MANAGEMENT ACCOUNTING

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1 MANAGEMENT ACCOUNTING FORMATION 2 EXAMINATION - AUGUST 2017 NOTES: Section A - Questions 1 and 2 are compusory. You have to answer Part A or Part B ony of Question 2. Shoud you provide answers to both Part(s) A and B of Question 2, you must draw a ceary distinguishabe ine through the answer not to be marked. Otherwise, ony the first answer to hand for this question wi be marked. Section B - You are required to answer any three out of Questions 3 to 6. Shoud you provide answers to a of Questions 3 to 6, you must draw a ceary distinguishabe ine through the answer not to be marked. Otherwise, ony the first three answers to hand for these four questions wi be marked. TIME ALLOWED: 3 hours, pus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Pease read each Question carefuy. Marks for each question are shown. The pass mark required is 50% in tota over the whoe paper. Start your answer to each question on a new page. You are reminded to pay particuar attention to your communication skis and care must be taken regarding the format and iteracy of your soutions. The marking system wi take into account the content of your answers and the extent to which answers are supported with reevant egisation, case aw or exampes where appropriate. List on the cover of each answer booket, in the space provided, the number of each question attempted. NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE ENVELOPE PROVIDED. The Institute of Certified Pubic Accountants in Ireand, 17 Harcourt Street, Dubin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND MANAGEMENT ACCOUNTING FORMATION 2 EXAMINATION - AUGUST 2017 Time aowed: 3 hours, pus 10 minutes to read the paper. Section A: Answer Question 1 and either Part A or Part B of Question 2. Section B: You are required to answer any three out of Questions 3 to 6. SECTION A - QUESTIONS 1 AND 2 ARE COMPULSORY 1. XY Storage Ltd. was estabished five years ago and manufactures pastic storage boxes in a range of sizes, suppying arge homeware retaiers throughout Ireand. To date, a simpe traditiona absorption costing system has been used to aocate overheads to products. Tota production overheads are divided by tota machine hours to obtain a rate per machine hour which is then appied to products. Seing prices are cacuated by adding a markup of 60% to the product cost. However, recenty XY Storage Ltd. has streamined its production process so that manufacturing overheads represent the most significant portion of product cost. In an attempt to recognise this situation the management accountant is trying to convince the managing director of XY Storage Ltd. to switch to activity based costing (ABC) for overhead aocation. Information reating to the company s most recent financia period and for two of its most popuar storage products is shown beow. Budgeted cost and activity information: Direct wages 306,250 Purchasing department costs 106,200 Machine set up costs 95,500 Quaity contro costs 108,400 Machine depreciation 62,500 Machine hours 73,125 Labour hours 24,500 Number of inspections 338,750 Number of machine set ups 119,375 Number of purchase orders raised 531,000 Product information: Medium storeganiser box Large storeganiser box Direct materias Labour hours 2 minutes 2 minutes Machine hours 6 minutes 8 minutes Number of machine set ups 1 1 Number of purchase orders 2 3 Number of inspections 1 2 REQUIREMENT: Cacuate the tota product cost and seing price for each of the two storage products noted using: (i) The costing approach currenty used by XY Storage Ltd.; (7 marks) (ii) Activity based costing (ABC). (11 marks) (b) Compare and briefy discuss your answers in (i) and (ii) above. (4 marks) (c) Outine TWO reasons why XY Storage Ltd. may decide NOT to adopt ABC. (3 marks) [Tota: 25 Marks] Page 1

