Management Accounting Practice Questions and Answers PDF

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Management(Accounting(practice(questions( (MSIN7016,(MSIN7016A,(MSIN716P)( ! Topic( Full!costing! ! CVP!&!Contribution! ! Absorption!&!ABC! ! ! Relevant!costs!&!limiting! factors! ! ! ! Standard!costing!&! overhead!absorption! ! Variance!analysis!&! accounting!for!control! ! ! ! ! ! ! !

Question(

Question( Page( 2! 3! 4! 4! 5! 6! 7! 8!

Answer( Page( ! ! ! ! 17! 18! 20! 21!

Answer(( Excel(tab( 1! 2! 3! 4! ! ! ! !

2!Relevant!cost! 3!Relevant!cost! 3!Limiting!factor! 1!

9! 10! 12! 13!

22! 23! 24! !

! ! ! 5!

2! 1!Newcastle!

14! 15!

! !

6! 7!

2!Borrico!

16!

!

8!

1!Wexford! 2!Magpie!printing! 1!Compact!disc! 2!Summer!chair! 1!Eleplanter! 2!Chess!engineering! 3!Morgan!chadwick! 1!Mr!Frost!

!

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Full(costing:(Q1.(Wexford( ( Wexford!plc!manufactures!high!quality!wooden!toys.!Production!varies!from!long!runs!of! popular!models!to!short!runs!of!specifically!produced!expensive!toys.!The!factory!is!divided! into!five!cost!centres!for!analysis!purposes:! ! Production:! Cutting,!Assembly,!Finishing! ! Service:! Design,!Stores.! ! The!company’s!system!for!dealing!with!budgeted!factory!overheads!is!as!follows:! (i)

Where possible budgeted overheads are allocated to the five cost centres above. Any costs which cannot be directly allocated to cost centres are allocated to an overall Factory cost centre and apportioned to the five cost centres according to floor area.

(ii)

Budgeted stores overheads are apportioned to the other four cost centres according to the value of materials requisitions.

(iii)

Budgeted design overheads are apportioned to the production cost centres in equal proportions.

(iv)

Production overheads are charged to production runs on the basis of machine hours in each of the three production cost centres.

! Budgeted!data!for!the!year!ending!31!December!2011.! ! Allocated(Costs( Cutting( Assembly(

Design(

Stores(

! 108,600!

! 126,100!

! 18,500!

780!

!

12,640!

!

4,650!

!

600!

Machine!Costs!(£)!

! 64,000! ! 56,400!

!

48,900!

!

63,400!

!

2,900!

Other(Data!

!

!

!

Floor!Area(m2!

!

770! !

1,310!

!

1,080!

!

480!

Material!Requisitions!(£)!

! 97,760! ! 109,400!

!

45,000!

!

4,640!

-!

Material!Requisitions!(No.)!!

!

!

1,200!

!

550!

-!

Indirect!Labour!(£)!

! 72,400! ! 83,900! 1,850 !

Indirect!Materials!(£)!

800! !

750!

Finishing(

!

!

Machine!Hours! ! 180,000! ! 85,000! ! 240,000! -! ! Unallocated!budgeted!factory!costs!amount!to!£184,000.! ! REQUIRED( ( Calculate a machine hour absorption rate for each of the three production cost centres. !

2

!

360!

-!

Full(costing:((Q2.(The(Magpie(Printing(Company(((Company!Data:( ! !

Type(Set(Department!

Printing(Department!

Number!of!Direct!Employees!

!

6!

!

10!

Area!m2!

!

1,000!

!

5,000!

Direct!Labour!hours!

!

9,000!

!

16,000!

Machine!hours! Cost!of!Equipment!(£)!

! !

5,000! 100,000!

! !

40,000! 150,000!

Ratio!of!Power!Usage!

!

1!

!

9!

Direct!Materials!(£)!

!

10,000!

!

80,000!

