N1510 Management Accounting Indexation 8.

1 Based on the costs for material Alpha, shown below, what is the cost July, based on January being the base period (index = 100) Month Cost per kg January 10.00 July 11.50

8.1 Index = 11.50/10.00 x 100 = 115

8.2 Based on the costs for material Beta, shown below, what is the cost index index (as a whole number) for March, based on January being the base period (index = 100) Month Cost per kg 8,.2 January 8.00 March 9.00

Index = 9/8 x 100 = 113

8.3 If material Delta cost 10 per kg in July and it cost 8 per kg in the base year (index = 100), what is the cost index in July? 8.3 Index = 10/8 x 100 = 125 8.4 If material Epsilon cost 5.00 per kg in July and it cost 4.80 per kg in the base year (index = 100), what is the cost index in July (as a whole number)? 8.4 Index = 5.00/4.80 x 100 = 104

8.5 Based on the costs for material Gamma, shown below, what is the cost index (as a whole number) for March, based on January being the base period (index = 100) Month January Total cost 10,000 Quantity purchased1,000kg March 12,650 1,100kg

8.5 Costs per kg: Jan: 10,000/1,000kg = 10/kg Mar: 12,650/1,100 - 11.50/kg Index = 11.50/10.00 x 100 = 115 8.6 Material Thita cost 20 per kg in January and 25 per kg in July. It cost 18 per kg in the base year (index = 100) Required: Calculate the cost index for July Calculate the percentage increase from January to July

a) b)

8.6 a) b) Index = 25/18 x 100 = 139 Increase = (25 - 20)/20 x100 = 25% 8.7 Falmer plcs performance data for the past four years is shown below: 2009 2010 2011 2012 000s 000s 000s 000s Sales Operating profit 61,650 6,850 65,070 7,230 68,130 7,570 69,750 7,750

Additional data: UK Retail Price Index (1987 = 100)

218

228

239

248

Required: a) Convert both sales and operating profit to 2012 prices b) Comment on the performance of the company 8.7 2009 2010 2011 2012 000s 000s 000s 000s Sales Operating profit Additional data: UK Retail Price Index (1987 = 100) Adjustment 61,650 6,850 65,070 7,230 68,130 7,570 69,750 7,750

218

228

239

248

248/218 248/228 248/239 1.138 1.088 1.038

1 1

Adjusted Sales Operating profit Ratio analysis

70158 7795

70796 7866

70719 7858

69750 7750

8.8 The following data relates to Style Ltd:

2011 000 000 000 2012 000

Trading & Profit and Loss Accounts Sales (all credit) Cost of Goods Sold Opening stock Purchases (all credit) Less closing stock Gross Profit Expenses Net profit
1,500 1,900

80 995 1,075 100 975 525 420 105

100 1,400 1,500 200 1,300 600 495 105

Balance sheet
Fixed Assets (NBV) Current Assets
Stock Trade debtors Bank 100 375 25 500 0 80 80 420 1,105 200 800 0 1000 10 200 210 790 1,210 685 420

Less : Current Liabilities

Bank overdraft Trade creditors

Net assets Capital and reserves

Ordinary share capital Profit and loss account

Shareholders funds

900 205 1,105

900 310 1,210

Required: (a) Calculate the following accounting ratios for the two years 2011 and 2012 respectively: 1. Gross Profit 2. Net profit 3. ROCE 4. Stock turnover 5. Current ratio 6. Acid test 7. Trade debtor collection period 8. Trade creditor payment period (b) Comment on the company's performance

8.8 a)
Gross profit Gross profit X 100 Sales

2011 525 x 100 1500 35

2012 600 x 100 1900 31.57895

Net profit

Net profit x 100 Sales Net profit x 100 Shareholders' funds Cost of goods Stock Current assets Current liabilities Current assets - stock Current liabilities Debtors x 365 Credit sales Creditors x 365 Credit purchases

105 x 100 1500 105 x 100 1105 975 100 500 80 400 80 375 x 365 1500 80 x 365 1075

105 x 100 1900 105 x 100 1210 1300 200 1000 210 800 210 800 x 365 1900 200 x 365 1400

5.526316

ROCE

9.502262443

8.677686

Stock turnover

9.75

6.5

Current ratio

6.25

4.761905

Acid test

3.809524

Debtor collection

91.25 days 27.1627907 days

153.6842 days 52.14286 days

Creditor payment

b)

