LEEDS TRINITY UNIVERSITY

EXAMINATION PAPER

Academic Year 2020/21

Mock Paper

BMM4442

FINANCIAL and MANAGEMENT ACCOUNTING

TIME ALLOWED: 3 HOURS

There are three CASE STUDY questions in this examination paper.

You are required to answer all questions.

There are 120 Marks Available

You may use a calculator in this examination, but you must show all the major
stages of your workings as part of your written answers.

Page 1 of 7
Question 1: Stephenson Ltd

Stephenson Ltd was founded in 1990, manufacturing and selling ski equipment to the wholesale
market. The company owns a factory and distribution centre in Newcastle, with an on-site ‘factory
shop’ which sells own branded goods to the public. This shop accounted for approximately 25% of all
sales in 2012. Over recent years, company sales turnover has been decreasing and the Directors of
the firm have become concerned about its future viability, especially in the light of continuing cash
flow and debt problems. You have been commissioned to advise the Board of Directors on the best
way to increase operating profits.

You have gathered the following information from the Company Financial Statements for 2020.

2020 2019
£ £

Sales Turnover 735,000 1,170,000

Cost of Sales 340,000 320,000
Labour Costs 150,000 190,000
Administrative and Office Costs 105,000 100,000
Power/Heat/Light 65,000 45,000
Distribution and Delivery 60,000 35,000

From the SOFP, you have noted the following:

 Stock at the year-end was valued at £ 340,000 as opposed to £ 160,000 at the start
of the year (at cost)
 The Company has a bank overdraft of £ 45,000
 Average ‘debtor days’ are 90 (40 last financial year), average ‘creditor days’ are
unchanged since last year at 28.

You have also noted that in 2019 the Company paid a Dividend of £ 20,000 to Directors.

Questions (50 Marks)

1. Calculate the Gross and Net (or Operating) Profit made by Stephenson Ltd in each accounting
year. (5 marks)
Calc. 2020 (£) 2019 (£)
Sales Turnover a 735,000 1,170,000
Less: Cost of Sales b 340,000 320,000
Gross Profit c=a-b 395,000 850,000
Less: Operating Expenses
Labour Costs d 150,000 190,000
Administrative and Office Costs e 105,000 100,000
Power/Heat/Light f 65,000 45,000
Distribution and Delivery g 60,000 35,000
Total Operating Expenses h=d+e+f+g 380,000 370,000
Net or Operating Profit i=c-h 15,000 480,000

Page 2 of 7
2. Calculate the Gross Profit and Net Profit to Sales ratios for each year. Explain why each of these
ratios is significant when analysing profitability? (10 marks)
Calc. 2020 (£) 2019 (£)
Gross profit to Sales ratio =Gross Profit/Sales Turnover 0.54 0.73
Net profit to sales ratio =Net Profit/Sales Turnover 0.02 0.41

Gross Profit ratio is very significant for measurement of profitability and financial performance
of a business. It reflects the efficiency of a business in terms of utilizing its raw materials, Labour
and other supplies. The ratio is used for comparing year over year and within industry
performance of business. Higher the ratio the better and vice versa.

Net Profit ratio is similar to gross profit ratio but it provides broader picture of business
performance. It indicates the amount of profit that is available to cover operating and non-
operating expenses. Change in Net profit ratio reflect the changes in the selling price or cost of
revenue from operations or a combination of both. If this ratio is low, it indicates unfavourable
purchase and sales policy. But if the ratio is high, it is a good sign.

3. Using the information given in the data above, what do you think might be the reasons for the
company’s declining profits and increasing cash flow problems between 2019 and 2020?
(15 marks)

Primary reason for declining profits is evident from decline in sales. Drop in sales by 37% in 2020
as compared to 2019. Decrease in sales reflects poor sales policy. There are several other
reasons for this decreased profitability one of which is increase in operating expenses in 2020 as
compared to 2019. Sales is decreased whereas, Distribution and Delivery expense increased
which is indicator of supply chain management issues.

Company’s increasing cashflow problems is a result of decreased sales in 2020 which is further
magnified by increase in debtor days. This shows poor working capital management and credit
policies. Moreover, increased inventory levels show that much needed funds are tied up in
inventories resulting into cashflow issues.

