MANAGEMENT ACCOUNTING - CPA Ireland

23 Pages·2013·0.15 MB·English

MANAGEMENT ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2013
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 to pay particular attention to your communication skills and care must be taken
regardingtheformatandliteracyofthesolutions.Themarkingsystemwilltakeintoaccountthecontent
of your 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.
TheInstituteofCertifiedPublicAccountantsinIreland,17HarcourtStreet,Dublin2.
THEINSTITUTEOFCERTIFIEDPUBLICACCOUNTANTSINIRELAND
MANAGEMENT ACCOUNTING
FORMATION2EXAMINATION-APRIL2013
Timeallowed:3hours,plus10minutestoreadthepaper.
SectionA:AnswerQuestion1andeitherPartAorPartBofQuestion2.
SectionB:YouarerequiredtoansweranythreeoutofQuestions3to6.
SECTION A - QUESTIONS 1 AND 2 ARE COMPULSORY
1. Apex Design Ltd manufactures an exclusive range of high quality office chairs. Using a modern, streamlined
productionprocessthecompanyproducesthreetypesofluxurychairs:TheClassic,PrestigeandUltra. Thereare
two main production departments, the forming department, which is highly mechanised and the finishing
department,whichislabourintensive.
Thecompanyhasbeeninoperationfortenyearsandeveryyearsaleshaveincreased. Inrecentyearsagreater
choiceofdesignfeatureshasbeenofferedtocustomerssuchthatthefinishedchair,especiallytheUltra,ishighly
bespoke. Thecurrentsellingpriceofthechairswasestablishedtwoyearsagobasedonamarkupofapproximately
30%onproductcost.
For the first time since it commenced trading, profits last year were lower than expected and management were
concerned that this may be a continuing trend. An initial investigation raised questions regarding the overhead
costing system used by the company. Currently, the company uses a traditional overhead costing approach,
absorbingoverheadsbasedoneithermachinehoursorlabourhoursasappropriate. Detailsrelatingtothecurrent
yearareprovidedbelow:
Classic Prestige Ultra
Sellingpriceperchair €875 €1,050 €1,200
Directmaterialsperchair €225 €270 €315
Directlabourperchair €115 €138 €161
Directlabourhoursperchair 5 6 7
Machinehoursperchair 10 11 13
Totalchairsproduced 1,750 1,000 600
Forming Finishing Total
€ € €
Productionoverheadcosts 828,729 400,982 1,229,711
In an attempt to curb the reduction in profits, the company is considering changing to an activity based costing
approachforabsorbingoverheadsandhascompiledthefollowinginformation:
CostDriverVolumes
Activity CostDriver Cost€ Classic Prestige Ultra Total
Purchasing No.ofrequisitions 125,175 240 225 285 750
Setupcosts No.ofsetups 512,120 150 300 350 800
Machining No.ofmachinehours 205,095 17,500 11,000 7,800 36,300
Qualitycontrol No.ofinspections 387,321 3,000 2,450 2,800 8,250
1,229,711
REQUIREMENT:
(a) Calculatethetotalproductcostforeachofthethreetypesofofficechairusing:
(i) ThecostingapproachcurrentlyusedbyApexDesignLtd; (8marks)
(ii) Activitybasedcosting. (10marks)
(b) Compareandcommentonyouranswersin(i)and(ii)above,providingrecommendationstoimprovetheprofitability
ofApexDesignLtd.
(7marks)
[Total:25Marks]
Page 1
ANSWER PART (A) OR PART (B)
2. AnswereitherPart(A)orPart(B)ofthisquestion.Eachpartisworth15marks.
(A) You have been approached by the managing director of a small company that has recently been set up. The
companyishopingtoobtainasignificantamountofbankfinancetosupportitsactivitiesandithasbeenaskedto
supply various documentation as part of its funding application. The managing director has provided all of the
requiredinformationexceptforthebudgetfortheforthcomingyear. Hehasexplainedtoyouthathereallydoesn’t
understand why this has been requested and further confesses that he is unsure about how exactly a budget is
prepared.
