The Association of Business Executives

Diploma

1.24 MA

Managerial Accounting

morning 4 December 2009

1 Time allowed: 3 hours.

2 Answer any FOUR questions.

3 All questions carry 25 marks. Marks for subdivisions of questions are shown in brackets.

4 No books, dictionaries, notes or any other written materials are allowed in this examination.

5 Calculators, including scientific calculators, are allowed providing they are not programmable and cannot store or recall information. Electronic dictionaries and personal organisers are NOT allowed. All workings should be shown.

6 Candidates who break ABE regulations, or commit any misconduct, will be disqualified from the examinations.

7 Question papers must not be removed from the Examination Hall.

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MA

1209

MA1209 © ABE 2009 A/500/3692

MA1209 2

Answer any FOUR questions

Q1 KPN, which manufactures a single product, has recently introduced a bonus payment system for its production staff. Details of the bonus system are as follows:

Time allowed for each unit produced 10 hours Basic hourly rate £6 Formula for calculating the bonus payment Time saved × 25% of basic hourly rate. Rejected items of production do not qualify for the bonus

In November 2009, the production staff worked 8,400 hours. A total of 1,000 units were produced, of which 100 units were rejected as faulty.

Required:

(a) Calculate the total basic wages paid to the production staff for November 2009.(2 marks)

(b) Calculate the total bonus paid to the production staff for November 2009. (7 marks)

(c) State one reason why KPN might have to increase the inspection of fi nished goods as a direct result of introducing a bonus payment system. (2 marks)

Knowledge of the differences between direct and indirect costs is essential to the study of Managerial Accounting.

Required:

(d) State which of the following labour costs are direct costs and which are indirect costs:

(i) Overtime worked at the request of the company management. (ii) Overtime worked at the request of a customer. (iii) Wages of a building site foreman. (iv) Wages of a foreman supervising the manufacture of a variety of products.

(4 marks)

(e) Give one reason for your answer to (iii) above. (2 marks)

A company manufacturing specialist motor cars uses 10,125 steering wheels each year. Orders are placed with the supplier when the stock level of steering wheels falls to 200 units and the cost of each order is £50. The annual stockholding cost for each unit is £5. All orders are received on the same day that they are placed.

Required:

(f) Calculate the Economic Order Quantity for steering wheels. (4 marks)

(g) State two limitations of the Economic Order Quantity model. (4 marks)(Total 25 marks)

MA1209 3 [Turn over

Q2 DEF Ltd manufactures and sells a single product. The following budget details are available:

£ per unit £ per unit Selling price 150 Less: Materials 60 Labour 30 ––– 90 ––– Contribution 60 ––– –––

Additional information:

(1) Budgeted sales units are as follows:

January February March April 5,000 2,000 2,500 6,000

(2) Opening stock of fi nished goods at the start of January will be 1,000 units. Closing stock of fi nished goods at the end of each month is budgeted at 10% of the sales volume for that month.

(3) DEF Ltd operates a Just-in-time ordering system. The stock of raw materials is therefore always zero.

(4) Raw material purchases are paid for in the month of purchase and labour costs are paid for in the month of production.

(5) All goods are sold on credit. Sales revenue is received 60% in the month of sale and 35% during the following month. The remaining 5% is treated as being irrecoverable.

(6) Fixed overheads are £80,000 per month. This fi gure includes depreciation of £20,000. (7) Fixed overheads are paid for in the month in which they are incurred. (8) Machinery costing £200,000 is due to be installed in February and paid for in March. (9) Taxation of £150,000 and proposed dividends of £75,000 are due for payment in April. (10) At the beginning of January, trade debtors will total £130,000 and the usual collectible

amount will be received during January. (11) Overdraft interest of 1% per month will be paid in respect of the closing bank balance

at the previous month end. (12) The opening bank balance of DEF Ltd in January will be £200,000 overdrawn.

