Download April 2010 - CPA Ireland

MANAGEMENT ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2010
NOTES:
Section A - Questions 1 and 2 are compulsory. You have to answer Part A or Part B only of Question 2. (If you
provide answers to both Part(s) A and B of Question 2, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for this question will be marked).
Section B - You are required to answer any three out of Questions 3 to 6. (If you provide answers to all of
Questions 3 to 6, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise,
only the first three answers to hand for these four questions will be marked).
TIME ALLOWED:
3 hours, plus 10 minutes to read the paper.
INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book. Please read each Question carefully.
Marks for each question are shown. The pass mark required is 50% in total over the whole paper.
Start your answer to each question on a new page.
You are reminded that candidates are expected to pay particular attention to their communication skills
and care must be taken regarding the format and literacy of the solutions. The marking system will take
into account the content of the candidates' answers and the extent to which answers are supported with
relevant legislation, case law or examples where appropriate.
List on the cover of each answer booklet, in the space provided, the number of each question(s)
attempted.
The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
MANAGEMENT ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2010
Time allowed: 3 hours, plus 10 minutes to read the paper.
Section A: Answer Question 1 and either Part A or Part B of Question 2.
Section B: You are required to answer any three out of Questions 3 to 6.
1.
Section A - Questions 1 and 2 are COMPULSORY
Slieve Ltd, operates a standard marginal costing system for production of wooden birdhouses. The standard costs
associated with the production of this single product are as follows:
Direct materials
Direct labour
Variable overhead
Sales price
2kg @ €1.80 per kg
1hr @ €8.00 per hour
1 hr @ €1.50 per hour
10% mark-up on cost
Sales:
Production:
Direct materials:
Direct labour:
Variable overhead:
95,000 units sold for €1,425,000
98,000 units
176,400 kg at a cost of €343,980
93,000 hours at a cost of €762,600
€116,250
The budgeted level of production and sales activity has been set at 1,200,000 units per annum. The actual results
for February 2010 are as follows:
REQUIRED:
a)
Prepare the budgeted and actual contribution statements for Slieve Ltd for the month of February 2010.
(2 marks)
b)
c)
Reconcile the budgeted and actual contribution by calculating the relevant variances for the month of February
2010.
(18 marks)
Comment on the interdependence of variances providing two examples from the results calculated in part (b)
above.
(5 marks)
[Total: 25 marks]
Page 1
2.
(A)
Answer either part (A) or part (B) of this question. Each part is worth 15 marks.
‘An enterprise can choose to use either marginal costing or absorption costing for internal reporting purposes.
These are significantly different systems and in certain circumstances may lead to differences in reported profits’.
REQUIRED:
Clearly explain the different treatment of costs used by each costing method.
(i)
(ii)
(iii)
Outline the arguments in favour of using each costing method.
Explain the effect on short-term results where sales and production are not equal.
OR
(B)
(2 marks)
(9 marks)
(4 marks)
[Total: 15 marks]
You have recently commenced a temporary contract in the accounts department of a company operating in the hotel
industry. The company supplies catering equipment and furniture to hotels and restaurants. The equipment and
furniture is hired out to hotels on a daily rate. The company operates in a competitive environment and is finding
it increasingly difficult to ‘win’ contracts with their current sales prices.
The manager of this company is aware that you have studied ‘Management Accounting’ but she can’t see how it
might be relevant to her company. She is of the understanding that management accounting is suitable for
manufacturing-based companies. Write a letter to the manager in which you address each of the following points:
(i)
(ii)
Describe the usefulness of management accounting techniques in a service-based company.
(8 marks)
Briefly outline the key differences between financial accounting and management accounting with specific
reference to each of the following matters in the context of financial accounting and management accounting:
(a)
(b)
(c)
(d)
Users of information.
Reporting period/ frequency.
Time orientation of information.
Reporting format.
(6 marks)
(Format and Presentation: 1 mark)
[Total: 15 marks]
Page 2
3.
1)
Section B - Answer any three questions.
Answer each of the following multiple choice questions. Each question is of equal marks.
Glebe Ltd incurs the following costs at the indicated activity levels:
Activity level
3,000
5,000
9,000
Total cost (€)
46,000
58,000
82,000
Estimate the fixed costs incurred by Glebe Ltd.
2)
(a)
(b)
(c)
(d)
€18,000
€30,000
€28,000
€12,000
Plato Ltd uses process costing to value its output. The following information is available for ‘Process 1’ for the
month of June:
Materials (1,000 units inputted)
Conversion costs
Normal loss:
Actual loss:
Scrap value of units:
€5,000
€6,000
10%
120 units
€2
There is no opening or closing stock.