REQUIREMENT:
Prepareareportforthemanagingdirectorinwhichyou:
(i) Explainthepurposesofbudgeting; (6marks)
(ii) Describethestagesinthebudgetingprocess. (9marks)
[Total:15Marks]
OR
(B) Oneofyourclientshascomplainedtoyouaboutthedifficultyofcostingproducts. Hiscompanymanufacturesone
product using a simple production process that allows input costs to be specified for each unit of output. The
costingsystemusedbythecompanycurrentlyfocusesonrecordingactualproductcostsastheyareincurredbut
duetodelaysinreceivinginvoicesitisdifficulttomonitorexpensesandcalculateprofits. Yousuggesttotheclient
thatastandardcostingsystemwouldbesuitableforthecompanybutbeforeagreeingwithyou,theclientasksyou
toexplainhowsuchasystemwouldoperate.
REQUIREMENT:
Draftamemorandumforyourclientwhich:
(i) Outlinesthepurposesofstandardcosting; (5marks)
(ii) Describeshowastandardcostingsystemoperates. (10marks)
[Total:15Marks]
Page 2
SECTION B - ANSWER ANYTHREE QUESTIONS.
3. Attempteachofthesemultiple-choicequestions.Onlyoneoftheofferedsolutionsiscorrect.Eachquestion
carriesequalmarks.Recordyouranswerstoeachsectionontheanswersheetprovided.
1) ThefollowinginformationrelatestotheoutputlevelsandcorrespondingoverheadcostsforCoxLtdforthepast4
months:
Outputlevel Overheadcosts
January 100,000 €175,000
February 75,000 €125,000
March 95,000 €181,000
April 50,000 €100,000
Usingthehigh-lowmethodofcostestimation,fixedmonthlyoverheadcostsareestimatedtobe:
(a) €10,000
(b) €25,000
(c) €0
(d) €100,000
2) Whenthevolumeofunitssoldexceedsthevolumeofunitsproduced:
(a) Profitsreportedundermarginalcostingarehigherthanunderabsorptioncosting.
(b) Profitsreportedunderabsorptioncostingarehigherthanundermarginalcosting.
(c) Profitsreportedarethesameundermarginalcostingandunderabsorptioncosting.
(d) Profitsreportedundermarginalcostingarelowerthanunderabsorptioncosting.
3) BLtdhasdecidedtousetheEconomicOrderQuantity(EOQ)todeterminetheamountofstocktopurchase. The
followingdetailshavebeenextractedfromthecompany’saccountingsystem:
Demandpermonth = 6,050units
Costofplacinganorder = €50
Costsofholdingoneunitinstock = €2permonth
TheEOQiscalculated(tothenearestwholeunit)as:
(a) 389units
(b) 1905units
(c) 550units
(d) 159units
4) Whichofthefollowingstatementsistrue:
(a) Semi-variablecostsvaryindirectproportiontothevolumeofoutput.
(b) Semi-variablecostsarethesameasstep-fixedcosts.
(c) Semi-variablecostsincludebothafixedandavariablecomponent.
(d) Semi-variablecostsarealwaysirrelevant.
5) ActualfixedproductionoverheadsforCherryLtdforMarchwere€170,000andtherewasanunder-absorptionof
overheadsof€11,240. Budgetedoverheadswere€180,000andthebudgetedproductionwas25,000units. The
actualnumberofunitsproducedintheperiodwas:
(a) 23,150units
(b) 22,050units
(c) 23,500units
(d) 21,050units
Page 3
6) Thefollowingprocessaccountrelatestothepreviousmonthandclosingworkinprogress(WIP)is40%complete.
ProcessAccount
Units € Units €
OpeningWIP 271 12,000 Output 289 ?
Periodcosts 33 2,455 ClosingWIP 15 ?
304 14,455 304
Thecompanyusestheweightedaverage(averagecost)methodofvaluation.
Onthisbasis,thevalueoftheclosingworkinprogressfortheperiodis:
(a) €441
(b) €294
(c) €735
(d) €285
Thefollowinginformationistobeusedinansweringquestions7)and8)
Trax Ltd uses a standard absorption costing system and produces one product. The standard cost card is given
below. ThevarianceanalysisreportforthemonthofMayrecordsasalesvolumevarianceof€4,000(A)andasales
pricevarianceof€14,500(F).Thebudgetforeachmonthistomakeandsell3,000unitsatasellingpriceof€150
perunit.
