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3) Costing MAC (15!2!2025) (Tutorial)

The document outlines financial data from a balance sheet, including fixed and current assets, liabilities, and capital reserves. It discusses the performance measurement of two divisions within a manufacturing company, focusing on return on investment (ROI) and residual income (RI) calculations based on budgeted operating statements. Additionally, it explores the implications of a potential investment in new machinery for Division B and its effect on ROI and RI.

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Lucky Dora
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8 views

3) Costing MAC (15!2!2025) (Tutorial)

The document outlines financial data from a balance sheet, including fixed and current assets, liabilities, and capital reserves. It discusses the performance measurement of two divisions within a manufacturing company, focusing on return on investment (ROI) and residual income (RI) calculations based on budgeted operating statements. Additionally, it explores the implications of a potential investment in new machinery for Division B and its effect on ROI and RI.

Uploaded by

Lucky Dora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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From the following balance sheet, compute the company's financial gearing ratio.

£'000 £'000 £'000


Fixed assets 12,400
Current assets 1,000
Creditors: amounts falling due within one year
Loans 120
Bank overdraft 260
Trade creditors 430
Bills of exchange 70
880
Net current assets 120
Total assets less current liabilities 12,520
Creditors: amounts falling due after more than one year
Debentures 4,700
Bank loans 500
(5,200)
Provisions for liabilities and charges: deferred taxation (300)
Deferred income (250)
6,770
Capital and reserves
Called up share capital
Ordinary shares 1,500
Preference shares 500
2,000
Share premium account 760
Revaluation reserve 1,200
Profit and loss account 2,810
6,770
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a
large manufacturing company. While both divisions operate in almost identical markets, each
division operates separately as an investment centre. Each month, operating statements must
be prepared by each division and these are used as a basis for performance measurement for
the divisions.

Last month, senior management decided to recharge head office costs to the divisions
Consequently, each division is now going to be required to deduct a share of head office costs
in its operating statement before arriving at net profit which is then used to calculate return
on investment (ROI)). Prior to this, ROI has been calculated using controllable protit only.
The company's target ROI, however, remains unchanged at 20% per annum For each of the
last three months, Divisions B and C have maintained ROIs of 22% per annum and 23% per
annum respectively, resulting in healthy bonuses being awarded to staff. The company has
a cost of capital of 10%

The budgeted operating statement for the month of July is shown below.

B C

Sales revenue 1,300 1,500


Less variable costs (700) (800)
Contribution 600 700
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292
Divisional net assets $23.2m $22.6m

Required

(a) Calculate the expected annualised return on investment (ROI) using the new method as
preferred by senior management based on the above budgeted operating statements, for
each of the divisions

The divisional managing directors are unhappy about the results produced by your
calculations in heard that a performance measure called residual income may provide more
information.

(b) Calculate the annualised residual income (RI) for each of the divisions based on the net
profit figures for the month of July
Division B has now been offered an immediate opportunity to invest in new machinery at a
cost of $2. 12 million The machinery is expected to have a useful economic life of four years,
after which it could be sold for $200,000 Division B's policy is to depreciate all of its machinery
on a straight-iine basis over the life of the asset. The machinery would be expected to expand
Division B s production capacity, resulting in an 8.5% increase in contribution per month

Required

(c) Recalculate Division Bis expected annualised ROI and annualised Ri based on July s
budgeted operating statement after adjusting for the investment. State whether the managing
director will be making a decision That is in the best interests of the company as a whole if
ROI is used as the basis of the decision.

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