MBA Programme

Financial and Management Accounting

Sample Exam Questions

Contents
Table of Ratios

Sample Exam Papers

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 MBA EXAMINATIONS

COMMONLY USED RATIOS

Profitability

Return on Capital Employed Profit before deducting interest and taxation x 100
Equity (Shareholders’ funds) plus Long Term Borrowing (debt)
Return on Shareholders Funds Net profit after taxes x 100
(also called Return on Equity) Equity (Shareholders’ funds)
Net profit after taxes x 100
Net Profit Percentage
Revenue (Sales)
Gross profit x 100
Gross Profit Percentage
Revenue (Sales)

Liquidity Ratios

Current Assets
Current Ratio
Current Liabilities
Current Assets less Inventory (stock)
Quick Ratio (Acid Test)
Current Liabilities

Efficiency Ratios

(Stock)/Inventory Holding Inventory (stock) x 365

Period (days) Cost of Sales
(Debtor)/Receivables Payment Trade receivables (debtors) x 365
Period (days) Revenue (Sales)
(Creditor)/Payables Payment Trade payables (creditors) x 365
Period (days) Purchases or Cost of sales

Financial Structure

Long Term borrowing (debt)

Gearing
Long Term Borrowing plus Equity

Profit before interest and tax

Interest Cover
Interest expense

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 FMA Sample examination questions

Question 1

The following information has been obtained about three companies in the same industry. They all have
adopted similar accounting policies.

Company DEF GHI JKL

Sales £100m £40m £5m
%
Gross profit as a percentage of sales 20 30 40
Net profit before interest and tax as a percentage of sales 12 15 10
Net profit after interest and tax 4 9 5
Return on Capital Employed before interest and tax 13.3 13.3 12.5
Return on Capital Employed after interest and tax 5 8 6
Return on Shareholders' Funds after interest and tax 10 8 8

Required:
(a) Using the ratios that have been calculated, suggest the strategy that has been adopted by each
company in terms of pricing and promotional activities. In your discussion, assume that the three
companies have similar costs of production.

(b) What do the ratios indicate about the method of financing that is being used by each of these
companies.
(c) When analysing the performance and financial position of different companies, two of the problems
that analysts encounter are the diversity of accounting methods used and the differences in the
objectives of the financial statements. Explain the nature of the problems that arise in these two areas.

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Question 2

Lythe Engineering Limited has two production departments, Machining and Assembly. The Machining
department has a monthly capacity of 1500 machine hours and the Assembly department a monthly
capacity of 3000 direct labour hours. The production capacity of neither can be enlarged within a
period of 15 months.

The company at present makes three products all of which use the same machining and assembly
facilities. The expected demand, unit selling price and variable cost are given below together with the
time which each unit takes in machining and assembly.

Product A B C

Unit selling price £100 £200 £250

Variable cost £40 £120 £124
Machining time 2 hours 4 hours 6 hours
Assembly time 3 hours 6 hours 8 hours
Monthly demand 200 units 200 units 100 units

The company has fixed overheads of £20,000 per month.

Required:

(a) Calculate the mix of production and sales which will maximise profits within the constraints
under which the company operates. Calculate the profit at this mix. State all the
assumptions which you have made in your calculations.
(15 marks)

(b) How would you respond to a question from the managing director as to which is the most
profitable product?
(7 marks)

(c) The marketing director has suggested that if a further £1,500 is spent on advertising
product A the sales could be increased to 300 units per month without any reduction in
selling price. Is the additional advertising worthwhile if the company is already short of
production capacity? State all your assumptions.
(111/3 marks)
(Total 331/3 Marks)

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Question 3

The accountant has been asked to determine the cost of products that will be sold during the next
financial year. The details of the budget for the year are:-

Cost Centres 1 2 3 4 5
Depreciation and indirect labour £000 55 72 60 48 35

It is expected that 10,000 direct labour hours will be worked in Cost Centre 1 and 8,000 direct labour
hours will be worked in Cost Centre 2. Cost Centres 3,4 and 5 provide services within the
organisation. The usage of these service cost centres has been estimated as follows:-

Receiving Cost Centres 1 2 3 4 5

From cost centre 3 30% 40% 20% 10%
From cost centre 4 50% 30% 20%
From cost centre 5 40% 60%

Required
(i) Determine the expected full cost of a product that will use the following:-
Materials £10,000
Labour – Cost Centre 1 3,000 direct labour hours @ £7 per hour
Labour – Cost Centre 2 1,200 direct labour hours @ £8 per hour

(ii) Calculate the effect on the company’s profit if the company only operates at 70% of the
budgeted level

(iii) It has been suggested that this company should introduce Activity Based Costing. Discuss
the benefits that could be obtained by adopting ABC.

