2009-Management Accounting Main EQP and Commentaries
2009-Management Accounting Main EQP and Commentaries
2009-Management Accounting Main EQP and Commentaries
UNIVERSITY OF LONDON
279 0097 ZA
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme
Management Accounting
Tuesday, 26th May 2009 : 10.00am to 1.15pm
An extra 15 minutes have been added to the time allowed for this paper.
Candidates should answer FOUR of the following EIGHT questions: TWO from Section A,
ONE from Section B and ONE further question from either section. All questions carry equal
marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
SECTION A
Answer two questions from this section and not more than one further question. (You are
reminded that four questions in total are to be attempted with at least one from Section B.)
1.
Superskis Ltd makes and sells three products. The forecast costs, use of production
facilities and demand figures are as follows:
Product
Learner Ski
Professional Ski
Snow board
200
300
400
30,000 units
40,000 units
70
200
260
1 hour
2 hours
1 hour
2 hours
11/2 hours
1 hour
Determine whether the company can meet the total demand from the machine and
assembly time available.
(3 marks)
(b)
One of the three products has the highest contribution per limiting factor for both
machining and assembly so the company wishes to make sufficient of this product to
meet market demand. Identify this product and indicate the number of hours
remaining in machining and assembly to make the two remaining products.
(4 marks)
(c)
Incorporating the production and market constraints calculate the optimal production
schedule for the two remaining products.
(8 marks)
(d)
Calculate the maximum profit which the company would make given the constraints.
(2 marks)
(e)
Calculate the dual (shadow price) for each of the production constraints and
explain how this information would be used by the company. (8 marks)
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2.
The East Mercia Ambulance Trust serves a resident population of 2 million. It provides
emergency ambulances and patient transport services to elderly and disabled patients
from their homes to hospital and clinic appointments at National Health Service and
Local Authority locations. For the past ten years these patient transport services have
been contracted out to a private sector company. The Trust Board now feel that this
has become increasingly expensive. There have been numerous complaints regarding
the standard of service provided. The present contract expires in just over a years time.
Accordingly the Trust has set up a small working party to investigate the feasibility of
taking the service back in house. This would involve the purchase of a fleet of patient
transport vehicles at an initial cost of 6 million and the recruitment and training of
appropriate staff (costing 1m) before the service can be run in house. The predicted
annual running costs of the in house service are shown in the table below. It is
estimated that the vehicles would have working lives of five years and a combined
residual value of 0.8 million. The residual value of the equipment would be realised in
the year after the final year of use. There would be an upgrade of the ambulances in
Year 3 of 0.04 million. This amount is already included in the Other Costs shown
below.
The Trust would, of course, save the cost of payments to the private contractor, which
are estimated to be 9.5 million in the first year, increasing by 3% per annum thereafter.
Predicted Running Costs of in house Service
Year of in house
service
1st
2nd
3rd
4th
5th
Staff Costs
000
6,000
6,090
6,182
6,274
6,368
Fuel
000
936
954
974
994
1,014
Other Costs*
000
2,000
2,016
2,072
2,048
2,066
* The Other Costs shown above include depreciation of the vehicles and amortisation
of the initial recruitment and training calculated using a straight line basis.
The Trusts cost of capital is 5% per annum. Discount factors for 5% are as follows:
Year
0
1
2
3
4
5
6
Discount
Factor
1.000
0.952
0.907
0.864
0.823
0.784
0.746
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Required:
(a)
Prepare a table showing the net cash savings to be made by the Trust during the
working life of the patient transport project.
(5 marks)
(b)
(c)
Payback period.
Accounting rate of return (based on average capital invested).
Net present value.
(12 marks)
A similar situation exists within the Trust in respect of computing facilities and a
similarly sized scheme has been evaluated. The computer scheme has the
following projected results:
Payback = 3.75 years
Accounting rate of return = 21%
Net present value = 2,900,000
However, the Trusts Director of Finance feels that capital funds are limited and
therefore the two projects are mutually exclusive.
Write a short report to the Trust outlining whether investment should be
committed to the patient transport or the alternative project outlined. Clearly state
the reasons for your decision.Include in your answer discussion of the relative
merits of the three investment appraisal methods.
(8 marks)
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3.
Blue Skies Promotions Ltd organises trade exhibitions around the UK. It concentrates
on medium sized cities providing medium sized exhibition facilities.
Typically, a location provides 1,000 square metres of stand space which Blue Skies
offers to exhibitors as small stands of 4 square metres or large stands of 6 square
metres. Companies needing even larger stands can take up multiples of either. For a
normal two day exhibition the list price for 2009 is 1,200 for a small stand and 1,680
for a large stand. Discounts are offered to companies which book early, or take larger
stands. If an exhibition runs for 3 or 4 days a pro-rata daily rate of 600 for a small
stand and 840 for a large stand applies.
Each location provides the exhibition hall, heating and lighting, cleaning, car parking
and catering facilities, etc. Blue Skies handles planning, advertising and publicity,
exhibition preparation, liaison with exhibitors and the running of the exhibition.
Blue Skies plan to run one 2-day exhibition each week. From January 1st 2009 the
management is establishing a budgeting system for the exhibition activities.
Shown below is the standard revenue and cost sheet for a 2-day exhibition:
Blue Skies Promotions - Standard per Two Day Exhibition
Per Exhibition
Revenue
Small (4 sq metres) stands
100 x 1,200 x 0.90 x 0.85
Large (6 sq metres) stands
100 x 1,680 x 0.90 x 0.85
Standard Revenue
91,800
128,520
220,320
78,000
60,000
60,000
4,680
2,688
205,368
14,952
Blue Skies will be able to let 90% of the available stand space and early booking
discounts, etc., will be 15% of the full list price.
There will be an equal number of large and small stands.