The value of one unit of output for ‘Process 1’ is:
3)
4)
5)
(a)
(b)
(c)
(d)
€12.27
€10.80
€12.00
€12.22
(a)
(b)
(c)
(d)
Fixed costs cannot be altered and remain constant indefinitely.
Fixed costs are constant for a period of 12 months and then become semi-fixed costs.
Fixed costs can be used to calculate the contribution made by a business.
In the long run, all costs are variable.
(a)
(b)
(c)
(d)
160.00 units
113.13 units
75.00 units
53.03 units
(a)
The high/low method is preferable to regression analysis as it is quicker to calculate and easier for nonaccountants to understand.
The scattergraph is the best method of determining the ‘line of best fit’ as it takes all available sets of data
into account.
It is advisable to calculate both the high/low method and regression analysis rather than relying on the result
of just one method.
Regression analysis gives the most accurate ‘line of best fit’ as it is less subjective than the high/low method
and the scattergraph.
Which one of the following statements is true?
A company purchases raw materials from an outside supplier. There is an ordering charge of €12.80 per order.
Annual demand for this product is 6,000 units and the company pay a holding cost of €6 per unit. What is the
Economic Order Quantity (EOQ)?
Which one of the following statement is true?
(b)
(c)
(d)
Page 3
6)
7)
8)
Which of the following scenarios most likely indicates that a company could benefit from an Activity-Based Costing
system?
(a)
(b)
(c)
(d)
The company manufactures goods primarily rather than supplies services.
The company is engaged in process costing activities.
Total indirect costs are insignificant in proportion to direct costs.
The company’s goods / services are complex and tend to require many different processes or inputs.
(a)
(b)
(c)
(d)
fixed cost per unit for each additional unit sold.
contribution margin per unit for each additional unit sold.
variable cost per unit for each additional unit sold.
none of the above.
(a)
(b)
(c)
(d)
A computer company manufacturing to customer specifications.
A manufacturer of flat pack furniture.
An accountancy firm targeting small-to-medium-sized enterprises.
A manufacturer of breakfast cereals.
Once the break-even point has been reached, operating profit will increase by the :
Which of the following organisations would be most likely to use a process costing system?
Page 4
[Total: 20 marks]
4.
You have been reviewing the internal management accounts of Diversions Limited, prepared for the year ending
31 March 2010, as part of the annual budget review/ preparation process. The company is organised into two
divisions, Wholesale and Retail, each of which serves distinct markets. Each division has been adversely impacted
by the economic downturn and the company overall has struggled to meet targets.
The following is the summarised management accounts for the year ended 31 March 2010:
Note
Sales
Less:
Variable costs
Contribution
Less:
Fixed costs
Net profit/loss
Wholesale
€
350,000
1
2
240,000
110,000
3
90,000
20,000
Retail
€
200,000
80,000
120,000
130,000
-10,000
Total
€
550,000
320,000
230,000
220,000
10,000
Notes:
1.
Sales in each division are categorised as either ‘Full price sales’ or ‘Discounted price sales’. The following
was the split of sales for each division by value and by unit volume in the year ended 31 March 2010:
Full price sales
Discounted price sales
2.
3.
Wholesale Division
€
Unit volume [% of total]
70,000
5,000 items [12.5%]
280,000
35,000 items [87.5%]
350,000
40,000 items [100%]
€
140,000
60,000
200,000
Retail Division
Unit volume [% of total]
4,000 items [40%]
6,000 items [60%]
10,000 items [100%]
The average variable cost of the items sold in each division during the year ended 31 March 2010 was €6
in the Wholesale Division (i.e. €240,000 ÷ 40,000 items sold) and €8 in the Retail Division (i.e. €80,000 ÷
10,000 items sold). The additional amount of €2 per item in the retail division is accounted for by additional
packaging and promotional expenditure.
Fixed costs in each division during the year ended 31 March 2010 were categorised as follows:
Wholesale
€
40,000
35,000
15,000
90,000
Building and occupancy costs
Other administrative costs
Interest and financial costs
The following changes are anticipated for the forthcoming budget [for year ended 31 March 2011]:
1.
2.
3.
4.
Retail
€
70,000
20,000
40,000
130,000
Unit volumes for each division: Total unit volume in the Wholesale Division is not expected to change in
the upcoming year. In the Retail Division, total unit volumes are expected to decline by 3%.
