Final Exam 2016, questions PDF

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ACCT20001 Cost Management Department of Accounting Faculty of Business and Economics Final Examination Paper - Semester 2, 2016 Student Number: Examination Details: Reading Time Exam Duration Exam Booklet Fifteen (15) minutes Three (3) hours This paper has thirty (30) pages Candidates are permitted ...

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ACCT20001 Cost Management Department of Accounting Faculty of Business and Economics

Final Examination Paper - Semester 2, 2016

Student Number:

Examination Details: Reading Time Exam Duration Exam Booklet

Fifteen (15) minutes Three (3) hours This paper has thirty (30) pages

Candidates are permitted to use non-programmable calculators Instructions to Invigilators: Candidates ARE NOT permitted to write during reading time. Dictionaries ARE NOT permitted to be used. This examination booklet IS NOT to be removed from the examination venue. This paper IS NOT to be released to the Baillieu Library Instructions to Students: This paper consists of five (5) questions, worth 100 marks in total. This paper represents seventy (70) % of the total assessment for this subject. Clearly label the front page of this examination booklet with your student number. You may not write in this examination paper during reading time. This examination paper is not to be removed from the examination venue and must be submitted intact. Failure to submit this examination booklet intact with your student number clearly indicated may result in an examination mark of ZERO (0). Do not open this examination booklet until you are instructed to do so. Authorised Materials:

QUESTION MARKS ACTUAL

One

Two

Three

Four

Five

Total

20

21

23

21

15

100

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Question One: [20 Marks] The Trendy Shoe Company (the Company) designs, manufactures and sells shoes for adults to retail chains in a highly competitive global footwear industry. It started operations on 1 January 2015 and currently produces 6 different shoe models. The Company prepares financial statements in accordance with the Australian Accounting Standards and uses the following costing systems / approaches: • • •

Process Costing Activity-Based Costing System to allocate indirect costs Normal Costing with any difference between the allocated and incurred indirect manufacturing cost written off solely to the Cost of Goods Sold (COGS) account at the end of the financial year.

a) John Smith, a new employee of the Company, is unfamiliar with some of the cost accounting concepts and choices made by the Company. Please help him by explaining the following: (i) What is the definition of an indirect cost? [ 2 marks]

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(ii) Would the Company’s choice of the Normal Costing method enable a more accurate calculation of total manufacturing cost per unit of output prior to the end of the period compared to if it adopted the Actual Costing method instead? Explain. [4 marks]

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The following information on the Company’s batch-level indirect manufacturing costs for 2015 relates to parts (b) - (d) below: • The forecasted batch-level indirect manufacturing costs was $250,000 • The forecasted allocation base quantity for batch-level indirect manufacturing costs was 20,000 units • The actual batch-level indirect manufacturing cost incurred was $300,000 • The actual allocation base quantity for batch-level indirect manufacturing costs was 25,000 units b) What is a batch-level cost? Provide one example of a batch level cost. [3 marks]

c) What is the total batch-level indirect manufacturing cost that was allocated to units of output in 2015 before any adjustment entries were made? Is the Cost of Goods Sold amount overstated OR understated in 2015 with respect to batch-level indirect manufacturing costs (before any adjustment entries)? Explain. [3 marks]

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d) The Company’s chosen approach to write off the difference between the allocated and incurred indirect manufacturing cost solely to the Cost of Goods Sold (COGS) account is not the most accurate approach as it ignores adjustments that should also be made to other accounts. What are two factors that would affect the extent (or size) of the inaccuracy of using this approach? State whether an increase in each of these factors would lead to an increase OR decrease in the extent (or size) of the inaccuracy. [4 marks]