Hall hire will average 39,000 per day
(question continues on next page)
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Blue Skies is now embarking on a detailed analysis of the most recent quarters
(January-March 2009) activities. During that quarter it actually ran eight 2-day
exhibitions, plus one of 3 days and one of 4 days. The analysis reveals:
Required:
(a)
(b)
(c)
Discuss the significance of the variances you have calculated. What further
information would be useful and are there any further variances which could be
calculated?
(5 marks)
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4.
DataExclusive Ltd has been trading for a few years as a software company, developing
high quality software products for industrial applications. Each product has an estimated
life of two years.
The company has noticed that their annual profits are erratic and have decided to
investigate, in detail, the profitability and cost structures of three of their products which
have just completed their economic lives. The details are shown below:
Package
Estimated demand
(units)
Selling price
Costs
Research & Product
Design
Production
Marketing
Distribution
Customer call out and
support
Inventory
movement (IM)
Year 1 Year 2
Distribution
logistics (DL)
Year 1 Year 2
Quality
measurement (QM)
Year 1
Year 2
2,500
1,800
10,000
1,600
2,000
3,000
3,000
3,000
4,000
2,500
3,500
2,200
000
000
000
000
000
000
6,500
750
1,400
150
12
2,800
2,600
600
5,100
900
1,200
240
100
1,200
800
360
2,400
1,500
2,400
600
910
1,400
1,700
360
500
1,250
450
850
2,200
3,080
For Product QM, in an effort to reduce costs, the research and product design was kept
to a minimum.
Required
(a)
Calculate the companys income for Years 1 and 2 and briefly comment on the
profit trend.
(5 marks)
(b)
Calculate the product life cycle income statement for each software package.
(10 marks)
(c)
(d)
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(4 marks)
SECTION B
Answer one question from this section and not more than one further question. (You are
reminded that four questions in total are to be attempted with at least two from Section A.)
5.
Outline the traditional approach to the calculation of overhead absorption rates. Identify
the key steps in the process and the main problems that can arise. Discuss the benefits
and limitations of the activity based costing (ABC) approach to absorption costing.
Include in your answer examples of the types of activity which might be measured.
(25 marks)
6.
In respect of ad-hoc decision making, identify four situations where information from
the routine accounting systems may need to be modified and/or additional information
may be sought. In each case explain the issues that arise in identifying which are
relevant costs.
(25 marks)
7.
Discuss the issues that arise in designing appropriate financial measures of performance
in a multi-divisional company where divisions are sub-divided into departments.
(25 marks)
8.
Give definitions and explain the meaning of each of the following management
accounting concepts. Give examples of their applications and explain their significance:
(a)
(b)
(c)
(d)
(e)
Direct cost.
Variable cost.
Material price and usage variances.
Process costing.
Target costing.
END OF PAPER
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(25 marks)
UNIVERSITY OF LONDON
279 0097 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme
Management Accounting
Tuesday, 26th May 2009 : 10.00am to 1.15pm
An extra 15 minutes have been added to the time allowed for this paper.
Candidates should answer FOUR of the following EIGHT questions: TWO from Section A,
ONE from Section B and ONE further question from either section. All questions carry equal
marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
SECTION A
Answer two questions from this section and not more than one further question. (You are
reminded that four questions in total are to be attempted with at least one from Section B.)
1.
Toymaker Ltd makes and sells three products. The forecast costs, use of production
facilities and demand figures are as follows:
Product
Princess Doll
Action Man
Robot
40
60
80
30,000 units
50,000 units
12
40
56
1 hour
2 hours
1 hour
1 hour
11/2 hours
2 hours
Determine whether the company can meet the total demand from the machine and
assembly time available.
(3 marks)
(b)
One of the three products has the highest contribution per limiting factor for both
machining and assembly so the company wishes to make sufficient of this product to
meet market demand. Identify this product and indicate the number of hours
remaining in machining and assembly to make the two remaining products.
(4 marks)
(c)
Incorporating the production and market constraints calculate the optimal production
schedule for the two remaining products.
(8 marks)
(d)
Calculate the maximum profit which the company would make given the constraints.
(2 marks)
(e)
Calculate the dual (shadow price) for each of the production constraints and
explain how this information would be used by the company. (8 marks)
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2.
East Bromwich Council is an English Local Authority responsible for providing a range
of services to its resident population of 300,000. One such service is refuse collection.
For the past ten years this has been contracted out to a private sector company.
However, several councillors feel that this has become increasingly expensive and there
have been numerous complaints regarding the standard of service provided. The present
contract expires in just over a years time.
Accordingly the Council has set up a small working party to investigate the feasibility
of taking the service back in house. This would involve the purchase of a fleet of
refuse collection vehicles at an initial cost of 3 million and recruitment and training
appropriate staff (costing 0.5m) before the service can be run in house. The predicted
running costs of the in house service are as shown in the table below. It is estimated
that the vehicles would have working lives of five years and a combined residual value
of 0.6 million. The residual value of the equipment would be realised in the year after
the final year of use. There would be vehicle refurbishment costs in Year 3 of 0.03
million. This amount is already included in Other Costs for Year 3.
The Council would, save the cost of payments to the private contractor which are
estimated to be 4.75 million in the first year, increasing by 3% per annum thereafter.
Predicted Running Costs of in house Service
Year of in house
service
1st
2nd
3rd
4th
5th
Staff Costs
000
3,000
3,045
3,091
3,137
3,184
Fuel
000
468
477
487
497
507
Other Costs*
000
1,000
1,008
1,046
1,024
1,033
* The Other costs shown above include depreciation of the vehicles and amortisation
of the initial recruitment and training both calculated using the straight line method.
The Councils cost of capital is 5% per annum. Discount factors for 5% are as follows:
Year
0
1
2
3
4
5
6
Discount
Factor
1.000
0.952
0.907
0.864
0.823
0.784
0.746
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Required:
(a)
Prepare a table showing the cash savings to be made by the Council during the
working life of the refuse collection project.
(5 marks)
(b)
(c)
Payback period.
