Management Accounting

2nd Year Examination

Autumn 2009

Paper & Suggested Solutions

Management Accounting Autumn 2009 2nd Year Paper

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© Accounting Technicians Ireland, 2009.

 Accounting Technicians Ireland
(Formerly The Institute of Accounting Technicians in Ireland)

Foundation Examination: Autumn 2009

Paper: MANAGEMENT ACCOUNTING
Friday 21st August 2009 – 9.30 a.m. to 12.30 p.m.
INSTRUCTIONS TO CANDIDATES

In this examination paper the £ symbol may be understood and used by candidates in
Northern Ireland to indicate the UK pound sterling and the € symbol may be understood
by candidates in the Republic of Ireland to indicate the Euro.

Answer ANY FIVE of the six questions.

If more than the required number of questions are answered, then only the requisite
number, in the order filed, will be corrected.

Candidates should allocate their time carefully.

All figures should be labelled, as appropriate, e.g. €/£’s, units etc.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

Management Accounting Autumn 2009 2nd Year Paper

QUESTION 1

FINE FURNISHINGS is a small manufacturing business which produces a number of

items of furniture. The following information has been prepared following discussions for
the purposes of preparing a cash budget for the year ahead:-

Sales (units) ..................................... 75,000

Sales (Price per unit) ......................... €/£85

Variable Costs
Materials .................................... €/£36
Labour ....................................... €/£24

Overhead Costs
Heat, light & power ................... €/£78,000 per annum, paid quarterly in arrears.
Sales & Marketing Overheads ..... 8% of gross sales. This is paid in the month
incurred.
Premises Costs ......................... €/£156,000 per annum, paid monthly in advance.
Supervisors’ salaries .................. €/£60,000 per annum.
Administration expenses ............ €/£2,500 per month.

(i) Sales and production are projected to be incurred evenly over the year.
(ii) 40% of sales are received in cash and get a 5% discount. The remaining 60% are on
credit terms of one month. 10% of all credit sales will become bad debt.
(iii) Materials costs are paid for two months in arrears.
(iv) Net labour and salary costs of 65% are paid in the month they are incurred, with the
balance, employer costs, paid in the next month.
(v) Assume that there are no stock-holdings and that production is based on sales
demand.
(vi) Opening Debtors of €/£175,250 were received in full in January of Year 2.
(vii) Opening Creditors were €/£225,000 – 75% of this amount is payable in January
and the balance in February of Year 2.
(viii) Employer costs relating to salaries and wages of €/£54,250 is outstanding from the
previous month.
(ix) The bank account balance at the start of the year was overdrawn by €/£44,600.

Requirement

(a) Prepare a cash budget (cashflow forecast/projection) for FINE FURNISHINGS,

detailing projected cashflow's by month for the first three months of the year.
15 Marks
(b) Write a note to the Director explaining why there is a difference between his bank
balance and profit for the first quarter.
5 Marks
Total 20 Marks
Management Accounting Autumn 2009 2nd Year Paper

QUESTION 2

The Managing Director of your company has recently attended a management

accounting course for managers from non-accounting backgrounds. Unfortunately, he
was unable to attend the second day of the course due to an important Board meeting.
As the first day’s discussion sparked his interest, he has followed up by asking you to
prepare a memorandum explaining and giving an applied example of the following
terminology which was due to be covered in the second day:-

(a) Equivalent units

(b) Flexible budget

(c) Ideal Standard

(d) Under absorbed overhead

(e) Variance Analysis 5 Marks each

Total 20 Marks

QUESTION 3

RAIN Ltd. operates a standard costing system. The following information relates to the
product Blockbuster for the first quarter of the year:-

Standard Actual
Sales (units) ............................. 4,000 4,000
Sales price ............................... €/£75 €/£80
Materials price (kg) ................... €/£15 €/£16
Materials used .......................... 5,000 kg 4,800 kg
Labour rate (per hour) ............... €/£15 €/£16
Labour hours worked ................. 4,500 4,400
Variable overhead ..................... 50% of direct labour €/£33,800
Fixed Overhead ......................... €/£60,000 €/£64,000

