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Management and Cost Accounting Instructor’s Manual COLIN DRURY Management and Cost Accounting EIGHTH EDITION Instructor’s Manual Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Management and Cost Accounting ª , Colin Drury Instructor's Manual, Ei...

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Management and Cost Accounting Instructor’s Manual

COLIN DRURY

Management and Cost Accounting EIGHTH EDITION

Instructor’s Manual

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Management and Cost Accounting Instructor's Manual, Eighth Edition, Colin Drury Publishing Director: Linden Harris Publisher: Brendan George Development Editor: Annabel Ainscow Editorial Assistant: Lauren Darby Production Editor: Lucy Arthy Production Controller: Eyvett Davis Marketing Manager: Amanda Cheung Typesetter: Integra, India Cover design: Design Deluxe Text design: Design Deluxe

ª

, Colin Drury

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted or of the United States Copyright Act, or under Section applicable copyright law of another jurisdiction, without the prior written permission of the publisher. While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions from the book or the consequences thereof. Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners. The publishers and author/s make no claim to these trademarks. The publisher does not endorse, and accepts no responsibility or liability for, incorrect or defamatory content contained in hyperlinked material. For product information and technology assistance, contact [email protected]. For permission to use material from this text or product, and for permission queries, email [email protected].

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-1-4080-6431-3 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire, SP

BE, United Kingdom

Cengage Learning products are represented in Canada by Nelson Education Ltd. For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com

Contents Preface Part I Solutions

vii 1

An introduction to cost terms and concepts Cost assignment Accounting entries for a job costing system Process costing Joint and by-product costing Income effects of alternative cost accumulation systems Cost–volume–profit analysis Measuring relevant costs and revenues for decision-making Pricing decisions and profitability analysis Activity based costing Decision-making under conditions of risk and uncertainty Capital investment decisions: appraisal methods Capital investment decisions: the impact of capital rationing, taxation, inflation and risk The budgeting process Management control systems Standard costing and variance analysis 1 Standard costing and variance analysis 2: further aspects Divisional financial performance measures Transfer pricing in divisionalized companies Cost management Strategic management accounting Cost estimation and cost behaviour Quantitative models for the planning and control of inventories The application of linear programming to management accounting

3 5 17 25 39 52 60 69 83 97 107 120 131 147 154 165 176 188 200 210 214 220 229 239

Part II Solutions to website learning note questions

253

Preface This manual is complementary to the main textbook, Management and Cost Accounting, and the accompanying Student’s Manual. Throughout the main text the illustrations have been kept simple to enable readers to understand the principles involved in designing and evaluating management and cost accounting systems. It is essential that students work through a wide range of problems to gain experience on the application of principles, but there is insufficient classroom time for tutorial guidance to meet this requirement. The Students’ Manual provides this guidance by enabling students to work independently on problems and compare their answers with the suggested solutions. In addition, tutors require feedback information on the students’ understanding of the subject and the ability to solve problems independently. Tutors also require that a range of problems is available where the solutions are not generally available to students. The Instructors’ Manual aims to meet these requirements. Recently some professional accountancy examining bodies have made solutions to examination questions available on their websites and other examining bodies provide published answers that can be purchased by students. To ensure that the problems are not available from published sources the problems applicable to the instructors’ manual tend to be approximately ten years old and thus do not appear on publication lists or websites of the professional examining bodies. All of the questions and answers that appeared in the seventh edition have been retained in the eighth edition. However, many of these questions and answers have been updated to reflect the current environment. For example, some monetary values have been changed (e.g wage rates) and references to entries for specific years have been changed from the early years of the millennium to reflect years relating to the current edition. Lecturers should therefore exercise care when using questions that appeared in the seventh edition. A huge amount of additional questions that have not been extracted from examinations set by professional accountancy bodies is available in the accompanying ExamView®. The solutions given in this manual are my own and not the approved solutions of the professional body setting the question. Where an essay question is asked and a full answer requires an undue repetition of the main book, either references are made to appropriate sections of the book, or an answer guide or outline is provided. Finally, I would like to thank once again, the Association of Accounting Technicians, the Institution of Chartered Accountants in England and Wales, the Chartered Association of Certified Accountants and the Chartered Institute of Management Accountants for permission to reproduce questions which have appeared in past examinations.