3 ANSWER PART (A) OR PART (B) 2. (A) ST Materias Ltd., a new cient, has asked for your assistance regarding inventory vauation and management. The company suppies different grades of paper and other stationery materias to government departments and educationa institutions. Paper suppies are purchased in buk from Germany and stored in a arge rented warehouse in Dubin. The company has a five year contract with one educationa institution, a private coege based in Sigo, to suppy paper for student examinations. As the coege stricty contros enroment, the contract requires the same quantity of paper each year for its examinations. The managing director of ST Materias Ltd. has read an artice on inventory vauation (FIFO, LIFO and Average Cost) and the importance of inventory management. In particuar, the artice proposed that the use of the economic order quantity (EOQ) may bring substantia benefits to an organisation. As a financia advisor to the company, the managing director has asked for your opinion on this matter. REQUIREMENT: Prepare a report on inventory vauation and management for the managing director of ST Materias Ltd., that: (i) Outines the main features of the FIFO, LIFO and Average Cost approaches to inventory vauation. (6 marks) (ii) Describes the appication of the economic order quantity (EOQ) mode, highighting its imitations. (6 marks) (iii) Briefy expain whether the use of the EOQ mode is suitabe for ST Materias Ltd. (2 marks) Format and Presentation (1 mark) [Tota: 15 Marks] OR (B) You are a trainee Certified Pubic Accountant in the firm of Farrey, O Brien & Co. Your firm has recenty started advising a number of Irish start-up manufacturing companies. The partner in charge of these cients has commented that the firms have spent time and energy deveoping their strategy but don t seem to reaise the importance of preparing budgets. You have been asked to draft a cear and concise briefing note that wi be circuated to the startup companies on the subject of budgeting. REQUIREMENT: Draft a briefing note that: (i) Expains the main purposes of budgeting; (6 marks) (ii) Outines the functiona budgets that are typicay prepared for a manufacturing company. (8 marks) Format and Presentation (1 mark) [Tota: 15 Marks] Page 2

4 SECTION B - ANSWER ANY THREE QUESTIONS. 3. The foowing mutipe-choice question contains eight sections, each of which is foowed by a choice of answers. Ony one answer is correct in each case. Each question carries equa marks. On the answer sheet provided indicate for each question, which of the options you think is the correct answer. Marks wi not be awarded where you seect more than one answer for any question. 1. In a company that manufactures furniture, which of the foowing is more ikey to be a step fixed cost: (b) (c) (d) Lengths of oak used in production. Factory teephone costs. Machinery depreciation costs. Supervisors saaries. 2. In process costing, a norma oss: (b) (c) (d) Is not an inherent part of the production process. Occurs under efficient operating conditions and is unavoidabe. Is ess than the expected oss from the process. Is not expected to occur under efficient operating conditions. 3. Which of the foowing statements is INCORRECT: (b) (c) (d) Financia accounting is more focused on historic information than management accounting. There is no requirement to prepare management accounts for any particuar period. Financia accounting information is more reguated than management accounting information. Management accounting information is prepared for a wider range of users than financia accounting information. The foowing information reates to Questions 4, 5 and 6. The tabe beow shows detais of materias that Brownow Ltd. currenty has in its warehouse: Materia Quantity (Kgs) Origina Cost Scrap Vaue Current purchase per Kg per Kg price per Kg B6 10, D7 4, G10 3,200 4 Ni 4.40 The company has been approached by a new customer who has requested a quotation for a one-off order. 4. Assume that the customer order requires 5,000 Kgs of materia B6. This materia is in reguar use by the company. What cost shoud be incuded in the customer quotation for this materia? 2,500 (b) 25,000 (c) 28,750 (d) Ni. 5. Assume that the customer order requires 6,000 Kgs of materia D7. This materia is aso in reguar use by the company. What cost shoud be incuded in the customer quotation for this materia? 60,000 (b) 66,000 (c) 62,000 (d) 45,000. Page 3