Required:

(a) Prepare a production budget, in units, for each of the four months, January to April.(2 marks)

(b) Prepare, in columnar form, a cash budget for each month. The cash balance at the end of each month must be clearly shown. (18 marks)

(c) Comment on the cash budget prepared in (b) and the implications for the company.(5 marks)

(Total 25 marks)

MA1209 4

Q3 A company manufactures two products, Product A and Product B. The following incomplete management report has been prepared in respect of these two products:

Product A Product B Sales £600,000 (vi) Variable costs (i) (vii) Contribution (ii) (viii) Fixed costs (iii) (ix) Profit (iv) £240,000 Contribution/Sales ratio 40% 50% Break-even point (in sales revenue) (v) £320,000 Margin of Safety (in sales revenue) £350,000 (x)

Required:

(a) Copy the above table into your answer book and complete the missing figures.(17 marks)

(b) Discuss two assumptions on which break-even calculations are based. (4 marks)

(c) State two examples of situations where marginal costing can be used as a decision-making aid. (4 marks)

(Total 25 marks)

MA1209 5 [Turn over

Q4 A company is considering an investment in a new machine for the production of Product Q. Two machines are being considered, Machine D and Machine E. Both the product and the chosen machine would have an expected life of fi ve years.

The following information is available:

£ Product Q Selling price 100 Variable cost 60

Anticipated sales of Product Q are:

Year Units 1 12,000 2 16,000 3 18,000 4 19,000 5 6,000

There would be an increase in fi xed overheads (excluding depreciation of the new machine) of £180,000 per year.

Machine details:

Machine D Machine E £000 £000 Initial cost 1,200 1,000 Residual value 100 50

The company’s cost of capital is 12% and the appropriate discount factors are:

Year Factor 1 0.893 2 0.797 3 0.712 4 0.636 5 0.567

Required:

(a) For each machine, calculate the following:

(i) Accounting rate of return, using average investment (ii) Payback (iii) Net present value (18 marks)

(b) Based upon your calculations in (a) above, advise management as to which machine to purchase and give two reasons for your advice. (3 marks)

(c) Discuss one advantage and one disadvantage of using the Accounting Rate of Return as a method of evaluation. (4 marks)

(Total 25 marks)

MA1209 6

Q5 DDK manufactures two types of electric cooker - the Supreme and the Standard. Both undergo similar production processes and use similar materials and grades of labour. A shortage of direct labour has recently been identifi ed and this is limiting the company’s ability to produce the required number of electric cookers for the six months ending 30 June 2010. During these six months, the direct labour capacity will be restricted to 235,000 hours.

The standard selling price and prime cost for each cooker are as follows:

Supreme Standard £ £ Selling price 250 150 Direct materials 95 22 Direct labour (rate of £10 per hour) 50 40 Estimated sales demand (in units) 10,000 50,000

Other information:

Fixed Variable (1) Production overhead £400,000 £5 per direct labour hour (2) Selling and distribution overhead £70,000 10% of selling price (3) Administration overhead £100,000

Required:

(a) Calculate the contribution, per unit, for each of the two types of cooker. (10 marks)

(b) Calculate the production plan that will maximise profi t for the six months ending 30 June 2010. (4 marks)

(c) Calculate, using your answer to (b), the profi t that will be earned by DDK for the six months ending 30 June 2010. (8 marks)

(d) Calculate the amount of profi t, based upon the estimated sales demand, which will be lost by DDK as a result of the limiting factor. (3 marks)

(Total 25 marks)

MA1209 7 [Turn over

Q6 (a) Packaway manufactures plastic stacking boxes. The company has two production departments: Cutting and Shaping. It also has two service departments: Stores and Administration. All departments are located within a single building.

Initial allocation and apportionment of the budgeted overheads for the fi nancial year ended 30 November 2009, has resulted in the following split:

Cutting Shaping Stores Administration Total Overheads (£) 479,200 306,600 80,000 75,000 940,800

The following information is also relevant:

Cutting Shaping Stores Administration Total No. of employees 28 41 6 - 75 Machine hours 12,000 Labour hours 45,600

Service centre costs are to be apportioned as follows:

Administration: To all other departments on the basis of the total number of employees. Stores: 80% to the Cutting department and 20% to the Shaping department.

