Q1 Provide example of one Saudi Company and analyze the steps that the managers in this company can take to achieve its vision and use core competencies. (2 Mark)
Q2 The following data were obtained from the accounting information system of ABC Corporation:
Units Total Cost
Month Produced
January 60 SAR1,533.4
February 50 1,300
March 80 2,000
April 30 833.5
a. Use the data for February and March and the two - point method to determine a cost function.
b. Use the high - low method to determine a cost function.
(2 Mark)
Q3 XYZ Corporation sells its product for $17 per unit. Its variable cost is $10 per unit, and total fixed costs are $800. Assuming next period’s estimated sales are 300, calculate the following amounts:
a. Degree of operating leverage
b. Margin of safety in units
c. Margin of safety in revenues
(1 Mark)
Q1
The steps that the managers at Saudi Basic Industries (SABIC)
follow to achieve the vision of providing solutions their customer’
challenges and build a better tomorrow, involves a decision-making
process supported by up-to-date, relevant accounting information.
Thus all the managers at SABIC will require accounting information to
support them in coming up with effective solutions for their
customers.
According to a 2021 report by Brand Finance
Chemicals, SABIC is one of the most valuable brands in the chemical
industry, and many other industries benefit from the chemical
solutions offered. Among those benefiting are automotive, packaging,
healthcare, industrial, building & construction.
That is why
before making any important decision on which solution benefits a
customer best, there needs to be a proper investigation on all
alternatives.
Drury (2012) explains how professionals
within an organization need to make business decisions that are
underpinned by sound financial information which they can understand.
Furthermore, since management requires accounting information that is
easily understood, especially when it comes to costs, prices, and
benefits they will need reports from the accounting
department.
Drury (2012) also analyzed the decision-making
process, and it consists of steps managers have to follow when making
decisions that can achieve the goals and objectives of a company.
The steps are:
Step 1: Identify the company
goals and objectives
The management has to identify the goals
and objectives that guide them in achieving the vision. They're
different objectives to choose from, and the common ones are profit
maximization and maximization of shareholder’s wealth. SABIC always
seeks sustainable solutions for its customers through
chemistry.
Step 2: Search for alternative causes of
action
SABIC’s management searches for alternative causes of
actions (or strategies) that enable the company to achieve the set
objectives. For the brand to survive, the management must identify
potential opportunities and threats in the current environment. This
involves gathering data about different alternatives – both
qualitative and quantitative.
Step 3: Select appropriate
alternative cause of action
This step involves evaluating
different alternatives and choosing the cause of action that best
satisfies the objectives set.
Step 4: Implementation of
the decision
The management has to also make budgets (or
financial plans) for implementing the best decisions that can help
customers. The budgeting process communicates to all partners of
SABIC the part they are to play in implementing the management
decision.
Step 5: Control
This step involves
comparing actual and planned outcomes and responding to any
divergences from the financial plan. The core competencies of all
workers will be fully utilized when the performances are being
measured, reported, and corrected.
Q2. a.
Determining cost function using the given two points
Feb activity of 50 units and cost of SAR 1,300
March activity of 80 units and cost of SAR 2,000
Regression formula: y=a + bx
finding variable cost (b) = Difference in cost/ difference in activity
= SAR 2,000 – SAR 1,300/ 80 units – 50 units
= SAR 700/ 30 units
= SAR 23,33 per unit
This calculation is based on a comparison of the changes in costs that can be observed on the straight line between activity levels of 50 and 80 units. This gives a regression formula:
y = SAR80 + SAR 23,33X
Q2. b.
Using the High-low method to determine the cost function
at highest activity level X2 = 80, Y2 = SAR 2,000
at lowest activity level X1 = 30, Y1 = SAR 833.5
Finding Variable cost per unit (b) Y2 – Y1/ X2 – X1
= SAR 2,000 – SAR 833.5/ 80 units– 30 units
= SAR 1,166.5/ 50 units
= SAR 23.33 per unit
Total Fixed cost (a)
y2 – bx2 = y1 – bx1
SAR 2,000 – SAR 23.33 (80) = SAR 833.5 – SAR 23.33 (30)
SAR 2,000 – SAR 1,866.4 = SAR 833.5 – SAR 699.9
SAR 133.6 = SAR 133.6
a = SAR 133.60
Thus, cost volume formula:
y = SAR 133.60 + SAR 23.33X
Q3. a.
Degree of operating leverage = contribution margin / profit
contribution margin = Total sales – total variable costs
= S-VC
= ($17 * 300 units) - ($10*300 Units)
= $5,100 - $3,000
= $2,100
Profit = Total Sales – Total Cost
= S-VC-FC
= ($17*300) - ($10*300) - $800
= $5,100 - $3,000 - $800
= $1,300
Degree of operating leverage = $2,100/ $1,300
= 1.6
Q3. b.
Margin of safety in units = Profit/ Contribution per unit
= Profit/ p-v
= $1,300/ ($17-$10)
= $1,300/ $7
= 185.71 units
Q3. c.
Margin of safety in revenue = Profit * Sales/ contribution margin
= $1,300 * $5,100/$2,100
= $3,157
References
Sabic Team. (2021, July 7). About Saudi Arabia basic Company. SABIC. https://www.sabic.com/en
Brand Finace Report (2021) Chemicals 25 2021: The annual report on the most valuable and strongest chemicals brands. Branddirectory. https://brandirectory.com/download-report/brand-finance-chemicals-25-2021-preview.pdf
Drury, C. (2012). Management and Cost Accounting(8th ed.). Cengage Learning EMEA.
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