Accounting Technicians Ireland 2 nd Year Examination: Summer 2015 Paper: MANAGEMENT ACCOUNTING Monday 18 May 2015 2.30 p.m. to 5.30 p.m. Note: Examinees are permitted to use terminology of either International Accounting Standards (I.A.S’s) or Financial Reporting Standards (F.R.S’s) where appropriate (e.g. Receivables/Debtors) when preparing management accounting statements. INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY In this examination paper the €/£ symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in SECTION A and ANY TWO out of THREE questions in SECTION B. If more than the required number of questions is answered, then only the requisite number, in the order filed, will be corrected. Candidates should allocate their time carefully. All figures should be labeled, as appropriate, e.g. €/£’s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf.
Transcript
Accounting Technicians Ireland
2nd
Year Examination: Summer 2015
Paper: MANAGEMENT ACCOUNTING
Monday 18
May 2015
2.30 p.m. to 5.30 p.m.
Note:
Examinees are permitted to use terminology of either International Accounting Standards (I.A.S’s) or Financial Reporting Standards (F.R.S’s) where appropriate (e.g. Receivables/Debtors) when preparing
management accounting statements.
INSTRUCTIONS TO CANDIDATES
PLEASE READ CAREFULLY
In this examination paper the €/£ symbol may be understood and used by candidates in Northern
Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the
Euro.
Answer ALL THREE questions in SECTION A and ANY TWO out of THREE questions in SECTION
B.
If more than the required number of questions is answered, then only the requisite number, in the
order filed, will be corrected.
Candidates should allocate their time carefully.
All figures should be labeled, as appropriate, e.g. €/£’s, units etc.
Answers should be illustrated with examples, where appropriate.
Question 1 begins on Page 2 overleaf.
SECTION A
Answer All Questions
QUESTION 1 (Compulsory)
Taurus plc. is in the process of preparing budgets for the period January 2015 to March 2015. The following
information has been provided to assist in the budgeting process.
1. The cash balance on 1st
January 2015 is expected to amount to €/£14,000.
2. Budgeted monthly sales units for the first four months of 2015 are as follows:
January 12,000
February 18,000
March 15,000
April 14,000
3. Sales price is €/£5 per unit for January rising to €/£7 in March.
Sales are 30% cash and 70% credit. Credit sales are collected over a three month period, 10% in the
month of sale, 60% in the month following sale and 30% in the second month following sale.
Total sales revenue in November 2014 and December 2014 amounted to €/£45,000 and €/£54,000
respectively.
4. Cost of sales is expected to be 75% of sales revenue each month.
5. The business maintains its closing inventory levels at 60% of the following month’s cost of sales.
Inventory at the beginning of January is expected to amount to €/£27,000.
6. 65% of inventory purchased is paid for in the month of purchase and the remaining 35% is paid for in
the month following purchase. At the 31st December 2014 amounts owed for purchases are €/£13,800.
7. A loan of €/£40,000 is expected to be received in January. The company will repay this loan evenly
over 20 months commencing in February.
8. A van which cost €/£8,000 when purchased second hand three years ago is expected to be sold in March
2015 for €/£3,300. The expenses associated with this sale are expected to be €/£300.
9. Equipment costing €/£12,000 will be purchased in January and paid for in February. This equipment
will be depreciated on a straight line basis over three years.
10. Operating expenses are paid as incurred. These have been estimated as follows:
€/£
January 12,800
February 18,900
March 14,600
The above figures include depreciation on existing assets (excluding planned purchases/disposals
detailed above) of €/£2,000 per month.
Required: (a) Calculate the purchases requirement for each month from January 2015 to March 2015.
5 Marks
(b) Prepare a monthly cash budget for January, February and March 2015.
12 Marks
(c) Outline any three potential benefits from the preparation of the cash budget as prepared in part (b).
3 Marks
Total: 20 Marks
QUESTION 2 (Compulsory)
Venus plc. is reviewing its portfolio of products and has provided you with the following information in relation to budgeted sales for the product Pisces.
Sales units 100,000
€/£
Sales price per unit 15
Variable costs per unit 11
Net profit/loss 140,000
In order to assist the sales manager with further analysis, you are asked to prepare a number of calculations relative to this product line.
Required:
(a) Calculate the total fixed costs attributable to Pisces.
2 Marks
(b) Calculate the Contribution/Sales ratio for Pisces.