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The information in the table below relates to one of the Company’s shoe models (Squid Ink) in the Company’s first month of operations (January 2015). Use this information to answer parts (e) and (f). Squid Ink Shoe Model – Manufacturing Costs Period: Physical units Direct Conversion Notes materials cost cost 1 - 31 January 500 units started; 400 $10,000 $4,500 Work in Progress 2015 units completed and (physical) units at transferred out. the end of January was 100% complete Of the 400 units with respect to direct completed and materials and 50% transferred out, 300 complete with units were sold in respect to January 2015. conversion e) What is the manufacturing cost of a unit of Squid Ink that was completed and transferred out during the month of January 2015? [2 marks]

f) What is the total manufacturing cost of Squid Ink that was expensed during the month of January 2015? [2 marks]

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Question Two [21 marks] The Melbourne Manufacturing Company (the Company) manufactures and sells 3 products: Orange, Pink and Blue. The Company’s Sales Team is responsible for securing orders from customers. Information on product prices, costs, capacity use, and available capacity for December 2016 is provided in the Product and Capacity Table below: Product and Capacity Table for December 2016 Information on the three products Selling price Variable cost Fixed cost

Machine Hours required Direct Labour Hours required

Orange $500.00 $150.00 $20.00

Pink $400.00 $100.00 $20.00

Blue $300.00 $50.00 $20.00

Notes Per unit Per unit Per unit; consists of : • Machine depreciation costs. • Direct labour (fixed) salaries.

3

3

3

Per unit

10

5

1

Per unit

Information on capacity available to manufacture the three products Total Machine Hours available

35,000 hours

Per month

Total Direct Labour Hours Available

65,000 hours

Per month

Machine and Direct Labour capacity is fixed over a 3 month timeframe. In other words, it would take at least 3 months from the time a decision is made by the Company for Machine and/or Direct Labour capacity to increase or decrease.

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a) It is now 1 November, 2016. The Company still has excess machine and direct labour capacity to accept orders for production and delivery in December, 2016. Which one out of its three products should the Company’s Sales Team prioritise selling for production and delivery in December, 2016 in order to maximise profit in December 2016? Consider quantitative factors only. Explain. [4 marks]

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b) It is now 28 November 2016. The orders received by the Company for production and delivery to customers in December 2016 are as follows: • Product Orange: 5,000 units • Product Pink: 2,000 units • Product Blue: 3,000 units The Company has just realised that the total direct labour hours it has available in December 2016 is actually 50,000 hours and not 65,000 hours as indicated in the ‘Product and Capacity Table for December 2016’. This reduction in available direct labour hours is due to an error in its information systems which had failed to incorporate the end-of-year leave plans of employees. Given this new information (and other information in the ‘Product and Capacity Table for December 2016’): (i) Prepare a quantitative analysis that would help the company decide which of its products it should prioritise producing and delivering to customers in the month of December, 2016. Determine the order of priority. [ 4 marks]

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(ii) How many units of each product should the company produce and deliver in December, 2016 based on the quantitative analysis done in part (i)? [2 marks]

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(iii) What are two qualitative factors that the Company would need to consider when deciding which products it should prioritise producing and delivering in December 2016? [3 marks]

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c) It is now 29 November 2016. The Company has just received an unexpected order for 50 units of product Orange from Happy Inc., a new customer who is willing to pay a price of $550 per unit. Happy Inc. requires the units to be produced and delivered in December 2016. Including Happy Inc.’s order, the total orders received for December 2016 are now as follows: • Product Orange: 5,050 units • Product Pink: 2,000 units • Product Blue: 3,000 units The total available direct labour hours for December 2016 are still 50,000 hours as per part (b). The rest of the information contained in the ‘Product and Capacity Table for December 2016’ (i.e., apart from total available direct labour hours) remains unchanged. (i) With Happy Inc.’s order of 50 units of Orange at $550 per unit, should the Company now produce more of Product Orange in December, compared to your answer in part b(ii)? Explain. Consider quantitative factors only. [5 marks]

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(ii) What are two qualitative factors that the Company would need to consider when deciding whether to accept Happy Inc.’s order. [3 marks]