Requirement

(a) Prepare a statement of the budgeted profit and the actual profit for the first
quarter of the year.
4 Marks
(b) Calculate the following variances:-
(i) Sales Price Variance
(ii) Materials Price Variance
(iii) Materials Usage Variance
(iv) Labour Rate Variance
(v) Labour Efficiency Variance
(vi) Variable Overhead Expenditure Variance
(vii) Variable Overhead Efficiency Variance
(viii) Fixed Overhead Expenditure Variance
16 Marks
Total 20 Marks
Management Accounting Autumn 2009 2nd Year Paper

QUESTION 4

GH Productions is planning an event and wants you to carry out some calculations to
advise in relation to certain financial decisions. They have provided the following
information on event costs:-
€/£
Hire of premises ............................ 2,500
Advertising & promotion ................. 1,200
Ticket printing .............................. 300
Musicians Fees .............................. 1,000
Other Artist Fees ........................... 1,500
Administration .............................. 500
Security & attendants .................... 2,000

GH Productions is considering charging either €/£15 or €/£20 per ticket. There are no
other fixed or variable costs.

Requirement

(a) Calculate the breakeven point of ticket sales, required for each price. 4 Marks

(b) GH Productions would like to make a profit of 25% of turnover, calculate the
number of tickets which must be sold at each price to achieve each target.
4 Marks

(c) GH Productions may incur an additional variable marketing cost of €/£1.00 per
ticket, in order to increase the audience to 700. Advise the company if they should
incur this cost.
4 Marks

(d) GH Productions are looking at a number of alternative venues. If the venue is

limited to an audience of 300, what price must be charged to ensure that the event
achieves a breakeven position?

4 Marks
(e) Briefly discuss the issues that GH Productions should consider if the musicians
indicate a willingness to take a percentage of turnover, rather than a fixed fee.

4 Marks
Total 20 Marks
Management Accounting Autumn 2009 2nd Year Paper

QUESTION 5

LOVE Plc. operates activity based costing and activity based budgeting systems.

The following information has been provided in respect of three separate production
departments:-

Dept. 1 Dept.2 Dept. 3 Dept. 4

Budgeted production (units) ... 20,000 10,000 15,000 45,000

No. of repair hours ................ 6,000 1,400 5,200 12,600
No. of orders issued .............. 500 1,000 800 2,300
Machine hours ...................... 400,000 300,000 200,000 900,000

Production overheads by Cost pool

€/£

Machining............................. 1,755,000
Stores.................................. 632,500
Quality Assurance ................. 405,000
Maintenance ......................... 378,000

Requirement

(a) Describe Activity Based Costing and Activity Based Budgeting.

6 Marks

(b) (i) Identify a suitable cost driver for each cost pool.
3 Marks

(ii) Calculate an activity based overhead absorption rate for each cost pool.

3 Marks

(c) Prepare a statement showing the total overhead cost:-

(i) for each production department and

(ii) per unit, within each department
8 Marks
Total 20 Marks
Management Accounting Autumn 2009 2nd Year Paper

QUESTION 6

HANNA Ltd. normally uses marginal costing for internal management accounting, but is
considering moving to total absorption costing. The following budgetary information has
been provided:-

Quarter 1 Quarter 2
Sales (units) ............................. 5,000 7,000
Production (units) ..................... 6,000 5,000

Per Unit
Sales Price ................... €/£100.00
Variable Cost:
Direct material ......... 2 kg @ €/£15/kg
Direct Labour ........... 1 hour @ €/£16/hour

There is an opening stock of 1,000 units which has been valued (using marginal costing)
at €/£54,000.

Production overhead is absorbed on the basis of 100% of direct labour, based on

estimated annual production of 24,000 units.

50% of production overheads are variable and 50% are fixed.

Administration and general overheads are projected at €/£160,000 per annum.

Requirement

(a) Calculate the projected annual fixed production overhead for HANNA Ltd.

