CAP2 SFMA Assessment January 2012 - Details needed

Muriel5119

Hi there,
I have an SFMA Assessment in January 2012, I have literally no idea what format it is or how it is to be completed. If anyone could provide me with some details or the questions that will be asked I would really appreciate it.

Many thanks, Muriel

Muriel5119

Here is the case study

dtmckeown

Basically, you need to work through the case study and predict what sort of questions they will be asking. On the day of exam you will be given a supplementary page detailing more information and you must use this in your answers. I think there are normally about 4 questions.

There was a lecture specifically geared towards this case study.

Look at the previous year exams and they will give you an idea of what the questions are like.

We were told there will be no curve balls, so if you spot something in the case study which they could ask you, it is likely it will come up.

Also, you should be able to see in the case study what information may be provided in the exam, such as sales reports and leasing costs.

Do all the calculations you can now and bring them into the exam with you.

Muriel5119

Hi there

Thanks very much for your response. From looking through the case study I suspect there may be Transfer pricing/investment appraisal and target costing although I am still unsure as to how this information will be presented. I am currently looking at past case studies on SFMA.

Merry Christmas

C14IRE

Hi, I have been looking through the assessment today. I picked out a number or areas that I think may be examined but again unsure how to actually prepare answers etc.

Management accounting - standard costing & variances, budgets & budgetary control & target costing (relevant costs in decision making including pricing)

Finance - leasing (medium terms sources of finance) discounted payback (capital investment decision making)

SFMA - something on company takeovers, foreign exchange & risks.

Has anyone picked out anything similar just to confirm I'm defiantly looking down right path?

Thanks

Claire

2802

Hi, I have been looking through the assessment today. I picked out a number or areas that I think may be examined but again unsure how to actually prepare answers etc.

Management accounting - standard costing & variances, budgets & budgetary control & target costing (relevant costs in decision making including pricing)

Finance - leasing (medium terms sources of finance) discounted payback (capital investment decision making)

SFMA - something on company takeovers, foreign exchange & risks.

Has anyone picked out anything similar just to confirm I'm defiantly looking down right path?

I think the areas will be

• Transfer Pricing
  • Aims v Conflict
  • Cost based v Marke Based v Negotiated
  • Issues & Resolutions
• Performance Measurement
  • Centralised v Decentralised
  • Alternative Perf. Measures
  • Consequence of Short Term Measures
• Mergers & Acquisitions
  • Finance Options - (Organic Growth)
  • Post Acquisition Assimilation
• Invesment Appraisal
  • Lease v Buy
  • Discunted Payback
  • NPV

I'm not sure where your seeing foreign exchange or variances in there?

Anybody see any area with enough info to prepare some/part calculations?? Or any idea what to have prepared?

dtmckeown

I go along with 2802's list.

I imagine the mergers and acquisitions question will be all theory based, so preparing a list of advantages and more so disadvantages for this would be advisable. The question highlights that the board want a list of risks with assessments, so this is where foreign currency risk could come in (although for all of you in ROI, this isn't really relevant - poor from the Institute in this respect).

Some other issues I have noted:

The board are asking you to praise the pre-packed sandwiches division in particular for the increase in TURNOVER, which doesn't seem fair as their margin is below expected, so there is an issue there as this may offend the other divisions who met their margins.

The question mentions Residual Income, but to calculate this we would require a breakdown of assets for each division. I don't think this will be a question in the exam - but it is worth noting, just in case. (Falls under performance measurement).

An additional piece of information we may get is the cost of purchasing from the outside supplier - so you may be asked to explain why this is detrimental to the shareholders by providing an example. There is one in the Management Accounting book.

We should also expect more details of the lease. So far, I have listed the following as relevant costs in calculating the discounted payback at 12% (WACC):

Lease costs per year - to be given in exam
Redundancy costs - £140k payable at year 0
Saving in wages - £120k payable at year 1 and 2
Saving in materials wastage - £500.5k in year 1 and £550.55k in year 2 (calculated using "Sales staff have indicated that if sandwiches are priced at €/£1.40 each in 2012 and 2013 that sales will increase by 10% per annum for each of the next two years." assumption)

There is a line in the question that has me confused slightly:
"Pay awards agreed to be first paid in the year ended 30/11/2013 are 3% for the three years thereafter"
Does anybody know the relevance of this and how to use it?

dtmckeown

Oh, and also - I heard that PWC in Belfast are preparing an exam pack for their trainees on this assessment. For the rest of us in smaller firms, it may be worth while keeping an eye out for a copy of this if you can get it. First off, if it is true and secondly, if I get a copy, I'll post a scan here.