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Question Three: [23 Marks] The Car Accessories and Parts Company (the Company) imports car accessories/parts and then sells them to its customers. The Company’s customers consist of large retailers (e.g., Big W, Target) and small independent car repair shops. The Company has a Sales Team who is responsible for securing sales to its customers; and a Purchasing Team who is responsible for sourcing the products (i.e., finished goods) from suppliers globally. Data regarding the company’s activities for the upcoming year are as follows: • Sales are budgeted at $500,000 in January 2017, $600,000 in February 2017 and $750,000 in March 2017. This is based on information submitted by the Sales Team. • Collections (in cash) from customers are expected to be 80% in the month of sale and 15% in the month following the sale. The remaining 5% is uncollectible and is written off as bad debt. For example, 80% of November’s sales are collected in November, while 15% are collected in December. • The cost of goods sold is expected to be 60% of sales in 2017. • The Purchasing Team plans to purchase all the goods that are expected to be sold to customers in the month prior to the month of sale. • Payment for the goods purchased is made in the month following the purchase. For example, purchases made in the month of November are fully paid for (in cash) in the month of December. • Budgeted monthly depreciation in 2017 is $30,000 • Other budgeted monthly expenses in 2017 amount to $150,000 - all of which to be paid in cash in the same month • The company does not plan to undertake any financing and investing activities in the first quarter of 2017 (i.e., January 2017 – March 2017) • Cash balance as at 1 February, 2017 is budgeted to be $5,000. • Ignore taxes. a) Describe how the budget/budget process could be used as a coordination mechanism between the Company’s Sales Team and Purchasing Team. [3 marks]

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b) The Company also uses the budget as a basis to evaluate the performance of the Sales Team staff. (i) What is one potential issue/risk that may arise as a result of using the budget as both a coordination mechanism and a basis to evaluate the performance of the Sales Team? Explain. [3 marks] (ii) How would the issue/risk described in part b(i) affect the Company’s profit? Explain. [2 marks]

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(iii) What is one thing that the Company can do to reduce the issue/risk described in part b(i)? Explain. [3 marks]

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c) What is the Company’s budgeted cash balance at the 28 February 2017? To answer this question, you could EITHER complete the Cash Budget template below OR use the space on the following page to calculate the answer using your preferred approach/template. Note: Not all of the rows/lines in the Cash Budget template below need to be filled.

Item

Cash Budget Template [7 marks] February 2017 ($)

____________________________________

_______________________

Add: ____________________________________

_____________________

____________________________________

_____________________

____________________________________

_____________________

____________________________________

_____________________

Less: ___________________________________

____________________

___________________________________

____________________

___________________________________

____________________

___________________________________

____________________

Equals: Cash Balance as at 28 February 2017:

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____________________

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d) Would the Company need to borrow funds from its bank in February 2017? Explain. [2 marks]

e) Subsequent to the preparation of the Company’s budgets for 2017, one of the Company’s customers unexpectedly ceased operations on 1 December 2016 due to financial difficulties. What advice would you give the Company with respect to its budget for January-March 2017 in response to this new development? [3 Marks]

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Question Four [21 marks] The Doggles Company (the Company) manufactures a variety of UV protection goggles for dogs. One of its most popular products is the Originalz. At the beginning of each year, the management accountant estimates the cost of a unit of Originalz for the coming year. These estimates (i.e., standards) are used as a benchmark against which the actual cost of production is compared. The standard (or budgeted) direct costs per unit of Originalz in 2015 are as follows: • Direct materials: 0.4 kg per unit at $20.00 per kg = $8 per unit • Direct labour: 0.2 hours per unit at $30.00 per hour = $6 per unit The budgeted production level for Originalz in 2015 is 60,000 units. The actual results for Originalz in 2015 are as follows: • Number of units produced: 50,000 units • Direct materials purchased: 25,000 kg • Direct materials used: 22,000 kg • Cost of direct materials purchased: $600,000 • Direct labour used: 9,000 hours • Direct labour cost: $360,000 Allocation base for all manufacturing overhead costs: direct labour hours a) Compute the direct materials quantity (or efficiency) variance for 2015. Indicate whether the variance is favourable or unfavourable. [2 marks]