5 6. Assume that the customer order requires 2,200 Kgs of materia G10. This materia is no onger used by the company. What cost shoud be incuded in the customer quotation for this materia? Ni (b) 8,800 (c) 9,680 (d) 12, Beton Ltd. manufactures ow caorie chocoate bars. The seing price per bar is 1.60 and tota variabe costs per bar are Fixed costs for the month are expected to be 10,730 and saes are budgeted to be 15,950 bars per month. What is the margin of safety for the month in bars (units) to the nearest whoe bar? (b) (c) (d) 3,473 bars 9,244 bars 5,220 bars 1,450 bars. 8. Rega Records Ltd. operates recording studios and charges its cients for time spent it its state of the art faciity. An extract showing the amounts charged during the past three months is shown beow: May June Juy Hours spent in studio 1,480 1,650 1,260 Recording fees charged 53,840 59,450 46,580 During August one artist spent 1,575 hours in the studios. The recording fees charged to this cient woud be: 56,975 (b) 57,295 (c) 56,748 (d) 58,225. [Tota: 20 Marks] Page 4

6 4. Tasty Crumbe Ltd. is an artisan bakery based in Wickow and speciaises in sourdough bread. Currenty the company has a sma production faciity and unti recenty this was sufficient to suppy demand mainy from retaiers. However, ast month the company and its products were featured on a popuar evening teevision show and as a resut demand has grown steadiy. The directors of the company are investigating the possibiity of moving to a arger premises and hiring more staff but for now want to focus on producing an optima mix of products to maximise profits. Financia information reating to the company for the year ahead is provided beow. 1. The company makes three main types of sourdough bread: 100% Rye; Mutigrain and Spet. 2. Budgeted seing and distribution expenses are estimated to be 13,860 per quarter and budgeted fixed production overhead is 9,450 per month. 3. The company has 9,792 abour hours avaiabe for production for the year. 4. Detais reating to the three products are shown in the tabe: 100% Rye Mutigrain Spet bread bread bread Saes demand for the year (oaves) 27,100 56,600 31,500 Seing price per oaf Ingredients required per oaf of bread: Direct materias: - Rye 0.60 per Kg 0.5Kg - Mutigrain four 0.85 per Kg 0.6 Kg - Spet 0.75 per Kg 0.6 Kg Direct 15 per hour 0.05 hour 0.10 hour 0.10 hour Variabe overhead: 100% Direct abour cost REQUIREMENT: (b) (c) State whether Tasty Crumbe Ltd. has sufficient production capacity to satisfy saes demand for the year ahead, providing cacuations to support your answer. (4 marks) Compute and show the ranking for the optima production pan for Tasty Crumbe Ltd. for the year, ceary showing tota profit expected. (13 marks) Another artisan bakery has offered to suppy up to 4,000 oaves, of any of the three types, to Tasty Crumbe Ltd. during the year for a fixed price of 5.00 per oaf. Shoud the company avai of this offer? Give reasons for your answer. (3 marks) [Tota: 20 Marks] Page 5

7 5. Foat On Ltd. was estabished six years ago in Gaway. The company produces speciay designed kickboards for swimmers. The kickboards, based on one simpe design, are produced using durabe high density EVA foam in a range of coours. Over the past two years, saes have been growing steadiy due to the Swimathon, a nationa event organised to encourage more peope to earn to swim. However, the managing director, Kate McKenna was dismayed when she received the management accounts for Juy. Whie saes had increased, profit for the month was ower than budgeted. She has asked for your assistance and has provided budgeted and actua information for the month as foows: Budget Actua Saes - units 1,400 1,500 - revenue 25,200 26,250 Direct materias - EVA (cubic metres) Cost 6,615 7,140 Direct abour - Hours Cost 4,480 3,969 Variabe production overhead 910 1,170 Fixed production overhead 3,800 Other information: 1. Variabe overhead is absorbed into production based on direct abour hours. 2. Tota fixed production overhead is budgeted to be 35,280 for the year and norma annua production is budgeted to be 16,800 units. REQUIREMENT: Prepare a standard cost card for ONE kickboard. (4 marks) (b) Using the information provided cacuate a reevant variances. (11 marks) (c) Reconcie budgeted profit to actua profit achieved. (3 marks) (d) Suggest TWO reasons to expain the materia variances. (2 marks) [Tota: 20 Marks] Page 6

