Aug 1999 IM218 : Information Management (Question 5) Suggested Solutions

(a)

Describe the operating lease and financing lease methods of financing an acquisition.

[2]

A lease allows the lessee to use the equipment for a fixed period of time. An operating lease is mainly concerned with providing use of a product, without regard to final ownership, whereas a financing lease ends with the lessee owning the equipment.

(b)

Which of the above two methods is most appropriate for purchasing :

(i) word-processing software?

(ii) computer monitors?

(iii) laser printers?

(1 mark each; any plausible justification is fine.)

[3]

(i)
rapidly changing, so an operating lease is most appropriate.

(ii)
stable, so a financing lease is fine.

(iii)
stable, so a financing lease is fine.

(c)

A data centre has estimated a total overhead of $30,000 for the month of March. It has also estimated the following resource costs:

Paper	60,000 pages	$15,000
Disk drive	10,000 MB	$20,000
CPU time	800 hours	$40,000
Personnel	2,500 hours	$25,000

(i) Find the unit rates for the above resources.

(ii) The Engineering Department used the following resources in March :

Paper	1,500 pages
Disk drive	8MB
CPU time	15 hours
Personnel	80 hours

Calculate the charge for the Engineering Department for the month.

[8]

[2]

(i)
The overhead was $30,000, and non-overhead costs add to $1000,000, so the total cost for the month was $130,000.

Resource	Usage	Cost	%	Share	Unit Rate
Paper Disk drive CPU time Personnel	60,000 10,000 800 2,500	$15K $20K $40K $25K	15% 20% 40% 25%	$19.5K $26K $52K $32.5K	$0.325/page $2.60/MB $65/hr $13/hr

For example, paper cost $15,000, or 15% of the non-overhead costs, so its share of the total costs is 15% of $130,000 or $19,500; so the unit rate of a page of paper is $19,500/60,000 or $0.325 per page.

(ii)
Using the unit rates calculated above, the cost is

1,500 ´ $0.325 + 8 ´ $2,60 + 15 ´ $65 + 80 ´ $13 = $2,523.30

(d)

What is the difference between incremental and zero-based budgeting?

[2]

With incremental budgeting, the previous budget is used as a base, and changes are derived as percentage increases or decreases from this base. with zero-based budgeting, the 'base' is a budget of zero, and each item must be justified and will be reviewed on its merits.

(e)

Which of the above two approaches is most appropriate for :

(i) insurance cover for hardware?

(ii) purchasing a new building?

(iii) salary costs?

[3]

(i)
incremental budgeting for recurring costs;

(ii)
zero-based budgeting for capital acquisition;

(iii)
incremental budgeting for recurring costs.