2 Marks
(c) Explain the term ‘breakeven’ and calculate the breakeven point for the product Pisces expressed in both
sales units and sales turnover. 4 Marks
(d) Explain the term ‘margin of safety’ and calculate the margin of safety percentage for Pisces.
4 Marks
(e) Venus plc. is considering a policy of requiring a target profit of 20% of turnover on all business lines.
Calculate the activity required by the product Pisces in order to generate this target profit.
4 Marks
(f) Cost Volume Profit (CVP) analysis is a model that is designed to help with decision-making. However
it is not without its assumptions and limitations that affect its validity.
List four limitations of CVP analysis.
4 Marks Total 20 Marks
QUESTION 3 (Compulsory)
Capricorn plc. makes three main products, using broadly the same production methods and equipment for
each. The company uses a traditional product costing system and absorbs its overheads on a labour hour
basis. However it is considering an activity based costing (ABC) system. Details of the three products for a
typical period are:
Product A Product B Product C Per unit
Labour hours 3 3 2
Machine hours 1 2 6
Material cost €/£40 €/£24 €/£50
Labour cost €/£20 €/£25 €/£28
Number of units produced 1,500 2,500 14,000
Production overheads can be analysed into the following cost pools:
€/£
Set-ups 235,000
Machinery 155,200
Materials handling 103,000
Inspection 206,800
Total production overhead 700,000
The following total activity volumes are associated with the product line for the period as a whole:
Product A Product B Product C Number of set ups 180 330 665
Number of material movements 24 42 176
Number of inspections 300 360 1,340
Required:
(a) Explain the terms ‘cost pools’ and ‘cost drivers’.
3 Marks
(b) Calculate the cost per unit for each product using Capricorn plc’s current method of absorbing overheads.
5 Marks
(c) Calculate the cost per unit for each product using ABC principles.
10 Marks
(d) Provide an explanation for the different costs per unit produced by (b) and (c) above.
2 Marks
Total: 20 Marks
SECTION B
Answer any two of the following questions
QUESTION 4
You have been asked by your manager to assist with the induction of a new member of the finance team.
After a number of days, the new staff member approached you with a number of queries about the
differences between the following terms which they have heard being used, but which they don’t understand:
1. Absorption and marginal costing
2. The FIFO and LIFO methods of inventory valuation
3. Process costing and batch costing
4. Cost centre and profit centre
5. Profit and cash-flow
Conscious of the importance placed upon clear guidance by your manager, and in order to provide
documentation for future reference, you decide that the best approach is for you to provide a written
explanation of each term.
Required:
Prepare brief notes which explain the difference between any four of the five above terms.
(Each part carries equal marks)
Total: 20 Marks
QUESTION 5
Arena plc. requires 3,000 composite hockey sticks for use in a project for one of its most highly valued
customers. Arena plc has never previously produced hockey sticks. However, management are currently deciding
whether to purchase the hockey sticks from another company at a price of €/£193,000 or to produce the
hockey sticks themselves. A junior member of the accounts department has estimated that the costs incurred by Arena plc in producing
3,000 hockey sticks would be as follows:
Note €/£
Material Carbon 10,000 kg 1 85,000
Material Kevlan 8,000 kg 1 88,000
Material Resin 6,000 kg 1 24,000
Skilled Direct Labour 85hrs. 2 3,900
Unskilled Direct Labour 110 hrs. 2 1,900
Depreciation of Equipment 11,000
Fixed Overheads 3 20,000
233,800
The following additional information is available in respect of the cost items listed above.
1. Arena plc. uses three types of materials in the production of its product. They already have sufficient stock
on hand for the production of the hockey sticks. The following price data is available in respect of each of
these raw materials:
Carbon
Alpha
Kevlan Resin
€/£ per kg €/£ per kg €/£ per kg
Original purchase price 8.5 11.0 4.0
Current purchase price 9.5 13.0 5.0
Realisable Value 7.0 10.5 nil
Arena plc. always maintains a stock of material carbon as it is used in virtually all of its production
processes. The stock on hand of material Kevlan was purchased several years ago for another project which was
cancelled at short notice. Management does not have any use for material kevlan other than in the
production of hockey sticks. If the stock of material Resin is not used in the production of the sticks it will have to be disposed of at
cost of €/£0.80 per kg.