8 6. JK Ltd. is based in Dubin and ses one product, a speciaist shampoo, Gossy Tresses. The shampoo was originay deveoped for the Irish swimming team at the Rio Oympics and was so successfu that a company was estabished specificay to produce and market the product. The managing director and product creator, John Knight, is aware that there are different methods of product costing, however, he does not understand their impact on profitabiity. He has provided company information reating to the most recent three month trading period (shown beow) and has asked for your assistance in highighting the difference in profit that may arise from using these costing methods. Production and saes voumes: Production (bottes) Saes (bottes) May 24,000 21,000 June 26,000 24,000 Juy 25,000 30,000 Cost data: Seing price per botte 22 Direct materias per botte 6.10 Direct abour per botte 0.75 Variabe production overheads 200% of direct abour Saes commission 5% of saes vaue Notes: 1. There were 5,000 bottes of shampoo in inventory at 1 May. 2. Fixed production overheads are budgeted at 612,000 per annum and are absorbed into products based on norma output of 25,000 per month. REQUIREMENT: Prepare management accounts for the most recent period showing profit cacuated using: (i) Variabe (margina) costing; (ii) Absorption costing. (15 marks) (b) Reconcie the profit cacuated at (i) and (ii) above. (3 marks) (c) Suggest TWO reasons why JK Ltd. shoud use absorption costing. (2 marks) [Tota: 20 Marks] END OF PAPER Page 7

9 SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND MANAGEMENT ACCOUNTING FORMATION 2 EXAMINATION - AUGUST 2017 SOLUTION 1: XY Storage Ltd. (i) Tota product cost of the two storage products based on Current costing approach (W1) Cacuation of overhead absorption rate Overhead absorption rate per machine hour = Tota production overheads = 372,600 = 5.10 Tota machine hours 73,125 (W2) Cacuation of direct abour rate per hour Direct abour rate per hour = Direct wages = 306,250 = Labour hours 24,500 Product cost and seing price Medium 'storeganiser' Large 'storeganiser' Direct materias Direct abour (2 mins & 2 mins x per hour) Production overhead (6 mins & 8 mins x 5.10) Tota product cost Add 60% mark-up on cost Seing price (7 marks) (ii) Activity based costing (W3) Cacuation of cost per driver Activity Cost driver Cost Tota drivers Cost per driver Purchasing costs Purchase orders raised 106, , Per purchase order Machine set up costs No of machine set ups 95, , Per machine set up Quaity contro costs No of inspections 108, , Per inspection Machine depreciation Machine hours 62,500 73, Per machine hour 372,600 (W4) Cacuation of tota overhead cost for each storage product Medium 'storeganiser' Large 'storeganiser' Purchasing costs Machine set up costs Quaity contro costs Machine depreciation Tota overhead cost Page 8

10 Product cost and seing price Medium 'storeganiser' Large 'storeganiser' Direct materias Direct abour Overheads (W4) Tota product cost Add 60% mark-up on cost Seing price (11 marks) (b) Compare and briefy discuss the answers in (i) and (ii) above Medium 'storeganiser' Large 'storeganiser' Product cost using current method Product cost using ABC Difference The current method of aocating overheads undercosts both products by 1.09 and 1.47 respectivey. This means that when pricing the products the company is using inaccurate costs and appying a mark-up based on these costs and so wi not achieve the desired profit on each product. Medium 'storeganiser' Large 'storeganiser' Seing price using current method Seing price using ABC Difference Using different costing systems resuts in quite different prices. The prices based on ABC are much higher than the prices obtained from the current absorption costing system. This may have impications for product competitiveness and customer demand. Are the products competitive compared to offerings from other companies? Wi customers purchase the product at the revised prices? Any other reevant points (4 marks) (c) Outine TWO reasons why XY Storage Ltd. may decide NOT to adopt ABC Any TWO of the foowing: - ABC requires greater understanding of costs and cost drivers which may be time consuming to attain. - It may not be possibe to aocate a overhead costs to specific activities. - There may be common costs i.e. costs that reate to many cost poos so that it is difficut to aocate them to specific functions. - Any other reevant point (3 marks) [Tota: 25 Marks] Page 9

