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CORK INSTITUTE OF TECHNOLOGY INSTITIÚID TEICNEOLAÍOCHTA CHORCAÍ Autumn 2010 Module Title: Management Accounting 1 Module Code: ACCT7011 School: School of Business Programme Title: Bachelor of Business in Management - Award Programme Code: BMMNT_7_Y3 External Examiner(s): Mr. Michael Murphy Internal Examiner(s): Ms. Ruth Vance Instructions: Answer three questions in total. Question one and two others. Duration: 2 hours Sitting: Autumn 2010 Requirements for this examination: Calculator Note to Candidates: No red pen please. Please check the Programme Title and the Module Title to ensure that you have received the correct examination paper. If in doubt please contact an Invigilator. Solutions to all questions, including Multiple Choice should be prepared on Answer book provided and not on this paper. Question 1 (20*2 marks) 1.1 Which of the following defines Prime cost? (a) Direct labour plus indirect materials and other indirect costs. (b) Indirect labour plus direct materials and other direct costs. (c) Direct labour plus factory overhead and other costs. (d) Direct labour plus direct materials and other direct costs. 1.2 Which of the following defines Production overhead cost? (a) Direct and indirect materials, direct and indirect labour, and other costs of production. (b) Indirect materials, indirect labour and other indirect costs of production. (c) Direct materials, direct labour and other direct costs of production. (d) Indirect materials, direct labour and other direct costs of production. 1.3 Which of the following defines Total product cost? (a) Direct costs plus indirect costs of production, selling and administration (b) Prime cost plus direct cost (c) Prime cost plus production overhead (d) Indirect cost plus production overhead This information should be used for question 1.4, 1.5 and 1.6 Alarms Ltd carries out annual visits to business premises to inspect and service burglar alarms. Each visit has the following direct costs. Labour (2 hours at €9.00/hour) Variable service materials € per visit 18 5 In addition, the company has monthly fixed overhead costs of €150,000. 1.4 If 1,000 visits are carried out every month, what is the total monthly cost of carrying out inspections and servicing of burglar alarms? (a) (b) (c) (d) €18,000 €23,000 €168,000 €173,000 1.5 If the selling price per unit is €40 and the number of services carried out is 75,000 the contribution per unit is: (a) €17 (b) €22 (c) €15 (d) €5 1.6 If 1,000 visits are carried out every month the prime cost is: (a) (b) (c) (d) 1.7 In most companies, direct labour is treated as: (a) (b) (c) (d) 1.8 The wages of an operative paid on the basis of output achieved. A bonus paid to the storeman. Costs of the payroll accounting section. Supervisors' salaries in the factory. Which of the following types of cost would not form part of the prime cost of a product? (a) (b) (c) (d) 1.10 Product cost. Period cost. Fixed cost. Sunk cost. Which of the following is a direct labour cost? (a) (b) (c) (d) 1.9 €18,000 €23,000 €5,000 €25,000 The direct labour costs The factory overhead costs The direct expense costs The direct material costs Which of the following describes a fixed cost? (a) (b) (c) (d) Any overhead cost that is incurred in the factory of a manufacturing company. Any selling, general or administrative cost incurred in a manufacturing company. A total cost that remains constant within the relevant range of output. A total cost which fluctuates with changes in output. 1.11 Which of the following is likely to be classified as a direct material cost of a motor car wheel? (a) (b) (c) (d) 1.12 Which of the following is the best description of a variable cost? (a) (b) (c) (d) 1.13 Cannot be estimated with any great degree of accuracy. Does not change over time. Varies with the level of activity. Varies in proportion to the level of fixed cost incurred. Which of the following is the best definition of indirect costs? (a) (b) (c) (d) 1.14 The cost of the quality inspection checks on the finished car wheels. The cost of operating the raw material stores in the factory. The metal used to manufacture a motor car wheel. The metal used to manufacture one of the tools used in the car wheel factory. Indirect costs are spread over a number of activities of the business for which costs are to be determined. Indirect costs are those costs which are treated as expenses in the period in which they are incurred. Indirect costs are not capable of being managed by the person responsible for the cost centre. Indirect costs are not affected by changes in the level of activity, over a period of time. Which of the following is the best definition of product costs? (a) (b) (c) (d) Product costs are the costs associated with unsold products retained in stock. Product costs are those costs associated with goods or services purchased, or produced, for sale to customers. Product costs are those costs which change with changes in the level of product activity, over a defined period of time. Product costs are overhead costs which are allocated over a number of products of the business for which costs are to be determined. 