Direct!Labour!(£)! ! 60,000! ! 80,000! ! Required:( ( 1.! Carry!out!an!overhead!analysis!and!calculate!production!overhead!absorption!rates! for!each!department.!The!layout!and!some!data!is!given!below:! ( ( Overhead(Analysis(Statement((£s)( ( Description( Basis( Total( Type(Set( Printing( Indirect!Materials!

! 2.! !

! 3.!

!

!

!

!

!

1,000!

!

1,000!

Indirect!Labour!

!

!

!

1,000!

!

4,000!

Rent!and!Rates!

!

!

15,000!

!

!

Manager’s!Salary!

!

!

14,000!

!

!

Secretary’s!Salary!

!

!

7,000!

!

!

Power! Equipment!Depreciation!

! !

! !

5,000! 25,000!

! !

! !

Building!Insurance! Total!

! !

! !

500!

! !

! !

Absorption!Rates!

!

!

!

!

!

Prepare!a!quotation!for!a!job!which!is!to!produce!2,000!copies!of!a!town!guide,!from! the!following!information,!assuming!the!company!uses!a!20%!mark!up!on!total!cost:! ( ( Type(Set( Printing( Direct!Materials!

!

£50!

!

Direct!Labour!(hours)! Machine!hours!

! !

50! 10!

! !

15p!per!copy! 60! 200!

How!does!the!quotation!change!if!you!change!some!of!your!assumptions!in!the! calculation!of!the!absorption!rates?!

!

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! Cost(Volume(Profit((&(Contribution:(Question(1( ( Compact! Discs! is! a! thriving! music! business,! buying! and! selling! CDs! to! the! public.! They!sell!2!ranges!of!CDs,!Classical!and!Popular.! The!following!information!is!available!to!you:! Classical( Popular( ! Selling!price!per!CD! £4! £10! Buying!price!per!CD! £2! £6! Contribution!per!CD! £2! £4! ! For! every! 4! CDs! sold,! 3! are! popular! and! 1! is! classical.! The! shop’s! fixed! costs! for! wages,!rent!etc.!are!£50,000.! ! Required:) a) Calculate!the!breakeven!point!for!the!business,!in!terms!of!CDs!to!be!sold.! b) What!would!the!shop’s!profit!/!loss!be,!if!they!sold!22,000!CDs!in!a!year?! c) If!the!business!decided!to!open!another!shop!in!a!nearby!town!–! Shaw!Heath! –! which!was! to!have! annual!running! costs!of! £36,000,!what! would!the! combined! breakeven!point!of!the!2!shops!be?! ! ! ! Cost Volume Profit & Contribution: Question 2. Summer Chair Designer plc manufactures a single product, with the following sales and production cost data: Current planned sales Selling price Variable production costs Fixed production cost

8,000 units £550 per unit £125 per unit £1,200,000 per annum

Calculate the following:

!

a) The profit at 6,000 units. b) The break-even point in units. c) The break-even point in pounds (£) of sales given that the fixed production costs increase to £1,500,000. d) What is the margin of safety at the current level of planned sales. !

4

Traditional Costing & Activity Based Costing Questions: Q1. Eleplanters Limited produces plant display units formed in the shape of elephants. The production process involves the mixing and shaping of the raw material using a computerised shaper and the subsequent manual finishing of the product. Three grades of the Eleplanter are produced: the Deluxe, Standard and Economy models. The following budgeted data has been obtained for the year ended 31 December 2005.

Direct materials (kg/unit) Direct materials (£/unit) Direct labour (minutes/unit) Shaping machine time (minutes/unit) Production quantity (units) Units per production run

Deluxe

Standard

Economy

8 18 40 15 1,800 200

12 26 90 30 2,400 400

6 14 120 45 600 100

Budgeted production overheads: Inspection costs Computerised shaper costs Material handling costs

£34,000 £48,120 £26,200

Budgeted wage rate is £7.50 per hour. Overhead costs for inspection, computerised shaping and material handling are presently absorbed by product units using rates per direct labour hour. Eleplanters Limited are considering implementing a system of activity based costing. Cost drivers for the production overheads have been identified as follows: Inspections costs Computerised shaper costs Material handling costs

Number of production runs Shaping machine hours Quantity of material handled

You are required to: (a) Calculate the unit costs for each grade of planter using: (i) (ii) (b)

the existing absorption costing approach; the proposed ABC approach;

Comment on your findings in (i) and (ii) above.