11 SOLUTION 2 (A) REPORT To: Managing Director, ST Materias Ltd. From: A Management Accountant Subject: Inventory Management Date: August 2017 Further to your request for assistance, the information regarding inventory vauation and management is provided beow. Firsty, the report outines the three different approaches to inventory vauation (FIFO, LIFO and Average Cost). Next, it describes the economic order quantity (EOQ) mode highighting its imitations. Finay, it provides a recommendation regarding the suitabiity of the EOQ mode for ST Materias Ltd. (i) F Three approaches to inventory vauation First In First Out (FIFO): FIFO assumes that materias purchased FIRST are used FIRST. It seems most ogica as it makes the same assumptions as the physica fow of materias through an organisation. However, in periods of infation eary purchases of materia wi have ower prices and wi be issued first. This wi resut in a ower cost of saes and higher profits. Cosing inventory wi aso be vaued using higher prices. FIFO is accepted by financia reporting standards as a suitabe method of vauing inventory. L Last In First Out (LIFO): LIFO assumes that materias purchased LAST are used FIRST. With LIFO the atest purchases of materia, which wi (generay) have higher prices, wi be issued first. This means that the cost of saes wi be higher so that profits wi be ower. It aso resuts in a ower vauation of inventory as oder prices are appicabe. LIFO is NOT accepted by financia reporting standards as a suitabe method of vauing inventory Average Cost (aso caed Weighted Average): Average Cost cacuates an average cost for a materias purchased. With Average Cost, materia issues wi be recorded at an average price based on purchases to date. Each time there is a purchase the average cost is cacuated and this is the vaue used when pricing materia issues to production. Average cost tends to produce a profit figure and inventory vauation that is in between FIFO and LIFO in monetary terms. Average Cost is accepted by financia reporting standards as a suitabe method of vauing inventory (6 marks) (ii) The economic order quantity (EOQ) The EOQ is a mathematica mode that addresses the question, in order to minimise cost how much inventory shoud be ordered? The EOQ formua is shown beow. ଶ EOQ (Q) = ξ Where EOQ = Optimum inventory order size D = Annua demand O = Cost to pace one order H = Annua cost of hoding one unit in inventory There are a number of benefits of using the EOQ incuding: It is based on a mathematica mode that can easiy be appied. It cacuates the optimum inventory order size to minimise tota hoding and tota ordering costs. However, the EOQ was deveoped based on a number of assumptions and these are imitations to the appication of the mode in business situations. The assumptions/imitations are: Saes demand is certain, constant and continuous. Hoding cost per unit remains constant. The average baance in inventory equas haf of the order quantity. If safety stocks are maintained, they remain the same regardess of order size. Inventory may be purchased in exacty the quantities required. 1 Any other imitations If a company in a particuar industry wishes to use the EOQ to determine the optima inventory size, these assumptions must hod/appy, otherwise the EOQ wi not minimise tota inventory costs. (6 marks) Page 10

12 (iii) Recommendation regarding use of EOQ mode As ST Materias Ltd has certain, continuous demand from the educationa institution (in terms of the five year contract) it may be possibe for the company to use the EOQ to determine the optimum order quantity of paper from its suppiers. This woud hep to reduce storage costs. However, the company must ensure that the assumptions underying the EOQ are appicabe to its own particuar circumstances. Any other reevant points (2 marks) Shoud you require carification or expanation in reation to any of the matters noted in this report, or require further assistance, I wi be happy to assist you. Yours sincerey, A Management Accountant. (Format and presentation 1 mark) [Tota: 15 Marks] Page 11

