Difference between capital expenditure and revenue expenditure.

Capital Expenditure:

  • It is expenditure which results in the acquisition of fixed assets or an improvement in their earning capacity.
  • Capital expenditure is not charged as an expense in the income statement at one go but rather a depreciation or amortization charge will usually be made to write off the capital expenditure gradually over time. 
  • Capital expenditure on fixed assets is the recognition of a fixed asset (e.g. vehicles, Land and Building) in the statement of financial position of the business.



Revenue Expenditure:

  • Is expenditure which is incurred for either: For the purpose of the trade/service of the business. 
  • This includes Selling & Distribution expenses, administration expenses and finance charges. 
  • To maintain the existing earning capacity on fixed Assets ( such as repair expenses)  
  • To ensure smooth running of the day to day activities of the company/Business.

Difference between margin and markup.

Margin is percentage of profit based on sales price while mark up is profit percentage based on cost price

Example
Suppose selling price is 10 and cost of product is 8. It means profit of product is 2 (10 minus 8)
Profit margin = profit/sales price
=2/10 =0.2 =20%
Profit markup = profit/cost price
= 2/8 = 0.25 = 25%

Revision question on budgetary slack and preparation of sales forecast.



“At times, subordination may try to play games and build in budgetary slack.” Horngren et al (2009).

REQUIRED:

  1. What is “budgetary slack” and describe two ways in which subordinates may attempt to create budgetary slack and state how senior managers may reduce the budgetary stack.
  2. Describe the possible reason why subordinates build in budgetary slacks when budgeting.
  1. “Firms with multinational operations face a variety of additional challenges in preparing their budgets.” Hilton (1999).

REQUIRED:
Describe briefly additional challenges in budgeting that are encountered by firms with multinational operations and how does management accountant address the challenge?

  1. “Sales forecasting is a critical step in budgeting process and it is very difficult to do accurately”; Hilton (1999)

REQUIRED:

    1. Describe factors that may be considered when preparing sales forecasts.
    2. Mention key problems that are faced in preparing the sales forecasts.

Budgetary slacks – meaning.

budgetary slack is the process by which managers seek to obtain the budget targets that can easily be achieved by either understating revenues and/or overstating costs. Some of the ways in which budgetary slacks arise include the following:

  • Managers avoid risky but profitable projects
  • Managers negotiate for lower targets
  • Managers dispute performance assessment reports.

Budgetary slack concept and its application in responsibility accounting.

Budgetary slack is the process by which managers seeks to obtain budget targets that can easily be achieved by understating revenues and/or overstating costs.

BUDGETARY SLACK CONCEPT AND ITS APPLICATION IN RESPONSIBILITY ACCOUNTING

The following are ways in which budgetary slack arise:

manager avoid risky but profitable projects



managers negotiate for lower targets

managers dispute performance assessment results

3 ways companies uses to determine transfer prices.

Transfer pricing is the setting of the price for goods and services sold between controlled or related legal entities within an enterprise. For example if the subsidiary company sells goods to the parent company the cost of those goods paid by the parent to the subsidiary is the transfer price.



Bases for determining transfer price are as follows:

Cost based transfer price,

This method offers the choice of various options as the bases for deciding the transfer price. These options are

  • Variable/marginal cost; under this method , units are transferred at variable costs incurred for those units. Fixed cost is borne by transferor department;
  • Full cost; under this method the total cost incurred for the units is considered when deciding the transfer price. This cost include both the fixed cost and variable costs of the product;
  • Cost plus method; here, in this method, the markup is added to the cost to cover the profit share of the transferor department/division. As the result, although the profitability of the transferee division increases,  the overall profitability of the organization as whole remain the same.

Market based method

Here, the listed price of the product is considered when determining the transfer price. This method is often considered to be the most suitable method. One disadvantage of this method is that, for most of intermediate product the external market is not available and it is therefore difficult to determine their market price.



Negotiated transfer price

In this method, the transferee and transferor divisions negotiate and then arrive at price acceptable to both divisions. In most cases, the market price is taken as the basis of determining the negotiated transfer price. Under this method, a division with poor bargaining skills loses out to one with superior bargaining skills

Audit and assurance Revision question 1 (NBAA, C2,NOV 2018)



Your firm has five offices all over Tanzania and it specializes in the provision of audit and tax advisory services to clients in the entertainment and media industries. The Finance Director of Nguvu Ltd (Nguvu) has recently requested your firm to accept appointment as external auditor for the year ended 30th September 2018.

