GSFM7514 Accounting and Finance for Decision Making – Management Accounting Analysis

Question 1

SAC services provide Air Conditioner maintenance throughout Selangor. The company bases its budget overhead costs on the following data:

Budget Price and Expenses

In January, the following actual costs were incurred for 250 services provided:

Competition in the market has forced SAC Services to reduce the price charged to customers to RM120 for each service.

a. Prepare the Net Operating Income for the Budget and the Actual services.

b. Prepare a variance analysis report for SAC Services for the month of January.

c. To improve situation, SAC Services is considering 2 proposals. The first proposal is to relocate the business and pay less rent to RM2,000. Salaries and wages are to be reduce to RM11,000. This however will increase the actual outdoor expenses to RM26 per service. The second proposal is by terminating workers and to reduce salaries and wages to RM8,000. This will increase maintenance to RM12 per service. The price of the service will remain at RM120. Evaluate using break even analysis and comment which proposal is best for the company.

Question 2

MEMC Company has just completed the second draft of their master budget. The cash budget summary shows a negative cash balance in Quarter 1, 3 and 4. The company is considering financing the deficits with a combination of long term and short-term loans. Short term borrowing will incur a 6% interest rate while a long-term loan interest rate will be 10%. Another plan is to negotiate a favorable term of credit from suppliers.

The Cash budget summary, the budget Income statement and the budget Balance Sheet are shown below.

Evaluate the cash budget situation and suggest actions that can be taken to prepare the company for the next period of operations. Prepare a new revised Cash Budget, revised Income Statement and revised Balance Sheet. Do not include any taxes in your calculations. Include liquidity, profitability, and debt management analysis in your evaluation.

MEMC for Budget Year 2025: Cash Budget

MEMC for Budget Year 2025: Income Statement

MEMC for Budget Year 2025: Balance Sheet

Current Assets

Current Liabilities

Stockholders’ Equity

Question 3

CCID plans to embark on a new investment in 2025 and will require RM15,000,000. The investment is expected to provide a return on invested capital (ROIC) of 16%. As of 31st December 2024, the Net Income stood at RM15,000,000. The company intends to pay Dividends amounting to RM4,500,000 and retained the balance. The number of shares is 10 million units. The expected growth rate of the dividends is 3.13%. The share price is currently RM1.55. The company is currently financed with 50% Debt. The current Beta of the company at this 50% level of debt is 1.2. The risk-free rate is 3% and investment analysts have estimated the Market Return is 18%. The corporate tax rate is 30%.

The company intends to reduce the use of debt and will finance the new project with 30% debt and 70% equity. The FTU Bank has indicated that any loans from the bank will incur a 15% interest rate.

The cost of issuing new shares will be 3% and will be added to the cost of equity.

Evaluate the situation and determine whether the company should go ahead with their plan.

Experts Answer on Above Questions on Management Accounting

Budgeted and actual net operating income

The budgeted net operating income is calculated as follows:
Sales volume – 37500
Less variable cost – 15000 (including cleaning 7500, maintenance 2500, outdoor expenses 5000)
Contribution margin – 22500
Let’s fixed cost – 25000 (including salaries and wages 15000, depreciation 3000, utilities 3000, rent 5000)
This leads to a net operating loss of 2500.
The actual net operating income is calculated as follows:
Sales volume – 30000
Less variable cost – 14000 (including cleaning 5500, maintenance 2500, outdoor expenses 6000)
Contribution margin – 16000
Let’s fixed cost – 22150(including salaries and wages 12000, depreciation 3500, utilities 1650, rent 5000)
This leads to a net operating loss of 6150.

Variance analysis

The variance analysis shows that the sales revenue has a unfavorable variance of RM7500, outdoor expenses is unfavourable by RM1000, salaries and wages is favourable by RM3000, depreciation is unfavourable at RM500, utilities is favourable at R350 and net operating income is unfavourable, as the actual loss exceeds by RM3650.
This indicates that the decision to reduce the price has adversely affected revenue even though there is savings in some operating costs.

Break even analysis

Proposal 1 – the selling price is RM120, variable cost is RM66 which leads to a contribution of RM54, and fixed cost is RM18150.
Break even is therefore at RM18150/RM54 = 337 services.
Proposal 2 – the variable cost is RM 62 which amounts to a contribution of RM58. The fixed cost is RM18150 and the break even point is therefore RM18150/RM58 = 313 services.
It is therefore recommended to prefer proposal 2 because it has a lower break even point and it implies that profitability can be achieved with fewer services.

Evaluation of cash budget

The analysis of the cash budget indicates that the company is faced with a deficit in quarter one, two and four which shows liquidity challenges. The cash inflows are not efficiently managed even though the annual operations are profitable. The excessive reliance on borrowing would increase the fixed cost.
Recommended actions – it is recommended to negotiate longer credit terms with suppliers, improve collection of receivables, maintain a minimum cash reserve and delay non- essential capital expenditure.

Required equity financing

The investment needed is RM15000000, debt financing is 30% which is RM4500000 and equity financing is 70% which is RM10500000.
Cost of equity = 3%+1.2(18%-3%) = 21%
After tax cost of debt is 10.5%
WACC – .7021%+.3010.5% = 17.85%
Investment evaluation – the expected ROIC is 16% and the weighted average cost of capital is 17.85%. It implies that the investment is likely to decrease the value of shareholders, and it is therefore recommended to not proceed with the proposed investment.

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