Required:

(i) Apportion the two service departments’ overheads over the two production departments. (9 marks)

(ii) Calculate the overhead absorption rates which will be used for each of the two production departments for the year ended 30 November 2009. (4 marks)

(iii) During the year ended 30 November 2009, the following hours were actually worked and the following costs incurred:

Department Labour hours Machine hours Overhead cost incurred Cutting 32,900 11,000 £536,500 Shaping 46,000 2,100 £360,300

Calculate the over-absorbed or under-absorbed overhead for each of the two production departments for the year ended 30 November 2009. (6 marks)

(b) Briefl y explain what is meant by each of the following terms:

(i) Overhead allocation (ii) Overhead apportionment (6 marks)

(Total 25 marks)

MA1209 8

Q7 (a) A company manufactures products Alpha and Beta jointly in a single operation. The following information relates to the most recent period:

Weight Costs (Kg) (£) Raw material input 240,000 864,000 Conversion costs 696,000 Output: Alpha 144,000 Beta 96,000

Alpha is sold for £9.60 per kg. Beta can be sold for £8.80 per kg or alternatively can be further processed to produce the same weight of product Delta. Further processing costs are £2.40 per kg. Delta can be sold for £10.00 per kg.

Required:

(i) Calculate the profi t/loss in the period, for each product and in total. Assume that all output was sold as products Alpha and Beta and joint costs were apportioned on the basis of weight of output. (10 marks)

(ii) State, using calculations, whether the further processing of product Beta is worthwhile or not. (4 marks)

(b) In Ebbage plc, 1,200 tonnes of raw material, costing £860,544, were input to a process in November 2009. Conversion costs totalled £238,656. Losses, in the form of reject product, are normally 12% of input. Reject product is sold for £520 per tonne.

1,042 tonnes of fi nished product passed inspection in November 2009. The remaining output was sold as reject product. There was no work-in-progress either at the beginning or the end of the month.

Required:

For November 2009:

(i) Calculate the cost per unit of normal output. (ii) Prepare the process account, including any abnormal losses/gains. (11 marks)

(Total 25 marks)

MA1209 9

Q8 A company has installed a system of standard costing but the Operations Manager of the company has very little knowledge of what standard costing involves. He has therefore asked for some additional information.

Required:

(a) Provide a brief explanation for each of the following:

(i) Standard Costing (ii) Fixed Budget and Flexible Budget (iii) Ideal Standards and Attainable Standards (iv) Favourable Variance and Adverse Variance (v) Standard Hour (vi) Semi-Variable Overhead Costs (vii) The High/Low Method. (21 marks)

(b) The Operations Manager has received a list of variable cost variances. Amongst these are the following:

£ Material Price Variance 200 favourable Material Usage Variance 600 adverse Labour Rate Variance 400 adverse Labour Efficiency Variance 300 favourable

Required:

(i) Explain why a favourable Material Price Variance might give rise to an adverse Material Usage Variance. (2 marks)

(ii) Explain why an adverse Labour Rate Variance might give rise to a favourable Labour Efficiency Variance. (2 marks)

(Total 25 marks)

End of Question Paper

MA1209 10

Diploma

Managerial Accounting

Examiner’s Suggested Answers

Q1 (a) £ 8,400 hours x £6 = 50,400 –––––– ––––––

(b) Output 1,000 Rejected 100 –––––– Good output 900 –––––– ––––––

Standard hours: 900 x 10 9,000 Less: hours worked 8,400 –––––– Hours saved 600 –––––– ––––––

Bonus earned (600 x £6 x 25%) £900

(c) To ensure that the quality of goods produced remains at an acceptable standard.

(d) (i) Indirect cost (ii) Direct cost (iii) Direct cost (iv) Indirect cost

(e) The foreman’s wages can be allocated to a specific contract.