Nguvu’s previous auditors have not been reappointed. Nguvu is a music events company that has its head office in Dar es Salaam. It organizes and perform seven live-music events held in the same seven locations in Tanzania each year. Music events are large-scale events, held outdoors, where a variety of musicians perform live on an open-air stage. The musicians performance vary between locations from year to year. Each event is held over a weekend (Saturday and Sunday) between June and August.



Tickets can be purchased online in advance from Nguvu’s website or on the day of the event at the entrance gate. Online tickets are available for the following year’s event one week after the current year’s events have been completely performed. The online Tickets bought are paid for by credit card. Tickets purchased at the entrance gate can be paid for by credit card or by cash. Cash collected at the entrance gate is periodically transferred to the on-site cash office during the day.

Customers who purchase their tickets online are required to present their booking confirmation at the ‘wristband exchange’ where they receive a wristband to wear during the event. Wristbands are color-coded according to the day of the event for which the ticket has been purchased. Customers who purchase their tickets on the day of the event receive their wristband at the entrance gate. No customers are permitted to enter the event venue without the correct wristband.



Nguvu arranges musicians to perform at the events through the musician’s agent. Fees to well known musicians are usually agreed and paid in advance, either in Tanzanian shillings or in the musician’s local currency. Some musicians ask for a portion of their fee to be paid in cash (Tanzanian shillings) on the day of their performance. Less well-known musicians are fully paid in cash (Tanzania shillings) at the end of their performance. Cash fees are collected by musicians, or their agents, at the on-site cash office.

Nguvu recruits a number of stewards for the duration of each event whose role is to provide information and directions to customers. Other temporary staff are employed to work at the entrance gate or in the wristband exchange. Stewards and temporary staff are paid in cash at the on-site cash office at the end of each event.

Permission to hold each event has to be obtained annually from both the local police authority and the local council that is governing the local area where the event is taking place. The local council determines the maximum number of tickets that may be sold for each day of an event.



The Finance Director of Nguvu has provided you with the following information:

  • At one of the events in August 2018, a customer was seriously injured after he gained access through the lighting pole and tried to climb it for a better view of the stage. He fell down and got injured. He was unable to work since the accident event. Nguvu is currently being sued for damages after a national newspaper started a campaign on behalf of the injured customer. There were no signs warning customers against climbing the lighting poles and no steward was present near the pole to guide the customers.
  • During 2018, the weaker economic climate and unpredictable cold weather resulted in a decline in ticket sales. This, coupled with increasing costs from the suppliers, has led to Nguvu’s decision to investigate the possibility of expansion of its business to overseas. Negotiations are underway to purchase the right to organize and perform an event in Kitwe town of Zambia. The purchase is to be funded by a bank loan currently being considered by Nguvu’s bankers. As part of the loan negotiation the bank will require a copy of the audited financial statements.

The Finance Director has requested that the audit be completed and audit report signed by 3rd April 2019 so that the bank loan could be granted and the purchase of the rights to perform the event in Kitwe be finalised by 10th April 2019. In addition to carrying out the statutory audit, the Finance Director has requested your firm to carry out a review of the controls at each event, in particular, the controls over cash and the wristband exchange process.



In the forthcoming year, he would like you to undertake a review of controls in two events. The remaining five events should be reviewed in subsequent years, with two events being reviewed in 2020, other two events in 2021 and the final event in 2022. He has requested you to attend the Nguvu board meeting after each review so as to discuss your firm’s findings and present your recommendations.

REQUIRED:

(i) Explain the matters that you would consider and the procedures that you would perform in order to decide whether to accept the appointment as external auditors of Nguvu.
(ii) Explain the matters that you would consider and the procedure that you would perform in order to decide whether to accept the additional work on controls proposed by the Finance Director.

(iii) Identify, from the information provided in the scenario, the principal audit risks in respect of the financial statements of Nguvu for the year ended 30th September 2018. For each risk, list the factors which lead to it identification and outline the procedures that should be included in the audit plan in order to address it.