1.15 Which of the following is the best definition of a cost centre? (a) (b) (c) (d) A cost centre is a unit of the organisation which is controlled by the central head office. A cost centre is a unit of the organisation which is operated by the management accounting department. A cost centre is a unit of the organisation in respect of which a manager is responsible for profits under his or her control. A cost centre is a unit of the organisation in respect of which a manager is responsible for costs under his or her control. This information should be used for question 1.16, 1.17 and 1.18 Stephen Ireland Company's profit statement for the preceding year is presented below. The cost and sales relationship for the coming year is expected to follow the same pattern as in the preceding year. Sales and production are always equal. €m Sales (2,000,000 boxes at €5) 10 Variable costs 2 8 Fixed costs 5 Profit 3 1.16 What is the break-even point in units? (a) (b) (c) (d) 1.17 750,000 units 1,250,000 units. 2,500,000 units. 5,000,000 units. An extension to the factory will add €2m to the fixed costs. How many boxes of discs would have to be sold after the extension to break even? (a) (b) (c) (d) 1,000,000 units. 1,250,000 units. 1,500,000 units. 1,750,000 units. 1.18 If the factory produces 3,200,000 boxes of discs after the extension, and fixed costs become €7m in total, what profit will be earned? (a) (b) (c) (d) 1.19 €2m €3.2m €5.8m €12.8m In decision making, managers’ use: (a) 1.20 Financial accounting information exclusively since it is more objective and precise due to well-established principles and conventions. (b) Information regarding the organization as a whole rather than segments of the organization in order to capture a broader perspective of the company's operations. (c) Information that is as precise as humanly possible. (d) Whatever information is relevant to the decision even though the information may not conform to generally accepted accounting principles. The managerial accounting reports of a company would be of most interest and benefit to the company's: (a) (b) (c) (d) Bankers. Shareholders. Bondholders. Vice president of manufacturing Question 2 Draw up a cash budget for R Keane showing the balance at the end of each month from the following information for the six months ended 31 December 20X5. a. Opening balance of cash at bank is €650 b. Production in units: c. Purchases and sales (in units) are as follows: April May June July August September October November December Sales € 500 550 610 640 680 700 540 480 500 Purchases € 400 500 550 630 680 700 300 300 340 Units are sold for €10 and are purchased for €6 Sales are divided as follows: 20% cash sales, 80% credit sales Debtors normally settled their accounts after two months All purchases are paid for one month in arrears. Rent is €8000 per annum, paid in quarterly instalments in January, April, July and October. i. Commission of €500 is received in November j. In July a new machine is purchased for €6500 k. An old machine is sold for €2700 in September 30 marks d. e. f. g. h. Question 3 John O Shea Ltd. manufacturers goods which could involve four production departments A,B,C,D and three service departments K,L,M. Most overhead costs have been apportioned between departments and the following shows the totals arrived at: Overhead Indirect Expenses Production Departments Service Departments A B C D K L M € € € € € € € 8,000 12,000 16,000 4,000 3,000 6,000 8,200 Total cost of Indirect labour €38,800. This is to be allocated between departments in the same proportion as direct labour cost per department which in this period amounted to: Production Departments Direct Labour Service Departments A B C D K L M € € € € € € € 54,000 62,000 72,000 30,000 90,000 40,000 40,000 The expenses of the service department are to be reapportioned between the other departments as follows: Department K to o Department A 20% o Department B 25% o Department C 30% o Department D 15% o Department M 10% Department L to o Department A 35% o Department C 45% o Department D 20% Department M to o Department B 40% o Department C 25% o Department D 35% Departments A and C use Direct labour hours as their allocation base Department B and D use Machine hours as their allocation base. The number of direct hours and machine hours per department are expected to be: A B C D Direct Labour Hours 4,000 8,000 8,900 5,400 Machine Hours 3,800 5,200 5,800 4,800 These will be used to calculate the overhead rates. Required 1. Calculate the total overhead for each department, apportioning the Indirect labour cost based on direct labour cost. 5 marks 2. Allocate the cost of the service department to the production departments. 10 marks 3. Calculate overhead rates for departments A,B,C and D. 10 marks 4. Using the overhead rate prepared above, what should be the overhead cost charged to Job 371 which was manufactured in department A given that direct labour costs per hour in this department are €5, the number of direct labour hours are 112, direct materials cost €760 and the number of machine hours are 80? 5 marks Total 30 marks Question 4 Stephen Hunt, a manufacturer of soccer balls has the following monthly costs: Materials cost Labour Cost Selling Price Fixed Overheads €8 per ball €12 per ball €35 per ball €12,000 Required: 1. Complete the following table (in your answer book) for production of balls in multiples of 0 to 1200. Number Material of Units Costs produced 0 200 400 600 800 1000 1200 Labour costs Total variable Costs Fixed Costs Selling costs 5 marks 2. Draw a breakeven graph based on the above range of data. 10 marks 3. Calculate the contribution per unit and prove your graph is correct by calculation of the breakeven point. 5 marks 4. If production is currently 1,000 balls, what is the margin of safety, expressed as a percentage and in units. 10 marks Total 30 marks