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Question 4

a. It is very important for non-financial managers to understand the basic financial information
produced by a company. Describe briefly the purpose of the three main financial statements and
especially, highlight why the profit position and the cash position of the company are not the same
thing.

(18 marks)

b. Cost volume profit analysis is an important tool in decision making. However it is based on a
number of assumptions. Describe these assumptions.

(7 marks)

c. In each case stated below one or more of the accounting conventions may have been broken.

Explain which accounting conventions are particularly relevant to each of these cases, and
explain what the correct accounting treatment would have been if you disagree with the
treatment adopted.

i. Lok Ltd has informed Tak Plc, a machine manufacturer, that they might place an order for
£10,000 worth of goods in December 2008. Tak's year end is 31st December 2008. The
company accountant of Tak Plc includes this sale in the income statement for 2008.

ii. Berm Ltd manufactures reproduction antique furniture in the expectation that it will find buyers
after the construction is complete. In the year ended 31st December 2008 the company built 3
identical dining room tables at a cost of £40,000 each. As one of the tables was sold for
£60,000 the remaining two units were valued at that amount in preparing the balance sheet.

(81/3 marks)
(Total 331/3 Marks)

Question 5
(a) Management accountants must provide managers with financial information that enables
management to judge the performance of each division. Discuss the information that would be
most relevant to the manager of the following divisions:-
(i) discretionary cost centres
(ii) cost centres with measurable outputs
(iii) profit centres
(iv) investment centres
(17 marks)
(b) Discuss the problems that can arise if accounting-based performance measures are used to
evaluate divisional performance and explain steps that can be taken to reduce the impact of
these problems.
(161/3 marks)
(Total 331/3 Marks)

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Question 6
The senior management of Steinbury plc were keen to evaluate the company’s performance and have
asked you to prepare a report that will enable them to obtain a better picture of the position in respect
of 2007.

The following information was available in the Annual Report:-

Income statement information £ million
Profit before interest and tax (EBIT) 1 000
Interest expense 50
Profit before taxation 950
Tax expense 150
Profit for the financial year 800

Balance Sheet information

Non-current assets 7 800
Current assets less current liabilities 200
8 000
Less: Non-current liabilities / Long-term Debt 3 000
Total Equity 5 000

Additional information
1. The interest rate on the long-term debt is 5 per cent per annum
2. The tax rate is 33 1/3 per cent
3. Equity investors in companies with this risk profile require a return of 12 per cent.

Required:
(a) What is the company’s Return on Capital Employed (ROCE) for 2007?
(4 marks)

(b) Discuss the problems that are faced in measuring performance, using Return on Capital
Employed.
(6 marks)

(c) Calculate the Residual Income of the company for 2007.

(4 marks)

(d) Discuss the advantages of using Residual Income (RI) to measure the company’s performance.
(6 marks)

(e) Explain Economic Value Added (EVA), highlighting the differences between EVA and
Residual Income (RI).
(131/3 marks)
(Total 331/3 Marks)

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 Master of Business Administration

MFR – FINANCIAL & MANAGEMENT ACCOUNTING

MARCH
MOCK EXAM BASED ON PAST MARCH EXAM WITH ONLY 5 QUESTIONS. EXAMS
NOW HAVE 6 QUESTIONS

2 HOURS

Answer ANY THREE questions

All questions carry equal marks

8
Question 1
SAM plc manufactures and sells beer and non-alcoholic drinks in many countries. The same
technology is used in all the factories and the cost of production is the same in all parts of the world.
The expenses in each geographic area are 4.5 % of Sales but the level of advertising and promotional
expenses are decided by the management of each geographic area. The financial statements for the
year show the following information and ratios have been calculated using the attached ratios.

Africa America Europe TOTAL

Sales million units 6 000 5 000 2 000 13 000
Sales - £ million 7 200 5 000 2 800 15 000

Return on Capital Employed 12.3% 1.6% 18.7% 9.2%

Ratios

Net Profit Percentage 20% 3% 25% 15%

Gross Profit Percentage 25% 10% 36% 22%
Stock Holding Period (days) 60 40 48 51
Debtor Payment Period (days) 90 73 26 73
Creditor Payment Period (days) 182 182 182 182

Required:-
(a) From this information, compare and contrast the performance of the company in each area of
the world. Discuss the strategies in each part of the world in respect of:-

(i) pricing;
(ii) advertising and promotional activities;
(iii) the use of resources which has resulted in differences possible causes of the
differences in the Return on Capital Employed.
(20 marks)

(b) Calculate the Return on Shareholder’s Funds for the whole company if the Interest expense for
the year was £500 million and the tax payable was £600 million. The Long-term Debt at the
end of the financial year was £8,350 million.
(7 marks)

(c) Discuss the financial structure of the company.

