Management Accounting and Management Control

Learning outcomes

1. Appraise the changing role of management accounting in the context of organisational, technological, social and economic change.

2. Critically evaluate a range of strategic management accounting techniques and how they contribute to the success of an organisation.

Submission dates

• Submit via Moodle before 12:00 noon on Friday 27 March 2015

• Make sure that the feedback sheet and marking criteria are attached to the beginning of your document and you have entered your student number on the shaded part.

• Upload the completed spreadsheet which forms part of Section 1 as well as your written answers.

Instructions

There are two parts to this assignment. You must complete both parts.

Section 1 50 marks budgeting exercise and written report

Section 2 50 marks essay

Section 1: The excel spreadsheet allows you to enter figures into the cells coloured pink on the first worksheet (entitled Detailed budgets). The results will be calculated automatically and carried forward to the Budgeted Income Statement and Budgeted Statement of Financial Position. Do not attempt to enter anything onto any of the worksheets except Detailed Budgets. You must use the spreadsheet provided, do not prepare your own.

Section 1 (50% of marks)

Scenario:

You are the assistant to the Finance Director of Bespoke Wedding Gowns Ltd, a company which commenced to trade on 1 January 2014. It manufactures one specialist product, very expensive wedding dresses. Although every gown is different and individually designed, the cost of buying in materials and manufacture are so similar for each gown that standard costing techniques can be applied.

The major shareholder of the company, Mr Satin, is a non-executive director who is not involved in the day to day running of the company. He is very interested in any financial information presented at Board meetings, which he always attends.

The Finance Director, Mrs Silk, has given you the task of preparing the budgets for next financial year (i.e. year ended 31 December 2015). Mrs Silk has told you that the directors wish to avoid the use of an overdraft facility because of the costs involved, and the budgets should incorporate a 10% increase in profits on last year (after tax). An overall gross profit percentage of 55% for the year is required.

The following information is available:

Bespoke Wedding Gowns Ltd

Statement of financial position as at 31 December 2014

Note £000 £000

ASSETS

Non-current assets

Property, plant and equipment 1 173

Current assets

Inventories 2 18

Trade receivables 3 20

Cash at bank 50 88

Total assets 261

EQUITY AND LIABILITIES

Equity

Share Capital – 10,000 £1 ordinary shares 4 10

Retained earnings 5 151

Total equity 161

Current liabilities

Trade payables 6 30

Loan 7 50

Corporation tax payable 8 15

Accruals 9 5

Total current liabilities 100

Total equity and liabilities 261

Section 1 continues on the next page

Section 1 continued

Notes

1. Property, plant and equipment as at 31.12.2014 consist of the following:

Annual depreciation rate Cost

£000 Accumulated depreciation

£000 Net Book Value

£000

Leasehold factory 2% SL 100 2 98

Plant and machinery 25% SL 52 13 39

Furniture, fittings and equipment 10% SL 20 2 18

IT equipment, website etc 33% SL 27 9 18

Total 199 26 173

The depreciation charge for 2015 is expected to be the same as for 2014.

2. Inventories at 31.12.2014 consist of the following:

£000

Raw materials (20 units * @ £100 per unit) 2

Finished goods (20 units @ £800 per unit) 16

18

? Raw materials are purchased as kits containing everything required to construct one gown.

3. Trade receivables are made up as follows:

£000

Due to be paid in January 2015 20

Due to be paid in February 2015 0

20

4. The directors have proposed a dividend of £1.00 per share for the year ended 31 December 2014. This will be paid in October 2015.

5. The retained earnings are the net profit for the year ended 31 December 2014.

6. Trade payables are made up as follows:

£000

Due for payment in January 2015 2

Due for payment in February 2015 2

Due for payment in March 2015 – see note below 26

30

The £26,000 which is due for payment in March 2015 relates to repairs to the factory premises which took place in June 2014. The builders agreed to an extended payment period.

Section 1 continues on the next page

Section 1 continued

Notes (continued)

7. The loan of £50,000 was made by one of the directors in November 2013, before trading commenced in January 2014. The loan is secured on the current and non-current assets of the company. The legal agreement stipulates that all of the capital will be repaid in October 2015 plus accrued interest of £5,000. This is all of the interest over the life of the loan and none of it was charged to last year’s income statement.

8. The Corporation Tax which is a creditor at 31 December 2014 is due for payment on 1 October 2015.

9. The accruals relate to various fixed costs and it is not expected that they will fluctuate significantly over the year. They can therefore be ignored for cash flow purposes.

10. The amount of interest which the company can earn on credit balances held in the bank is 0.05%. This is such a small amount that it is not worth including it in the budgets.

11. The company has not been able to negotiate any overdraft arrangements with its bankers and therefore it is important that the bank account should remain in credit.