Standardcostcard €
Directmaterials:2kg@€5perkg 10
Directlabour:3hours@€15perhour 45
Variableoverhead(absorbedbasedonlabourhrs) 15
Fixedproductionoverhead 40
110
7) ForTraxLtd,theactualsalesvolumeandactualsalespricewere:
Salesvolume Salesprice
(a) 2,900units €145
(b) 2,900units €155
(c) 3,100units €154
(d) 3,100units €145
8) ForTraxLtd,iftheactualnumberofunitsproducedandsoldinJunewas2,750,thenthefixedproductionoverhead
volumevarianceforthemonthwas:
(a) €10,000(A)
(b) €3,750(A)
(c) €3,750(F)
(d) €10,000(F)
[Total:20Marks]
Page 4
4. TheRegencyisamediumsizedtheatre,withamaximumcapacityof500seats,offeringavarietyofmainlymusic
events to its patrons. In the past, the events offered were low budget, featuring local and regional singers and
musicians. This year, the theatre engaged the services of a music director who negotiated and booked two well
knownartistsforeventsinMay. TheRegencyreceivessomefundingtopromoteitsactivitiesfromtheDepartment
ofCultureandthisissufficienttopaybasicoperatingexpensessuchasinsurance,lightandheat,andstaffcosts.
Whenaconcertoreventisstagedadditionalcostsariseandtheboardofmanagementofthetheatremustensure
that all such costs are covered by ticket sales. While the artists that have been booked for May are nationally
known, they charge higher fees to perform and the board of management are particularly concerned to ensure
thattheticketpricechargedfortheeventissufficient.
Thefollowingdetailshavebeenprovidedbytheboardofmanagement:
Ticketprices
Tickets for events are usually priced at €15 each but the board have stated that a higher price of €25 would be
moresuitableforthewellknownartistsifcostsaretobecovered. TheRegencyemploysaticketbookingfacility
that customers may use online or by telephone. The company providing the service charges the theatre 10% of
theticketpriceforeachticketsold.
Additionalstaff
Foreveryeventthatisheldthetheatreemploystenpart-timestaffmembers. Onestaffmemberisrequiredforbox
office ticket collection, four staff members are required to usher customers to their appointed seats and after the
event has finished five workers are required to clean and arrange the theatre in preparation for the next event.
Eachstaffmemberispaid€80forworkingattheevent.
Wellknownartists
• Onegroup,TheSols,agreedtoplayoneconcertforafixedfeeof€8,155.
• Anothersinger/songwriter,JillMalsoagreedtoplayoneconcert. Shenegotiatedanarrangementwiththe
musicdirectorwherebyshewouldbepaid€5,780plus20%oftheticketpriceforeveryticketsold.
REQUIREMENT:
(a) Foreachoftheeventsfeaturingwellknownartists:
(i) Calculatethenumberofticketsthatmustbesoldtobreakeven.
(ii) Assumingthemaximumnumberoftickets aresold,iftheboardofmanagementwouldliketoearnaprofit
of€5,000ontheeventwhatticketpriceshouldbecharged?
(10marks)
(b) Assuming a ticket price of €25, at what level of ticket sales will the profit earned fromThe Sols equal the profit
earnedfromJillM?
(5marks)
(c) OutlinethemainassumptionsonwhichtheCost-Volume-Profitmodelisbased. (5marks)
[Total:20Marks]
Page 5
5. PromoTees Ltd specialises in manufacturing good quality pure cotton t-shirts that are sold to two top retailers.
The company has recently been approached by a conference organiser to provide a quotation for the supply of
5,000 t-shirts over the next three months. As PromoTees Ltd is currently working at 80% of its full production
capacityitisseriouslyconsideringundertakingthisshorttermcontracttoboostitsprofits. Thefollowinginformation
isavailable:
1. Theconferenceorganiserrequiresthet-shirtstobeinequalquantitiesofblackandwhitecotton.Tofulfillthe
contract2,000metresofwhitecottonfabricand2,000metresofblackcottonfabricisrequired.
2. Currently, Promo Tees Ltd only manufactures white t-shirts and has plenty of fabric available which was
purchasedinbulksixmonthsagoat€2.25permetre. Thecurrentpriceofthiscottonfabricis€2.40.
3. The company does not have any black cotton fabric in stock.However, it could buy some from an existing
supplier for €2.60 per metre but must purchase a minimum of 2,500 metres. At present the company has
nouseforanyunusedblackcottonfabric.