(6 1/3 marks)
TOTAL 33 1/3 marks

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Question 2
HAL plc manufactures and sells four products that use the same production facilities. In the plan for
2006, the details of each product were:-

Product J K L M
£ £ £ £
Selling price per unit 83 70 45 30
Variable costs per unit 40 35 25 12
Apportioned fixed costs 25 20 10 10
per unit
Profit per unit 18 15 10 8
Estimated sales – units 10 000 15 000 20 000 20 000
Estimated profit- £000 180 225 200 160

When the budget was prepared, the total fixed costs were estimated to be £950 000 and the output
was expected to be 190 000 direct labour hours. An overhead recovery rate, based on Direct Labour
Hours, is used to apportion the fixed costs to products.

As a result of unforeseen circumstances, the capacity has been reduced to only 145 000 direct labour
hours in 2006 but the overhead costs will not be affected by the change in the output level.

Required
(a) What products should be produced and sold to maximise the company’s profit and what will be
the total profit of the company?
(11 marks)

(b) As an alternative to turning away orders, it has been suggested that if the selling price of all
four products should be increased by 10 per cent. It is expected that this will reduce the demand
for each product by 25 per cent. This would reduce the required direct labour below the 145
000 hours that are now available. Would this result in a better outcome than that the one
resulting from the strategy proposed in part (a)?

(9 marks)

(c) “Activity Based Costing (ABC) has enabled managers to make more informed decisions”

Explain Activity Based Costing and discuss the manner in which ABC would enable the
managers of HAL plc to make more informed decisions in their present situation.
(13 1/3 marks)
TOTAL 33 1/3 marks

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Question 3
Most financial analysts consider ratio analysis to be a useful means of interpreting financial reports.
Recently, many companies include profitability, liquidity and gearing ratios in the voluntary reports
that are in the Annual Report that is given to shareholders. On the other hand, however, it has been
suggested that ratio analysis can prove to be a distraction.

(a) Discuss this statement, considering the limitations of ratio analysis

(16 marks)

(b) Discuss the applications of financial statement analysis that are useful to managers.
(17 1/3 marks)
TOTAL 33 1/3 marks

Question 4
(a) Financial reporting is influenced primarily by legislation and accounting practices, which are
based on the concepts and conventions that have developed over many years. Two important
conventions are:-

(i) The use of Historic cost to value Fixed Assets

(ii) The Prudence convention

Explain these two conventions and discuss the impact of each of them on the ratios that are
used to assess the performance of firms.

(13 marks)

(b) Explain and discuss the usefulness of Economic Value Added (EVA) to measure the
performance of companies.
(20 1/3 marks)
TOTAL 33 1/3 marks

Question 5
(a) Discuss the costs and benefits of decentralisation in a firm that sells a range of different
products countries that are manufactures in factories in several different geographical areas of
the world.
(16 marks)

(b) What information would be most appropriate to be provided to the managers of:-
(i) discretionary cost centres
(ii) cost centres with output that can be measured
(iii) profit centres
(iv) investment centres
(17 1/3 marks)
TOTAL 33 1/3 marks
End of Paper

11
 Master of Business Administration

MFR – FINANCIAL & MANAGEMENT ACCOUNTING

AUGUST
MOCK EXAM BASED ON PAST AUGUST EXAM WITH ONLY 5 QUESTIONS. EXAMS
NOW HAVE 6 QUESTIONS

2 HOURS

Answer ANY THREE questions

All questions carry equal marks

12
Question 1
Company LHD sells only one product. The sales in 2004 were 80,000 units but during 2005, the
sales increased to 100,000 units. However, in 2006, the sales had fallen to 90,000 units. The
company results for the period are:-

Profit and loss account

2004 2005 2006
£000 £000 £000
Sales 14,400 16,000 17,100
Cost of sales 9,600 10,800 11,160
Gross profit 4,800 5,200 5,940
Administration 1,000 1,200 1,400
Marketing and promotion costs 2,800 2,800 3,290
Profit before interest and tax 1,000 1,200 1,250
Interest paid 100 150 210
Profit before tax 900 1,050 1,040
Tax 300 330 290
Profit after tax 600 720 750

Balance sheet at year end

2004 2005 2006
£000 £000 £000
Fixed Assets 5,000 5,400 5,500
Current Assets
Stock 2,500 4,000 4,500
Debtors 2,000 2,400 2,800
Cash   --       600    200
4,500 7,000 7,500
Less: Creditors 1,500 1,600 2,000
Net current assets 3,000 5,400 5,500
Total net assets 8,000 10,800 11,000
Less: Long-term debt 2,000 4,500 4,400
6,000 6,300 6,600