2. Skilled direct labourers are paid a fixed weekly wage and are currently under-utilised. It is expected that
the hours of skilled labour required for hockey sticks will be met out of what is currently classified as
idle time. The unskilled direct labour relates to hours worked by casual employees who are employed as required
and paid an hourly rate.
3. If the company decides to produce hockey sticks it is estimated that incremental fixed overheads
incurred directly in respect of producing hockey sticks will amount to €/£8,300
4. If the equipment is not required for the production of the hockey sticks, it may be hired out for €/£1,500.
Required: (a) On the basis of the financial information provided above, recommend whether Arena plc. should
produce hockey sticks internally or purchase them from another company.
Support your answer with relevant workings.
16 Marks
(b) Suggest any four qualitative factors which Arena plc. should consider before arriving at a
decision whether to produce the hockey sticks internally or source them externally.
4 Marks
Total: 20 Marks
QUESTION 6
The Irish division of Acquaris plc. has taken over the production and sale of the product Star-2. The product is made to order, so no inventories are carried. Acquaris plc. operates an absorption costing system.
You have been provided with the following budget data for the first quarter:
Standard data for the first quarter
. €/£ per unit
Sales price 85.00
Materials 4 kg 20.00
Direct Labour 2 hours 18.00
Variable Overhead 2 hours 22.00
Fixed Overhead 2 hours 10.00
Total costs 70.00 Budgeted production 8,000 units
Actual results for the first quarter
Production and sales 7,500 units
€/£
Sales 685,000
Materials (36,000 kg) 208,800
Direct Labour (18,000 hrs.) 158,600
Variable Overhead 172,000
Fixed Overhead 95,000
Required:
(a) Prepare a statement which reconciles the actual with budgeted profit, after identifying all variances.
16 Marks
(b) Outline two benefits and two limitations of a standard costing system. 4 Marks
Total 20 Marks
END OF PAPER
Management Accounting May 2015 2nd
Year Paper
Page 1 of 19 Management Acc S2015
Management Accounting
2nd
Year Examination
May 2015
Exam Paper, Solutions & Examiner’s Comments
Management Accounting May 2015 2nd
Year Paper
Page 2 of 19 Management Acc S2015
NOTES TO USERS ABOUT THESE SOLUTIONS
The solutions in this document are published by Accounting Technicians Ireland. They are intended to
provide guidance to students and their teachers regarding possible answers to questions in our
examinations.
Although they are published by us, we do not necessarily endorse these solutions or agree with the views
expressed by their authors.
There are often many possible approaches to the solution of questions in professional examinations. It
should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us.
Alternative answers will be marked on their own merits.
This publication is intended to serve as an educational aid. For this reason, the published solutions will
often be significantly longer than would be expected of a candidate in an examination. This will be
particularly the case where discursive answers are involved.
This publication is copyright 2015 and may not be reproduced without permission of Accounting
Material Carbon As Material Carbon is used in virtually all of the company's production processes, any stock which is utilised will have to be replaced at the current purchase price and therefore the current purchase price of €/£9.50 should be used to determine the relevant cost of material carbon consumed. Material Kevlan Material Kevlan has no alternative use within Arena plc. and therefore it may be assumed that if it is not required for the hockey sticks management will act rationally to optimise profitability and avail of the opportunity to sell it at the current selling price of €10.50 per kg.
Skilled labour As there is sufficient idle skilled labour hours to meet the requirements for the production of the hockey sticks no extra charge will be incurred if the hockey sticks are produced and therefore the relevant cost of skilled labour is zero. Unskilled labour The costs associated with unskilled direct labour are all relevant as unskilled labourers are employed as required and therefore these costs will only be incurred if the hockey sticks are produced.
Depreciation Depreciation costs are always irrelevant, how the contribution foregone as a result of not being able to hire out the equipment is an opportunity cost incurred as a consequence of producing the hockey sticks. Fixed overheads Only the €/£8,300 in fixed overheads which would specifically be incurred as a consequence of producing the hockey sticks are relevant costs.