Muriel5119

Thanks very much to D T McKeown for all the input

Lucynka

Hi,

In relation to the investment appraisal the comapny currently produces sandwiches with 0.9oz of the filling. If the lease of the new machine is approved there will be no waste and therefore the company should be able to save the 10% currently being wasted (0.1oz of filling per sandwich= 0.03 cent per sandwich). I'm just wondering if you would include the savings as the cashflows (€429K for 2012 and €471.9K for 2013).
Thanks

dtmckeown

I think it should be included as it is a saving coming directly from the new machine.

My calculations are slightly different however. In the question, it is given that the saving per package is 3.5c/p.

Given the assumed 10% increase in annual sales, I have calculated the sales as follows:

2012 - 13,200,000 (12m x 110%)
2013 - 14,520,000 (13.2m x 110%)

(In my previous post, I used the actual sales quantity in 2011 (13,000,000) to calculate this rather than the budgeted sales - which one is correct?!)

Therefore the savings would be:

462k in 2012 and 508.2k in 2013

Lucynka

Hi,

Well I think the actual sales figure should be used as it provides actual number of sandwiches sold.

Sales Details Sales '000 Filling Packaging StaffCost Redund.Pmts
Sales 2011 (18.2mln/1.4) 13,000,000 - - - -140,000
Sales 2012 (2011 + 10%) 14,300,000 429,000 500,500 120,000 -
Sales 2013 (2012 + 10%) 15,730,000 471,900 550,550 120,000 -

myshirt

Would anybody factor in the rebate available on redundancy?

Ali Postit

Hi,

In the TP section has anyone had a stab at the numbers? I've got very confused about what quantities are transferred between precooked meals and frozen foods.

From the turnover and profit info on pg 2 and given the cost per frozen meal on p5 this would suggest a q of 475k however, p 6 mentions 360k pre cooked meals transferred and p 4 also mentions sales volumes increasing by 8%?

Thanks

rockman15

myshirt wrote: »

Would anybody factor in the rebate available on redundancy?

Interesting point. It would be indicative of cross subject examination and a "professional competency" mark. Id be slow to include it in cashflow projections as it is a Fiscal Policy that may change given the macroeconomic austerity. IMO it would be more prudent not to include it, than to include it but make a note to that effect.

myshirt

It's a touchy one. It was 60%, but is now reduced to 15%.

There may be ethical/legal issues by replacing the staff with machinery also. It would certainly piss me off if I was one of them.

For redundancy to be bona-fide, the job has to become redundant i.e the work has to not be there anymore; in other words the company is no longer producing that much sandwiches. The opposite is the truth however, they are in fact producing more - the work is indeed there. It is not thus a real redundancy situation.

If you scratched the word redundancy, and called it a severance payment - maybe bulked the payment up for them, you might side-step these issues.

The company could also go down the 'we are re-structuring our business' route - but presuming they are in a healthy position, I don't see how this could work.

It is something to just highlight on a surface level in our advices - I wouldn't get too hung up on it.

princessmolly

hello,

just about the discounted payback period, to do the calc we need the initial cash outflow, and then the projected cash inflow for the 2 years to find if the machine will pay for itself within the 2 years. do we have any of these figures at the moment?

is the 140,000 redundancy included as an initial cash outflow?

thanks for any help, im really confused .

jennydoll

Does anyone know if redundancy costs go in year 0 or year 1?

Also does anyone know what the pay award will be in 2013? Do we think that we will be given this on the day?

princessmolly

in relation to the risk identification and assessment of the acquisition, some of my points are

1. clash of organisational cultures
2. The effect of external factors on the companies
3. The risk that we would pay too much for the companies
4. The risk of ignoring existing customers while the acquisition is being bedded down.

does anyone else have similiar points for that?