Accounting rate of return (based on average capital invested).
Net present value.
(12 marks)
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3.
Whitewater Promotions Ltd organises trade exhibitions around the UK. It concentrates
on medium sized cities and uses medium sized exhibition facilities.
Typically, a location provides 1,000 square metres of stand space which Whitewater
offers to exhibitors as small stands of 4 square metres or large stands of 6 square
metres. Companies needing even larger stands can take up multiples of either. For a
normal two day exhibition the list price for 2009 is 1,000 for a small stand and 1,400
for a large stand. Discounts are offered to companies which book early, or take larger
stands. If an exhibition runs for 3 or 4 days a pro-rata daily rate applies.
Each location provides the exhibition hall, heating and lighting, cleaning, car parking
catering facilities, etc. Whitewater handles planning, advertising, publicity, exhibition
preparation, liaison with exhibitors and the running of the exhibition.
Whitewater plan to run one 2-day exhibition each week. From January 1st 2009 the
management is establishing a budgeting system for the exhibition activities.
Shown below is the standard revenue and cost sheet for a 2 day exhibition:
Whitewater Promotions - Standard per Two Day Exhibition
Per Exhibition
Revenue
65,000
50,000
50,000
3,900
2,240
171,140
12,460
Whitewater will be able to let 90% of the available stand space and early booking
discounts, etc. will be 15% of the full list price.
There will be an equal number of large and small stands.
Hall hire will average 32,500 per day.
(question continues on next page)
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Required:
(a)
(b)
(c)
Discuss the significance of the variances you have calculated. What further
information would be useful and are there any further variances which could be
calculated?
(5 marks)
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4.
Sweets Galore Ltd has three production divisions in different parts of the country. The
divisional financial reports on a historical cost basis for the year ended 31st March 2009
for each division are as follows:
E
000
F
000
G
000
Income Statement
Revenues
Less: operating expenses
straight-line depreciation
Net profit
500
294
84
122
700
412
120
168
920
541
160
219
840
756
84
200
284
1,200
480
720
250
970
1,600
160
1,440
300
1,740
136
160
170
Division
Using the historical cost approach to asset valuation, calculate the three measures
indicated above for each division and discuss the performance of the divisions as
revealed by the calculations.
(4 marks)
(b)
The manager of Division G feels that the method of assets valuation for is unfair
and requests that a current cost accounting approach be applied to Fixed Asset
valuation and depreciation charges. It is agreed that the net current assets figures
represent current values and the price index should be used to revalue the fixed
assets. For each of the divisions, calculate the three measures calculated in a) but
using current cost accounting. Discuss the performance of the divisions as
revealed by the calculations.
(8 marks)
(c)
A new member of the head office accounting staff argues that a fairer method
would be to ignore depreciation completely and calculate the ratios using
EBITDA/historical gross fixed assets plus net current assets. He argues that this
measure most closely represents the original investment decision. The manager of
Division G would prefer this measure to use current cost valuations. Calculate the
ratios using these two bases and discuss the performance of the divisions as
revealed by the calculations.
(8 marks)
(d)
Briefly explain which of the methods in (a) - (c) above seems fairest for
evaluation purposes.
(5 marks)
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SECTION B
Answer one question from this section and not more than one further question. (You are
reminded that four questions in total are to be attempted with at least two from Section A.)
5.
Discuss the relationship between financial (or stewardship) accounting and management
accounting. Identify and enlarge upon the similarities and the key differences between
the two disciplines.
(25 marks)
6.
7.
Discuss the rationale behind the absorption costing approach to management accounting
and that of the marginal (or variable) costing approach. Include discussion of their
relative merits and main problem areas for decision making and control. (A discussion
of the use of either method for income determination and inventory valuation is not
required).
(25 marks)
8.
Give definitions and explain the meaning of the following management accounting
concepts. Give examples of their applications and explain their significance:
(a)
(b)
(c)
(d)
(e)
Cost centre.
Opportunity cost.
Throughput contribution.
Break-even chart.
Capacity variance.
(25 marks)
END OF PAPER
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SECTION A
Answer two questions from this section and not more than one further
question. (You are reminded that four questions in total are to be
attempted with at least one from Section B.)
Question 1
Superskis Ltd makes and sells three products. The forecast costs, use of
production facilities and demand figures are as follows: [For full text of the
question please refer to the examination paper].
Required:
a) Determine whether the company can meet the total demand from the
machine and assembly time available. (3 marks)
Reading for this question:
Subject guide: Chapter 4, pp.4650; Horngren et al, Cost accounting:
Chapter 11, Appendix.
Approaching the question:
In order to achieve good marks workings must be shown.
Product
Learner
Professional Ski
Snow Board
Product
demand
Machine hours
50,000
30,000
40,000
50,000
60,000
40,000
Assembly hours
100,000
45,000
40,000
97 Management accounting
b) One of the three products has the highest contribution per limiting factor
for both machining and assembly so the company wishes to make
sufficient of this product to meet market demand. Identify this product
and indicate the number of hours remaining in machining and assembly to
make the two remaining products. (4 marks)
Reading for this question:
As above.
Approaching the question:
To obtain full marks for this part, the contribution per limiting factor for
each factor and each product should be calculated. If candidates calculate
the answer in their head or with a calculator they should still show the
numerical results which led to their choice of product.
Contribution per
limiting factor
Machine hours
Assembly hours
Learner
Professional Ski
Snow Board
130/1 =130
130/2 = 65
100/2 = 50
100/1.5 = 66.7
140/1 = 140
140/1 = 140
constraints:
i.
Machining
1L + 2P < 80,000
ii.
Assembly
iii.
Market L
L < 50,000
iv.
Market P
P < 30,000
v.
No Negative
L>0
vi.