(b) Others answers to this question would be acceptable. These include the following: 1
(i) Has the external supplier the skill to produce the sticks? 1
(ii) Will they be of a high quality because this is valued customer? 1
(iii) How will staff react to the opportunity of engaging in the production of the hockey sticks? 1
(iv) Would the time involved in producing the sticks leave less time for the production of other
products? 1
Management Accounting May 2015 2nd
Year Paper
Page 16 of 19 Management Acc S2015
Examiner Comments on Question Six
SOLUTION 6
Sales price variance
€/£
Total
Marks
Allocated
7,500 units should have revenue of
(€/£85) 637,500
7,500 units did have revenue of 685,000
Variance 47,500F 1
Sales volume variance
Units
Budgeted sales volume 8,000
Actual sales volume 7,500
500A
x standard profit per unit €/£15
Variance €/£7,500A 1
Material price variance
€/£
36,000 kg should have cost (x €/£5) 180,000
36,000 kg did cost 208,800
Variance 28,800A 1
Material usage variance
Kg
7,500 units should have used (7,500 x
4) 30,000
This question was optional and tested the candidate’s knowledge of standard costing and variance analysis. It is
obvious from the standard of answers that standard costing and variance analysis is a problem area for students.
This has been a consistent pattern over the past few sittings despite the fact that this area is comprehensively
covered in the study text. It has also been examined at every sitting to date and also features prominently in the
sample papers.
Part (a) of the question required candidates to calculate variances and then prepare reconciliation between budgeted
and actual profit.
The standard of answers was very mixed. In relation to the calculations of the variances many candidates scored full
marks whilst others seemed to have difficulty with the calculation of the material usage, labour efficiency and
variable overhead efficiency variances.
Most candidates did not perform well in the production of an operating statement which was required in order to
reconcile budgeted with actual profit. This applied even in the case of students that performed well in the
calculation of the variances.
Part (b) of the question required candidates to outline two benefits and two limitations of standard costing. This
question was exceptionally well answered by the majority of candidates including those that did not perform well in
part (a).
Management Accounting May 2015 2nd
Year Paper
Page 17 of 19 Management Acc S2015
7,500 units did use 36,000
6,000A
x standard cost per kg €/£5
Variance €/£30,000A 1
Labour rate variance
€/£
18,000 hours should have cost
(18,000 x €/£9) 162,000
18,000 hours did cost 158,600
Variance 3,400F 1
Labour efficiency variance
Hrs.
7,500 units should have used (7,500 x
2)) 15,000
7,500 units did use 18,000
3,000A
x standard cost per hr. €/£9.00
Variance €/£27,000A 1
Variable overhead rate variance
€/£
18,000 hours should have cost
(18,000 x €/£11) 198,000
18,000 hours did cost 172,000
Variance 26,000F 1
Variable overhead efficiency
variance
Hrs.
7,500 units should have used (7,500 x
2)) 15,000
7,500 units did use 18,000
3,000A
x standard cost per hr. €/£11.00
Variance €/£33,000A 1
Fixed overhead expenditure
variance
€/£
Budgeted fixed overhead 80,000
Actual fixed overhead 95,000
Variance 15,000A 1
Fixed overhead volume variance
Hrs
Budgeted output 8,000 units x 2 hrs 16,000
Management Accounting May 2015 2nd
Year Paper
Page 18 of 19 Management Acc S2015
Actual output 7,500 units x 2 hrs 15,000
1,000
x standard rate per unit €/£5.00
Variance €/£5,000A 1
Reconciliation of actual with
budgeted profit
€/£ €/£ €/£
Budgeted profit (8,000 x €/£15) 120,000
Sales volume variance
7,500A 6
Budgeted profit on actual sales
units 112,500
Revenue variance
Sales price 47,500F
Cost variances
Direct material price 28,800A
Direct material usage 30,000A
Labour rate 3,400F
Labour efficiency 27,000A
Variable overhead rate 26,000F
Variable overhead efficiency 33,000A
Fixed overhead expenditure 15,000A
Fixed overhead volume ________ _5,000 A
76,900F 136,300A 61,900
A
Actual profit 50,600
Management Accounting May 2015 2nd
Year Paper
Page 19 of 19 Management Acc S2015
(b) The benefits and limitations of a standard costing system
Benefits
i. The use of standards costs is fundamental to the management by objectives approach. When costs
are out of control then managers can divert their attention to them.
ii. They provide benchmarks for employees against which they can monitor their performance.
iii. They can simplify book-keeping. Instead of recording actual costs the company book-keeper can
record standard costs.
iv. Standard costs fit naturally in an integrated system of responsibility accounting.
Total Marks Allocated
2 marks
Limitations
i. Variances can only be calculated after they have occurred.
ii. Sometimes standards can be unattainable which causes negative morale amongst employees.
iii. Labour rate and efficiency variances assume that labour cost is variable whereas it can be fixed.