Tricky1979

In relation to your risk assessment - possible FX risk - EURO / POLISH ZLOTY. However, they could pay for the companies in Euro's, but future revenue streams are likely to be in PLN.
(Poland is not in the Euro)

See potential for a number of theory questions in divisionalisation V decentralisation and transfer pricing

think there is definite scope to be asked to calc RI and to compare it with sales margin as a performance measure

Is there any preperation work that can be done for the lease V Buy investment appraisal?

Is there scope for Variances in either the Frozen Meals or Pre-packed sandwiches divisions? Standard costing mentioned in the later.

In the Frozen meals division there is a quote from North Foods Ltd expected - could be asked to evaluate whether to proceed with this external v internal supplier?

In the above posts, I don't get where you are getting €500.5k in yr 1 and €550.55k for yr 2 in terms of savings in materials wastage - can somebody please break this down?

Thanks

Muriel5119

Hi there

For 2012 we have sales of 14.3 million
14.3 million x 3.5p saving per package = 500,500

For 2013 we have sales of 15.73 million
15.73 million x 3.5p saving per package = 550.550

Hope this helps

princessmolly

''In relation to your risk assessment - possible FX risk - EURO / POLISH ZLOTY. However, they could pay for the companies in Euro's, but future revenue streams are likely to be in PLN.
(Poland is not in the Euro)''

---

thanks for pointing that out to me !


im just looking at the cost profile of the precooked meals, i dont see any fixed costs mentioned, does anyone think they could they be in the 'other costs' or are they all variable too? i was just thinking in terms of the idle capacity ''we have capacity to at least treble production over the next 5 years with no difficulty''.

The Tank87

Ali Postit wrote: »

Hi,

In the TP section has anyone had a stab at the numbers? I've got very confused about what quantities are transferred between precooked meals and frozen foods.

From the turnover and profit info on pg 2 and given the cost per frozen meal on p5 this would suggest a q of 475k however, p 6 mentions 360k pre cooked meals transferred and p 4 also mentions sales volumes increasing by 8%?

Thanks

Hi,
Could you please explain where you are getting the 475k?
Apologies if this is a stupid question.

2802

Ali Postit wrote: »

Hi,

In the TP section has anyone had a stab at the numbers? I've got very confused about what quantities are transferred between precooked meals and frozen foods.

From the turnover and profit info on pg 2 and given the cost per frozen meal on p5 this would suggest a q of 475k however, p 6 mentions 360k pre cooked meals transferred and p 4 also mentions sales volumes increasing by 8%?

Thanks

Also not sure where the 475k is coming from - but I'm unsure about the quantities to use too.

I'm confused whether to use 360,000, as this was the quantity transfered last year or use the quantity that will be transfered/bought in the coming year 388,800 (360,000 x the 8% increase)
I'm swaying slightly toward using the 388,800

Has anyone else tried the figures for Transfer Pricing??

j4m3s

jennydoll wrote: »

Does anyone know if redundancy costs go in year 0 or year 1?

Also does anyone know what the pay award will be in 2013? Do we think that we will be given this on the day?

Pretty sure Yr 0 as you will have to pay the redundancy imediately.

The pay award is an incresed saving in 2013 of 3,600 (Total 123,600. 120,000 in 2012) further years after 2013 are not relevant.

Also from looking at last years assessment, they got very little additional info, however I think we will need to get a lot of additional info for transfer pricing and Investment appraisal making it more difficult predict and have templates.

Also I think as mentioned above that there may be a greater portion relating to theory.

acc12345

Hi,

I have had a scan through this forum and had a thought that might or might not be correct so feel free to disagree.

In the discounted cash flows for the payback period, I dont think that you include the wasted filler as a cost saving because the text specifically says that costs with suppliers are set and this is regardless of volume- therefore if we save filler and need to purchase less, there is no actual cost saving from this due to the signed contract of what BKL will purchase. This means there is no incremental effect on cash flow.

Another question I have is in relation to how you treat the lease payments in the calculation. Usually payback calculations have an initial outflow, but since this is a lease payment, it does not.

Do you add the lease payments together and deduct the discounted cash flows from their total, or do you include them in the yearly cash flows- therefore the calculation looks more like an NPV than a discounted payback?

Thanks

The American

acc12345 wrote: »

Hi,


Another question I have is in relation to how you treat the lease payments in the calculation. Usually payback calculations have an initial outflow, but since this is a lease payment, it does not.