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Traditional Costing & Activity Based Costing Questions: Q2. Chess Engineering Ltd make two products Knight and Rook. The budgeted cost and operating data for both products are: Product Knight Selling price per unit £50 Variable cost per unit £35 Machine hours per unit 0.3 Output per week 400

Rook £70 £50 0.6 600

Weekly overheads are: Activity Setting up machine Storing and issuing material Maintaining machines

Cost driver Number of batches Material requisitions Machine hours

Cost pool £1,250 £3,150 £2,400

Core costs of £8,000 per week (senior management and administration) are not affected by production activity. The products are produced in batches of 20 units at a time. A Knight is made from 6 separate items and so 6 material requisitions are needed for each batch manufactured. A Rook is made from 11 different items so 11 material requisitions are needed per batch. Required; (a)

Calculate the activity based cost per unit of cost driver consumed.

(b)

Prepare a budgeted weekly operating statement for Chess Engineering. You should show the following separately, within the statement. The budgeted output for each product per week; The contribution to profits for each product and in total before charging activity based costs; The profit for each product and in total after charging activity based costs but before charging core costs (non activity based costs). The total profit after charging core based costs.

1) 2) 3) 4) (c)

Discuss the advantages of using an ABC approach to product costing compared to using absorption or marginal costing approaches.

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Traditional Costing & Activity Based Costing Questions: Q3. Morgan Chadwick Ltd is a firm of financial consultants which offers short revision courses on taxation and auditing for professional examinations. The firm has budgeted annual overheads totalling £152,625. Until recently the firm has applied overheads on a volume basis, based on the number of course days offered. The firm has no variable costs and the only direct costs are the consultants' own time which they divide equally between their two courses. The firm is considering the possibility of adopting an Activity Based Costing system (ABC) and has identified the overhead costs as shown below. Details of overheads: Centre hire Enquiries administration Brochures Total

£ 62,500 27,125 63,000 152,625

The following information relates to the past year and is expected to remain the same for the coming year. Course No. of courses Duration of sold course Auditing Taxation

50 30

2 days 3 days

No. of enquiries No. of brochures per course printed per course 175 300 70 200

All courses run with a maximum number of students (30), as it is deemed that beyond this number the learning experience is severely diminished, and the same centre is hired for all courses at a standard daily rate, The firm has the human resources to run only one course at any one time. Required: (a) Calculate the overhead cost per course for both auditing and taxation, using traditional volume based absorption costing. (b) Recalculate the overhead costs per course using activity based costing and explain your choice of cost driver in your answer (c) Indicate briefly which ways ABC can provide more meaningful information for the consultants as opposed to using the traditional absorption costing system based on volumes? Illustrate your answer using your findings from your calculations above. ! !

