AC2097

AC2097 Management Accounting

Candidates should answer FIVE of the following SEVEN questions: THREE from
Section A (All Section A questions carry equal marks) and BOTH questions
from Section B.

Please find questions on following page.

© University of London 2023

Page 1 of 7
 SECTION A: Answer 3 Questions from this Section (each question has 25 marks)

1 The Blue Water Company (BW) has designed a new type of fishing boat fitted with the
latest technology that it plans to export to the USA. The costs for the first boat are:

£
Materials 10,000
Labour - 750 hours 12,000
Overhead – based on labour cost 12,000
Total cost 34,000
Profit mark up 6,800
Selling price 40,800

The plan is to sell all of the boats at full cost plus 20%. The prices quoted will be valid for
three months only. The overhead costs quoted for the first boat are at 100% of labour
cost. Overheads include freight costs of £1,000 for one boat. The Production Manager
estimates that an 80% learning curve will apply to the production work. Due to inflationary
pressures in the economy, it is expected that material costs will increase by 5%, freight
costs by 7% and labour costs by 2% in four months’ time.

A major customer from the Fishing Boat Company (FB) based in the USA has expressed
an interest in buying one of the boats, but thinks the price is expensive. FB might want
to buy two or more boats during the upcoming months.

FB has asked the following questions:

I. If they paid £40,800 for the first boat, what price would they have to pay in four
months’ time for a second boat?
II. Would BW quote the same unit price for two boats, if FB ordered the two boats
together now?
III. If FB bought two boats now at one price, what would be the price per unit for a
third and fourth boat, if ordered separately in four months’ time?
IV. Could BW quote a single unit price for four boats to be delivered in one months’
time?

Required:

Using the cumulative average time learning model

a) Answer the questions posed by FB in points i) to iv) above to 2 decimal places.

(14 marks)
b) Create a brief report for Fishing Boat Company summarizing your calculations.
(5 marks)

c) Evaluate learning curve theory. Your discussion should refer to the BW Company and
the customer FB. Calculations are not required. (6 marks)
(total 25 marks)

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2. a) Explain the reasons why a company would conduct target pricing and costing and
give detailed explanation of the steps involved in the process. (8 marks)

b) Ming Cycles Ltd makes a range of cycles and is interested in expanding to making
electrical cycles (E bikes) which have a motor as well as pedal power to assist with
hill climbing etc. As well as the motor the specifications of the bicycle will need to be
more robust than their current bikes. They are looking at the commuting and
shopping customer rather than mountain bikers etc.

• Consumer survey and price comparisons has indicated that customers would
be prepared to pay £1,200 per bike retail. The retailer normally expects a 20%
profit on sales price.
• The company wishes to make 25% profit on full cost
• The following costs have been estimated:
• The Electric motor will cost £180.
• The Cycle frame is bought from an outside supplier. The normal frame costs
£80 but the supplier considers that the strengthening specification will cost an
additional 15% on the normal price.
• Pedals and other accessories are made in house. The standard cost of these is
£40.

• The assembly, painting and finishing should be costed at the ABC costs used in
the company as follows:

Activity Hours needed

Assembly £45 per hour 3
Painting £20 per hour 1
Finishing £35 per hour 2

• Marketing and selling commission are charged at £50 per unit + 10% of sales
price to the retailer (paid to the salesman)
• Administration is charged based on production hours at £50 per hour.
• It is planned that 50,000 would be sold in the first month

Required:
Provide a cost calculation and target price for the E-Bike. (10 marks)

c) Describe the investigations you would make to verify or change the estimates in the
target price and cost statement and determine whether the project can be made
viable.
Explain how or why you might question the basis of charging of some of the indirect
costs. (7 marks)
(total 25 marks)

Page 3 of 7
3. Cool Casuals Ltd is a small, recently established company run by Tom. It makes men’s
jackets and trousers.

The company uses full absorption product costing for its products
The estimate sales units per month have been set and the machine hours required are:-

Units Machine hours

Jacket style 1 18,000 units 36,000 hours
Trouser Style 2 6,000 units 9,600 hours
Jacket Style 3 10,000 units 24,000 hours

The selling price and direct costs per unit are shown below:

£ Jacket style 1 Trouser style 2 Jacket style 3

Per unit Per unit Per unit
£ £ £
Selling price 42.00 25.00 45.00
Direct materials 6.00 7.00 10.00
Direct labour 8.00 4.00 2.00

Production hours needed 2 hours 1.6 hours 2.4 hours

Other costs:
• Production fixed costs per month: £750,000
(Estimated production capacity is 75,000 hours. The standard production overhead is
therefore £10 per production hour).
• Variable selling costs are of £0.50 per product
• Fixed administration and selling costs are £136,000 and are charged to products
based on expected sales units.

It was discovered that direct materials and direct labour are variable.