Full price sales and discounted price sales: The split between ‘Full price sales’ and ‘Discounted price
sales’ in each division is expected to be as follows in the forthcoming year:
Full price sales
Discounted price sales
Wholesale
15% of division volume
85% of division volume
Retail
50% of division volume
50% of division volume
Selling prices in each division: The wholesale division’s average selling prices are not expected to change
for either ‘Full price sales’ or ‘Discounted price sales’. However, due to pressures in the retail business, the
average selling price under each category [‘Full price’ and ‘Discounted price’] is expected to decline by €1
per item sold.
Variable costs in each division: No change in the average variable cost per item is expected in the
wholesale division. In the retail division, a variable cost saving of €0.50 per item is projected by changing
the packaging used for the items sold.
Page 5
5.
Fixed costs are expected to change as follows in each division:
Wholesale
Increase by 2%
Unchanged
Increase by 1%
Building and occupancy costs
Other administrative costs
Interest and financial costs
Retail
Decrease by 2%
Increase by 1%
Increase by 1.5%
REQUIRED:
Using the values shown for the year end 31 March 2010, calculate separately the contribution to sales margin for
(a)
the Wholesale division, the Retail division and the company overall.
(2 marks)
(b)
(c)
Prepare the budgeted sales and costs for each division and the company overall for the year end 31 March 2011
using the same layout as shown for the year end 31 March 2010 and taking account of the anticipated changes
outlined above.
(8 marks)
Using the figures for the company overall which you have computed in the previous step, prepare a break-even
chart [USE GRAPH PAPER], clearly identifying each of the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
The revenue line.
The variable costs line.
The fixed costs line.
The total costs line.
The breakeven point.
The profit area.
The margin of safety.
The activity axis should be in increments of 5,000 units and end at 55,000 units. The costs/ revenues axis should
be in increments of €50,000 and end at €600,000.
(10 marks)
[Total: 20 marks]
Page 6
5.
You have recently been hired on a contract basis by Maxitron Limited, a company which manufactures a range of
sophisticated products, the biggest seller of which is the ‘Obashton’ (annual sales of this item amount to 8,000 units
per annum).
This appointment is initially to be for 6 months duration but may lead to a full-time position, subject to satisfactory
performance. As a young accountant in the early stage of your career, you are keen to create a positive impression
within the company.
The first assignment you have been given has the following detail:
•
A long-standing customer has offered to purchase a large volume of ‘Obashton’. However, the customer is
seeking a 30% discount off the normal selling price.
The cost card (direct costs only) for the product is as follows:
•
Note:
Material
Labour
Finishing costs
Direct costs
Notes
0.5 kilos
1 labour hour
1 machine hour
€
45
15
8
68
The current basis of charging fixed overheads to units of production is explained later in the question. To compute
a product’s selling price, the company adds fixed overheads to direct costs to compute manufacturing cost and then
adds a mark-up of 30% to the manufacturing cost.
•
The Chief Financial Officer (CFO) is opposed to accepting the deal under the proposed terms. He notes that
since the selling price of this product is calculated using a mark-up of 30% of cost, the company cannot
agree to the pricing terms requested by the customer. He has publically dismissed the deal to be “a nonrunner”.
•
The Chief Manufacturing Officer (CMO) however, disagrees with the Chief Financial Officer and feels that
there may be scope for accepting the deal. He feels that since the customer has been (and continues to be)
a “key-account” customer for many years that an extra effort ought to be made to meet the demand. He fears
that a refusal might be seriously detrimental to the ongoing relationship between the customer and Maxitron
Limited.
•
Your task is to resolve the disagreement between the CFO and the CMO and report your proposed resolution
to each of these officers.
In your efforts to resolve the dispute, you have undertaken some preliminary research and have collected the
following information:
1.
The company currently uses an absorption costing system to charge overheads to products. These
overheads total €700,000 per year. The current basis of charging fixed overheads to units of production is
summarised in the following table:
Total annual overhead
Total annual hours
2.
Overheads charged
using labour hours
€
400,000
20,000
Overheads charged
using machine hours
€
300,000
25,000
A study undertaken by external consultants identified the following drivers of the annual fixed overheads
incurred by the company:
Purchasing / goods inward costs
Machine set-up/ retooling
Quality control inspections
Despatch/ goods outward costs
Total annual overhead cost
Total number of cost
driver events per annum
1,200
6
8,000
5,000
Page 7
Total amount of overhead cost
€
30,000
90,000
500,000
80,000
700,000
3.