No Negative
P>0
2L + 4P = 160,000
subtract ii)
2L + 1.5P = 104,000
2.5P = 56,000
P = 22,400
substituting in i)
1L + 44,800 = 80,000
1L = 35,200
Contribution
1.5P = 4,000
P = 2,666
Contribution
L +2P = 80,000
L = 20,000
Contribution
97 Management accounting
d) Calculate the maximum profit which the company would make given the
constraints. (2 marks)
Reading for this question:
As above.
Approaching the question:
Some candidates forgot to include the Snow Board in this calculation.
e) maximum profit:
contribution of Learner
Professional Ski
Snow Board
3,400,000
= 9,016,000
f) Calculate the dual (shadow price) for each of the production constraints
and explain how this information would be used by the company. (8
marks)
Reading for this question:
As above.
Approaching the question:
Some candidates chose to reduce the available hours by one rather than
increase them as shown in this answer. This would also give the correct
answer. Some candidates rounded the figures too early and obtained the
wrong answer, so could not score all the marks available. Other
candidates increased both constraints simultaneously. Although this gave
the correct combined answer it did not provide as much useful
information to management so did not score full marks.
Shadow price calculations using constraints i) and ii) plus one hour
dual price of machining using one additional hour
equation i)
1L + 2P = 80,001
multiply i) by 2
2L + 4P = 160,002
subtract ii)
2L +1.5P = 104,000
2.5P = 56,002
P = 22,400.8
Substituting in i)
97 Management accounting
2L +1.52P = 104,001
multiply i) by 2
2L + 4P = 160,000
subtract ii)
2L +1.5P = 104,001
2.5P = 55,999
P = 22,399.6
substituting in ii)
2L + 33,599.4 = 104,001
2L = 70,401.6
L = 35,200.8
Cash Flow
Year 1
000
9,500
Year 2
000
9785
Year 3
000
10,079
Year 4
000
10381
Year 5
000
10692
Total
000
50,437
6,000
936
760
7,696
1,804
1,804
6,090
954
776
7,820
1,965
3,769
6,182
974
832
7,988
2,091
5,860
6,274
994
808
8,076
2,305
8,165
6,368
1,014
826
8,208
2,484
10,649
30,914
4,872
4,002
39,788
10,649
iii.
ii)
97 Management accounting
iii)
Year 0 outlay
Year 1 saving
Year 2 saving
Year 3 saving
Year 4 saving
Year 5 saving
Year 6 Sale proceeds
Net Present Value
Cost
000
Discount
factor
7,000
1804
1965
2091
2305
2484
800
1,000
.952
.907
.864
.823
.784
.746
Present
value
000
7,000
1717
1782
1807
1897
1947
597
2747
iii.
However, the Trusts Director of Finance feels that capital funds are limited
and therefore the two projects are mutually exclusive.
Write a short report to the Trust outlining whether investment should be
committed to the patient transport or the alternative project outlined.
Clearly state the reasons for your decision. Include in your answer discussion
of the relative merits of the three investment appraisal methods. (8 marks)
Reading for this question:
Subject guide: Chapter 2, pp.2326; Horngren et al, Cost accounting:
Chapter 21, particularly Decision points, pp.745746 (twelfth edition)
and 781781 (thirteenth edition).
Approaching the question:
An answer to this question would require candidates to indicate the
correct choice. If parts of their calculations were incorrect, then their
recommendations would obviously differ from those below but marks
would be awarded for their interpretation. They would also need to
discuss the conceptual merits of each approach. Marks were available for
both parts.
An answer should draw attention to the fact that patient transport fleet
investment has a lower NPV but a slightly shorter payback and a higher
accounting rate of return than the computer facilities. The decision should
be based on the NPV rate (as the most conceptual reliable method). It is
recommended that the council invests in the new computer facilities.
The strengths and limitations of each method should be explained and the
reasons for the superiority of the NPV technique over the accounting rate
of return and payback methods should be highlighted.
Question 3
Blue Skies Promotions Ltd organises trade exhibitions around the UK. [For
full text of the question please refer to the examination paper].
Required:
a) Prepare a table (down to company operating profit) showing:
i.
A budget for the quarter based on the original planned activity.
ii.
iii.
The actual income and expenditure for the period. (10 marks)
91,800
128,520
78,000
60,000
60,000
4,680
2,688
Basis of
flexing
Original
Flexed
Actual
budget
budget
13
10
10
26
23
23
Exhibs
Days
Exhibs
Days
897,000
870,000
780,000
600,000
636,000
780,000
690,000
732,000
60,840
46,800
55,080
34,944
30,912
32,640
2,669,784 2,264,712 2,325,720
194,376
268,968
244,680
108,000
108,000
111,600
86,376
160,968
133,080
97 Management accounting
10
74,592 F
15,300 F
121,380 A
63,000 F
79,800 F
27,000 F
36,000 A
42,000 A
4,680 F
12,960 A
2,352 F
4080 A
3,600 A
Profit reconciliation
(May be incorporated with variance table)
Operating profit as per original budget
Volume variance*
Operating profit as per flexed budget
Capacity utilisation variance
Average price variance
Hall hire spending variance
Advertising and publicity:
Exhibitors spending variance
Visitors
Set-up and dismantling
Efficiency variance
Rate variance
Exhibition administration
Efficiency variance
Rate variance
Head Office expenses spending variance
Actual operating profit
86,376
+74,592
+160,968
85,680
+122,400
+27,000
36,000
42,000
+4,680
12,960
+2,352
4,080
3,600
133,080
Significance of variances
Further information
11
97 Management accounting
Additional variances
The price variance could be further analysed into a mix variance and an
actual price variance. There is also mix variance arising between the
number of two-day, three-day and four-day exhibitions. However, as we
do not have an indicative standard for three- and four-day events it is not
possible to calculate it.
Question 4
DataExclusive Ltd has been trading for a few years as a software company,
developing high-quality software products for industrial applications. Each
product has an estimated life of two years. [For full text of the question please
refer to the examination paper].
