Title: Management Accounting Skills
You have been hired as project consultant by a hotel group, Viago Group. The group prepares financial statements on a quarterly basis. You are required to provide consultancy to Viago on two accounts, resulting in two tasks for you:
Task 1
You have been asked to review the performance of the group's hotel in Scotland. You have in front of you the results for this year (based on some actual results and some forecasts to the end of this year):
| Quarter |
Sales Revenue ($) |
Profit/ Loss ($) |
| 1 |
400 |
-280 |
| 2 |
1,200 |
360 |
| 3 |
1,600 |
680 |
| 4 |
800 |
40 |
| Total |
4,000 |
800 |
Additional Information:
o The total estimated number of guests (guest nights) for this year is 50,000, with each guest night being charged at the same rate.
o The results follow a regular pattern; there are no unexpected cost fluctuations beyond the seasonal trading pattern.
For next year, an increase in unit variable cost of 10 percent and a profit target for the hotel of $1 million is anticipated. These need to be incorporated into the hotel's plans.
Help the management at Viago by:
o Calculating the total variable and total fixed cost of the hotel for this year. Show the provisional annual results for this year in total, showing the variable and fixed costs separately. Also, show the revenue and cost per guest.
o Determining:
- The required revenue rate per guest to meet the profit target, if there is no increase in guests for the next year.
- The number of guests required to meet the profit target, if the required revenue rate per guest is not raised above this year's level.
Task 2
Viago is also planning to launch a memorabilia chain by the name Memories Unlimited. The new business will start production on 1 April, but sales will not start until 1 May. Planned sales for the next nine months are as follows:
| Months |
Sales Units |
| May |
500 |
| June |
600 |
| July |
700 |
| August |
800 |
| September |
900 |
| October |
900 |
| November |
900 |
| December |
800 |
| January |
700 |
The additional information available includes:
o The selling price of a unit will be a consistent $100 and all sales will be made on one month's credit.
o It is planned that sufficient finished goods inventories for each month's sales should be available at the end of the previous month.
o Raw materials purchases will be such that there will be sufficient raw materials inventories available at the end of each month to meet precisely the following month's planned production. This planned policy will operate from the end of April.
o Purchases of raw materials will be on one month's credit.
o The cost of raw material is $40 a unit of finished product.
o The direct labor cost, which is variable with the level of production, is planned to be $20 a unit of finished production.
o Production overheads are planned to be $20,000 each month, including $3,000 for depreciation.
o Nonproduction overheads are planned to be $11,000 a month, of which $1,000 will be depreciation.
o Various noncurrent (fixed) assets costing $250,000 will be bought and paid for during April.
o Except where specified, assume that all payments take place in the same month as the cost is incurred.
o The business will raise $300,000 in cash from a share issue in April. Based on the given data, draw the cash budget for Memories Unlimited.
Task 3
A subsidiary of Viago, Lip Smackers Ltd., deals in baked goods. In recent months, the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors approached the Oscar bank to ask for an increase in the existing overdraft for one year, to be able to comply with the suppliers' demands. The most recent financial statements of the business are as follows:
| Statement of Financial Position as of May 31 |
| ASSETS |
$ |
| Noncurrent Assets |
|
| Property, plant, and equipment |
74,000 |
| Current Assets |
|
| Inventories at cost |
198,000 |
| Trade receivables |
3,000 |
|
201,000 |
| Total Assets |
275,000 |
| EQUITY AND LIABILITIES |
20,000 |
| Equity |
|
| $1 ordinary shares |
20,000 |
| General reserve |
4,000 |
| Retained earnings |
17,000 |
|
41,000 |
| Noncurrent Liabilities |
|
| Borrowings: Loan notes repayable in just over one year's time |
40,000 |
| Current Liabilities |
162,000 |
| Trade payables |
10,000 |
| Accrued expenses |
17,000 |
| Borrowings: Bank overdraft |
5,000 |
| Taxation |
194,000 |
|
|
| Total Equity and Liabilities |
275,000 |
Additional information:
o The loan notes are secured by personal guarantees from the directors.
o The current overdraft bears an interest rate of 12 percent a year.
Answer the following questions for Lip Smackers:
o Identify and state the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business.
o In your opinion, should the bank grant the required increase in the overdraft for Lip Smackers Ltd.?