You analysed the activities referable to the ‘Obashton’ product for the past year and have determined the
following information:
Cost driver
Purchasing / goods inward costs
Machine set-up/ retooling
Quality control
Despatch/ goods outward costs
Number of cost driver
events per annum
120
2
2,000
500
REQUIREMENT:
(a)
Calculate the current fixed overhead absorption rates used by the company.
(b)
(c)
(d)
(e)
(2 marks)
Calculate the current selling price of the ‘Obashton’ product.
(2 marks)
Calculate the total overheads which would be charged to the annual production of ‘Obashton’s’ using activity based
costing principles and the amount per unit.
(4 marks)
Calculate the revised manufacturing cost of an ‘Obashton’ using activity based costing principles.
(3 marks)
Prepare a brief memorandum (not to exceed approximately 1 page) to the CFO and CMO setting out your findings.
Your memorandum should include reference to possible factors which they may wish to consider when deciding
whether the terms should be accepted.
(8 marks)
(Format and presentation: 1 mark)
[Total: 20 marks]
Page 8
6.
Oozeco Limited manufactures a range of products which are sold to agricultural markets. The company uses a
process costing system for the manufacture of one of the company’s products, ‘Grobig’. This product involves two
distinct processes - Separation and Liquidising. After the Liquidising stage is completed, the final product is packed
in tins for shipping.
The company has established standards for each process as follows:
Normal loss
Sales value of lost product
Note
1
Separation process
5%
€1.50
Liquidising process
2%
€2.00
Note:
1.
Normal loss of a process is calculated as a percentage of the sum of the total kilograms processed in that
process.
The following data is available for the week ending 16th April in respect of each process:
Units from previous process
Materials added
Labour incurred
Overheads incurred
Separation process
Qty.
€
Nil
--1,200 kgs
840
1,000
2,500
Liquidising process
Qty.
€
1,130 kgs
2,020 kgs
4,440
600
500
At the end of the Liquidising process, 3,090 kilos were transferred to Finished Goods. No opening or closing workin-progress is held by the company.
REQUIREMENT:
(a)
(b)
c)
Briefly outline the typical characteristics of a process costing system. Your answer should include a clear distinction
between ‘job/ batch costing’ systems and ‘process costing’ systems.
(3 marks)
State the treatment of each of the following types of losses in a process costing system:
(i)
(ii)
Normal losses.
Abnormal losses.
Your answer should clearly indicate the valuation method of each type of loss and the treatment of sale proceeds,
if any, which may arise in respect of such losses.
(3 marks)
Prepare each of the process accounts of Oozeco Ltd for the period. You are not required to prepare the loss
(14 marks)
accounts.
[Total: 20 marks]
END OF PAPER
Page 9
SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
MANAGEMENT ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2010
SOLUTION 1
a)
Contribution statements for Slieve Ltd – February 2010
BUDGETED CONTRIBUTION STATEMENT
Sales
Less:
Materials
Labour
Variable Overhead
Total Costs:
Budgeted contribution
Working Ref:
(i)
(ii)
(iii)
(iv)
ACTUAL CONTRIBUTION STATEMENT
Sales
Less:
Materials
Labour
Variable Overhead
Total Costs:
Less Closing Stock (13.10 * 3,000 units)
Cost of Sales
Budgeted contribution
(2 marks for profit statements)
€
1,441,000
360,000
800,000
150,000
1,310,000
131,000
€
1,425,000
343,980
762,600
116,250
1,222,830
-39,300
1,183,530
241,470
Workings
i)
Cost €13.10 * 110% = €14.41 * 100,000 units (per month)
ii)
2kg * €1.80 = €3.60 * 100,000 = €360,000
iii)
1hr * €8 = €8 * 100,000 = €800,000
iv)
1hr * €1.50 = €1.50 * 100,000 = €150,000
b)
Reconciliation of Budgeted to Actual Profit for Slieve Ltd.