Required
a) Calculate the companys income for Years 1 and 2 and briefly comment on
the profit trend. (5 marks)
Reading for this question:
Subject guide: p.101; Horngren et al. Cost accounting: Chapter 12,
pp.436438 (twelfth edition) and 469471 (thirteenth edition).
Approaching the question:
It was very straightforward, if tedious to calculate the answer to this
question. Not all candidates provided separate income calculations for
each year and many missed the issues shown when it came to the
comment section. The income (profit) for year 1 was a loss and for year 2
was a profit due to several products with two-year lifecycles starting in
year 1. If the company on reviewing their performance at the end of year 1
had decided to eliminate products making a loss, the two better products
would have been eliminated.
The question only asked for the calculation of net income for each year,
which could be done by calculating sales and adding up costs from the
question paper. Although it does not ask for a detailed income statement
this may be provided as below.
Year 1
Estimated demand
(units)
Selling price
Total sales
Costs
Research & Product
design
Production
Marketing
Distribution
Customer call out and
support
Total product costs
Product profit
12
(IM)
(DL)
(QM)
Total
2,500
2,000
4,000
1,800
000
4,500
3,000
000
6,000
2,500
000
10,000
000
20,500
6,500
5,100
2,400
14,000
750
1,400
150
900
1,200
240
1,500
2,400
600
3,150
5,000
990
500
450
2,200
3,150
9,300
4,800
7,890
1,890
9,100
900
26,290
5,790
Year 2
Estimated demand
(units)
Selling price
Total sales
Costs
Research & Product
design
Production
Marketing
Distribution
Customer call out and
support
Total product costs
Product profit
(IM)
(DL)
(QM)
total
10,000
3,000
3,500
1,600
000
16,000
3,000
000
9,000
2,200
000
7,700
000
32,700
12
100
910
1022
2,800
2,600
600
1,200
800
360
1,400
1,700
360
5,400
5,100
1,320
1,250
850
3,080
5,180
7,262
8,738
3,310
5,690
7,450
250
18,022
14,678
The information shows that profits are low in the first year of each
products life due to research and product development costs and lower
sales. If most product lifecycles are only two years then annual profits will
be low and high in alternate years. The annual profits may become less
volatile when the portfolio is extended and different products are at
different stages in their life cycle. It may be useful to develop some
products which have longer lives or find ways to revamp existing products
without the need for so much research and product design cost.
b) Calculate the product life cycle income statement for each software
package. (10 marks)
Reading for this question:
As above.
Approaching the question:
Estimated
demand (units)
Selling price ()
Total sales ()
Costs ()
Research and
Product design
Production
Marketing
Distribution
Customer call
out and support
Total product
costs
Product profit
Profit %
(IM)
Year 1
Year 2
(DL)
Year 1
Year 2
(QM)
Year 1
Year 2
2,500
10,000
2,000
3,000
4,000
3,500
1,800
4,500
1,600
16,000
20,500
3,000
6,000
3,000
9,000
15,000
2,500
10,000
2,200
7,700
17,700
6,500
12
6,512
5,100
100
6,400
2,400
910
3,310
750
1,400
150
2,800
2,600
600
3,550
4,000
750
900
1,200
240
1,200
800
360
2,100
2,000
600
1,500
2,400
600
1,400
1,700
360
2,700
4,300
960
500
1,250
1,750
450
850
1,300
2,200
3,080
5,280
9,300
7,262
16,562
7,890
3,310
11,200
9,100
7,450
16,550
4,800
8,738
3,938
19.2%
1,890
5,690
3,800
25.3%
900
250
1,150
6.5%
total
total
total
13
97 Management accounting
14
the full set of revenues and costs for each product become visible
particularly research and development, marketing and customer
service and disposal costs
as with all planning tools the approach enables viability of the product
to be assessed, any problems foreseen and opportunities for improved
profits taken.
SECTION B
Answer one question from this section and not more than one further
question. (You are reminded that four questions in total are to be
attempted with at least two from Section A.)
Question 5
Outline the traditional approach to the calculation of overhead absorption
rates. Identify the key steps in the process and the main problems that can
arise. Discuss the benefits and limitations of the activity-based costing (ABC)
approach to absorption costing. Include in your answer examples of the types
of activity which might be measured. (25 marks)
Reading for this question:
Subject guide: Chapter 6, pp.6668 and Chapter 7; Horngren et al, Cost
accounting: Chapters 4 and 5.
Approaching the question:
This fairly routine question requires both parts of the question to be
answered. Candidates who only discussed ABC could not achieve a good
mark. The bullet points below are not necessarily exhaustive.
Traditional Approach obtain full cost of production of each
product/batch by allocating and absorbing costs in a systematic way.
Key steps:
15
97 Management accounting
lack of information on detailed costs of production activities (e.g. setups or the costs and usage of support departments such as stores)
can be used for pricing and investigation into the use of resources, etc.
Problems:
The main problem lies with the investment of time necessary to set up
ABC and the lack of understanding that in the short term many costs are
still fixed. There can be difficulties in identifying costs and drivers for other
production operations. This might include set up, material handling and
inspection, etc. but also activities outside the production area (e.g.
procurement, sales delivery, sales commissions, marketing costs and
customer service, etc.).
16
Question 6
In respect of ad-hoc decision making, identify four situations where
information from the routine accounting systems may need to be modified
and/or additional information may be sought. In each case explain the issues
that arise in identifying which are relevant costs. (25 marks)
Reading for this question:
Subject guide: Chapter 2, pp.1822, Chapter 4 and Chapter 9, pp.9194;
Horngren et al, Cost accounting: Chapter 11, Chapter 12 and Chapter 22.
Approaching the question:
This question can be answered by choosing relevant cost, short-run pricing
and transfer pricing examples. In many companies full product costs and
full departmental costs are routinely reported as these make decision
makers aware of total cost. Usually opportunity costs are not routinely
reported. Thus for many ad hoc decisions the costs need to be revised to
ensure correct decisions are made.