2 Marks
(b) Prepare a projected statement of stock valuation at end of Quarter 1 using
(i) marginal costing
(ii) absorption costing
4 Marks
(c) Prepare a projected profit statement for each quarter using
(i) marginal costing
(ii) absorption costing
12 Marks

(d) Prepare a reconciliation of the projected marginal and absorption costing profit
figures.
2 Marks
Total 20 marks
Management Accounting Autumn 2009 2nd Year Paper

2nd Year Examination: Autumn 2009

Management Accounting

Suggested Solutions

QUESTION 1

(a) FINE FURNITURE – CASH BUDGET FOR THE THREE MONTHS

Month 1 Month 2 Month 3 TOTAL

£/€ £/€ £/€ £/€
Inflows
Cash sales 201,875 201,875 201,875 605,625
Credit sales 175,250 286,875 286,875 749,000
Total Inflows 377,125 488,750 488,750 1,354,625
Outflows
Supplier (Materials) 168,750 56,250 225,000 450,000
Labour costs – net 97,500 97,500 97,500 292,500
Heat, Light & Power - - 19,500 19,500
Sales & Marketing 42,500 42,500 42,500 127,500
Premises costs 13,000 13,000 13,000 39,000
Supervisors’ salaries – 3,250 3,250 3,250 9,750
net
Employer salary On-costs 54,250 54,250 54,250 162,750
Administration Costs 2,500 2,500 2,500 7,500
Total Outflows 381,750 269,250 457,500 1,108,500
Net Inflow/(Outflow) (4,625) 219,500 31,250 246,125
Opening Balance (44,600) (49,225) 170,275 (44,600)
Closing Balance (49,225) 170,275 201525 201,525

Workings

1.
Sales per month 6,250
Sales Price £/€85
£/€531,250

Cash Sales per month 40% 212,500

Less 5% (10,625)
Net Cash Sales – per month £/€201,875
Management Accounting Autumn 2009 2nd Year Paper

Credit Sales – per month 60% 318,750

Less bad debt 10% (31,875)
Net Debtor Receipts £/€286,875

2. Materials £/€36
Production per month 6250
£/€225,000

3. Labour £/€24
Production per month 6250
£/€150,000
65% - Net salary cost £/€97,500

4. Sales & Marketing Overheads £/€531,250 x 8% £/€42,500

5. Premises Costs £/€156,000 / 12 £/€13,000

6. Supervisors’ salaries £/€60,000/12 £/€5000

65% £/€3250

7. Administration costs £/€2,500

8. Employer On-costs
Labour 35% 52,500
Supervisors 35% 1,750
£/€54,250

(b)

To: Director
From: Student
Date: X/X/XX

The main reasons why there is a difference between bank balances and reported profits
for the first quarter are:
- there are costs that do not involve expenditure of cash, for example, depreciation
- there are changes in the level of sales debtors and creditors for purchases, which
affect cash balances but do not affect profits
- capital purchases have an immediate impact on cash balances, but are not
charged against profits
- there are also differences between profit and cash at bank caused by changes in
stock levels, depending on the basis of the stock valuation.
Management Accounting Autumn 2009 2nd Year Paper

QUESTION 2

(a) Equivalent units

At the end of any given period of accounting, there are likely to be partly completed
units in process. Clearly, some costs incurred during the period are attributable to these
units as well as those which are fully complete. In order to spread cost equitably, the
number of equivalent units is calculated. This is the equivalent number of fully complete
units which the partly complete units represent.

Example:
Production of fully complete units during period 2000 units
Work in progress 500 units – 50% complete

Total equivalent production 2000 + (500*50%) = 2250 units

Cost would be spread over the total equivalent production of 2250 units

(b) Flexible budget

A flexible budget can be defined as ‘a budget, which by recognising cost behaviour
patterns, is designed to change as the volume of output changes’ In order to be able
to prepare flexible budgets it is necessary to distinguish between fixed and variable
costs as each react differently to changes in the volume of output. Flexible
budgeting allows us to analyse performance and carry out comparisons in a more
meaningful way by flexing the budget to the actual volume of output achieved.