(2 marks for each variance calculation + 2 marks for final reconciliation = 18 marks)
Item:
Budgeted contribution (as part a) above):
Sales volume variance
Sales price variance
Materials price variance
Materials usage variance
Labour rate variance
Labour efficiency variance
Variable o/h rate variance
Variable o/h efficiency variance
Total sum of variances:
Working:
w1
w2
w3
w4
w5
w6
w7
w8
Actual contribution (budgeted contribution + sum of variances)
Page 11
€
- 6,550
+56,050
-26,460
+35,280
-18,600
+40,000
+23,250
+7,500
€
131,000
+110,470
241,470
Workings:
W1 Sales volume variance
(Actual quantity – Standard quantity) * Standard contribution
(95,000-100,000) * 1.31 =
W2 Sales price variance
(Actual price – Standard price) * Actual volume of sales
Standard price: 1,441,000/1,000,000 = €14.41
Actual price: 1,425,000/95,000 = €15.00
(15.00-14.41)*95000 =
W3 Materials price variance
(Standard price – Actual price) * Actual quantity
Actual price per unit = 343,980/176,400 = €1.95
(1.80-1.95)*176,400 =
W4 Materials usage variance
(Budgeted quantity – Actual Quantity) * Standard price
((98,000*2kg) – 176,400)*€1.80
(196,000-176,400)*1.80 =
W5 Labour rate variance
(Standard price – Actual price) * Actual hours
Actual cost per hour = 762,600/93,000 = €8.20
(8.00-8.20) * 93,000 =
W6 Labour efficiency variance
(Budgeted hours – Actual hours) * Standard price
(98,000-93,000) * €8 =
W7 Variable overhead rate variance
(Standard price – Actual price) * Actual hours
Actual price per hour = 116,250/93,000 = €1.25
(1.50-1.25) * 93,000 =
W8 Variable overhead efficiency variance
(Budgeted hours – Actual hours) * Standard price
(98,000-93,000)*€1.50 =
Page 12
€6,550 adverse
€56,050 favourable
€26,460 adverse
€35,280 favourable
€18,600 adverse
€40,000 favourable
€23,250 favourable
€7,500 favourable
c)
Interdependence of Variances
( 1.5 marks for each of 2 examples given + 2 marks for general comment = 5 marks)
An ‘individual variance result’ should not be examined in isolation. Quite often the occurrence of a favourable or
adverse variance can be explained by an adjustment to another factor in the standard cost equation. In the example
of Slieve Ltd, an adverse materials price variance highlights the fact that materials were more expensive than the
standard cost. It is possible, that although the materials were more expensive, they were of higher quality than the
material on which the standard cost was originally based. The higher quality material could have resulted in less
re-works/waste and could have contributed to the favourable materials usage variance which also occurred in the
period.
On a similar note, the labour rate variance shows an adverse result for the period under review. It is possible that
Slieve Ltd paid for a higher ‘grade’ of labour. The employees may have been more experienced and therefore
more expensive. The more experienced staff could have made more efficient use of the time and of the materials
used, explaining both the favourable labour efficiency and favourable materials usage variances.
With regard to the sales variances, Slieve Ltd has a negative sales volume variance and a positive sales price
variance. This agrees with the laws of demand which state that as price increases, quantity demanded decreases.
The results above demonstrate that as the price increased greater than that of the standard selling price, a
favourable sales price variance occurred. However, with the higher sales price, the sales volume did not reach the
anticipated levels of the budget. The actual results were 5,000 units less than expected, giving rise to an adverse
variance in Sales volume.
Management should examine the relationships between variances to ensure that the ‘cause’ of an adverse or
favourable variance is understood. Understanding the cause of the variance and the relationships between them
can also assist managers in devising a performance appraisal system for employees. Employees are reviewed on
the variances results which are controllable and which can be explained by their actions during the period under
review.
Page 13
SOLUTION 2
(a)
Absorption costing includes all manufacturing costs- whether direct costs (such as material or direct labour) or
fixed overhead costs in computing product cost. The marginal costing technique, in contrast, includes only variable
manufacturing costs in product costs, treating fixed overheads as costs of a period rather than costs of a product.
Each costing system has advantages. Proponents of marginal costing argue that it is an operationally easy system
to use, avoiding the complexity of both overhead apportionments [a process fraught with estimation and difficult to
implement in complex operations] and the accounting for under/over absorption of overheads. Additionally, as
that system focuses on ‘contribution’ it allows managers to evaluate the marginal impact of accepting/ rejecting
changes in output levels. On the other hand, proponents of absorption costing argue that since the fixed overheads
are an essential cost incurred in the production process, it is essential that the products fairly reflect this cost.
Therefore, a business must include the overheads as part of the cost of production. Furthermore, for the purpose
of external reporting, financial accounting standards require that absorption costing is used as it more accurately
reflects the ‘true’ cost of production. Additionally, undue reliance on ‘contribution’ may not allow a decision maker
to determine the sufficiency of the contribution to cover all costs based on volumes achievable.
The different costing techniques may result in net profit values differing from each other where production and
sales volumes differ. This difference arises due to the contrasting treatment of fixed production overheads under
each system. Under marginal costing, fixed production overheads are treated as period costs. This means that they
are written off as a period cost rather than as a part of the product cost. In contrast, under absorption costing these
the fixed production overheads are included as part of the cost of production. This result in such costs being
charged against profit only when the goods are sold.