4. Advise the directors of three strategies you would recommend to improve the financial position
of the company and explain in detail how these could lead to increased profits in the next
financial year. (20 marks)

Board of Directors,
Stephenson Ltd,

May 1, 2021

Dear Sir/Madam,

Being advisor to the company for improvement of financial performance. I hereby advise three strategies
which should help improve financial position of company and increase profitability in next financial year.
Strategies are listed as under:
 1. Focus on sales policy should be top priority for company. In order to boost sales company should do
promotional campaigns and provide discounts to customers. Providing discount will also help in
decreasing debtor days which will result in increased cashflows. Distribution network should be
increased to boost sales. Increase in profitability is magnified by decrease in cost that is directly
attributable to product being made. Various cost cutting techniques should be used in order to
achieve high profitability which includes vendor contract management, outsourcing of processes or
contract manufacturing.

2. Good inventory management is backbone for a business funds availability. In order to achieve
optimum inventory levels at any time company should utilize just in time production techniques in
order to stop piling up of inventory. This will enable the company to utilize funds at areas where it can
get increased profitability by purchasing new production machine which is efficient and automated
plants etc.,

3. Debtor days should be reduced in order to improve cashflows and recover unpaid invoices. This can
be achieved by providing discounts on early payment, Sales agreement at the of sale and giving
customers multiple payment options. Another option for recovering unpaid invoices is to use debt
collection agency for long outstanding receivables. To manage bank overdraft which usually have high
interest rate debt refinancing is an option to efficiently manage debt burden or alternatively raise
money with grants or crowdfunding.

Question 2: Descoin Ltd

Descoin Ltd, based in Halifax, manufacture wooden toys for the craft market and retail toy industry.
The company is currently developing a new product Early Learning Centre stores called ‘the climbing
cat’, which will commence production in December 2021.

The company currently does not have any cost absorption model, preferring instead to allocate costs
across its entire product range on a ‘pro-rata’ basis, according to production levels. This has made it
difficult to price each product using the ‘cost plus’ method with any degree of accuracy and the
Directors are concerned that some existing product lines may be being sold at a loss. The company
also relies on Incremental Based Budgeting for business analysis purposes and the level of variances
is traditionally very high, making accurate forecasting difficult.

Questions (30 marks)

1. If the allocated Fixed Costs of producing the new product are £ 100,000 and the variable
costs are £ 5.00 per toy, and assuming a selling price of £ 15.00 per toy, using the net
contribution method calculate the Break Even Point of Production for ‘The Climbing Cat’. (5
marks)
2. How might the use of either Break Even Analysis or Cost Volume Profit Analysis enable the
company to set profitable sales revenue targets? (10 marks)

Page 4 of 7
3. Outline and explain to the Directors the advantages and disadvantages of switch to Activity
Based Costing and explain how this may help them to ensure that all lines are being priced
profitably. (15 marks)
 Page 5 of 7

Question 3: Taylor Ltd

Taylor Ltd has been producing Clip Frames for sale to supermarkets and chain stores around the UK
since 1977 from a single factory site in Brighton. All aspects of financial management and planning
are under the control of Terry Taylor, the current CEO, who recently inherited a majority of the
shareholding. The company has struggled with a declining market, recently losing contracts with
Sainsbury’s and Tesco to competition from within the UK and Sector analysis suggests that whilst
customers are generally satisfied with the quality and presentation of Taylor’s products, there have
been problems with distribution and supply during period of high demand and also with price.
Taylor’s continue to use Incremental Based Budgeting as their only financial forecasting model,
although they have been considering demand forecast models available on line. Budgets are
prepared for the whole company, rather than individual departments and processes, and there is no
specific costing data to show where overheads are accruing or where cash flow problems are
effecting the smooth operation of the business.

Budget Actual (outrun)

£ £
Sales Turnover 1,000,000 660,000
Direct Costs:
Materials 330,000 410,000
Labour 150,000 220,000
Power 80,000 85,000
Packing and Distribution 40,000 50,000
Indirect Costs
Administration 100,000 130,000
Advertising and Marketing 20,000 20,000
Premises Costs 185,000 290,000

Question (40 Marks)

Construct a ‘five step’ Budget Variance Analysis, highlighting:

1. A calculation of three significant variances between projected and outrun figures. (5 marks)

2. An explanation for likely/possible causes of these variances. (5 marks)

Page 6 of 7

3. A projection of potential consequences for the business of each of the variances you have
chosen. (10 marks)

4. Suggested strategies for elimination or correction of these variances– either through a

change in the current costing model or changes to operations. (10 marks)

5. An evaluation of the advantages disadvantages of a switch from Incremental Based

Budgeting to Zero Based Budgeting. (10 marks)
 END
Page 7 of 7