Part I

Solutions

An introduction to cost terms and concepts Solutions to Chapter 2 questions

Solution IM 2.1

(1) (a); (2) (d); (3) (e); (4) (f); (5) (i); (6) (b); (7) (h). (i)

Direct materials 9

(ii)

Direct labour 16

(iii)

Direct expenses 10

(iv)

Indirect production overhead 1 6 8 18 19

(v)

Research and development costs 20

(vi)

Selling and distribution costs 7 11 12 13 17

(vii) Administration costs 2 3 4 14 15

(viii)

Finance costs 5

Solution IM 2.3

(a) Variable cost per running hour of Machine XR1

Fixed cost

„

„

„

„

Solution IM 2.2

(£27 500/1100 hours)= „ „ „ „ „ (£20 000/1100 hours) =

Cost of brain scan on Machine XRI:

(£) 25 18.182 (£)

Variable machine cost (4 hours × £25) X-ray plates

100 40

Total variable cost Fixed machine cost (4 hours × £18.182)

140 72.73

Total cost of a scan

212.73

Total cost of a satisfactory scan (£212.73/0.9)

236.37

(b) It is assumed that fixed costs will remain unchanged and also that they are not relevant to the decision. The relevant costs are the incremental costs of an additional scan: Machine XR1: Variable cost per scan Variable cost per satisfactory scan (£140/0.9) Machine XR50: AN INTRODUCTION TO COST TERMS AND CONCEPTS

(£) 140 155.56 (£) 3

Variable machine cost per scan (£64 000/2000 hours × 1.8 hours) X-ray plates

57.60 55.00

Variable cost per scan

112.60

Variable cost per satisfactory scan (£112.60/0.94)

119.79

The relevant costs per satisfactory scan are cheaper on Machine XR50 and therefore brain scans should be undertaken on this machine.

Solution IM 2.4

Standard cost sheet (per unit)

(a)

(£) Direct materials 40 m2 at £5.30 per m2 Direct wages: Bonding dept 48 hours at £12.50 per hour Finishing dept 30 hours at £9.50 per hour

(£) 212

600 285 885

(i) Prime cost Variable overhead:a Bonding dept 48 hours at £0.75 per hour Finishing dept 30 hours at £0.50 per hour

1097 36 15 51

(ii) Variable production cost Fixed production overheadb

1148 40

(iii) Total production cost Selling and distribution costc Administration costc

1188 20 10 30

(iv) Total cost

1218

Notes a

Variable overhead rates: Bonding = Finishing =

b

£375 000 500 000 hours £150 000 300 000 hours

Fixed production overhead rate per unit of output =

= £0.75 = £0.50 £392 000 9800 units

= £40

The fixed production overhead rate per unit of output has been calculated because there appears to be only one product produced. Alternatively, a fixed production hourly overhead rate can be calculated and charged to the product on the basis of the number of hours which the product spends in each department. c

Selling and production cost per unit of output = Administration cost per unit of output =