In periods where production exceeds sales [i.e. stock levels are increasing], an absorption costing system will
result in greater profits compared to a marginal costing system. This is because the overheads included in stocks
will not be charged against revenues until later periods. Conversely, when stock levels are decreasing (i.e.
production levels are lower than sales levels), marginal costing systems will report higher profits compared to
absorption costing systems.
Page 14
(b)
Tutorial note: The points outlined in this model solution are not intended to be an exhaustive list of possible matters
raised in the memorandum. Candidates would be awarded credit for making other points not mentioned in the
solution where such points are logically made and/or are of relevance to the matter in hand.
2 Main Street,
Cork
Ireland
10th April 2010
Dear Manager,
I am writing to you to outline the usefulness of management accounting within the company. I understand that,
traditionally, management accounting was concerned with accounting for manufacturing companies. Management
accounting concepts have developed to meet the needs of accountants in industry. In Ireland, service industries
account for almost 70% of all industry. Management accounting has become an essential tool for accountants.
Modern management accounting concepts deal with areas such as cost competitiveness and strategic planning.
I understand that in the current environment, our company is operating in a competitive environment and it is
essential that we examine our costs to offer existing and potential customers the best possible price. Modern
management accounting concepts could help us examine our costs and ensure that they reflect the ‘true cost’ of
providing the service. Relevant concepts include Total Quality Management (TQM), Activity Based Costing (ABC)
and Activity Based Budgeting (ABB).
Management accounting also focuses on non-financial information and examines the service provided to the
customer. The ‘Balanced Scorecard’ would be particularly useful in our business as it would help us identify
performance measures which are meaningful and reflect on the service provided by the organisation as a whole.
To understand the primary difference between financial accounting and management accounting, I have included
the following summary for your perusal:
a)
b)
c)
d)
Users of information: The users of management accounting information are primarily internal managers of
the organisations. Whereas financial accounting is concerned with reporting financial information to external
users such as shareholders, investors and financial institutions.
Reporting period: Management accounts can be prepared as often as required by management. Reports can
be generated on a daily/weekly/monthly basis depending on manager’s needs. Financial information is
usually prepared on an annual basis for most SMEs.
Time orientation of information: Management accounting mainly focuses on current and future projections.
Financial accounting is always on a historical basis.
Report format: The presentation of financial accounts is regulated and financial accounts are required to show
certain information by law and financial reporting standards. Management accounts will be designed to suit
the business in question and the management accountant can be more innovative when it comes to the
presentation of information. Management accountants are increasing the amount of non-financial information
in their reports. Non-financial information in financial accounting is usually in the form of ‘notes to the
accounts’. These notes are formed from guidelines from government, E.U. legislation and accounting
institutes.
If you would like to discuss any of the information above in more detail, please contact me.
Yours sincerely
A.N. Other.
Page 15
SOLUTION 3
1)
Multiple Choice Questions
Tutorial note workings
High/low method:
High
Low
Diff
2)
3)
Units
9000
3000
6000
€
82000
46000
36000
Variable cost = 36000/6000 = €6 per unit.
Based on activity level of 9,000 units, variable cost = €6*9000 = €54,000.
Total cost is €82,000 less variable cost of €54,000 leaves the remaining fixed cost at €28,000
Answer c)
Tutorial note workings
Cost per unit = Costs of production less scrap value of normal loss / Expected output
Costs of production less scrap value of normal loss: €5,000+€6000 – (€2*100) = €10,800
Expected output = 1,000 less 10% = 900 units
Therefore CPU = €10,800/900 = €12 per unit.
Answer c)
Answer d) – In the long run, all costs are variable.
4)
Tutorial note workings
5)
Answer d) – This is the ‘most correct’ answer of the statements provided.
6)
7)
8)
Formula for EOQ = √ (2*D*O )/H
Where: d = annual demand, o= ordering cost per batch, h = holding cost per unit
= √ (2* 6,000*12.80)/6.00
= √ 153,600/6.00
= √ 25,600
= 160 units
Answer a)
Answer d)
Answer b)
Answer d)
Page 16
SOLUTION 4
a)
Contribution to sales margin for each division
Tutorial note: The formula used is Contribution amount ÷ Sales amount
Contribution
110,000
120,000
230,000
Wholesale division
Retail division
Company overall
b)
Budgeted values for year end 31 March 2011
Sales
Less:
Variable costs
Contribution
Less:
Fixed costs
Net profit
Workings:
1.
