You have just started a new job as Managing Director of Newtron Technologies Ltd a UKbased
company whose principal activity is the manufacture and distribution of computer
components.
After discussions with colleagues at a business conference, you have concluded that the
strategic planning and annual budgeting process needs to be reformed. You are particularly
interested in the concept of “Beyond Budgeting” that was one of the themes of the conference.
You have therefore carried out some background research into “Beyond Budgeting” and have
obtained the following documents (available on the module Moodle page).
Document 1 – A journal article on the Beyond Budgeting (Sandalgaard, N. and Bukh, P.N.
(2014) ‘Beyond Budgeting and change: a case study.’ Journal of Accounting & Organizational
Change 10, (3) 409-423)
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Document 2 – Income statements
The following income statements relate to Newtron Technologies Ltd.
Year-ended 31/12/201731/12/201631/12/201531/12/201431/12/201331/12/201131/12/2010
£000 £000 £000 £000 £000 £000 £000
Turnover 31,671 43,416 48,509 52,377 42,753 20,097 14,810
Cost of Sales (22,603) (31,603) (36,239) (40,272) (31,076) (15,292) (11,636)
Gross Profit 9,068 11,813 12,270 12,105 11,677 4,805 3,174
Administration
Expenses (12,675) (11,102) (12,482) (16,980) (23,876) (5,433) (3,951)
Operating Profit (3,607) 711 (212) (4,875) (12,199) (628) (777)
Other Income &
Interest 2 194 (152) (1,123) 10,432 (63) (47)
Profit (Loss)
before Tax (3,605) 905 (364) (5,998) (1,767) (691) (824)
Taxation 810 (82) 0 (569) 386 214 267
Profit (Loss) after
Tax (2,795) 823 (364) (6,567) (1,381) (477) (557)
The last seven years have been very difficult for the company, and it has survived through the
support of its parent company and its bank. However, the company now intends to engage in
a number of income generating, cost-saving and efficiency measures in order to improve its
financial performance.
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Document 3 – New production equipment
Newtron Technologies Ltd are considering automating their production process for the TX9
computer procesor. At present this is requires a significant input of manual labour.
Due to the automation, the requirement for production labour will be significantly reduced.
The current typical annual volume of output and sales is about 160,000 units.
Information relevant to this decision is given in the following table:
Current
production
system
Automated
production
system
Sales price (per component) £42.00 £42.00
Direct materials cost (per component) £23.00 £23.00
Direct labour cost (per component) £12.00 £5.00
Fixed manufacturing overheads £800,000 £1,400,000
Fixed administrative overheads £80,000 £60,000
Fixed selling and distribution overheads £60,000 £60,000
Break-even point (components) 134,286 108,572
Margin of safety at budgeted profit level 35% 25%
Unit sales required to achieve budgeted profit
of £500,000 (components) 205,715 144,286
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Document 4 – Cash budget
Newtron Technologies Ltd’s Finance Department has prepared the following cash budget and
budgeted income statement together with some balances extracted from the budgeted
statement of financial position for the final 6 months of 2018.
The Chairman of the Board has expressed surprise and dismay that the cash balance is
expected to deteriorate by nearly £2,000,000 over a period when the total loss is expected to
be less than £1,500,000.