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! Relevant(costs(&(Limiting(factors!Q1.!Mr.!Frost!owns!and!occupies!a!two-storey! house!in!which!gas!fired!central!heating!is!installed!to!the!ground!floor!only.!Oil! convector!fires!heat!the!first!floor.!The!original!cost!of!the!gas!fired!central!heating! was!£2,500,!and!of!the!oil!heaters,!£500.!The!oil!heaters!have!no!resale!value.!He!is! considering!whether!to!dispose!of!the!oil!heaters!and!extend!the!gas!central!heating! to!cover! the!whole!house.!He!intends!to!sell!the!house!in!3!years!time!and!believes!that!the! extension!to!the!central!heating!will!add!£1,500!to!the!resale!value!of!the!house.! ! He!has!received!a!quotation!of!£2,000!for!the!extension.!The!expected!annual!fuel! costs!of!the!part!central!heating!are!£240!as!opposed!to!the!annual!costs!of!a!full! system,!which!are!estimated!at!£450.!Fuel!and!maintenance!for!the!oil!heaters!costs! £150!each!year.!Mr.!Frost!pays!British!Gas!£150!per!annum!to!service!and!maintain! the!part!heating!system!and!does!not!expect!this!cost!to!alter!if!the!system!is! extended.! ! Required:( a)!Draw!up!a!schedule!showing,!in!one!column,!the!relevant!numeric!costs!of! extending!the!system!and,!in!the!next!column,!the!relevant!numeric!costs!of! retaining!the!present!system.! ! Briefly!describe!each!item!that!you!list.!In!a!third!column,!calculate!the!differences! between!the!first!two!columns!and!demonstrate!the!most!cost-efficient!option!to!Mr.! Frost.!Assume!that!Mr.!Frost’s!predictions!are!sufficiently!accurate.!Ignore!inflation! and!the!time!value!of!money.! b)!Given!the!conditions!in!‘a)’!above,!explain!why!Mr.!Frost!might!decide!not)to! choose!the!most!numerically!cost-effective!option.!! ! !

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! Relevant(costs(Q2.!Relevant!Cost!Problem! 1) A!garage!has!an!old!car!standing!around!that!it!bought!several!months!ago!for! £3,000.!The!car!needs!a!replacement!engine!before!it!can!be!sold.!It!is!possible!to! buy!a!reconditioned!engine!for!£300.!This!would!take!seven!hours!to!fit!by!a! mechanic!who!is!paid!£8!per!hour.!At!present!the!garage!is!short!of!work,!but!the! owners!are!reluctant!to!lay!off!any!mechanics!or!even!to!cut!down!their!basic! working!week!because!skilled!labour!if!difficult!to!find!and!an!upturn!in!repair! work!is!expected!soon.! Without!the!engine!the!car!could!be!sold!for!an!estimated!£3,500.!What!is!the! minimum!price!at!which!the!garage!would!have!to!sell!the!car,!with!a! reconditioned!engine!fitted,!to!justify!the!work?! ! 2) Assuming!the!same!circumstances!as!part!1)!except!that!the!garage!is!busy.!If!a! mechanic!is!to!be!put!on!the!engine!replacement!job,!it!will!mean!that!other! work!that!the!mechanic!could!have!done!during!the!seven!hours,!all!of!which! would!be!charged!to!a!customer,!will!not!be!undertaken.!The!garage's!labour! charge!is!£12!an!hour.!What!is!the!minimum!price!at!which!the!garage!would! have!to!sell!the!car,!with!a!reconditioned!engine!fitted,!to!justify!the!work!under! these!circumstances?! ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( 9