(f) 2 10 125 50

5x x,

= 202,500. Square root is 450.

The economic order quantity is therefore 450 steering wheels.

(g) Assumes that there is a regular usage pattern for the item concerned. Assumes that the unit purchase price will remain fixed. Assumes no change in lead time. There is no provision for quantity discounts which might be available for bulk buying.

MA1209 11 [Turn over

Q2 (a) January February March April Sales units 5,000 2,000 2,500 6,000 Closing stock (10% of sales) 500 200 250 600 ––––– ––––– ––––– ––––– 5,500 2,200 2,750 6,600 Less: Opening stock 1,000 500 200 250 ––––– ––––– ––––– ––––– Units to produce 4,500 1,700 2,550 6,350 ––––– ––––– ––––– ––––– ––––– ––––– ––––– –––––

(b) January February March April Receipts Sales (units x £150) Current (60%) 450,000 180,000 225,000 540,000 1 month (35%)* 113,750 262,500 105,000 131,250 ––––––– ––––––– ––––––– ––––––– 563,750 442,500 330,000 671,250 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– Payments Materials (units x £60) 270,000 102,000 153,000 381,000 Labour (units x £30) 135,000 51,000 76,500 190,500 Fixed overheads 60,000 60,000 60,000 60,000 Machinery 200,000 Tax 150,000 Dividend 75,000 Overdraft interest (1%) 2,000 1,033 0 343 ––––––– ––––––– ––––––– ––––––– 467,000 214,033 489,500 856,843 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––

Net cash flow 96,750 228,467 -159,500 -185,593 Opening balance -200,000 -103,250 125,217 -34,283 ––––––– ––––––– ––––––– ––––––– Closing balance -103,250 125,217 -34,283 -219,876 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––

* £130,000 is 40% of original sales value. As 5% represents irrecoverable balances the collectible value is reduced to £113,750

(c) The cash position has worsened over the four month period by nearly £20,000. This is mainly the result of purchasing machinery for £200,000 and paying for it

immediately rather than in stages.

Implications The future for the company appears good. Cash flow is positive as, without the

purchase of equipment, the company would have generated an increase in cash of circa £180,000. Assuming this four month period is representative of the year as a whole and the purchase of equipment is a ‘one-off’ event, the company might expect an annual net cash inflow in excess of half a million pounds.

MA1209 12

Q3 (a) Product Product A B Sales £600,000 (vi) £800,000 Variable costs (i) £360,000 (vii) £400,000 Contribution (ii) £240,000 (viii) £400,000 Fixed cost (iii) £100,000 (ix) £160,000 Profit (iv) £140,000 £240,000 Contribution/Sales ratio 40% 50% Break-even point in sales (v) £250,000 £320,000 Margin of safety in sales £350,000 (x) £480,000

Workings

£ (ii) Sales x contribution ratio 600,000 x 40% 240,000

(v) Sales - Margin of Safety 600,000 - 350,000 250,000

(i) Sales x [100 - 40] 600,000 x 60% 360,000

(iii) Breakeven x Contribution ratio 250,000 x 40% 100,000

(iv) Contribution - Fixed Costs 240,000 - 100,000 140,000

(x) Profit/Contribution ratio 240,000/50% 480,000

(vi) Margin of safety + break-even 480,000 + 320,000 800,000

(vii) Sales x [100 - 50] 800,000 x 50% 400,000

(viii) Sales x contribution ratio 800,000 x 50% 400,000

(ix) Contribution - profit 400,000 - 240,000 160,000

(b) Fixed costs remain the same at all levels of production. Variable costs remain constant. Selling price remains constant. (c) Whether to make a product or buy it in. Whether or not to accept an order at a reduced price. Whether or not to discontinue producing an apparently loss making product.