£196 000 9800 units £98 000 9800 units

= £20 = £10

100 (b) Selling price per unit £1218 ⫻ ᎏᎏᎏ = 1433 85

4

AN INTRODUCTION TO COST TERMS AND CONCEPTS

Cost assignment Solutions to Chapter 3 questions

(a) For the answer to this question see ‘Budgeted overhead rates’ in Chapter 3. (b) A lower production overhead rate does not necessarily indicate that factory X is more efficient than factory Y. The reasons for this are: (i) Factory Y’s operations might be highly mechanized, resulting in large depreciation costs, whereas factory X’s operations might be labour-intensive. Consequently products produced in factory Y will incur higher overhead and lower labour costs, whereas products produced in factory X will incur lower overhead and higher labour costs. (ii) Factory Y may have invested in plant with a larger operating capacity in order to meet future output. This will result in larger fixed costs and a higher overhead rate. (iii) Both factories may use different denominators in calculating the overhead rates. For example, if factory Y uses normal capacity and factory X uses maximum practical capacity then factory Y will have a higher overhead rate. (iv) Current budgeted activity might be used by both firms to calculate the overhead rate. The level of budgeted sales will determine budgeted activity. The lower overhead rate of factory X might be due to a higher sales volume rather than efficient factory operations. (v) Different cost classification might result in different overhead rates. Factory X might treat all expenditure as a direct cost wherever possible. For example, employers’ costs might be charged out by means of an inflated hourly wage rate. Factory Y may treat such items as overhead costs.

Solution IM 3.1

See answer to Question 3.22 in the text for the answer to this question.

Solution IM 3.2

(a) For the answer to this question see ‘Blanket overhead rates’ in Chapter 3. (b) For the answer to this question see Learning Note 3.1 on the open access website.

Solution IM 3.3

(a)

Solution IM 3.4

Production department

Service department

Total

(£)

(£)

A

B

C

(£)

(£)

(£)

Direct

261 745

226 120

93 890

Indirect

135 400 (40%)

118 475 (35%)

67 700 (20%) 16 925 (5%) 338 500

Service dept appointment Allocation base (1)

COST ASSIGNMENT

1

23 410 ( ) ––––––– 3 420 555 ––––––– 17 760 =£23.68 per direct labour hour

1

23 410 ( ) ––––––– 3 368 005 ––––––– 5 760 =£63.89 per m/c hour

53 305

1

23 410 ( ) ––––––– 3 185 000 ––––––– 148 000 =£1.25 per hour

(70 230) –––––– — ––––––

635 060

––––––– 973 560 –––––––

5

Note: 1. Dept. A direct labour hours = 10 × 37 × 48 = 17 760 Dept. B machine hours = 5 × 24 × 48 =5760 Dept. C units = 148 000

(b)

Dept A 9 direct labour hours at £23.68 Dept B 3 m/c hours at £63.89 Dept C 100 units at £1.25

£ 213.12 191.67 125.00 529.79

Cost per unit = £5.30 (£529.79/100)

Solution IM 3.5

Overhead analysis sheet

(a)

Production Total (£)

Bags (£)

Stores (£)

Canteen Maintenance (£) (£)

6 400 5 300 31 200 5 389

19 500 4 100 17 500 12 046

20 100 2 300 24 600 10 144

41 200 — 2 500 951

15 000 18 700 3 400 2 536

45 000 24 200 5 000 634

11 120

13 900

9 730

2 085

3 475

1 390

359 400

59 409

67 046

66 874

46 736

43 111

76 224

– – –

29 210 2 694 1 887

5 842 18 476 37 731

5 842 21 941 42 448

(46 736)

— (43 111)

5 842 — (82 066)

147 200 54 600 84 200 31 700 13 800 14 400 13 500

Reapportionment: Storesc Canteend Maintenancee Machine hours Labour hours

Service

Tents (£)

359 400 87 000 112 000

⎧ ⎨ ⎩

Indirect wages Consumable materials Plant depreciation Powera Heat and lightb Rent and ratesb Building insuranceb

Cutting (£)

93 200 129 095 137 105 2 000 40 000 45 000 7 000 48 000 57 000

Machine hour rate

£46.60

£3.23

£3.05

Overheads per labour hour

£13.31

£2.69

£2.41

Notes Bases of apportionment: a estimated power usage; b area; c value of issues; d direct labour hours; e machine hours. Actual basis for other costs. (b) See section on budgeted overhead rates in Chapter 3 for the answer to this question. In addition the following points should be made: (i) It draws attention to the under/over recovery of overheads arising from changes in production levels. (ii) There is difficulty in determining estimated overheads and an appropriate level of activity when calculating predetermined overhead rates.