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b) Compute the direct materials price variance for 2015. Indicate whether the variance is favourable or unfavourable. [2 marks]

c) Compute the direct labour price/rate variance for 2015. Indicate whether the variance is favourable or unfavourable. [2 marks]

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d) Compute the direct labour efficiency variance for 2015. Indicate whether the variance is favourable or unfavourable. [2 marks]

e) Does the Company have a favourable or unfavourable fixed manufacturing overhead volume variance for 2015? Explain. Calculations are not required. [3 marks]

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f) Does the Company have a favourable or unfavourable variable manufacturing overhead efficiency variance for 2015? Explain. Is this variance a true reflection of the company’s efficiency with respect to its use of variable manufacturing overhead? Explain Calculations are not required for this question.

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[ 2+ 2 marks]

g) Ms. Peters, the production manager at the Company wants to adopt lean principles to improve her materials quantity / efficiency variance. More specifically, she would like the company to reduce the size of each direct materials order placed with suppliers i.e., smaller quantity of direct materials per order but with more frequent orders. (i) Explain how a reduction in order size could improve the materials quantity / efficiency variance (ii) What is one other variance that could be affected by the reduction in order size? Explain. [3 + 3 marks]

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Question Five [15 marks] Steven and Ling recently opened an antique furniture restoration business, The Unique Antique Furniture Company (the Company). Steven and Ling work full-time in the Company, which does not have any other employees. They purchase unique old pieces of furniture, restore them in a workshop, and then sell them through a small showroom which is attached to their workshop. Given the small size of the showroom, many restored furniture pieces lie in the workshop waiting for space in the showroom to become available. The showroom and workshop are leased by the Company. The restoration process undertaken can involve repairing broken pieces, painting, mending tears to the fabric, and getting rid of scratches and dents. Once a piece of restored furniture is purchased by a customer, the company will package the item securely and arrange delivery to the customer’s nominated address at no additional cost to the customer. In other words, the selling price of each piece of furniture in the showroom includes packaging and delivery services. Deliveries to customers are done by an external delivery service provider and the Company is charged for each item that is delivered. a) Which long-term pricing approach should the Company use to determine the price of a particular piece of restored furniture in the showroom? Explain. [2 marks]

b) What are two factors that the Company should consider when deciding on the appropriate amount of profit or mark-up for a particular piece of restored furniture in the showroom? Explain. [3 marks]

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c) There is a particular coat rack, named ‘The Octopus’ in the Company’s showroom that has been unsold for a long time. The showroom price of The Octopus had been determined using an appropriate long-term pricing approach. Details on the costs incurred by The Octopus are as follows: • Purchase price (unrestored): $10 • Variable cost of restoration: $10 • Fixed cost of restoration: $5 The Company has decided to reduce the price of The Octopus in order to get it sold as quickly as possible without incurring any further loss on this item. What should the Company consider when deciding on the discounted selling price of The Octopus? Explain. Include the following in your answer: • Whether the three cost items listed above (i.e., purchase price, variable and fixed restoration costs) should be considered • Any opportunity cost(s) that should be considered If necessary, include any assumption(s) you make to justify your answer. Calculations are not required.

[5 marks]

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d) Steven is keen on using Cost-Volume-Profit analysis to give the Company a sense of the number of restored furniture items that need to be sold each year in order to break-even. However Ling disagrees with Steven and believes that CVP is of little use given the nature of their business. Do you agree with Steven or Ling? Explain. [5 marks]

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Additional writing space – please label question number clearly

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End of Exam Paper Page 30 of 30...