MA1209 13 [Turn over

Q4 (a) (i) £ Unit selling price 100 Variable cost 60 ––– Contribution 40 –––

D E Machine £ £ Cost 1,200,000 1,000,000 Residual value 100,000 50,000 –––––––– –––––––– Depreciation 1,100,000 950,000 –––––––– –––––––– –––––––– ––––––––

Total unit sales 71,000 x 71,000 x Contribution 40 40 –––––––– –––––––– 2,840,000 2,840,000 Less: Depreciation 1,100,000 950,000 –––––––– –––––––– 1,740,000 1,890,000 Less: Fixed overheads (180,000 x 5 years) 900,000 900,000 –––––––– –––––––– Profit 840,000 990,000 –––––––– –––––––– –––––––– –––––––– Average annual profit over 5 years 168,000 198,000

Average investment 1 300 0002

, , = 650,000 1 050 0002

, , = 525,000

Accounting rate of return 168 000

650 000100,

,x = 25.85% 198 000

525 000100,

,x = 37.71%

(ii) Cash Flows Machine D E £ £ Year 1 (12,000 x 40) - 180,000 300,000 300,000 Year 2 (16,000 x 40) - 180,000 460,000 460,000 Year 3 (18,000 x 40) - 180,000 540,000 540,000 Year 4 (19,000 x 40) - 180,000 580,000 580,000 Year 5 (6,000 x 40) - 180,000 60,000 60,000 Year 5 Residual Value 100,000 50,000

Cost 1,200,000 1,000,000 Inflow Year 1 300,000 Year 2 460,000 760,000 760,000 ––––––– –––––––– –––––––– 440,000 240,000

440 000540 000

365,,

x = 297 days 240 000540 000

365,,

x = 162 days

Payback = 2.81 years = 2.44 years

MA1209 14

(iii) Machine Machine D NPV E NPV Discount £ £ £ £ Year 1 0.893 300,000 267,900 300,000 267,900 Year 2 0.797 460,000 366,620 460,000 366,620 Year 3 0.712 540,000 384,480 540,000 384,480 Year 4 0.636 580,000 368,880 580,000 368,880 Year 5 0.567 60,000 34,020 60,000 34,020 Year 5 0.567 100,000 56,700 50,000 28,350 –––––––– –––––––– 1,478,600 1,478,600 Less: Original cost 1,200,000 1,000,000 –––––––– –––––––– Net Present Value 278,600 450,250 –––––––– –––––––– –––––––– ––––––––

(b) The company should purchase Machine E as it has:

A higher accounting rate of return. A shorter payback period. A higher net present value.

(c) Advantages include: Easy to calculate and understand. Minimises risks by helping liquidity to be achieved earlier.

Disadvantages include: Time value of money is ignored. Receipts after payback has been achieved are ignored.

Q5 (a) Supreme Standard £ £ £ £ Selling price 250 150 Direct materials 95 22 Direct labour 50 40 Production overhead (5 x £5) 25 (4 x £5) 20 Selling overhead (10%) 25 15 –– –– 195 97 ––– –– Unit contribution 55 53 ––– ––

(b) Contribution per unit of resource:

555

= £11 534

= £13.25

DDK should therefore manufacture the Standard first:

50,000 units x 4 hours = 200,000 hours

MA1209 15 [Turn over

This leaves 35,000 hours to manufacture the Supreme:

35 0005

,hours

= 7,000 units

Production plan is therefore:

50,000 of Standard and 7,000 units of Supreme.

(c) £ Contribution 50,000 x 53 = 2,650,000 7,000 x 55 = 385,000 ––––––––– 3,035,000 Less: £ Production fixed overhead 400,000 Selling & Dist fixed overhead 70,000 Administration 100,000 ––––––– 570,000 ––––––––– Profit 2,465,000 ––––––––– –––––––––

(d) Lost profit Lost units of Supreme x contribution £ 3,000 x £55 165,000

Q6 (a) (i) Total Cutting Shaping Stores Admin £ £ £ £ £ Overheads 940,800 479,200 306,600 80,000 75,000 Re-apportion admin based on employees 28,000 41,000 6,000 -75,000 ––––––– ––––––– –––––– –––––– 507,200 347,600 86,000 Nil Re-apportion stores (80:20) 68,800 17,200 -86,000 ––––––– ––––––– ––––––– –––––– 940,800 576,000 364,800 Nil ––––––– ––––––– ––––––– –––––– ––––––– ––––––– ––––––– ––––––