6

COST ASSIGNMENT

(a) Percentage of direct labour cost method = (£600 000/£200 000)  100 = 300% of direct labour cost Direct labour hour method = (£600 000/40 000 direct labour hours) = £15 per direct labour hour Machine hour method = (£600 000/50 000 machine hour) = £12 per machine hour

Solution IM 3.6

(b) See ‘Predetermined overhead rates’ in Chapter 3 for the answer to this question. (c) The question states that the company has become machine-intensive and implies that in the long term there is a closer association between overhead expenditure and machine hours than the other two methods. Therefore the best measure of overhead resources consumed by jobs or products is machine hours. (d) Job Ax Direct material Direct labour Direct expenses

(£) 3788 1100 422

Prime cost Production overhead (120 machine hours  £12)

5310 1440

Factory cost Administrative overheads (20%  £6750)

6750 1350

Total cost Profit (£8100/0.90  £8100)

8100 900

Selling price

9000

Workings Administration overhead absorption rate

= Total admin. overheads/total factory cost = £328 000/£1 640 000 = 20% of factory cost

(e) The general characteristics of incentive schemes should ensure that: (i) the scheme is simple to understand and administer; (ii) payment should be made as quickly as possible after production; (iii) there should be no limit on earnings and employees must be safe-guarded from earning lower wages than time rate wages arising from problems which are outside their control. The advantages of incentive schemes are: (i) increased production and lower average unit costs; (ii) increased morale of the workforce; (iii) attraction of more efficient workers to the company.

COST ASSIGNMENT

7

Solution IM 3.7

machine department overheads (£1 080 000)

(a) Predetermined machine hour rate =

machine hours (80 000)

Machining department = £13.50 per machine hour Hand finishing department = £760 000/120 000 labour hours = £6.33 per labour hour (b) (i)

Machine department Hand finishing department (£) (£) Overhead incurred 84 500 67 100 Overhead absorbed 81 000 (6000  £13.50) 60 800 (9600  £6.33) Under recovery of overheads

3 500

6 300

(ii) Overheads that are apportioned to cost centres tend to be on an arbitrary basis and are unlikely to be controllable by the cost centre manager. Managers should be held accountable for only those overheads that they can control. See ‘Guidelines for applying the controllability principle’ in Chapter 16 for a more detailed discussion of controllable and non-controllable costs. (c) Absorption costing is used by companies to ensure that all products/services bear an equitable share of company overheads. The Statement of Standard Accounting Practice (SSAP 9) requires that stocks should be valued at full production cost. Therefore absorption costing is required to allocate overheads to products in order to meet financial accounting requirements.

Solution IM 3.8

(a) In order to ascertain the actual overhead traced to the production departments, it is necessary to allocate the service department overheads to the filling and sealing departments:

Allocated Reallocation of: Canteen Maintenance Canteen Maintenance

Filling (£) 74 260 14 625 18 900 486 47 108 318

Sealing (£) 38 115 (60%) (70%) (60%) (70/97)

7 800 7 290 259 18

8

(32%) 1 950 (8%) (27%) (27 000) (32%) 65 (8%) (27/97) –

Canteen (£) 24 375 (24 375) 810 (3%) (810) –

53 482

Predetermined overhead rates: Filling (£) Budgeted overheads 110 040 Budgeted direct labour hours 13 100 Direct labour hour overhead rate 8.40 Overhead incurred Overhead allocated £5.20) (Under)/over recovery

Maintenance (£) 25 050

Sealing (£) 53 300 10 250 5.20

108 318 53 482 107 688 (12 820  £8.40) 52 390 (10 075 (630)



(1 092)

COST ASSIGNMENT

(b) The objectives of overhead apportionment and absorption are: (i) To meet the stock valuation and profit measurement requirements for financial accounting purposes. Financial accounting regulations in most countries require that all manufacturing...