Example
Sales price £/€28 per unit
Standard production costs
Direct materials 5kg @ £/€2/kg
Direct labour 2 hours @ £/€6/hr
Variable overhead 2 hours @ £/€2/hr
Fixed overheads £/€50000 per month

Using the standard costs, the flexible budget shows budgeted production costs at
various levels of output:

20000 units 25000 units 30000 units

£/€ £/€ £/€

Sales revenue 560000 700000 840000

Variable costs
Direct materials 200000 250000 300000
Direct Labour 240000 300000 360000
Variable Overhead 80000 100000 120000
Total Variable cost 520000 650000 780000
Gross Profit 40000 50000 60000
Fixed Overhead 50000 50000 50000
Budgeted Net Profit/(Loss) (10000) 0 100000

(c) Ideal standard

An ideal standard is defined as ‘ a standard which can attained under the most
favourable conditions with no allowance for normal losses, waste and machine
breakdown. Also known as a potential standard’
Management Accounting Autumn 2009 2nd Year Paper

An ideal standard is a target production cost which should be attained in the best
possible operating conditions (ie: no wastage; no breakdowns; no downtime). Because
in reality this is an unlikely situation, ideal standards are normally unattainable in
practice, and therefore are rarely used except for development or research purposes.
The ideal standard can be used to inform the normal attainable standard, which should
be based upon technical, engineering and work studies.

Example:
A widget, produced in perfect working conditions has the following costs
£/€
Direct Materials 2 kg @ £/€5 10.00
Direct Labour 4 hours @ £/€10 40.00
Production overhead 4 hours @ £/€4 16.00
66.00
Due to normal losses and expected downtime, the standard cost of widget is
£/€
Direct Materials 2.5 kg @ £/€5 12.50
Direct Labour 5 hours @ £/€10 50.00
Production overhead 5 hours @ £/€4 20.00
82.50
(d) Under-absorbed Overhead
Overhead costs are normally absorbed into production costs using estimated pre-
determined rates (related to labour, production, etc). This means that the absorbed
overhead may be different from the actual overhead incurred. If the overhead absorbed
is more that the actual overhead incurred, this is known as under absorbed overhead.
Under absorbed overhead should be charged directly to the profit and loss account for
the period during which it was incurred.

Example:
Budgeted Overhead £/€50,000
Projected labour hours 5,000
Overhead absorption rate £/€10 per direct labour hour

Actual overhead £/€55,000

Actual labour hours 4,800

Absorbed overhead £/€48,000

Under absorbed Overhead £/€7,000

(e) Variance analysis

Variance analysis is the process by which the total difference between standard and
actual costs is sub-divided. It is the analysis of performance by means of variances,
which can be used to prompt management action.
Variances arise from differences between standard and actual quantities and /or
differences between standard and actual prices. Variances are either adverse (a
negative variance were actual cost is greater that the projected standard) or favourable
(a positive variance were actual cost is less than the projected standard).
Variance analysis is the process of investigating and examining the causes of variances
so that the management of a company or organisation can react to the actual
circumstances. The company may seek to correct an adverse variance or to encourage
positive variances.

Example:
A company reported an adverse labour rate variance of £/€5000 and a favourable labour
efficiency variance of £/€3000.
Management Accounting Autumn 2009 2nd Year Paper

- The adverse varaince means that the labour used cost £/€5000 more than was
budgeted. Further analysis indicates that this could be because a higher, more skilled
grade of labour was used, or because of additional wage increases not budgeted.
- The favourable variance indicates that the labour used worked £/€3000 more
efficiently than budgeted. Further analysis could tell us that this could be because of
better working conditions (eg Materials or Equipment/Machinery) or because of more
skilled labour working quicker.