(ii) Cutting Department 576,000 is £48 per machine hour12 000,

Shaping Department 364,800 is £8 per labour hour45 600,

MA1209 16

(iii) Cutting Shaping Actual machine hours 11,000 Actual labour hours 46,000 Rate per machine hour £48 Rate per labour hour £8 ––––––– ––––––––

£ £ Overhead absorbed 528,000 368,000 Overhead incurred 536,500 360,300

Over-absorbed 7,700 Under-absorbed 8,500

(b) (i) Overhead allocation occurs when an overhead can be identified as belonging to a specific cost centre and is charged to that centre.

(ii) Overhead apportionment occurs when overheads cannot be identified as belonging to a specific cost centre and are therefore shared out on an equitable basis.

Q7 (a) (i) Alpha Beta £ £ Sales [144,000 x 9.60] 1,382,400 [96,000 x 8.80] 844,800 Less: Joint costs [W1] 936,000 624,000 –––––––– ––––––– Profit 446,400 220,800 –––––––– ––––––– –––––––– ––––––– W1 £ Total joint costs [864,000 + 696,000] 1,560,000 –––––––– ––––––––

Split Alpha 1 560 000 144144

, , x+ 96

936,000

Beta 1 560 000 96144

, , x+ 96

624,000

(ii) £ Increase in sales price (10.00 - 8.80) 1.2 Further processing costs 2.4 ––– Loss in contribution from further processing 1.2 ––– Further processing not worthwhile.

MA1209 17 [Turn over

(b) (i) £ Materials 860,544 Conversion cost 238,656 –––––––– 1,099,200 Less: scrap value of normal loss 1,200 x 12% x 520 74,880 –––––––– Expected cost of normal output 1,024,320 –––––––– ––––––––

£

Unit cost of normal output 1 024 3201 200 88

, ,, %x

is 970

(ii) Process Account

Units £ Units £ Materials 1,200 860,544 Finished goods 1,042 1,010,740 Conversion costs 238,656 Normal loss 144 74,880 Abnormal loss 14 13,580 –––––– –––––––– ––––– –––––––– 1,200 1,099,200 1,200 1,099,200 –––––– –––––––– ––––– –––––––– –––––– –––––––– ––––– ––––––––

Q8 (a) (i) A control technique which compares standard or predetermined costs and revenues with actual results to obtain variances.

(ii) Fixed budget is a budget which is designed to remain unchanged regardless of the volume of output or sales achieved.

Flexible budget is a budget which, by recognising different cost behaviour patterns, is designed to change as volumes of output change.

(iii) Ideal standards are based on perfect operating conditions, i.e. no wastage, no spoilage, no inefficiencies, no idle time and no breakdowns.

Attainable standards recognise that some allowances need to be made for wastage, spoilage and inefficiencies.

(iv) A favourable variance occurs when either a cost is lower than the standard or income is greater than the standard.

An adverse variance occurs when either a cost is higher than the standard or income is less than the standard.

(v) The amount of work achievable, at standard efficiency levels, in a hour.

(vi) A cost which contains both fixed and variable components and which is thus partly affected by a change in the level of activity.

(vii) A process that estimates the fixed and variable elements of semi-variable costs.

MA1209 18

(b) (i) A favourable material price variance occurs when the price paid for materials is less than the standard. A lower price might well indicate that the quality of the material is inferior giving rise to greater wastage and thus an adverse usage variance.

(ii) An adverse labour rate variance occurs when the rate paid for labour is higher than the standard. This might well indicate that the labour is of higher quality giving rise to less time being taken to perform a task and thus creating a favourable efficiency variance.

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MA1209 19

MA1209 20 2775-124-1