SUGGESTED ANSWER SCHEME FOR FINAL EXAM ACC 1511 MANAGEMENT ACCOUNTING FUNDAMENTALS

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1 SUGGESTED ANSWER SCHEME FOR FINAL EXAM ACC 1511 MANAGEMENT ACCOUNTING FUNDAMENTALS Section A: MCQ 1. B 6. A 11. C 16. D 2. D 7. C 12. D 17. D 3. D 8. B 13. B 18. C 4. C 9. D 14. D 19. D 5. C 10. A 15. A 20. B

2 Solution Question 1 (Budget) A) January February March Quarter Sales 320, , ,000 Accounts receivable 82,000 January sales 240, (75%*320k) (20%*320k) February sales (75%*340k) (20%*340k) March sales (75%*330k) Total cash collections 322, , /3 = 5 marks (B) Merchandise purchase budget January February March Quarter Budgeted COGS (65%) 208, , , ,500 (0.65*320K) (0.65*340K) (0.65*330K) Add: desired ending Inv (80%) 176, , , ,200 (0.8*221K) (0.8*214.5K) (0.8*0.65*360k) Total needs 384, , , ,700 Less: beginning inventory 166, ,800 OF 171,600 0F 166,400 Total required purchases 218, ,800 0F 230,100 0F 664, /4 = 5 MARKS c) Cash budget January February March Quarter Cash balance, beginning 22,000 24,000 OF 30,800 OF 22,000 Add: Cash receipts 322,000 OF 319,000 OF 315,500 OF 956,500 Total cash available 344, , , ,500 Less: cash disbursment Purchases 199, , , ,200 Other monthly expenses 21,000 21,000 21,000 63,000 Equipment 70, ,000 Dividend 100, ,000 Total cash disbursment 390, , , ,200 Cash Excess/(deficit) (46,000) OF 103,600 OF 109,500 OF 112,300 Financing Borrowing 70,000 70,000 Interest payment (2,800) (2,800) Loan payment (70,000) (70,000) Cash balance, ending 24,000 30, , , /4 = 7 MARKS (d)if a company prepares budgeted income statements and financial position, why is a cash budget necessary? The two budget serve different purposes. Budgeted income statement shows the expected net operating income or loss of the company. (1/2 M) It does not provide information on the cash availability and cash needs for the company in running the business. (1/2 M) Cash budget on the hand provide information on probable cash needs during the budget period. (1M) This is important for the company to make advance arrangement for bank loans and other sources of financing. (1 M) 3 MARKS (TOTAL: 20 MARKS)

3 QUESTION 2 a. Many managers prefer variable costing over absorption costing because : income statements prepared under variable costing more closely reflect operations. Management finds it easy to understand Consistent with CVP analysis Emphasizes contribution in short-run pricing decisions. Profits for period not affected by fixed manufacturing overhead Impact of fixed cost on profits emphasized b. Absorption-costing operating income statements: Year 1 Year 2 Year 3 Sales revenue (at $25 per case) $2,000,000 1,500,000 $2,250,000 Less: Cost of goods sold (at absorption cost of $21 per case) * 1,680,000 1,260,000 1,890,000 Gross margin $ 320,000 $ 240,000 $ 360,000 Less: Selling and administrative expenses: Variable (at $.50 per case) 40,000 30,000 45,000 Fixed 37,500 37,500 37,500 Operating income $ 242,500 $ 172,500 $ 277,500 *The absorption cost per case is $21, calculated as follows: Budgeted fixed manufactur ing overhead variable manufactur + Planned production cost per case Variable-costing operating income statements: $400,000 80,000 + $16 $5 + $16 = $21 Year 1 Year 2 Year 3 Sales revenue (at $25 per case) $2,000,000 $1,500,000 $2,250,000 Less: Variable expenses: Variable manufacturing costs (at $16 per case) 1,280, ,000 1,440,000 Variable S&A Costs (at $.50 per case) 40,000 30,000 45,000 Contribution margin $ 680,000 $ 510,000 $ 765,000 Less: Fixed expenses: Fixed manufacturing overhead 400, , ,000 Fixed S&A 37,500 37,500 37,500 Operating income $ 242,500 $ 72,500 $ 327,500 ing

4 c. Reconciliation: Year Reported Operating Income Difference in Reported Operating Income Change in Inventory (in units) Predetermined Fixed Overhead Rate* Difference In Fixed Overhead Expensed Under Absorption and Variable Costing Absorption Costing Variable Costing 1 $242,500 $242, $ ,500 72,500 $100,000 20,000 5 $100, , ,500 (50,000) (10,000) 5 (50,000) *Predetermined fixed manufacturing overhead rate = d. (I) Preferred income statement $400,000 80,000 Absorption costing income statement is preferable. Absorption costing may provide an incentive for managers to overproduce inventory so that the fixed manufacturing overhead costs may be spread over a larger number of product units, thereby lowering the reported product cost per unit (FOH will be lower). (II) It is not ethical. This is because the overproduction did not take any consideration of prevailing economic conditions, capacity, may lead to employees dissatisfaction. e. JIT inventory and ACVC Under JIT inventory and production management, inventories are minimal. With little or no inventories, fixed manufacturing overhead costs cannot be shifted between periods under absorption costing. As a result, both variable and absorption costing will show essentially the same net operating income figure, and the net operating income under absorption costing will move in the same direction as movements in sales.