Liquidity has deteriorated (acid test from 5 to 3.8) and there is now an overdraft of 10,000 The level of risk depends on what is considered usual in the industry Customers are taking longer to pay (153 days instead of 91) Suppliers are paid more quickly than customer pay but the time has increased from 27 days to 52. Profitability has fallen (ROCE from 9.5% to 8.7%) This is because the increase in net assets and revenue has not been matched by an increase in net profit. Gross profit percentage is poorer (from 35% to 31.6%), which contributed to the reduced net profit percentage, as did the increase in expenses. This could be due to either reduced selling price,s or increases in cost of goods sold, or both

8.9 Falmer plcs performance data for the past four years is shown below: 2009 2010 2011 2012 000s 000s 000s 000s Sales Operating profit 51,900 5,400 57,600 6,430 65,100 7,620 68,200 7,740

Required: Evaluate the profitability of the company

8.9

2009 2010 2011 2012 000s 000s 000s 000s Sales Operating profit
Operating profit/sales

51,900 5,400
10.4%

57,600 6,430
11.2%

65,100 7,620
11.7%

68,200 7,740
11.3%

Profit increasing continuously but profitability has fallen in 2012

8.10

The following data related to two divisions of Keeble plc for last month Div A 50,000 700,000 250,000 32 4,800 0.1 hr Div B 60,000 450,000 156,000 18 2,600 0.05 hr

Units produced and sold Revenue Production costs No. of employees Hours worked Standard time per unit

Required: a) Calculate the following ratios for each division: Efficiency Output per hour Cost per unit Revenue per employee b) Comment on the relative performance of the two divisions 8.10 a) Div A 50,000 x 100 104.167 4,800hrs/0.1hr 50,000 10.4167 4,800 250,000 50,000 5 Div B 60,000 115.38 2,600hrs/0.05hr 60,000 2,600 156,000 60,000 156,000 18 23.077

Efficiency

Actual output Expected output

Output per hour

Cost per unit

2.6

Revenue per employee

700,000 21,875 32

8,667

b)

Difficult to compare using output/hr and cost/unit because they depend on the nature of the product There is a similar problem with revenue per employee, although it is widely used as a performace measure On the basis of efficiency, Division B is performing better than Division A

8.11

The following data relates to Herriott Ltd:

2011 2012

Trading & Profit and Loss Accounts Sales (all credit) Cost of Goods Sold Opening stock Purchases (all credit) Less closing stock Gross Profit Expenses Net profit 800,000 900,000

50,000 500,000 550,000 60,000 490,000 310,000 100,000 210,000

60,000 550,000 610,000 55,000 555,000 345,000 120,000 225,000

Balance sheet Fixed Assets (NBV) Current Assets Stock Trade debtors Bank Less : Current Liabilities Bank overdraft Trade creditors 850,000 860,000

60,000 80,000 15,000 155000 0 110,000 110000 45000 895,000

55,000 130,000 0 185000 20,000 128,000 148000 37000 897,000

Net assets Capital and reserves Ordinary share capital Profit and loss account Shareholders funds

600,000 295,000 895,000

600,000 297,000 897,000

Required: (a) Calculate the following accounting ratios for the two years 2011 and 2012 respectively: 1. Gross Profit 2. Net profit 3. ROCE 4. Stock turnover 5. Current ratio 6. Acid test 7. Trade debtor collection period 8. Trade creditor payment period (b) Comment on the company's performance

8.11 a)
Gross profit Gross profit X 100 Sales

2011 310,000 x 100 800,000 38.75

2012 345,000 x 100 900,000 38.33333

Net profit

Net profit x 100 Sales Net profit x 100 Shareholders' funds Cost of goods Stock Current assets Current liabilities Current assets - stock Current liabilities Debtors x 365 Credit sales Creditors x 365 Credit purchases

210,000 x 100 800,000 210,000 x 100 895,000 490,000 60,000 155,000 110,000 95,000 110,000 80,000 x 365 800,000 110,000 x 365 500,000

26.25

225,000 x 100 900,000 225,000 x 100 897,000 555,000 55,000 185,000 148,000 130,000 148,000 130,000 x 365 900,000 128,000 x 365 550,000

25

ROCE

23.46368715

25.08361

Stock turnover

8.166666667

10.09091

Current ratio

1.409090909

1.25

Acid test

0.863636364

0.878378

Debtor collection

36.5 days 80.3 days

52.72222 days 84.94545 days

Creditor payment

b)

Liquidity has deteriorated (current ratio from 1.41 to 1.25)and there is now an overdraft of 20,000, although stock has been reduced and the acid test is stable The level of risk depends on what is considered usual in the industry Customers are taking longer to pay (53 days instead of 37) Suppliers are paid more quickly than customer pay and the time has increased slightly from 80 days to 85. Net profit ratio has fallen slightly (from 26.25% to 25%) but the ROCE has improved because profits have been increased with hardly any increase in net assets Gross profit is also slightly worse (38,33% down from 38.75%)