Cash budget July August September October November December
£ £ £ £ £ £
Opening balance (250,000) (487,937) (895,422) (1,344,350) (1,823,601) (2,104,989)
RECEIPTS:
Cash sales 623,700 643,191 662,229 706,038 732,262 609,608
Credit sales 1,995,000 1,896,300 1,981,809 2,067,771 2,233,962 2,347,738
Total receipts 2,618,700 2,539,491 2,644,038 2,773,809 2,966,224 2,957,346
PAYMENTS:
Cash purchases (586,818) (629,604) (684,468) (726,206) (698,490) (664,333)
Credit purchases (579,495) (563,806) (580,708) (605,511) (615,599) (566,798)
Operating expenses (144,800) (154,936) (165,782) (177,386) (189,803) (203,089)
Fixed overheads (155,800) (155,800) (155,800) (155,800) (155,800) (155,800)
Production labour (789,544) (824,645) (869,479) (932,324) (912,413) (809,967)
Administration
labour
(600,180) (618,185) (636,731) (655,833) (675,508) (695,773)
Total payments: (2,856,637) (2,946,976) (3,092,967) (3,253,060) (3,247,612) (3,095,760)
Net cash flow (237,937) (407,485) (448,928) (479,251) (281,388) (138,414)
Balance c/f (487,937) (895,422) (1,344,350) (1,823,601) (2,104,989) (2,243,402)
Budgeted income
statement July August September October November December
£ £ £ £ £ £
Sales 2,520,000 2,625,000 2,730,000 2,940,000 3,080,000 2,590,000
Cost of sales (1,836,000) (1,912,500) (1,989,000) (2,142,000) (2,244,000) (1,887,000)
Gross profit 684,000 712,500 741,000 798,000 836,000 703,000
Operating expenses (154,936) (165,782) (177,386) (189,803) (203,089) (217,306)
Fixed overheads (156,645) (156,645) (156,645) (156,645) (156,645) (156,645)
Administration costs (600,180) (618,185) (636,731) (655,833) (675,508) (695,773)
Total expenses (911,761) (940,612) (970,762) (1,002,281) (1,035,242) (1,069,724)
Operating
profit/(loss) (227,761) (228,112) (229,762) (204,281) (199,242) (366,724)
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Extract from budgeted statement of financial position at period ends
July August September October November December
Accounts receivable at
the period end (£) 1,896,300 1,981,809 2,067,771 2,233,962 2,347,738 1,980,392
Accounts payable at
the period end (£) 563,806 580,708 605,511 615,599 566,798 515,484
RM closing stock (£) 349,237 405,047 477,755 514,307 502,217 548,080
FG closing stock (£) 462,825 529,472 627,220 722,797 668,587 725,507
The following information is relevant to the figures above:
1. Credit customers are allowed one month’s credit on sales;
2. Credit suppliers allow one month credit on raw materials purchases;
3. Production labour costs are included in cost of sales in the budgeted income statement.
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Document 5 – Full (absorption) costing
Newtron Technologies Ltd’s product costing team have provided you with the following
information on the current method used to charge overhead costs to products. The table
shows each overhead cost and the apportioned and reapportioned costs by cost centre
together with the apportionment bases used.
Department Computer
Processors
Graphics
Processing
Units
Memory
Cards
Maintenance
Administration
Total
Direct costs
Direct materials (£) 3,405,000 2,951,000 2,644,000 – – 9,000,000
Direct labour (£) 2,066,000 1,902,000 2,032,000
–
– 6,000,000
Overheads
Indirect labour (£) 900,000
Rent (£) 2,380,000
Machine insurance
(£) 20,000
Heating (£) 50,000
Machine power (£) 900,000
Machine
depreciation (£) 720,000
Value of machines
(£) 832,000 725,000 713,000 1,330,000 – 3,600,000
Floor area (m2
) 11,000 10,000 9,000 8,000 7,000 45,000
Machine hours 449,000 385,000 329,000 637,000 – 1,800,000
Direct labour hours 130,000 110,000 104,000 – – 344,000
Employees 72 61 58 68 49 308
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Department Computer
Processors
Graphics
Processing
Units
Memory
Cards
Maintenance
Administration
Total
£ £ £ £ £ £
Direct materials (£) 3,405,000 2,951,000 2,644,000 – – 9,000,000
Direct labour (£) 2,066,000 1,902,000 2,032,000
–
– 6,000,000
Direct costs 5,471,000 4,853,000 4,676,000 0 0
15,000,00
0
Overheads
Indirect labour
(direct labour) 309,900 285,300 304,800 – – 900,000
Rent (floor area) 581,778 528,889 476,000 423,111 370,222 2,380,000
Machine insurance
(machine value) 4,622 4,028 3,961 7,389 – 20,000
Heating (floor
area) 12,222 11,111 10,000 8,889 7,778 50,000
Machine power
(machine hours) 224,500 192,500 164,500 318,500 – 900,000
Machine
depreciation
(machine value) 166,400 145,000 142,600 266,000 – 720,000
Total apportioned
overhead costs 1,299,422 1,166,828 1,101,861 1,023,889 378,000 4,970,000
Re-apportion
maintenance
(machine hours) 395,293 338,949 289,647 (1,023,889) – –
Re-apportion
administration
(employees) 142,492 120,723 114,785
– (378,000)
–
Total reapportioned
overhead costs 1,837,208 1,626,499 1,506,293 0 0 4,970,000
Total reapportioned
overhead costs 1,837,208 1,626,499 1,506,293
Direct labour hours 130,000 110,000 104,000
Overhead
absorption rate
per direct labour
hour (£) 14.13 14.79 14.48
The Graphics Processing Unit cost centre has been making significant losses in recent times
and the Board of Directors have held discussions about whether this product line is still viable
or should be shut down. The manager of the Graphics Processing Unit cost centre has
complained that a significant portion of the cost centre’s costs are apportioned and
reapportioned overheads. The manager has noted that the cost centre is charged a higher
amount per direct labour hour (£14.79) for overheads than the other cost centres (£14.13 and
£14.48). She has complained that she has no control over these costs and has queried the
basis upon which the charges are made.