Do you add the lease payments together and deduct the discounted cash flows from their total, or do you include them in the yearly cash flows- therefore the calculation looks more like an NPV than a discounted payback?

Thanks

It should look like a NPV calc since we have to judge the decision on a Discounted Payback Period basis. I assume we count the machine as an initial inflow and then account for the lease payments as outflows in years 1 & 2 (as you would be paying on the lease year by year). NPV of leases is fairly simple: For Each Period, PV = Cash Flow in the Period / (1 + Interest Rate of Lease) ^ (# of periods remaining)
Note that gives 0 for the Initial Period (since theres a nil cash flow)

Can someone correct if that's wrong?

acc12345

Does that not double count the lease payments if you include them initially and then again in the cash flows?
Also, I wondered if you included all cash outflows in the initial payment to which we subtract cashflows, therefore including redundancy here?
Has anybody got an example of their layout?

Thanks for the help!

SFMA 123

Hi all,

In relation to ACC1234 i think the filler saving is an inflow as it is only the price thats agreed irrespective of quantity i.e. if they buy more they cannot benefit from economies of scale. But if they save on waste they can buy less filler, i.e. buy less quantity and save an outflow.

In relation to the discounted payback, would the lease payments be an annual outflow in the DCF calculation along with the other relevant costs and therefore if the NPV is positive after year 2 there has been payback but if the NPV is negative there is no payback?

Thanks

acc12345

NPV of leases is fairly simple: For Each Period, PV = Cash Flow in the Period / (1 + Interest Rate of Lease) ^ (# of periods remaining)
Note that gives 0 for the Initial Period (since theres a nil cash flow)

Can someone correct if that's wrong?[/QUOTE]

That is correct for the NPV of leases.

Does this mean that we don't discount using the WACC of 12% and we just use the rate that the lease is given at?

helpmeplease1

Hi All, I am having difficulty with this Case Study.

I have a good idea of the theory to be covered such as:

Transfer Pricing
Aims v Conflict
Alternative performance measures
Mergers and Aquisitions
Leases

If you have any additional theory I would be happy to hear you're views on this.

However I see a great number of small calculations but can't get my head around a solid foundation of what exact calculations could come up

Does anyone have a good idea of these calculations??? Helpmeplease

Thanks.

TooLate

Hi all,

Being looking through the forum and case study, the theory seems pretty straight forward and all of it has already been mentioned on this site i think.

Still having a bit of trouble with the calculations,people seem to be taking different angels and approaches. Not sure which way to go myself
Would any one be willing to post or scan up their calculations,it would be really appreciated and helpfull as its nearly toolate for me:(

Thanks

Insider123

2802 wrote: »

Also not sure where the 475k is coming from - but I'm unsure about the quantities to use too.

I'm confused whether to use 360,000, as this was the quantity transfered last year or use the quantity that will be transfered/bought in the coming year 388,800 (360,000 x the 8% increase)
I'm swaying slightly toward using the 388,800

Has anyone else tried the figures for Transfer Pricing??

Hello everyone,

475k comes from:
2.8-0.9=1.9 cost of sales
1.9/4= 475 meals
If 360k meals were sold by the precooked meals dept. then cost of sales in frozen foods dept. must contain an element of fixed costs.

canny jock stewart

Hi all,

Just a couple of observations on the case, specifically on the possible investment appraisal question.Might be way off tho

I can't find anything on whether the staff are at full capacity or can make more sandwiches. Does mean we are to assume they are at full capacity?If they are not then are the only potential inflows those from efficiencies from the machine and the reduction in staff costs?

Also does anyone else think its a bit weird that 4 people made 13 million sandwiches in the previous year or am I missing something?

Thanks

princessmolly

TooLate wrote: »

Hi all,

Being looking through the forum and case study, the theory seems pretty straight forward and all of it has already been mentioned on this site i think.

Still having a bit of trouble with the calculations,people seem to be taking different angels and approaches. Not sure which way to go myself
Would any one be willing to post or scan up their calculations,it would be really appreciated and helpfull as its nearly toolate for me:(

Thanks

if you pm me your email address, i can send you on some stuff if this helps.