Revised sales figures
Working reference
1
2
Sales
350,000
200,000
550,000
Contribution/Sales
31.43%
60.00%
41.82%
(2 marks)
Wholesale
356,000
Retail
208,550
Total
564,550
90,950
25,050
129,400
6,400
220,350
31,450
3
240,000
116,000
72,750
135,800
312,750
251,800
Expected unit volume
Volume @ full price
Volume @ discount price
Wholesale
100% of prior year: 40,000 items
40,000x15%: 6,000 items @ €14
40,000x85%: 34,000 items @ €8
Retail
97% of prior year: 9,700 items
9,700 x 50%: 4,850 items @ (€35 - €1)
9,700 x 50%: 4,850 items @(€10 - €1)
Expected unit volume
Average variable cost
Total variable cost
Wholesale
40,000 items
€6 => unchanged from prior year
40,000 @ €6 = €240,000
Retail
9,700 items
€8 - €0.50 packaging saving => €7.50
9,700 @ €7.50 = €72,750
Wholesale
€40,000 x 102% = €40,800
€35,000 x 100% = €35,000
€15,000 x 101% = €15,150
Retail
€70,000 x 98% = €68,600
€20,000 x 101% = €20,200
€40,000 x 101.5% = €40,600
2.
Revised variable costs
3.
Revised fixed costs
Building and occupancy costs
Other administrative costs
Interest and financial costs
Page 17
8 marks
€ '000
600
550
Profit Area
Breakeven
Point
500
450
Revenue line
400
350
Total costs line
Variable costs line
300
250
Fixed costs line
200
150
Margin of safety
100
50
5
10
15
20
25
30
35
40
45
50
55
60 ['000 units]
10 marks
Page 18
SOLUTION 5
(a)
Current fixed overhead absorption rates
(b)
Calculation of normal current selling price of the Obashton
Labour hour absorption basis
Total annual overheads
400,000
Annual labour/ machine hours
20,000
Rate per hour
400,000/20,000= €20 per labour hr.
Direct costs as per question
Add:
Fixed costs
Manufacturing cost
Add:
30% mark-up
Normal selling price
(c)
Working
1
Machine hour absorption basis
300,000
25,000
300,000/25,000= €12 per mach. hr.
€ per unit
68
32
100
30
130
Note:
1.
An Obashton uses 1 labour hour and 1 machine hour per the cost card. Therefore, the overhead applied is
(€20 x 1 labour hour) + (€12 x 1 machine hour).
Calculation of overheads chargeable to annual production of Obashton’s using Activity Based Costing techniques
Overhead
Purchasing/ goods in
Machine set-up/ retooling
Quality control
Despatch/ goods out
€
Annual
30,000
90,000
500,000
80,000
# of cost
drivers
per annum
1,200
6
8,000
5,000
Rate per
cost driver
25.00
15,000.00
62.50
16.00
Drivers
attributable to
Obashton’s
120
2
2,000
500
Overheads
charged to
Obashton’s
3,000
30,000
125,000
8,000
166,000
As the annual production of Obashton’s totals 8,000 units, this means that the overhead charged per unit amounts
to €20.75 [€166,000/8,000].
(d)
Revised manufacturing cost of Obashton using ABC technique
Direct costs as per question
Add:
Fixed costs
Manufacturing cost
Working
(c) above
Page 19
€ per unit
68.00
20.75
88.75
(e)
Memorandum
Tutorial note: The points outlined in this model solution are not intended to be an exhaustive list of possible matters
raised in the memorandum. Candidates would be awarded credit for making other points not mentioned in the
solution where such points are logically made and/or are of relevance to the matter in hand.
To: CFO; CMO
From: I. Mc Carthy
Re: ‘Obashton’- proposed contract terms
Please find attached my report setting out the key findings in relation to the ‘Obashton’ product and the discount
terms requested by X customer.
In summary, my findings are as follows:
1.
2.
Maxitron Limited may wish to amend the basis on which it presently charges overheads to product. The
current basis – which relies on labour and machine hours to charge overheads - appears to be overstating
the overheads which should be reasonably charged to ‘Obashton’s’. Per my calculations, using activity
Based Costing principles, this product should be charged €20.75 in overheads instead of the current charge
of €32 per unit.
In relation to the decision as to whether to accept or reject the terms of the deal being requested by X
customer, I feel that the following factors should be carefully evaluated:
a.
Price: If we are obliged to reduce the current sales price by 30% to €91 it will mean that we are
working on a mark-up of approximately 2.5% on manufacturing cost [(91-88.75)/88.75]. While the
deal offers the potential for profitability, there is clearly very little room for error. Possible costs such
as warranty costs / currency movements may erode the margin.
b.