Required:
a) Using the full absorption costing approach, produce a table showing for each garment:
i) the unit product sales revenue, the costs and net income per garment,
ii )the total of sales, costs and net income per garment for the month,
iii) the total of each cost and revenue and profit for all products. (9 marks)

b) If one of the products in the full absorption cost statement which you have calculated
is showing a loss, explain whether the product should be discontinued from the range.
(3 marks)

c) Present the budgeted sales costs and net income for the month using a contribution
format. (5 marks)

d) Assuming that selling prices and costs will remain the same as the estimates, but more
garments could be sold, provide a statement explaining to Tom which products should
be given priority if net income is to be increased. You can provide several possible
scenarios. (8 marks)
(total 25 marks)

Page 4 of 7
4. Damian is a Hairdresser who runs a salon but does not work there on a regular basis
as he has other businesses. For simplicity the services are categorised as either
“Colour and Trim” or “Trim”.
Staff are paid a salary (which is included in fixed costs) and commission which is the only
variable cost.
Damian has set up a budgetary system to monitor the variable revenue and costs of the
Salon as follows:
Monthly Budget
Colour and Trim Trim
Monthly demand (services) 6,000 1,500

Average price per service £60 £24

Average commission £3 £1.25
Monthly fixed costs £120,000

Actual for April

Colour and Trim Trim
Monthly demand (services) 3,000 4,000

Average revenue £70 £30

Average commission £3.50 £1.50
Monthly fixed costs £130,000

Required
a) For the month of April
i) provide a monthly budget income statement and an income statement of actual
performance. (3 marks)
ii) provide a statement of reconciliation between the monthly budget and the actual by
calculating:
Price variances,
Quantity variances,
Mix and quantity variances based on the number of services
Cost variances. (10 marks)

b) Explain to Damian the performance for the month as shown by your variance
statement. (5 marks)

c) Based on the budgetary estimates, if each “Trim” takes 20 minutes and each “Colour
and Trim” takes 40 minutes (this does not include the time taken for the colour to set
as the stylist can do other work at that time), using the budget price and commission,
explain which service is the more profitable. Also explore the amount of capacity the
salon can use and is using. How would your explanation help Damian when
managing, pricing and marketing the services of the salon?
(7 marks)
(total 25 marks)

Page 5 of 7
5 South Pacific Ltd has manufacturing divisions in Australia and marketing divisions
throughout the world selling South Pacific Ltd products and similar products for other
companies. The South Pacific Ltd manufacturing division in Melbourne Australia
produces one product the M50 for which the following cost and revenue information is
available:
Australian tax rate on Australian Division’s operating income 40%
Variable manufacturing cost of product M50 A$340
Full manufacturing cost of product M50 A$500
Normal Market Price in Australia A$650

The Melbourne division, in order to fill capacity, is discussing, with a local customer, the
regular sale of 2,000 units of product M50 at a discounted price of A$580 per unit.

One of South Pacific Ltd’s marketing divisions is in Poland. It currently buys a product
similar to M50 from a local supplier for A$600 and sells it for A$800*

The following information relates to South Pacific Ltd’s trading in Poland;

Polish tax rate on Polish division’s operating income 20%
Polish import duty (based on import price) 6%
Selling price of M50 in Poland A$800*
*All prices in Poland are quoted in A$ equivalent

The Australian and Polish tax authorities only allow transfer prices between the full
manufacturing cost per unit and the Australian market price of A$650. Import duty paid
to the Polish authorities is a deductible expense for calculating Polish tax due.

Required:
(a) Calculate the additional after tax profit for South Pacific Ltd if the Melbourne division
sells 2,000 units of M50 in Australia at A$580 and the Polish division sells 2,000 units
of the M50 equivalent, bought from the Polish supplier in Poland. (4 marks)

(b) South Pacific Ltd would prefer to trade with its marketing division in Poland. Calculate
the after tax income which would be earned by the Australian and Polish divisions
combined if they transferred 2000 units of product M50 at:
i) the highest price allowed by the tax authorities
ii) the lowest price allowed by the tax authorities
iii) the discounted price.

Explain what transfer price, complying with the tax rules, would be most profitable for
the corporation as a whole. (10 marks)

(c) If divisional managers acted autonomously to maximize their own divisions after tax
income, discuss the likely range within which the transfer price will lie, given the
restrictions imposed by the tax authorities. (6 marks)

(d) Briefly discuss how companies trading internationally can maintain divisional
autonomy and maximize profits. Relate your answer to the circumstances in the
question. (5 marks)
(total 25 marks)

Page 6 of 7
SECTION B: Answer Both Questions in this section. Note: question 7 has a
choice of a or b.

6 Choose TWO of the terms/techniques listed below and for each one:

i) explain the meaning of the term/technique,

ii) give two examples of its application,
iii) explain some of the practical limitations of which users
should be aware with regard to the term/technique.

a) Indirect costs
b) Equivalent units
c) Contribution
d) Direct material yield variance

Note: Only two answers are required, if more answers are provided, only the first two
will be marked if more are provided you should cross out the ones you do not wish to be
considered.

Examiners value the use of your own words. The word limit for each answer is
300 words
5 marks per answer (total10 marks)

7a) With regard to the Balanced Scorecard *Bhimani et al state:

”Do not assume the cause and effect linkages to be precise”
and “Do not use only objective measures in the scorecard”

Briefly describe the purpose and design of the Balanced Scorecard and explain
what the advice relates to.

*Bhimani A., Horngren C.T., Datar S.M. & Rajan M. “Management and Cost
Accounting” Seventh Edition 2019 p632

Q7a Examiners value the use of your own words. The word limit for your answer is
800 words (total15 marks)

OR
7b i) Product or service pricing is the role of Marketers! Discuss this statement.
Include in your answer the roles of other professionals who are involved
in the pricing decision. (6 marks)

ii) Describe four different types of pricing decision that organisations might use and
explain the accounting information which would be provided to assist with the
pricing decision you have described. (9 marks)

Q7 Examiners value the use of your own words. The word limit for your answer is
800 words total 15 marks)

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End of paper