MindGuru

canny jock stewart wrote: »

Hi all,

I can't find anything on whether the staff are at full capacity or can make more sandwiches. Does mean we are to assume they are at full capacity?If they are not then are the only potential inflows those from efficiencies from the machine and the reduction in staff costs?

Also does anyone else think its a bit weird that 4 people made 13 million sandwiches in the previous year or am I missing something?

Thanks

1) I would assume the sandwich dept. can hire more people to meet future demand, if they did not purchase the machine. As a result I wouldn't include the extra sales figures.

2) The 4 people being made redundant are employed in packing not making the sandwiches (good point though if you had missed that part)

Also I have some questions of my own

1) Why are we given a month by month breakdown of the sandwich sales rather than just a total figure?

2) Would I be correct in assuming that the external Buy In price will be somewhere between 1.5 (marginal cost) and 3 (current transfer price),

As if it is that means frozen food will buy from an external supplier, as ready meals manager will not sell to frozen foods at a price less than 3 as it will damage their 50% margin.
and if this were to happen it wouldn't be the best policy for BK Ltd. as a whole.

If the external price was below 1.5 or above 3, the answer would be too simple considering there are no capacity restraints.

princessmolly

in relation to the maximum transfer price, is it not what the external supplier will offer to provide them for one unit.

so if for example, they got a quote of €2 per unit, would this not then be the maximum price the selling division could charge per unit?

what books and notes i have looked at on this matter, say its the €2 which is the maximum they could provide for.

MindGuru

princessmolly wrote: »

in relation to the maximum transfer price, is it not what the external supplier will offer to provide them for one unit.

so if for example, they got a quote of 2 per unit, would this not then be the maximum price the selling division could charge per unit?

what books and notes i have looked at on this matter, say its the 2 which is the maximum they could provide for.

Lets say the external price is 2
It is best for the company to buy internally as it 0.50 cheaper (2-1.5)

If the transfer price is set to 1.5, the supplying division will not sell to the receiving division as it is below their required 50% and it will look bad on the manager at the end of year review (remember they're appraised based on their margins). As a result receiving division must buy externally, that is not the best result for the company.

If the transfer price is 2, supplying division will refuse to sell as it is below their required 50% margin. So the receiving division will buy externally, that is not the best outcome for the company.

If the transfer price is 3, supplying division will supply as it meets their margin but receiving division will buy externally. No the best result for the company.
This creates a scenario in which the supplying manager refuses to sell to receiving division even though it's best for the company, as doing so will mean the 50% margin will be reduced and he may be fired.

Your job is to get a solution for this problem, i.e. dual transfer pricing

Ajwalsh7

Hi all,

I was just wondering if anyone can tell me what year zero's dates are exactly, ie. is it 1/12/11-30/11/12 or what??

Also,

Would the wastage savings not be included into the calculation as well as the savings on packaging as it states in the qoute that the machine will reduce wastage to nil (so the 0.1OZ cost is saved) and the packaging cost reduced by 3.5cent??! Clarification would be much apprectiated thanks!

Another thought I had was that labour time of 1minute for preparation and packaging.... would this be affected at all with the introduction of the machine!!

Ajwalsh7

thanks dtmckewon.... very appreciated!!

Gillian31

dtmckeown wrote: »

Not entirely sure which firm compiled this, but I got a copy via email today - enjoy!

Can you explain how you arrived at the cash flows in lease or buy?

Many thanks

CeevieD

Hi there folks,
I found this forum and it is a excellent idea. I am from a small firm and I dont know anybody in CAP2, so I feel I am the only one doing this assesment.
I have done some work on the assesment but I would like to see what angles you guys are going on.? I dont want to be going off the beaten track.!
From reading the case study I cant see past transfer pricing, target costing, discount payback. Do you think the questions will be more theory based or numbers based? How many questions do you think there will be.?
I would be grateful for any feedback
Thanks;)

Gillian31

Can someone explain how the pre-packed sandwich division did not meet the 50% sales margin if you take turn over of 18.2m/13m sales = £1.4 which is the standard cost set, am I correct in saying this?

MindGuru

Gillian31 wrote: »

Can someone explain how the pre-packed sandwich division did not meet the 50% sales margin if you take turn over of 18.2m/13m sales = £1.4 which is the standard cost set, am I correct in saying this?