13 (B) (i) BRIEFING NOTE Main purposes of budgeting The main purposes of budgeting are as foows: Co-ordination: there is better co-ordination of the various functions of the business as managers examine the operations of their departments reative to other departments. Communication: the budgeting process requires that a eves of the organisation are informed of ong range pans, providing and receiving feedback throughout the budgeting process. Motivation: a budget, if it is reaistic and prepared with the participation of managers, provides a standard of performance that managers wi strive to achieve. However, if a budget is set by higher eve managers and imposed on ower eve managers it may be resisted and cause dissatisfaction and demotivation. Contro: a budget assists managers in controing the activities for which they are responsibe by aowing them to compare actua performance with expected or budgeted performance. Any significant differences may then be investigated and inefficiencies highighted for remedia action. (ii) Performance evauation: a manager s performance may be evauated by reference to how we budgeted resuts are achieved. Budgets thus aow managers to gauge how we they are meeting targets that they have been invoved in setting. (6 marks) The budgets that woud be prepared for a manufacturing company In a manufacturing environment it is ikey that the foowing budgets woud be prepared: Saes budget: this is the starting point as it is based on what the company expects to se in the year ahead. It is prepared showing saes in units and in vaue terms. Production budget: this budget is prepared in unit terms ony and aims to ensure that production is sufficient to cover saes and panned inventory eves for the year ahead. Direct materias usage budget: this budget is based on the production budget and shows the materias required to meet budgeted production eves. It is expressed in units and cost terms. Direct materias purchase budget: this budget shows the quantity of materias that must be purchased to meet budgeted production eves and panned materias inventory eves. It shows materia quantities and costs. Direct abour budget: this budget is based on the production budget and shows the abour hours required to achieve production eves and aso the budgeted cost of that abour. Factory overhead budget: comprises fixed and variabe factory overheads. Budgeted fixed factory overheads for the year ahead are incuded as are variabe factory overheads based on production eves. Seing, distribution and administration budgets: these are prepared by the managers of the respective departments and show the budgeted overhead costs for the year ahead. Master budget: when a of the other budgets have been prepared they are then summarised into a budgeted profit and oss and baance sheet, which gives an overview of the expected performance for the year ahead. (8 marks) (Format and presentation 1 mark) [Tota: 15 Marks] Page 12

14 SOLUTION 3 1. Answer (d) Supervisors saaries. 2. Answer (b) Occurs under efficient operating conditions and is unavoidabe. 3. Answer (d) Management accounting information is prepared for a wider range of users than financia accounting information. 4. Answer (c) 28,750. As materia B6 is in reguar use the company wi have to repace it if it is used, hence repacement cost is appicabe i.e. 5,000 Kgs x 5.75/Kg = 28, Answer (b) 66,000. Again, materia D7 is in reguar use and so must be repaced if used so the repacement cost is appicabe i.e. 6,000 Kgs x 11/Kg = 66, Answer Ni. Materia G10 is no onger used by the company and has no scrap vaue hence the cost of using the materia on the customer order is NIL. 7. Answer (d) 1,450 bars. Break-even point in units (bars) = Tota fixed costs/contribution per unit. Break-even point in units (bars) = 10,730/( ) = 14,500 bars (units) Margin of safety in units (bars) = Expected saes - break-even saes Margin of safety in units (bars) = 15,950-14,500 = 1,450 bars. 8. Answer 56,975 x y x-y June Juy Change Recording fees charged 59,450 46,580 12,870 Hours spent in studio 1,650 1, Variabe recording cost per hour = 12,870/390 = 33 per hr Tota recording fees = Fixed recording cost + variabe recording cost Say for Juy = 46,580 = Fixed recording cost + ( 33 x 1,260 hrs) 46,580 = Fixed recording cost + 41,580 => Fixed recording cost = 46,580-41,580 = 5,000. Tota recording fees for 1,575 hours = 5,000 + ( 33 x 1,575) Tota recording fees for 1,575 hours = 56,975. [Tota: 20 Marks] Page 13