Possible examples (any four from):
short-run specific pricing exercises
cost-saving exercises
transfer pricing.
You may need to obtain more information and incorporate it into the new
analysis. Your answer could include a numerical example if you felt this
would explain the issues better.
Question 7
Discuss the issues that arise in designing appropriate financial measures of
performance in a multi-divisional company where divisions are sub-divided
into departments. (25 marks)
Reading for this question:
Subject guide: Chapter 9; Horngren et al, Cost accounting: Chapter 6,
pp.223227 and Chapter 23.
17
97 Management accounting
operating profit
ROCE
residual income
Finally, you would give the difficulties which can arise with transfer prices.
For example, there might be different departmental classifications cost
centres, profit centres or revenue centres. How should targets be set for
departments? There might also be problems with responsibility
accounting. If responsibility accounting systems are recommended by head
office are they suitable for all types of division in any country? You would
also need to discuss how expenses would be allocated to head office and
to divisions and how general overheads would be allocated to
departments, etc.
Question 8
Give definitions and explain the meaning of each of the following
management accounting concepts. Give examples of their applications and
explain their significance:
a)
b)
c)
d)
e)
Direct cost.
Variable cost.
Material price and usage variances.
Process costing.
Target costing. (25 marks)
Reading for this question:
Horngren et al, Cost accounting: pp.27, 31, 227233, 99100 and 425430
(twelfth edition).
Approaching the question:
Good marks will only be awarded for comprehensive definitions and
explanations of the management accounting contexts perhaps giving two
or three contexts where relevant. These should be followed by good
examples, showing how the application contributes to the overall
management accounting framework. Some parts give the opportunity to
provide longer answers than others; for example, there is more to say
about target costing than material price and usage variances.
18
SECTION A
Answer two questions from this section and not more than one further
question. (You are reminded that four questions in total are to be
attempted with at least one from Section B.)
Question 1
Toymaker Ltd makes and sells three products. The forecast costs, use of
production facilities and demand figures are as follows:
Product
Selling price per unit
Anticipated annual sales units
Variable costs per unit
Use of machine time per unit
Assembly time per unit
Princess Doll
40
40,000 units
12
1 hour
1 hour
Action Man
60
30,000 units
40
2 hours
11/2 hours
Robot
80
50,000 units
56
1 hour
2 hours
Product
demand
40,000
30,000
50,000
Machine hours
required
40,000
60,000
50,000
Assembly hours
required
40,000
45,000
100,000
97 Management accounting
b) One of the three products has the highest contribution per limiting factor
for both machining and assembly so the company wishes to make
sufficient of this product to meet market demand. Identify this product
and indicate the number of hours remaining in machining and assembly to
make the two remaining products. (4 marks)
Reading for this question:
As above.
Approaching the question:
To obtain full marks for this part, the contribution per limiting factor
for each factor and each product should be calculated. If candidates
calculate it in their head or with a calculator they should still show the
numerical results.
Contribution per limiting factor
Limiting factor
Machine hours
Assembly hours
Princess
28/1 = 28
28/1 = 28
Action Man
20/2 = 10
20/1.5 = 13.33
Robot
24/1 = 24
24/2 = 12
constraints:
i.
Machining
2A + 1R < 80,000
ii.
Assembly
iii.
Market
A< 30,000
iv.
Market
R < 50,000
v.
No negative
A>0
vi.
No negative
R>0
Use graph (below) or trial and error approach to show optimal corner
Equations i) and ii)
multiply i) by 2
4A + 2R = 160,000
subtract ii)
substituting in ii)
36,000 + 2R = 100,000
2R = 64,000
R = 32,000
Contribution
2A = 60,000
2A +1R = 80,000
R = 20,0000
Contribution
2R = 100,000
subtract ii)
Contribution
= 50,000 x 24 = 1,200,000
97 Management accounting
d) Calculate the maximum profit which the company would make given the
constraints. (2 marks)
Reading for this question:
As above.
Approaching the question:
Some candidates forgot to include the Princess in this calculation.
maximum profit:
contribution of Princess 28 x 40,000 = 1,120,000
Action man
20 x 24,000 = 480,000
Robot
24 x 32,000 = 768,000
= 2,368,000
680,000
= 1,688,000
e) Calculate the dual (shadow price) for each of the production constraints
and explain how this information would be used by the company. (8
marks)
Reading for this question:
As above.
Approaching the question:
Some candidates chose to reduce the available hours by one rather
than increase them as shown in the answer below. This would also give
the correct answer. Some candidates rounded the figures too early and
obtained the wrong answer so could not score all the marks. Other
candidates increased both constraints simultaneously. Although this
gave the correct combined answer it did not provide as much useful
information as possible to management so did not score full marks.
Shadow price calculations using constraints i) and ii) plus 1 hour
dual price machining
i) Machining
2A + 1R = 80,001
multiply i) by 2
4A + 2R = 160,002
subtract ii)
Substituting in ii)
36,001.2 + 2R = 100,000
2R = 63,998.8
R = 31,999.4
97 Management accounting
1.5A + 2R = 100,001
multiply i) by 2
4A + 2R = 160,000
subtract ii)
Substituting in ii)
35,999.4 + 2R = 100,001
2R = 64,001.6
R = 32,000.8
Year 1
000
4,750
Year 2
000
4,893
Year 3
000
5,039
Year 4
000
5,190
Year 5
000
5,346
Total
000
25,218
3,000
468
420
3,888
862
862
3,045
477
428
3,950
943
1,805
3,091
487
466
4,044
995
2,800
3,137
497
444
4,078
1,112
3,912
3,184
507
453
4,144
1,202
5,114
15,457
2,436
2,211
20,104
5,114
iii.
i)
ii)
97 Management accounting
iii)
Year 0 outlay
Year 1 saving
Year 2 saving
Year 3 saving
Year 4 saving
Year 5 saving
Year 6 Sale proceeds
Net Present Value
Cost
000
Discount
factor
3,500
862
943
995
1,112
1,202
600
1.000
.952
.907
.864
.823
.784
.746
Present
value
000
3,500
821
855
860
915
942
448
1,341
iii.