QUESTION 3

(a) RAIN Ltd Statement of Budgeted and Actual Profits for the first quarter

Budgeted Actual
£/€ £/€
Sales 300,000 320,000
Cost of Sales
Materials 75,000 76,800
Labour 67,500 70,400
Variable Overhead 33,750 33,800
Gross Profit 123,750 139,000

Fixed Overhead 60,000 64,000

Net Profit 63,750 75,000

(b)
(i) Sales Price Variance
(Actual Sales Quantity x Actual Price) – (Actual Sales Quantity x Standard Price)
(4,000 x 80.00) - (4,000 x 75.00)
320,000 - 300,000 = £/€20,000 fav

(ii) Material price variance

(Actual quantity of inputs x Actual price) – (Actual quantity of inputs x Standard Price)
(4,800 x 16.00) - (4,800 x 15.00)
76,800 - 72,000 = £/€4,800 adv

(iii) Materials usage variance

(Actual quantity of inputs x Standard price) – (Budgeted quantity x Standard price)
(4,800 x 15.00) - (5,000 x 15.00)
72,000 - 75,000 = £/€3,000 fav

(iv) Labour rate variance

(Actual Hours of input x Actual Rate) – (Actual Hours of input x Standard rate)
(4,400 x 16.00) - (4,400 x 15)
70,400 - 66,000 = £/€4,400 adv

(iv) Labour efficiency variance

(Actual Hours of input x Standard rate) – (Budgeted hours x Standard rate)
(4,400 x 15) - (4,500 x 15.00)
66,000 - 67,500 = £/€1500 fav

(vii) Variable overhead expenditure variance

Actual expenditure – (Actual Hours of input x Standard rate)
33,800 - (4,400 x 7.50) = £/€800 adv

(viii) Variable overhead efficiency variance

(Actual Hours of input x Standard rate) – (Budgeted hours x Standard rate)
Management Accounting Autumn 2009 2nd Year Paper

(4,400 x 7.50) - (4,500 x 7.50)

33,000 - 33,750 = £/€750 fav

(viii)Fixed Overhead
Budgeted Overheads – Actual Overheads
60,000 - 64,000 = £/€4000 adv

QUESTION 4

(a) Breakeven point = Fixed Costs

Contribution per unit

Breakeven @ £15/ticket = 9000 = 600 tickets

15

Breakeven @ £20/ticket = 9000 = 450 tickets

20

(b) The level of activity which will yield a profit of 25% of turnover

Calculation of Revised Contribution – on which to base calculations

Original Contribution 15.00 20.00

Profit requirement – 25% 3.75 5.00
Revised Contribution 11.25 15.00
(for calculation of target turnover)

Revised breakeven calculation to achieve target profit calculation

Fixed Costs
Revised Contribution

@ £15/ticket = 9,000 = 800 tickets = £/€12,000

11.25

@ £20/ticket = 9,000 = 600 tickets = £/€12,000

15.00

(c) Additional variable cost - £1.00

Relevant calculations:

(i) Original Contribution 15.00 20.00

Less Variable Cost 1.00 1.00
Revised Contribution 14.00 19.00

Audience number 700 700

Revised Contribution £/€9,800 £/€13,300

(ii) Breakeven calculations 9000 9000

Revised contribution 14.00 19.00
Breakeven – no of tickets 643 tickets 474 tickets
Management Accounting Autumn 2009 2nd Year Paper

Additional cost is likely to be of benefit at the higher ticket price of £/€20 as it increases
sales above the target 25% profit – while at £/€15 ticket price sales are only marginally
above breakeven.
However, the margin of safety at both prices is reduced as the breakeven point has
increased

(d) Calculation of unit contribution (sales price)

Breakeven Unit Contribution = Fixed Costs

Unit Quantity

= 9000 = £/€30 ticket price

300

(e) The decision to agree a fixed fee or a variable fee will be influenced by the
company’s confidence about ticket sales. If the company is confident of good tickets
sales then it will be likely to opt for the fixed artists fee. If there is less certainty, then
the option of a variable fee would offer the company a greater degree of comfort and
would spread some of the risk.