Jack!is!the!manager!of!Relevant!Costs!Conference!Centre!plc.!!Lydia!is!the!manager!of! an!Accounting!Department!who!employ!50!staff.!The!Accounting!Department!are!going! to!have!a!team!building!day!and!Lydia!asks!Jack!to!quote!a!price!to!hire!the!conference! centre!for!this!team!building!event.!!The!day!they!want!is!Friday!22nd!July!2016,!the! conference!centre!is!normally!open!on!Fridays.!Jack!has!prepared!the!following!costing! and!has!asked!you!to!check!his!calculations:! ! ! Notes! £! Cost!of!Jack!preparing!this!quotation!(1/2!day!@!£180)! 1! !!!!!!90!! Cost!of!Jack!organising!the!Conference!centre!in!the!week! 2! !!!!!540!! leading!up!to!22nd!July!(3!days!@!£180)! Cost!of!Jack!on!the!day!of!the!event! 3! !!!!!!180!! Conference!centre!staff!(10!staff!@!£60!per!day)! 4! !!!!!!600!! Cost!of!food!and!drinks! 5! !!!!!!800!! Decorating!the!conference!centre! 6! !!!!!!270!! Hire!of!facilitator! 7! !!!!!!380!! Depreciation!of!conference!centre!building!&!equipment! 8! !!!!!!820!! Absorption!of!general!overheads!(200%!x!£600)! 9! !!!!!1,200!! Total!cost! ! !!!!!5,170!! 160%!mark-up! ! !!!!!8,272!! Proposed!total!price!of!event! ! !!!13,442!! ( Notes:( 1! Jack!is!paid!£45,000!per!annum!by!the!conference!centre.!!This!means!that!Jack!costs! approximately!£180!per!working!day.!Jack!spent!half!a!day!preparing!this!quotation.! 2! Jack!expects!to!spend!3!days,!of!the!week!before!22nd!July,!organising!the!Conference! centre.! 3! Jack!is!on!a!salary.!This!is!his!pay!averaged!over!each!evening!that!he!works.!!He!will! also!get!a!bonus!of!£250!for!the!team!building!event.! 4! On!Mondays,!the!10!conference!centre!staff!would!normally!clean!the!conference! centre.!These!staff!are!paid!£15,000!each!per!annum.!!This!means!that!each!member! of!staff!costs!the!conference!centre!£60!per!day.!If!this!event!is!held!on!the!planned! date!then!outside!contractors!will!have!to!be!hired!to!do!the!cleaning.!!The!outside! cleaning!contractors!cost!!£230.!! 5! This!is!the!cost!of!the!food!and!drinks!for!the!team!building!event.!However,!this!does! not!allow!for!the!20%!discount!that!Jack!has!negotiated!with!the!supplier!for!all!the! food!and!drink!the!conference!centre!buy.! 6! £175!of!this!is!the!cost!of!the!decorations!that!the!conference!centre!manager!had! made!last!November.!He!has!already!used!them!three!times!before.!The!other!£95!is! for!signs!that!will!have!Accounting!Department’s!name!on!them.! 7! The!cost!of!hiring!a!facilitator!for!the!event!is!£380.! 8! One!day’s!depreciation!will!be!charged!on!the!building,!fixtures,!fittings!and! equipment!used!in!the!conference!centre.! 9! Fixed!costs!are!absorbed!at!200%!of!the!cost!of!conference!centre!staff.! ( ( 10

Required( a) Distinguish!between!‘relevant!cost’!and!‘irrelevant!cost’.!!Give!examples!of! each!cost!from!the!question.( ( b) Calculate!the!minimum!price!that!Jack!could!charge!for!the!‘Team!building! Event’.!You!need!to!decide!which!costs!should!be!included!and!those!costs! that!should!not!be!included.!Please!state!your!reasons!why!you!have!either! included!or!not!included!each!particular!cost.( ! c) Comment!on!what!other!factors!should!Jack!consider!in!the!cost!for!the!team! building!day?( ! ! ! ! ! ! ! ! ! ! ! ! ! ! (

(

11

( Limiting(Factors((Q3( ! The!following!standard!data!are!available:! ! ! ! ! ! Direct!materials!per!unit! ! ! Rate!per!hour! Direct!labour:! ! !!!Grinding! £5.0! !!!Finishing! £7.5! Selling!price!-!per!unit! ! Budgeting!production! !

Product! Able! £10! ! ! 7!hours! 15!hours! £206.5! 1200! units! 1500! units!

Baker! £30! ! ! 5!hours! 9!hours! £168! 600!units!

Maximum!sales!for!the! ! 800!units! period! ! Notes:! ! (1) No!closing!stocks!are!anticipated.! ! (2) The!skilled!labour!used!for!the!grinding!processes!is!highly!specialised!and!in! short!supply,!although!there!is!sufficient!to!meet!the!budgeted!production.!! However,!it!will!not!be!possible!to!increase!the!supply!for!the!budget!period.! ! Required:! ! (a) Prepare!a!statement!showing!the!contribution!from!each!product!based!on!the! budgeted!production.! (b) Prep...