However, the councils director of finance feels that capital funds are limited
and therefore the two projects are mutually exclusive.
Write a short report to the Council outlining whether investment should be
committed to the refuse collection project or the alternative project outlined.
Clearly state the reasons for your decision. Include in your answer discussion
of the relative merits of the three investment appraisal methods. (8 marks)
Reading for this question:
Subject guide: Chapter 2, pp.2326; Horngren et al, Cost accounting:
Chapter 21, particularly Decision points, pp.745746 (twelfth edition)
and 781781 (thirteenth edition).
Approaching the question:
An answer to this question would require candidates to indicate the
correct recommendation. If parts of their calculations were incorrect
their recommendations would obviously differ from those below but
marks would be awarded for their interpretation. Candidates also
needed to discuss the conceptual merits of each approach. Marks were
available for both parts.
An answer should draw attention to the fact that the refuse fleet
investment has a higher NPV but a slightly longer payback and a higher
accounting rate of return than the alternative. The decision should be
based on the NPV results and it is recommended that the council
invests in the refuse facilities.
An answer should also explain the strengths and limitations of each
method and indicate the reasons for the superiority of the NPV
technique over the accounting rate of return and payback methods.
Question 3
Whitewater Promotions Ltd organises trade exhibitions around the UK. It
concentrates on medium-sized cities and uses medium-sized exhibition
facilities. [For full question please refer to the examination paper].
Required:
a) Prepare a table (down to company operating profit) showing:
i.
a budget for the quarter based on the original planned activity
ii.
iii.
the actual income and expenditure for the period. (10 marks)
Basis of
flexing
76,500
Days
107,100 Days
Original
budget
13
26
994,500
1,392,300
2,386,800
Flexed
budget
10
23
879,750
1,231,650
2,111,400
Actual
10
23
945,000
1,197,000
2,142,000
65,000
Days
845,000
747,500
735,000
50,000
50,000
3,900
2240
Exhibs
Days
Exhibs
Days
650,000
650,000
50,700
29,120
2,224,820
161,980
90,000
500,000
575,000
39,000
25,760
887,260
224,140
90,000
530,000
610,000
45,900
27,200
1,948,100
193,900
93,000
97 Management accounting
Operating Profit
71,980
134,140
b) Provide an analysis of all possible variances and show a reconciliation of
the original budgeted profit with the actual profit for the period. (10
marks)
Reading for this question:
As above.
Approaching the question:
This part requires the normal process of calculating variances from the
given data. Very few candidates calculated the volume variance
correctly. Although some made good efforts to calculate this as part of
each variance they failed to calculate all variances so could not
reconcile their calculations. The profit reconciliation could have been
presented as part of the variance calculations.
Volume variance (difference between fixed and flexed budget)
134,140 71,980
Revenue
Capacity utilisation variance
Small stands (2070 2100) x 425
Large stands (2070 1900) x 595
Price variance
Small stands (425 450) x 2100
Large stands (595 630) x 1900
Expenditure
Hall hire
Spending variance (747,500 735,000)
Advertising and publicity
For exhibitions spending variance (500,000 530,000)
For visitors spending variance (575,000 610,000)
Set up and dismantling
Efficiency variance (300 270) x 130
Rate variance (130 170) x 270
Exhibition administration
Efficiency variance (184 170) x 140
Rate variance (140 160) x 170 days
Head Office expenses
10
62,160 F
12,750 F
101,150 A
52,500 F
66,500 F
12,500 F
30,000 A
35,000 A
3,900 F
10,800 A
1,960 F
3,400 A
100,900
Profit reconciliation
Operating profit as per original budget
Volume contribution variance
Operating profit as per flexed budget
Capacity variance
Average price variance
Hall hire spending variance
Advertising and publicity:
Exhibitors spending variance
Visitors
Set-up and dismantling
Efficiency variance
Rate variance
Exhibition administration
Efficiency variance
Rate variance
Head Office expenses spending variance
Actual operating profit
71,980
+62,160
134,140
71,400
+102,000
12,500
30,000
35,000
+3,900
10,800
+1,960
3,400
3,000
100,900
Significance of variances
Further information
11
97 Management accounting
Additional variances
The price variance could be further analysed into a mix variance and
an actual price variance.
There is also mix variance arising between the number of two-day,
three-day and four-day exhibitions. However, as we do not have an
indicative standard for three- and four-day events it is not possible to
calculate it.
Question 4
Sweets Galore Ltd has three production divisions in different parts of the
country. [For full question please refer to the examination paper].
Required:
a) Using the historical cost approach to asset valuation, calculate the three
measures indicated above for each division and discuss the performance
of the divisions as revealed by the calculations. (4 marks)
Reading for this question:
Subject guide: Chapter 9, pp.9598; Horngren et al, Cost accounting:
Chapter 23, pp.793803 (twelfth edition) and pp.827836 (thirteenth
edition)
Approaching the question:
This is a straightforward divisional performance appraisal question.
The request for comments in each part as well as in part d) aimed to
encourage students to think through the implications of their
calculations as they proceeded through the question, enabling them to
draw useful conclusions in part d). This was largely unsuccessful as
students mostly just stated which divisions looked better under each
measure, without looking at the underlying reasons for the differences.
Historical cost,
Net Assets
R.O.I (%)
Asset turnover
(times)
Net profit %
122/284 = 42.9%
500/284 = 1.76
168/970 = 17.3%
700/970 = 0.72
219/1,740= 12.6%
920/1740 = 0.53
122/500 = 24.4%
168/700 = 24%
219/920 = 23.8%
All divisions are making almost the same net profit percentage.