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Document 6 – Capital investment appraisal
The Maintenance department is considering investing in a new piece of problem diagnostic
equipment that will help them identify problems with production equipment more quickly,
reduce equipment down times and wasted material and components in the factory.
There are two options for the new piece of equipment: the Oracle and the Clairvoyant.
The following information about the cash flows, profits and capital investment appraisal
measures has been provided to you. The company’s cost of capital is currently 6%.
Oracle
Year Cash flow
(£)
6%
Factors
Present
value (£)
Depreciation
(£) Profit (£)
Cumulative
cash flow
(£)
0 (1,500,000) 1.0000 (1,500,000) (1,500,000)
1 480,000 0.9434 452,832 (264,000) 216,000 (1,020,000)
2 420,000 0.8900 373,800 (264,000) 156,000 (600,000)
3 375,000 0.8396 314,850 (264,000) 111,000 (225,000)
4 315,000 0.7921 249,512 (264,000) 51,000 90,000
5 270,000 0.7473 201,771 (264,000) 6,000 360,000
5* 180,000 0.7473 134,514 540,000
NPV = 227,279 540,000
Payback period 3 years 9 months
Accounting rate of return 12.86%
Internal rate of return 11.31%
Clairvoyant
Year Cash flow
(£)
6%
Factors
Present
value (£)
Depreciation
(£) Profit (£)
Cumulative
cash flow
(£)
0 (2,000,000) 1.0000 (2,000,000) (2,000,000)
1 370,000 0.9434 349,058 (350,800) 19,200 (1,630,000)
2 431,000 0.8900 383,590 (350,800) 80,200 (1,199,000)
3 513,000 0.8396 430,715 (350,800) 162,200 (686,000)
4 575,000 0.7921 455,458 (350,800) 224,200 (111,000)
5 657,000 0.7473 490,976 (350,800) 306,200 546,000
5* 246,000 0.7473 183,836 792,000
NPV = 293,632 792,000
Payback period 4 years 3 months
Accounting rate of return 14.11%
Internal rate of return 10.29%
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*The second cash flow in year 5 for each option represents the sales proceeds on the disposal
of the equipment at the end of its life (residual value).
The Clairvoyant will not be fully effective until other modifications and improvements have
been made to production equipment over the next few years, whereas the Oracle will be fully
effective almost immediately.
Only one of the two pieces of equipment can used on the company’s production equipment
as they are incompatible and essentially perform the same functions.
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Assignment requirements
You are required to write a report for the Board of Directors of Newtron Technologies Ltd
(italicized words in brackets indicate the approximate word count for each section).
The report should cover the following key areas:
1. An executive summary outlining the key challenges that the company is facing and the
main outcomes from the analysis work you have under taken so far (250-300 words).
2. A discussion of why Newtron Technologies Ltd might want to implement “Beyond
Budgeting” and why the company may not want or be able to fully adopt “Beyond
Budgeting”. (Document 1) (225-275 words).
3. A discussion of the break-even analysis of the proposed automation of the TX9
production process (Document 3) with particular emphasis on the following areas :
a. An explanation of the probable reasons for the changes in the different costs
relating to production of the TX9 component in the table above (90-110 words).
b. A review of the risk and return offered by the two manufacturing options with
reference to the concept of operating gearing and a recommendation on which
option Newtron Technologies Ltd should choose (210-240 words).
4. A discussion of the reasons for the significant deterioration of the cash balance in the
cash budget above (Document 4), given the much smaller total loss recorded in the
budgeted income statement. (325-375 words).
5. A discussion of the basis and reasons for charging overheads to individual production
cost centres (Document 5) with particular emphasis on the following areas:
a. Using the figures in the tables above, explain the basis of the overhead charges
to the Graphics Processing Unit cost centre. (275-325 words);
b. Using the figures in the table above to illustrate your points, critically discuss
the process of absorption costing. (180-210 words).
6. A critical appraisal of the results of the capital investment appraisal of the Oracle and
Clairvoyant (Document 6) with particular emphasis on the following areas:
a. A discussion of the reasons for the apparent conflicts between the investment
advice provided by each method (375-425 words);
b. A discussion of the risk and return presented by each option and a
recommendation as to which option should be chosen (170-200 words).