15 SOLUTION 4: Tasty Crumbe Ltd. Production capacity to meet demand Saes demand Labour hours Tota Labour required per oaf hours required 100% Rye bread 27, ,355 Mutigrain bread 56, ,660 Spet bread 31, ,150 10,165 Tota hours avaiabe 9,792 Excess/(shortfa) of hours -373 The company does not have enough abour hours in the current year to meet saes demand (4 marks) (b) Compute the optima production pan and tota profit for the year Cacuate the contribution per unit of imiting factor Limiting factor = abour hours 100% Rye bread Mutigrain bread Spet bread Seing price per unit Less: variabe costs per unit Direct materia: Four Direct 15 per hour Variabe overhead: 100% Direct abour cost Tota variabe costs per unit Contribution per unit (x) Labour hours per unit (y) Contribution per abour hour (x/y) Ranking Optima production pan (8 marks) Contribution Production Tota Labour Contribution per unit in units hours required 100% Rye bread ,100 1,355 75,880 Spet bread ,500 3,150 70,875 Mutigrain bread 1.99 *52,870 5, ,211 9,792 Tota contribution 251,966 Less fixed production overheads ( 9,450 x 12 months) 113,400 Less seing and distibution expenses ( 13,860 x 4 quarters) 55,440 83,126 * Baancing figure 9, ,150 = 5,287 / 0.1 hr per oaf = 52,870 oaves (5 marks) Page 14

16 (c) Another artisan bakery has offered to suppy oaves. Shoud Tasty Crumbe Ltd. avai of the offer? Tasty Crumbe Ltd. shoud avai of the offer because: - Each oaf wi generate a contribution of 0.50 towards fixed costs - By taking the offer customers wi not be disappointed - Any other reevant points Tasty Crumbe Ltd. shoud not avai of the offer because: - The oaves may not be of the same high quaity which may deter customer purchase in the future - The bakers working for Tasty Crumbe Ltd. may be concerned about their jobs if the company outsources - Wi the other bakery be reiabe in deivering the required oaves? - What if customers find out about this - it may adversey affect the company's reptuation - Any other reevant points (3 marks) [Tota: 20 Marks] Page 15

17 SOLUTION 5: Foat On Ltd. Standard cost card for ONE kickboard Direct ( 6,615/189) 35 per Kg x Kg (189Kgs/1,400) Direct ( 4,480/280) 16 per hour x 0.2 hr (280hrs/1,400) Variabe production ( 910/280) 3.25 per hour x 0.2 hr Fixed production 2.10 ** per unit Tota standard product cost Seing price per unit Standard profit per unit **Budgeted fixed production overhead per unit = Tota budgeted fixed production overhead 35,280 = Budgeted production/norma production 16,800 = 2.10 per unit (4 marks) (b) Variances Direct materia price variance (SP - AP) x AQ = ( 35 - ( 7,140/210)) x 210 = F Direct materia usage variance (SQ - AQ) x SP = ((0.135 x 1500) -210) x 35 = A Direct abour rate variance (SR - AR) x AH = ( 16 - ( 3,969/325)) x 325 = 1,231.0 F Direct abour efficiency variance (SH - AH) x SR = ((0.20 x 1,500) - 325) x 16 = -400 A Variabe overhead expenditure variance (SR - AR) x AH = ( ( 1,170/325)) x 325 = A Variabe overhead efficiency variance (SH - AH) x SR = ((0.20*1,500) - 325) x 3.25 = A Fixed production overhead expenditure variance (BFO - AFO) (( 35,280 /12) - 3,800) = -860 A Fixed production overhead voume variance (AP - BP) x SR per unit = (1,500-1,400) x 2.10 = 210 F Saes price variance (AP - SP) x AV = (( 26,250/1,500) - ( 25,200/1,400)) x 1,500= -750 A Tota of variances exc. saes voume variance Saes voume variance (AV - BV) x SM = (1,500-1,400) x = F (11 marks) Page 16