They were told to add a 50% margin on their cost
Their cost being 10.9 Million
So the sandwiches should of sold for 10,900,000/1-0.5= 21,800,000

Instead they only sold it for 18,200,000 total
In which case the margin is 7,300,000/18,200,000=40.11%

So they missed their target

acc12345

I think you can just do this:
profit margin =
profit / sales:
7.3/18.2 = 40.11%

For the discounted payback in the leasing situation is anybody else going to show the redundancy saving in year zero, and then slot both lease payments into the discounted cash flows in year 1 and 2.

It will appear as though we are recovering only 140k (redundancy) in our calculation as there is no initial cash outlay for the machine.

MindGuru

Thanks dtmckeown, very comprehensive document and will help me a lot, although I have a different answer to some questions mainly due to different assumptions I'm currently making.

On a separate issue

In the DCF calculation should the lease payments be paid at the start of the year
i.e. They should be paid immediately on the start of the 2012 year and at the start of the 2013 year
In which case the 2012 payment is due now i.e. YR 0 , and is not discounted
and the payment to lease the machine for 2013, is due in one years time i.e YR1

fil_allen

@ rockman15,

just wondering what you meant when you said like macroeconomic austerity? is that like what the government are doing now in ireland?

Also could anyone tell me if your alloud to use coloured pens? like someone told me before that your not alloud use them and can loose marks for it. how sh*t is that like!

Serious shout out to dtmckeown for the notes, your a star!

any help is much apreciatted!

#SFMAsucks

Mr SFMA

Hi guys,

A group of us in work actually completed all the work that dtmckeown has posted.

We have no issue with our work being used (it is doing the rounds through email anyway) but if anybody has any feedback or different calculations or opinions or insights it would be welcomed.

No point in anyone hiding information so if you have any more information please share it like we have

SFMA?

Mr SFMA wrote: »

Hi guys,

A group of us in work actually completed all the work that dtmckeown has posted.

We have no issue with our work being used (it is doing the rounds through email anyway) but if anybody has any feedback or different calculations or opinions or insights it would be welcomed.

No point in anyone hiding information so if you have any more information please share it like we have

Hi Mr SFMA,

A group of us in work also got the pack posted by dtmckewon. However we have a few problems with the calculations. Would you be willing to email me your calculations so we can compare and see where we are going wrong?

Thanks

mickkellys

Does anybody now what figure we use for transfer pricing as the case states they sold 360,000 internally however when I work it out its in coming in at 475, 000 I believe this is down to closing stock from the previous period. So my question is when working out how different transfer prices will affect the company we will have to use the 360,000 for the selling department but what figure do we use for the buying department as they have about 115,000 previously ?? Will this stock from the previous period affect the cost figure and profit figure for this period??



if anybody could send me on their workings for transfer pricing i would be very greatful

MindGuru

mickkellys wrote: »

Does anybody now what figure we use for transfer pricing as the case states they sold 360,000 internally however when I work it out its in coming in at 475, 000 I believe this is down to closing stock from the previous period. So my question is when working out how different transfer prices will affect the company we will have to use the 360,000 for the selling department but what figure do we use for the buying department as they have about 115,000 previously ?? Will this stock from the previous period affect the cost figure and profit figure for this period??

No its not closing stock, it should be reasonable to assume that the turnover relates directly to the cost i.e closing stock cost is excluded
Now at first glance 1,900,000/4= 475,000 units but that's wrong here's why

look to page 5 again
Notice line 7 of that cost profile for frozen foods, there are fixed costs frozen meals incurs, now it doesn't matter if frozen food sells 1 meal or 10,000,000 meals fixed costs are fixed. Also notice line 8 apportioned office cost, now as we don't know how they are apportioned it could be a variable (if its on units produced) or fixed cost (given to the department)

So we can only safely say 4-(.1+.05)=3.85 is variable

Now they bought in around 360,000 meals, for simplicity lets call that an exact figure
So 3.85*360,000= 1,386,000 Euro = Total Variable Cost for frozen food

1,900,000-1,386,000= 514,000 Euro is made up of apportioned and fixed costs that frozen food has

I also as said before there are no capacity restraints i.e no opportunity costs for ready meals in the Transfer pricing question. So other than picking a transfer price and justifying it , I don't see where calculations are going to come into it, other than working out the selling price for frozen food per unit depending on the transfer price