4. Whenmanufacturingt-shirts,onlywhitethreadmaybeusedtomakewhitet-shirtsandonlyblackthreadmay
beusedtomakeblackt-shirts.
5. Foreach1,000t-shirtsproduced,200reelsofcottonthreadwouldberequired. Atpresentthereare2,000
reelsofwhitecottonthreadinstockwhichoriginallycost€1,800intotalsomemonthsago. Thepurchase
pricehasnotincreasedsincethattime.
6. Asthecompanydoesnothaveanyblackcottonthreadinstockitwillhavetopurchasesomeandhasbeen
quoted a price of €1.10 per reel. A regular supplier has offered PromoTees Ltd an end of batch box of
1,000reelsofblackcottonthreadatadiscountpriceof€450. Iftheblackthreadisnotusedforthiscontract
itcannotbeusedforproducinganyotherproducts.
7. Tomeetthelabourrequirementsofthecontractsomeskilledandunskilledworkersarerequired. Thecost
forskilledstafftoworkonthecontractamountsto€9,250. Thefactoryforemanhasstatedthatitwouldbe
feasiblefortheexistingskilledstafftoworkonthecontractasthereissufficientidletime. Additionalunskilled
staffwillhavetobeemployedonacasualbasis,asrequired,toworkonthecontractatacostof€15,000
intotal.
8. Machinerynotneededinthecurrentproductionsetupcouldbeusedforthiscontract.However,PromoTees
Ltdhasbeenoffered€5,000touseitforthenextthreemonthsbyanotherclothingmanufacturer.
9. Depreciationonthemachinery,notedat8above,amountsto€24,000perannum.
10. The fixed production overhead applicable to the contract is €5,250. This has been calculated using an
overheadabsorptionrateof€1.05pert-shirt.
11. Theconferenceorganiserrequiresalogotobeappliedtoeacht-shirt. Thelogoscost€0.25eachandthe
companywouldhavetopurchasethese,inadvance,fromaspecificsupplier. Ifthelogosarenotusedon
thecontracttheycanbereturnedtothesupplierforafullrefund.
REQUIREMENT:
(a) Brieflyexplainthefollowingterms:
(i) Relevantcost
(ii) Limitingfactor (4marks)
(b) On the basis of the financial information provided above, calculate the lowest quotation that PromoTees Ltd can
offerforthecontractwithoutincurringaloss.
(12marks)
(c) OutlineTWO qualitative factors that PromoTees Ltd should take into consideration before going ahead with the
contract.
(4marks)
[Total:20Marks]
Page 6
6. Top Glass Ltd provides toughened glass panels to customer order. The panels are used for both internal and
externalpurposestoaddadecorativeeffectaswellasfulfillingapracticalpurpose. Anewcustomerhasplaced
anordertoprovideglasspanelsforanewlibrarybuildinginCork. TheaccountantatTopGlassLtdhascodedthis
orderasJobA134andprovidedthefollowingproductioninformation:
DirectMaterials:
TopGlassLtdusesaweightedaveragesystemforpricingissuestoproduction.
Openingstockat1stApril:
20sizeLglasspanels@€40each
80typeBchromefittings@€2each
Purchases:
1stApril: 50sizeLglasspanels@€37.76each
15thApril: 90typeBchromefittings@€2.17each
Issuestoproduction(JobA134):
17thApril: 15sizeLglasspanels
19thApril: 90typeBchromefittings
DirectLabour:
Assembly: 42hours@€18perhour
Finishing: 16hours@€16perhour
AsthecustomerspecificallyrequestedthattheJobwasfinishedby20thApriltomeetconstructiondeadlinesfor
the library, six of the hours worked in the assembly department were worked as overtime. The company pays
overtimeatarateofoneandahalftimesthenormalhourlyrate.
Overheads:
Thecompanyabsorbsoverheadsusingatraditionalapproachbasedonlabourhours.
Assembly Finishing Total
Productionoverheads €336,105 €421,215 €757,320
Directlabourhours 64,000 102,000 166,000
Machinehours 500 100 600
Pricingpolicy:
Itiscompanypolicytopriceallordersbasedonachievingaprofitmarginof25%onsalesprice.
