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

2 Relevant cost 3 Limiting factor 1

9 10 11

20 21

2 1 Newcastle

12 13

6 7

2 Borrico

14

8

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

1

Answer Excel tab 1 2 3 4

15 16 18 19

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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 Indirect Labour (£) Indirect Materials (£) Machine Costs (£)

Cutting

Assembly

Finishing

Design

Stores

72,400

83,900

108,600

126,100

18,500

1,850

780

12,640

4,650

600

64,000

56,400

48,900

63,400

2,900

770

1,310

1,080

480

97,760

109,400

45,000

4,640

360 

800

750

1,200

550

180,000

85,000

240,000

Other Data Floor Area m2 Material Requisitions (£) Material Requisitions (No.) Machine Hours



Unallocated budgeted factory costs amount to £184,000. REQUIRED Calculate a machine hour absorption rate for each of the three production cost centres.

2

 

Full costing: Q2. The Magpie Printing Company Company Data: Type Set Department Number of Direct Employees

Printing Department

6

10

Area m

1,000

5,000

Direct Labour hours

9,000

16,000

2

Machine hours

5,000

40,000

Cost of Equipment (£)

100,000

150,000

Ratio of Power Usage Direct Materials (£)

1 10,000

9 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

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

5,000

Equipment Depreciation

25,000

Building Insurance

500

Total Absorption Rates 2.

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 Direct Materials

3.

£50

Printing 15p per copy

Direct Labour (hours)

50

60

Machine hours

10

200

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

3

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.

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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 sold Auditing Taxation

50 30

Duration of course 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?

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Limiting Factors Q3 The following standard data are available: Product Able £10

Direct materials per unit

Baker £30

Rate per hour Direct labour: Grinding Finishing Selling price - per unit Budgeting production

£5.0 £7.5

Maximum sales for the period

7 hours 15 hours £206.5 1200 units 1500 units

5 hours 9 hours £168 600 units 800 units

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) Prepare a statement showing the total contribution that could be obtained if the best use was made of the skilled grinding labour.

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Overhead Absorption & Standard Cost Card: Question 1 From the following data prepare the standard cost card for one unit of the sole product manufactured by the company: Direct materials: X 15 kgs @ £0.90 per kg Y 18 kgs @ £2.60 per kg Direct labour: Assembly 16 hours @ £10.50 per hour Finishing 7 hours @ £11.25 per hour Variable overheads are allocated using direct labour hours. Budgeted total overheads for the year: £ Hours Assembly Dept. 95,000 23,000 Finishing Dept. 140,000 27,000 The fixed overheads included in the above figures are £27,000 (Assembly) and £52,000 (Finishing). Required: Develop the standard cost card showing the full factory cost based upon the above information.

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Overhead Absorption & Standard Cost Card: Question 2. a) From the following data prepare the standard cost card for one unit of the sole product manufactured by the company: Direct materials: A 12 ltrs @ £1.90 per ltr B 18 ltrs @ £3.20 per ltr Direct labour: Assembly 22 hours @ £15.50 per hour Finishing 9 hours @ £10.00 per hour Budgeted total overheads for the year: £ Hours Assembly Dept. 125,000 22,000 Finishing Dept. 132,000 9,000 The fixed overheads included in the above figures are £32,000 (Assembly) and £60,000 (Finishing). b) To make 1,000 units of the product it was later found that: i. 15,000 litres of material A were used; the price paid per litre was £2.00 ii. 13,0000 litres of Material B were used; the price paid per litre was £3.00 iii. 24,000 hours were worked in the Asembly department; iv. 8,900 hours were worked in the Finishing department. Required: Discuss the above information with regard to the original standards which were set, highlighting where the company may have made mistakes in it’s standard costing procedures and how it may improve it’s forecasting capabilities. (NOTE: You are not required to attempt any formal variance analysis)

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Variance analysis (Accounting for Control) Question 1 Newcastle Patterns Limited manufactures a single product that has the following standard cost specifications (per unit). £ Direct materials 15 square metres at £3 per square metre 45 Direct labour 5 hours at £4 per hour 20 65 During June, the following actual data have been recorded in the production of 1,400 units: 22,000 square metres at £4 per square metre Direct materials Direct labour 6,800 hours at a total cost of £34,000 Required: a) What is the materials usage variance? b) What is the materials price variance? c) What is the labour rate variance? d) What is the labour efficiency variance?

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Variance analysis (Accounting for Control) Question 2 Borrico Ltd manufactures a single product and they had recently introduced a system of budgeting and variance analysis. The following information is available for the month of July 2005. Budget Actual £ £ Direct materials 200,000 201,285 Direct labour 313,625 337,500 Variable manufacturing overhead 141,400 143,000 Fixed manufacturing overhead 75,000 71,000 Variable sales overhead 64,400 69,500 Administration costs 150,000 148,650 2. 3.

4. 5.

Standard costs were: Direct labour 48,250 hours at £6.50 per hour. Direct materials 20,000 kilograms at £10 a kilogram. Actual manufacturing costs were: Direct labour 50,000 hours at £6.75 per hour. Direct materials 18,900 kilograms at £10.65 a kilogram. Budgeted sales were 20,000 units at £50 per unit. Actual sales were: 15,000 units at £52 a unit; 5,000 units at £56 a unit. There was no work in progress or stock of finished goods.

Required: a. An Income Statement showing the budgeted and actual gross and net profits / losses for July 2005. b. The following variances for July 2005: i) Direct materials cost variance, direct materials price variance and direct materials usage variance. ii) Direct labour cost variance, direct labour rate variance and direct labour efficiency variance. c. What use can the management of Borrico Ltd make of the variances calculated in (b) above?

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Answers Absorption & ABC Q1. Production Quantity Labour time/ unit (minutes) Total labour hours

Deluxe

Standard

Economy

1,800

2,400

600

40

90

120

1,200

3,600

1,200

Overhead rate per labour hour

Total

6,000 18.05

Number of production runs

9

Total shaping hours required Material requirement (kgs)

6