You arrange a series of meetings with various heads of department and establish the following information relating to the year starting on 1st January 2015:

A. Gown sales for 2015 and early 2016 are forecast as follows:

No. of gowns No. of gowns

January 2015 20 August 2015 100

February 2015 20 September 2015 90

March 2015 30 October 2015 80

April 2015 60 November 2015 30

May 2015 70 December 2015 30

June 2015 100 January 2016 30

July 2015 100 February 2016 30

The selling price per gown from January until March inclusive is expected to be £1,000. From April onwards the selling price for each one will increase to £2,000. This is because a reality t.v. star has recently ordered a dress for her wedding next March and you anticipate that this will allow a doubling of your prices without affecting demand. The celebrity’s choice of your company’s gown will be a secret until the day of the wedding.

Terms of credit offered to customers are 30 days from date of invoice. The invoice is dated on the day of the wedding.

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Section 1 continued

Notes (continued)

B. Raw materials are imported from the Far East and will be purchased the month before the gowns are manufactured. The gowns will be manufactured the month before they are expected to be sold. For example, for the units sold in March 2015, the raw materials will have been purchased in January 2015 and held in stock at 31 January. The materials will then be issued to production department for manufacture during February and the finished goods held in stock at the end of February.

C. The standard costs of manufacture for each gown are expected to be:

Jan – Jun 2015 Jul – Dec 2015

£ £

Direct materials 100 120

Direct labour – 40 hours per unit –

normal rate per hour 20 21

overtime rate per hour 30 32

All overheads are treated as expenses of the period and none are included in the valuation of finished stock.

The company has arranged favourable payment terms with its suppliers – 60 days from date of invoice.

D. Wages will be paid in the month in which the work is carried out. Normally it is not necessary to work overtime but any hours worked in excess of 3,000 per month will be paid at the overtime rate.

E. Monthly fixed costs are forecast as follows:

£ £

January 8,000 July 8,200

February 8,000 August 8,200

March 8,000 September 8,200

April 8,000 October 8,200

May 8,000 November 8,200

June 8,000 December 8,200

These fixed costs are paid in the same month as they are incurred.

Section 1 continues on the next page

Section 1 continued

Required:

1. Prepare the following budgets for the year ended 31 December 2015, in monthly format (i.e. one column for each month and a total column). Use the spreadsheet provided, do not prepare your own version.

Sales budget (in units and £££)

Finished goods (in units)

Raw materials (in units)

Raw materials (in £££)

Trade payables

Trade Receivables

Cash budget

Use the Statement of Financial Position at 31 December 2014 to obtain the opening balances for the various budgets.

The figures you enter on the “Detailed Budgets” worksheet will automatically feed through to the “Budgeted Income Statement” and “Budgeted Statement of Financial Position” worksheets. Check that the Budgeted Statement of Financial Position balances to make sure that you have entered all the figures correctly.

Ignore bank interest payable on overdrawn bank balances.

20 marks

2. The board of directors is due to meet next week to discuss the draft budgets. Prepare a written report for presentation at the meeting (approximately 1000 words), including the following:

a. key areas arising from the cash and income statement budgets which require their attention. This should include gross profit percentage, profit target and any action which may be required to ensure sufficient cash is available.

b. an explanation of why the budgeted profit for the year ended 31 December 2015 is so different from the movement in cash balances over the year (illustrate your answer by reference to the spreadsheet).

c. Mr Satin, the non-executive director, mentioned the last time you met that he does not really understand why it is necessary to spend all this time (and therefore, indirectly, money) preparing these detailed standard costs and budgets. Bearing in mind that he is not a formally trained accountant, explain to him in very simple terms the benefits and limitations of this kind of management control system. Illustrate your answer with examples from the budgets you have prepared for the company.

30 marks

Total marks for Section 1: 50

Section 2 is on the next page

Section 2 (50% of marks)

1250 word essay

“In an age of discontinuous change, unpredictable competition and fickle customers, few companies can plan ahead with any confidence – yet most organisations remain locked into a “plan-make-sell” business model that involves a protracted annual budgeting process based on negotiated targets and resources and that assumes that the customers will buy what the company decides to make. But such assumptions are no longer valid in an age when customers can switch loyalties at the click of a mouse.”

Hope, J, & Fraser, R 2000, ‘beyond budgeting’, Strategic Finance, 82, 4, pp. 30-35, Business Source Premier, EBSCOhost, viewed 11 November 2013

Required:

Critically analyse the ideas which are outlined in this extract. Explain the background to the theory of Beyond Budgeting, comparing the traditional view of standard costs and budgeting for control (as discussed in Section 1.2.c. above) with more recent thinking. Marks will be awarded for evidence of reference to a variety of relevant academic literature, including correct use of the Harvard system. You should also include reference to the following articles:

• Bourmistrov, A, & Kaarboe, K n.d.,2013. ‘From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas’, Management Accounting Research, 24, 3, pp. 196-21.

• Ostergren, K. & Stensaker, I., 2011, ‘Management Control without Budgets: A Field Study of ‘Beyond Budgeting’ in Practice’, European Accounting Review, 20, 1, pp 149-181.

• Wallander, J., 1999. ‘Budgeting – an unnecessary evil’, Scandinavian Journal of Management 15, 405–421.

50 marks

END OF ASSIGNMENT.

You should have completed both section 1 and section 2.