REQUIREMENT:
(a) CalculatethetotalcostofJobA134. (14marks)
(b) CalculatethepricechargedbyTopGlassLtdtothecustomer. (2marks)
(c) Brieflyexplainthemaindifferencesbetweenjobcostingandprocesscosting. (4marks)
[Total:20Marks]
ENDOFPAPER
Page 7
SUGGESTED SOLUTIONS
THEINSTITUTEOFCERTIFIEDPUBLICACCOUNTANTSINIRELAND
MANAGEMENT ACCOUNTING
FORMATION2EXAMINATION-APRIL2013
SOLUTION1
(a)
(i) Totalproductcostusingtraditionaloverheadcostingapproach
W1Calculationoftotaldirectlabourhours
Classic:1,750chairsX5hourseach 8,750
Prestige:1,000chairsX6hourseach 6,000
Ultra:600chairsX7hourseach 4,200
Totaldirectlabourhours 18,950
W2Calculationofproductionoverheadabsorptionrate
Forming Finishing
Totalproductionoverhead €828,729 €400,982
Overheadabsorptionbase
-Machinehours 36,300
-Directlabourhours(W1) 18,950
Productionoverheadabsorptionrate(OAR) €22.83 €21.16
Permachine Perdirectlabour
hour hour
Calculationoftotalproductcost
Classic Prestige Ultra
€ € €
Directmaterials 225.00 270.00 315.00
Directlabour 115.00 138.00 161.00
Productionoverhead
-Formingdept(machinehrsxOAR) 228.30 251.13 296.79
-Finishingdept(directlabourhrsxOAR) 105.80 126.96 148.12
Totalproductcost 674.10 786.09 920.91
(8marks)
(ii) Totalproductcostusingtraditionaloverheadcostingapproach
W3 Calculationofcostperdriver
Activity Costdriver Cost Totalofdrivers Costperdriver
€ €
Purchasing Requisitions 125,175 750 166.900
Setupcosts Setups 512,120 800 640.150
Machining Machinehours 205,095 36,300 5.650
Qualitycontrol Inspections 387,321 8,250 46.948
1,229,711
Page 8
W4Calculationoftotalandunitproductionoverheadcost
Classic Prestige Ultra Total
€ € € €
Purchasing 40,056.00 37,552.50 47,566.50 125,175.00
Setupcosts 96,022.50 192,045.00 224,052.50 512,120.00
Machining 98,875.00 62,150.00 44,070.00 205,095.00
Qualitycontrol 140,844.00 115,022.60 131,454.40 387,321.00
Totalproductionoverheadcost A 375,797.50 406,770.10 447,143.40 1,229,711.00
Unitsproduced B 1,750 1,000 6,00
Productionoverheadcostperunit A/B €214.74 €406.77 €745.24
Calculationoftotalproductcost Classic Prestige Ultra
€ € €
Directmaterials 225.00 270.00 315.00
Directlabour 115.00 138.00 161.00
Productionoverhead 214.74 406.77 745.24
Totalproductcost 554.74 814.77 1221.24
(10marks)
(b) ComparisonofProductcosts
Productcostperchair
Traditional/ ABCapproach Difference Sellingprice
Existingapproach perchair
€ € € €
-Classic 674.10 554.74 119.36 875.00
-Prestige 786.09 814.77 -28.68 1,050.00
-Ultra 920.91 1,221.24 -300.33 1,200.00
Comments&recommendations
Comments
ABC is a more accurate method of absorbing overheads onto products. In relation to the 3 chairs being
produced:
Classic
The classic chair is currently overcosted by €119.36 - too much overhead is being absorbed as part of the
productcost.
This chair is produced in greater quantity than the others and under the existing costing system is being
incorrectlyallocatedagreatershareofproduction overheads. It is subsidising the two other types of chairs
whicharecreatingmorecostsforthecompany.
Thecompanyischarging€875foreachchairsoldandisactuallygeneratingahighermarkupthanthe30%
orsoexpected. Itisgeneratingalmost58%markuponcost(€320.26/€554.75).
Prestige
Fromtheanalysisabove,theprestigechairisbeingundercostedby€28.68,i.e.Undertheexistingoverhead
costingsystemthereisnotenoughproductionoverheadbeingincludedaspartoftheproductcost.
For the prestige chair the company is charging €1,050 and is generating approximately 29% mark up
(€235.23/€814.77)ratherthanthe30%orsoexpectedmarkup.
Page 9