, the bank
representatives will ask for a pro
forma balance sheet. Creating a

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monthly cash budget enables easier
preparation of this document.
enable the company to make plans to
optimise the utilisation of cash. There
is cash surplus at the end of april and
june. The management will know that
they will need the cash to cover the
insufficiency in cash in May. However,
they might be able to use the cash
surplus in June to invest in more
productive ventures such as
purchasing raw materials in bulk.
To avoid negative cash balance in
may, the managemnet might be able
to negotiate for better credit terms
with their creditors by asking for
extended payment rather than paying
the creditors on the month of
purchases. With that, the company
will be able to continue to make
capital expenditure in April.
Moreover, cash budget allows better
estimation of how much money your
company will make in a particular
quarter, as well as for the entire year.
This makes tax filing more accurate
and reduces the amount of additional
taxes owed when compiling the final
return.

- End of Questions -

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Q5 (30 marks)

XY Sdn Bhd imported appliances and distributed them to retail stores in Selangor. XY have
three broad lines of merchandise: Audio Equipment, TV Equipment and Kitchen appliances.
Each line accounted for about 1/3 of total XY sales revenue. Although each line was referred
to by XY managers as a department, the company did not prepare any departmental income
statement (until 2013). In late 2012 departmental accounts were set up in anticipation of
preparation of quarterly income statement by each department starting in 2013. In early April
2013, the first quarterly statement was distributed to the management group. Although in the
first quarter of 2013, XY have earned net income equivalent to 4.3% of sales, the TV
department had shown a gross margin that was too small to even cover the departments
operation expenses.

RM Percentage
Net Sales Revenue 1, 612 403 100%
Cost of sales 1, 422 473 88.2%
Gross Margin 189 930 11.8%
(-)operating expenses
Personnel expenses (note 1) 10 140
Department Managers office 12 393
Rent (note 2) 50 107
Inventory, taxes & insurance 37 274
Warehouse utilities (note 3) 3 006
Delivery cost (note 4) 32 248
Sales Commissions (note 5) 80 621
Administrative cost (note 6) 40 310
Inventory financing charge 23 708
(note 7)
Total operating expenses 289 807 18.0%
Income Taxes (credit) 34 957 2.2%
Net income (loss) 64 920 4.0%

Note 1- These were for warehouse personnel. Although merchandise for the three
departments was kept at the warehouse, this personnel only worked for TV department.

Note 2- Allocated to department on the basis of square footage utilized. XY had 5 years non-
cancellable lease for the facilities.

Note 3- Allocated to the departments on the basis of square footage utilized. However the
whole warehouse still needed to be lighted irrespective of the space utilized for storage by the
three departments.

Note 4- Allocated on the basis of sales in RM, a delivery from XY to the retail store typically
included only merchandise from only one particular department.

Note 5- Sales person was strictly paid on commission. They only do sell products from the
TV line.

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Note 6- Allocated on the basis of sales dollars generated by each product line. This is related
to general administration activities conducted at the HQ of XY.

Note 7- The cost of financing inventory is assessed based on average inventory held and it
was charged to discourage managers from carrying excessive stock. This charge will be 0 if
there is no Inventory held.

The TV departments poor performance prompted the companys accountant to suggest the
department should be discontinued. This is exactly why I proposed that we prepare
departmental financial statements to see if each department is carrying its fair share of the
load, the accountant explained. This suggestion lead to much discussion among the
management group particularly on 2 issues:

1- Was it justifiable to rely on the first quarter of the year results to decide on
discontinuing the TV department?
2- Would discontinuing TV equipment cost a drop in sales in the other 2 departments?
Area manager Miss EE however stated that even if the quarter was typical and other
sales wouldnt be hurt, Im still not convinced we will be better off dropping our TV
line. You are required: What action should be taken with regard to the TV department?
Justify your answer.

Answer (1):

Warehouse Personnel Expense should be pro-rated against all department

Rent and warehouse utilities to be divided not by square footage utilised, but by the profit
margin of each department.This is because the TV Appliance arebigger in size compare to
audio and kitchen appliance.

To have a better outlet replenishing plan, Aggregrate restock request from outlets and deliver
several merchandise from all 3 departments at the same time

Divide by profit margin of each department, not by sales price. Certain item such as
television will have higher selling price but lower profit margin.

To set re-order quantity by applying economic Ordering Quantitiy (EOQ)

Answer (2)

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(a) Not reliable because the trend of sales might not be fixed. Should use whole year. Sales of
TV might be seasonal, influence by festive season.

(b) Might only cause drop in sales in others 2 departments if the outlets are offering purchase
with purchase deal, all these while. It might affect sales of other 2 departments cause people
tend to by several type of home appliance from the same shop. Customer might shift to others
rival.

======

2nd Opinion Answer

Basically u have jotted down the point for these questions. Just write down
any logical points and give ur justifications.
Eg.
Personnel expenses will not be distributed to the other department as it is
for the television department only. However, VSS will have to be offerred
to those retrenched staff.
Same amount of rent will have to be paid by De Adore even if the
department is discontinued. The rent will be allocated to the other two
departments. The fixed costs of the other two department will be
increased. In addition, the space in the warehouse might be underutilised
and results in wastage of resources.
warehouse utilities will also have to be allocated to two other departments
if television department is discountinued. Similarly, it will increased the
fixed cost of the other two departments as the whole warehouse still
needs to be lighted.
Delivery cost typically only include merchandise from one particular
department. Therefore, if the department is discontinued, this cost will on
affect the other departments. However, as the volume of services needed
has reduced, the delivery company might increase the charges on delivery
for the remained two departments
Generally, it is not recommened to discontinued the television departmnet
based on the information arised from the first quarters as there might be
cycles within each year which result in lower net income at the early of
the year. It might be better to get a whole year information before keep or
drop decision is made.
However, the cost of sales might be too high at 88.2 % of sales. With
that, the company can review that components and try to reduce the cost
of sales.

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