18 (c) Reconciiation of budgeted profit to actua profit Budgeted profit 1,400 x , Saes voume variance Fexed budgeted profit 1,500 x , Tota variances (exc saes voume variance) Actua profit 10, Cacuation of actua profit Saes as per question 26, Less: tota product costs 16, Profit 10, (3 marks) (d) Reasons for direct materias variances Any TWO of the foowing reasons may be given: Direct materias price variance This may arise due to: - Unexpected price decrease - Purchase of inferior quaity materias - Any other reevant point Direct materias usage variance This may arise due to: - Careess handing of materias by staff - Purchase of inferior quaity materias - Theft of materias - Changes in production methods - Changes in quaity contro requirements - Any other reevant point (2 marks) [Tota: 20 Marks] Page 17

19 SOLUTION 6: JK Ltd. Workings W1 Cacuation of product cost Under Absorption costing Direct materias 6.10 Direct abour 0.75 Variabe production overhead 1.50 Fixed production overhead ** 2.04 Tota product cost per unit Fixed production overheads per year 612,000 Norma production capacity per year (25,000 units x12) 300,000 Fixed production overhead absorption rate per unit ** 2.04 Under Variabe costing Direct materias 6.10 Direct abour 0.75 Variabe production overhead 1.50 Tota product cost per unit 8.35 May June Juy W2 Cacuation of changes in inventory units units units Opening inventory 5,000 8,000 10,000 Production 24,000 26,000 25,000 Tota inventory avaiabe 29,000 34,000 35,000 Saes 21,000 24,000 30,000 Cosing inventory 8,000 10,000 5,000 W3 Cacuation of Under/Over absorbed overhead May June Juy Actua fixed production overhead 51,000 51,000 51,000 Absorbed fixed production overhead 48,960 53,040 51,000 Under/(over) absorbed overhead 2,040-2,040 0 Profit statements for JK Ltd. for the months of May, June and Juy Using Absorption costing (Product cost = see W1) May June Juy Saes 462, , ,000 Cost of Saes: Opening stock 51,950 83, ,900 + Production 249, , ,750 - Cosing stock (see W2) 83, , , ,360 51, ,700 Under/(over) absorbed overhead (see W3) 2,040-2,040 0 Gross profit 241, , ,300 Saes commission (5% of saes vaue) 23,100 26,400 33,000 Profit 218, , ,300 Page 18

20 Using Variabe costing (Product cost = 8.35 see W1) May June Juy Saes 462, , ,000 Cost of Saes: Opening stock 41,750 66,800 83,500 + Production 200, , ,750 - Cosing stock (see W2) 66,800 83,500 41,750 Production cost of saes 175, , ,500 Saes commission (5% of saes vaue) 23,100 26,400 33,000 Contribution 263, , ,500 Fixed production overheads 51,000 51,000 51,000 Profit 212, , ,500 (15 marks) (b) Reconciiation of Absorption and Variabe costing profit figures May June Juy Profit per absorption costing 218, , ,300 Less fixed production overhead in inventory (5,000-8,000) * ,120 (8,000-10,000) * ,080 (10,000-5,000) * ,200 Profit per variabe costing 212, , ,500 (3 marks) (c) Suggest TWO reasons why JK Ltd. shoud use Absorption Costing Any TWO of the foowing reasons: - For financia reporting purposes absorption costing is preferred to variabe costing. - Absorption costing avoids having to separate costs into their fixed and variabe eements. - Absorption costing does not underestimate the importance of fixed production overheads. - By cacuating and anaysing under/over absorbed overheads in absorption costing, inefficient utiisation of resources may be reveaed. - Absorption or fu costing is a better basis for cacuating seing prices. - Any other reevant point (2 marks) [Tota: 20 Marks] Page 19