Divisions F and G show poor performance for ROI and asset turnover
due to higher costs of assets and fewer years of depreciation than E. E,
however, has very old assets so they may suffer using this method
when their assets need to be replaced.
12
G
000
920
541
160
219
9
210
(720 x 180/)160
810
250
1060
(1440 x 180)/170
1525
300
1825
153/1060 = 14.4%
700/1060 = 0.66
153/700 = 21.9%
210/1,825 = 11.5%
920/1825 = 0.50
210/920 = 22.8%
13
97 Management accounting
c) A new member of the head office accounting staff argues that a fairer
method would be to ignore depreciation completely and calculate the
ratios using EBITDA/historical gross fixed assets plus net current assets.
He argues that this measure most closely represents the original
investment decision. The manager of Division G would prefer this
measure to use current cost valuations. Calculate the ratios using these
two bases and discuss the performance of the divisions as revealed by the
calculations. (8 marks)
Reading for this question:
As above.
Approaching the question:
This method is not specifically explained in the textbook although
using gross book value for the investment is discussed. The instructions
in the question meant that it should not have been difficult to calculate
the ratios.
EBITDA, Gross Assets
ROI
206/1,040 = 19.8% 288/1,450 = 19.8%
Asset turnover (times)
500/1040 = 0.48
700/1450 = 0.48
EBITDA %
206/500 = 41.2%
288/700 = 41.1%
EBITDA, Gross Assets replacement cost
ROI
206/(1,112+ 200)
288/(1350 + 250)
= 15.7%
= 18%
Asset turnover (times)
500/1312 = 0.38
700/1600 = 0.44
EBITDA %
206/500 = 41.2%
288/700 = 41.1%
Using these methods it would appear that, based on the original cost of
fixed assets and ignoring the effect of depreciation on profits, all the
divisions are performing equally well (which may be the true
situation).
Using replacement cost Division G is showing slightly better returns
than the other divisions on ROI and asset turnover due to holding
newer assets.
d) Briefly explain which of the methods in (a) (c) above seems fairest for
evaluation purposes. (5 marks)
Reading for this question:
As above.
Approaching the question:
Any reasoned comments can earn good marks. Historical cost seems
the least fair method. Replacement cost method solves the anomalies
of higher assets prices in later years on both the balance sheet and
income statement but not the accumulated depreciation effect. This
can be resolved by using gross assets as in part c). EBITDA has the
same effect of focusing on what managers are achieving during the
year but may have unfair effects on divisions which are labour
intensive rather than capital intensive. This could encourage divisions
to invest in labour cost saving equipment which was not actually cost
effective. If this method were adopted stringent monitoring of project
14
379/1,900 = 19.9%
920/1,900 = 0.48
379/920 = 41.2%
379/(1,694+300)
= 19.0%
920/1994 = 0.46
379/920 = 41.2%
SECTION B
Answer one question from this section and not more than one further
question. (You are reminded that four questions in total are to be
attempted with at least two from Section A.)
Question 5
Discuss the relationship between financial (or stewardship) accounting and
management accounting. Identify and enlarge upon the similarities and the
key differences between the two disciplines. (25 marks)
Reading for this question:
Subject guide: Chapter 1; Horngren et al, Cost accounting: Chapter 1.
Approaching the question:
This question provides candidates with an opportunity to discuss all
the roles of management accounting. This should not be too difficult as
they just need to discuss, in a focused way, the various topics they have
studied. The financial accounting part may be harder for candidates
not specialising in accounting but is covered in the readings.
The chart below is adapted from the textbook, Exhibit 1.
Purpose of information
Primary users
Focus and emphasis
Rules on measurement and
reporting
Time span and types of
report
Management Accounting
Help managers with
operational and strategic
decision making to fulfill
organisational goals.
Managers of organisations
Financial accounting
Communicate organisations
financial position to
investors, banks, regulators
and other outside parties.
External users as above
Past-orientated
GAAP
National Company law
Audit required.
Annual and quarterly
financial reports, income
statement, balance sheet,
cashflow statement in
required formats. Mostly
summarised to cover
company as a whole with
some segmental reporting.
15
97 Management accounting
Question 6
What is meant by the balanced scorecard approach to management
information? Outline and discuss the four perspectives which are normally
identified in the balanced scorecard. Are there any further perspectives that
you might identify, and why? (25 marks)
Reading for this question:
Subject guide: Chapter 10, pp.104106 and references on p.99 relating
to Ittner C. and D. Larcker, and Kaplan R.S. and D.P. Norton; Horngren
et al, Cost accounting: Chapters 13 and 19.
Approaching the question:
An answer should cover each aspect of the question in a clear and
logical fashion.
The balanced scorecard approach to management information
emphasises the importance of directing all management activities and
measurement towards strategic goals, performance objectives and
management objectives. You should give reasons for using a mix of
several different measures and explain how you would determine
which ones to use. You could include examples of objectives, measures,
initiatives and outcomes and how the measures are used to create the
balanced score.
Outline and discuss the four dimensions identified by Kaplan and
Norton:
financial
16
Control:
Main problems:
managers using the cost for decision making may not realise that
the majority of the attributed costs are not avoidable if the product
is not made
17
97 Management accounting
Control:
Contribution targets are used (e.g. B/E, etc.) which are easier to set,
calculate and understand than profit targets set using absorption
costing.
Main problems:
determining the behaviour of costs which may involve semifixed, semi-variable or step-fixed costs, etc.
Cost centre.
Opportunity cost.
Throughput contribution.
Break-even chart.
Capacity variance. (25 marks)
Reading for this question:
Horngren et al, Cost accounting, pp.197, 764, 38890, 675677, 6566
and 272 (twelfth edition).
Approaching the question:
Good marks would be awarded for comprehensive definitions and
explanations of the management accounting contexts perhaps in two
or three contexts. These should be followed by several good examples
showing how the application contributes to the overall management
accounting framework. Some parts give the opportunity to provide
longer answers than others (e.g. there is more to say about cost centres
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