Issued Share Capital 5,400 5,400 5,400

Retained profit   600   900 1,200
6,000 6,300 6,600

Required
(a) Calculate four profitability ratios.
(8 marks)
(b) Discuss the company’s pricing strategy and identify the possible causes of any changes in the
profitability ratios that have occurred over the period from 2004 to 2006.
(15 marks)
(c) Suggest four ways by which the Return on Capital Employed could be improved during the
next year. It is not possible to change the unit selling prices or the costs per unit or the
company’s total expenses.
( 10 1/3 marks)
TOTAL 33 1/3 marks

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Question 2
The annual budget of MN0 plc has just been completed and the details are:-

Product P Product Q Product R TOTAL

Sales – units 20,000 40,000 120,000
£000 £000 £000 £000
Sales 2,000 3,200 10,200 15,400
Variable costs 800 2,200 8,400 11,400
Fixed costs 440 720 2,640 3,800
Total costs and expenses 1,240 2,920 11,040 15,200
Profit / (Loss) 760 280 ( 840) 200

The Directors were alarmed at the forecast of the results and asked for the following alternative
courses of action to be assessed:-

(a) What would be the effect of not producing and selling Product R?
(3 marks)

(b) An additional amount of £130,000 is available to advertise one of the three products. It is
expected that the additional advertising expenditure would increase the sales of the
relevant product by 10%. Should the advertising of any of the products be increased by
£130,000?
(7 marks)

(c) The decisions in part (a) and (b) are typical of the decisions that are made when the
annual budget of an organisation is being prepared. Describe the process that is most
commonly used to produce an organisation’s annual budget.
(16 marks)

(d) Although many managers consider the production of an annual budget to be a waste of
time, most organisations prepare one. Discuss the benefits that arise from the preparation
of an annual plan.
(7 1/3 marks)
TOTAL 33 1/3 marks

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Question 3
The Sales Director of ST has asked for the accountant to provide details of the “full” cost of the two products
that are sold. The cost details are:-

Product S Product T
Expected sales – units 5,000 1,000
Material £28 £48
Labour hours per unit – Dept 1 4 2
Dept 2 0.5 1

The labour cost is £8 per hour in Dept 1 and £6 per hour in Dept 2.

Dept 1 Dept 2 Canteen Repairs TOTAL

Allocated costs £300,000 £150,000 £30,000 £100,000 £580,000

Rent & Power -Apportioned on the basis of area £120 000

Management costs - Apportioned on the basis of numbers £250 000

The other information that has been obtained is:-

Area Number
Dept 1 55% 65%
Dept 2 30% 25%
Canteen 5% 4%
Repairs 10% 6%

It is expected that 70% of the repair facilities will be used by Dept 1 and 30% will be used by Dept 2.
The Canteen costs are apportioned to the other departments on the basis of the numbers but not to the
Canteen.

Required:
(a) If overheads are apportioned to products on the basis of direct labour hours, calculate the cost
of each product if only one overhead recovery rate is used.
(5 marks)
(b) Calculate the cost of each product if separate departmental recovery
rates are used. If the managers use total cost to set selling prices, discuss the implications of
using separate departmental overhead recovery rates rather than a company-wide recovery rate
(9 marks)
(c) The company is considering the introduction of Activity Based Costing. Prepare a report that
describes the main characteristics of ABC.
(9 marks)
(d) What are the benefits that are claimed for Activity Based Costing and discuss the extent to
which it would benefit the company that has been described in this question.
(10 1/3 marks)
TOTAL 33 1/3 marks

15
Question 4

Although studies show that a high proportion use the traditional Rational Budgeting method to
produce the annual budget, there are other approaches to forecasting and planning the future of
organisations.

(a) Explain the following alternative approaches to budgeting:-

(i) Zero-based budgeting

(ii) Activity Based budgeting (ABB)
(iii) Kaizen budgeting
(12 marks)

(b) In developing a budget for an organisation, it is important to take the behavioural aspects of
budgeting into consideration. Discuss the factors that can affect the motivation of the
managers in the organisation.
(12 marks)

(c) “The preparation of the annual budget is important as a means of communication within the
organisation.”

Discuss this quotation and relate it to an organisation with which you are familiar.
(9 1/3 marks)
TOTAL 33 1/3 marks

Question 5
(a) Discuss the nature of the accounting information that is provided in a typical Cash Flow
Statement that is included in the Annual Report of most companies. You should include a
typical Cash Flow Statement in your answer but it is not necessary to show any figures.
(16 marks)

(b) Discuss the significance to financial analysts of three of the accounting conventions / concepts
when they are using ratio analysis to assess the performance of companies.
(17 1/3 marks)
TOTAL 33 1/3 marks

End of Paper

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