Input costs: In an effort to enhance the margin, the company may be able to review the current
manufacturing process to determine if savings or efficiencies could be made in either material, labour
or machine costs.
c.
Importance of X customer: As per our previous discussions, the particular customer is of significant
standing in the company. I advise that an evaluation of the customer in terms of profitability/ annual
turnover/ credit record should be made in order to quantify the monetary value to the company. This
will facilitate a meaningful discussion of the pros and cons of taking or rejecting the terms. A realistic
view needs to be taken of the value of customer X. The request for a substantial discount may either
be a signal of ‘a new reality’ which we can expect in future dealings with this customer, with
consequential reductions in profits. The relative attractiveness of retaining the customer will likely
diminish relative to selling to other customers / markets.
d.
Current capacity: The increased demand for the ‘Obashton’ will require an assessment of the
availability of the necessary inputs (labour, materials, equipment). The company needs to allow for
possible non-availability of some or all of these inputs. Additionally, the lead-in time to ready the
production line for any new output must be assessed.
e.
Existing / future demand for the product: At present, the company sells approximately 8,000 units
of the ‘Obashton’ per annum. An assessment of likely trends in the level of demand should be
undertaken to determine if this level of demand is likely to materially change. If there are indications
that demand is likely to decline, this may suggest that the product is facing an ‘end-of-life’ situation,
with consequential declining prices. Alternatively, if demand is likely to be maintained at current levels
and at current prices, it might be financially risky to reduce the existing selling price which is
achievable.
f.
Outsourcing possibility: It may be possible to outsource the production of the product or another of
the products made internally by the company. If the financials work, this could be advantageous in a
number of ways- it will help meet the customer’s request and may also free up resources which could
be used in other ways. However, the risks of outsourcing may include factors such as loss of control
over the production of the ‘Obashton’ and the unclear consequences of a competitor gaining access
to the details or intellectual property of the company.
In summary, there are many competing considerations at play in this decision. If I can clarify anything further
or offer further assistance please let me know.
{Signature of author}
Page 20
SOLUTION 6
(a)
A process costing system is suitable for situations having the following characteristics:
•
The production process is continuous and typically involves a series of activities.
The products are standardised/ homogeneous.
•
•
The finished output from a process is used as the raw input to a later process.
Typical examples of industries where a process costing system is used include the chemicals industry (e.g. paint
manufacturing) or the food processing industry (e.g. canned foods).
(b)
In contrast, a job costing system is a method used when the units manufactured vary significantly from one anotherif the jobs were virtually identical, it is likely that a process costing system would be more relevant. Job costing
accumulates costs by jobs rather than by processes.
The typical treatment of normal loss depends on whether there is a sales or scrap value attaching to the loss. The
various treatments are as follows:
1.
2.
If the loss has no scrap value:
The quantity of loss is credited to the process account. No value is ascribed to the loss. Good output bears
the cost of the normal loss.
If the loss has a scrap value:
The scrap value is deducted from the total costs of the process. The net process costs are used to determine
the cost of good production.
The treatment of abnormal loss differs from that applying to normal loss. In essence, abnormal loss is not
charged as a cost of the process. Instead, the loss is transferred out of the process account and into an
‘Abnormal Losses’ account. Such losses are valued at the same amount as good production.
(c)
Materials
Labour
Overheads
From Process 1
Materials
Labour
Overheads
Abnormal gain
Workings:
SEPARATION PROCESS
€
840
Normal loss [W]
1,000
To Liquidising [W]
2,500
Abnormal loss
1,200
4,340
KILOS
1,200
LIQUIDISING PROCESS
€
4,212.72
Normal loss [W]
4,440
To Finished Goods [W]
600
585
3
9.36
3,153
9,762.08
KILOS
1,130
2,020
Normal Loss calculation
Abnormal loss/(gain) calculation
Value of good product
Separation
5% * 1,200
(1,200*95%)-1,130
€4,340-€90/(1,200*95%)
Tutorial note:
Treatment of product losses
KILOS
60
1,130
10
1,200
€
90
4,212.72
37.28
4340
KILOS
63
3,090
€
126
9,636.08
3,153
9,762.08
Liquidising
2% * (1,130+2,020)
(3,150*98%)-3,090
€9,752.72-€126/(3,150*98%)
The scrap proceeds of the normal loss kilos in each process are deducted from the costs of that process.
Abnormal losses are valued at ‘full cost’ i.e. the same as a good unit.
Page 21