QUESTION 5

(a)
Activity Based Costing (ABC) is a cost management approach that links resource
consumption to activities that a company performs and the assigns those activities and
their associated costs to customers or product lines. ABC recognises that it is activities
which drive costs and aims to control cost drivers by charging overheads to cost units on
the basis of benefits received from the particular indirect activity e.g. ordering, planning
etc. ABC seeks to attribute overheads to product costs on a realistic basis than simply
production volume and also tries to show the relationship between overhead costs and
the activities that cause them

Activity based budgeting (ABB) is a planning and control system which seeks to support
the objective continuous improvement. It is a development of traditional budgeting
systems based on activity analysis techniques. ABB reviews activities to ensure they are
adding value and focuses on relevant performance measures, by linking strategic
objectives of the organisation with the objectives of individual activities.

(b)

Cost Pool Cost Driver Act. Based O.A.R.

Machining Machine hours £/€1.95 per machine
hour
Stores No. of orders issued £/€275 per order issued
Quality Assurance Budgeted production – £/€9 per unit
units
Maintenance No. repair hours £/€30 per repair hour
Management Accounting Autumn 2009 2nd Year Paper

(c)

Dept 1 Dept 2 Dept 3 Total

£/€ £/€ £/€ £/€
Machining 780,000 585,000 390,000 1,755,000
Stores 137,500 275,000 220,000 632,500
Quality Assurance 180,000 90,000 135,000 405,000
Maintenance 180,000 42,000 156,000 378,000
Total Overhead 1,277,500 992,000 901,000 3,170,500
Cost
Budgeted 20,000 10,000 15,000 45,000
production
Overhead Cost £/€63.88 £/€99.20 £/€60.06
per unit
Management Accounting Autumn 2009 2nd Year Paper

QUESTION 6

(a)
Estimated direct labour cost 24,000 units x 1 hour x £/€16= £/€384,000
Estimated Total Production Overhead = £/€384,000
Fixed Production Overhead = 50% = £/€192,000

(b)
Projected Stockholding
Quarter 1
Opening Stock 1,000
Production 6,000
Sales (5,000)
Closing Stock (Units) 2,000

Projected Stock Valuation – Marginal costing

Stock – units 2,000

Cost per unit

Direct materials 30
Direct labour 16
Variable Production Overhead 8
£/€54 £/€108,000

Projected Stock Valuation – Absorption costing

Stock – units 2,000

Cost per unit

Direct materials 30
Direct labour 16
Total Production Overhead 16
£/€62 124,000

(c) HANNA Ltd

Projected Profit Statement – Marginal Statement
Quarter 1 Quarter 2
£/€ £/€
Sales 500,000 700,000
Cost of Sales
Opening Stock 54,000 108,000
Direct Materials 180,000 150,000
Direct Labour 96,000 80,000
Variable production overhead 48,000 40,000
Closing Stock (108,000) -
Gross Profit 230,000 322,000
Fixed Production Overhead 48,000 48,000
Administration & General Overhead 40,000 40,000
Net profit 142,000 234,000
Management Accounting Autumn 2009 2nd Year Paper

Projected Profit Statement – Absorption Costing

Quarter 1 Quarter 2
£/€ £/€
Sales 500,000 700,000
Cost of Sales
Opening Stock 62,000 124,000
Direct Materials 180,000 150,000
Direct Labour 96,000 80,000
Production overhead 96,000 80,000
Closing Stock (124,000) -
Gross Profit 190,000 266,000
Administration & General Overhead 40,000 40,000
Under Absorption of Variable Overhead - 8,000
Net profit 150,000 218,000

Workings

Fixed Production Overhead Per Quarter = £/€48,000

Administration & General Overhead Per Quarter = £/€40,000

Opening Stock restated using absorption costing value 1000 @ £/€62 £/€62,000

Calculation of under absorbed overhead

Variable Production 5000 x 8 40,000
Fixed 48,000
Total Quarter 2 88,000
Absorbed 80,000
Under absorbed variable overhead 8,000

(d) Reconciliation of Marginal and Absorption Profit Statements

Marginal Costing Quarter 1 142,000

Quarter 2 234,000
376,000
Absorption Costing Quarter 1 150,000
Quarter 2 218,000
368,000

Difference - represented by difference in opening stock

8,000