5 QUESTION 3 - Part (a) a) Relevant cost analysis: (7 marks) Revenue per meal 8.00 Less: Variable cost ( ) 6.50 Contribution margin per meal 1.50 No of meals X 400 Total revenue per day 600 No of days X 7 Total revenue for 7 days 4,200 Less: Packaging mat 1,000 Additional chef wages 200 Opportunity costs CM per unit = x 100 meals x 6 days 3,900 NET LOSS FROM THE SO 900 Workings: 900 units per day/0.75=1,200 Excess capacity= =300 shortage of meals =100 meals per day VC per unit = = RM8.50 Decision: do not accept. b)breakeven price= RM23,300 = RM (400x7) c) Three other factors to decide special order a. When extra capacity is available and the order generates additional profit b. There is no effect of the discounted price on the normal price offering c. The special order sale should not harm the competitive position of the business such as selling to competitors.

6 QUESTION 3 - Part (b) a). Cost to buy: ($18x5000 units) = $90,000 Cost to make: 30,000 ((3+2+1)x5000) + 25, , , ,000(1,500x12mths) = $122,500. Total cost to purchase is lower by = $122,500 90,000 = $32,500. b). a. Suppliers can ensure parts quality b. Suppliers can deliver parts as per production schedules. c. Protection of intellectual property rights against competitors. Alternative format: QUESTION 3 - Part (b) Make Unit cost Make Annual cost Buy Annual cost Supplier s price $90,000 Material cost ,000 Labor cost ,000 Variable overhead ,000 Set up cost 25,000 Supervisory salaries 37,500 Direct factory fixed costs 12,000 Opportunity loss from Rental 1,500 x12 mths 18,000 Total packaging cost ,500 $90,000 OR Rental revenue (18,000) 104,500 72,000 Total cost to purchase is lower by = $122,500 90,000 = $32,500. OR 104,500 72,000 = 32,500

7 QUESTION 4 a) target cost based on Salima s proposal: Cost per set: 150,000* / 75 sets = 2,000 Target cost based on Hazeeq s proposal: Selling price per set = 2,500 Target cost as per selling price = 75% *2,500 =1,875 2,000 vs 1,875, estimated target cost proposed by Salima is higher than target cost proposed by Hazeeq. Therefore, the cost estimates prepared by Saleema do not meet Haziq s proposed selling price. Do not meet + justification *Workings: RM Design cost 8,000 Direct materials 32,000 Direct manufacturing labor 38,000 Variable manufacturing overhead 32,000 Fixed manufacturing overhead 26,000 Marketing 14,000 Total costs 150,000

8 b) DM reduced by 60%: 60%*32,000 = 19,200 Design cost increase by 1,100 Selling price per set = 2,400 Revised target cost: 150, ,100 19,200 = 131,900 / 75 = 1,759 Target cost as per selling price = 75% *2,400 = 1,800 1,759 vs 1,800, changes in preceding costs do reduce the estimated target cost hence selling price of RM2,400 is acceptable. Alternative format Revised target cost: Total cost as per requirement (a) 150,000 DM reduced by 60% (19,200) Design cost 1, ,900 Revised Target cost per set = 131,900/ 75 sets RM1,759 Target cost as per selling price = 75% *2,400 = 1,800 1,759 vs 1,800, changes in preceding costs do reduce the estimated target cost hence selling price of RM2,400 is acceptable. c) increase in marketing by 3,000 revised target cost: 150, ,000 = 153,000/ 75 = 2,040 Target cost as per selling price = 75% *2,800 = 2,100 Alternative format Revised target: Total cost as per requirement (a) 150,000 Marketing ,000 Revised Target cost per set = 153,000/ 75 sets RM2,040 2,040 vs 2,100, revised target cost per set is below than 75% of the target cost of selling price.

9 d) market price is 2,600 and profit margin as per industry is 20% of the selling price a b c Revenue 2,500*75 187,500 Revenue 2,400*75 180,000 Revenue 2,800*75 210,000 Total costs 150,000 Total costs 131,900 Total costs 153,000 Operating 37,500 Operating 48,100 Operating 57,000 income income income Profit margin 37,500/187,500 20% Profit margin 48,100/180,000 27% Profit margin 57,000/210,000 27% Option A is more competitive as the selling price per set is lower than the market price and the profit margin is still within the industry s profit margin. In fact, the company may increase the price in order to be at par as per the market price hence increase profit margin too.

MID TERM EXAMINATION Spring 2010 MGT402- Cost and Management Accounting (Session - 2) Time: 60 min Marks: 47

MID TERM EXAMINATION Spring 2010 MGT402- Cost and Management Accounting (Session - 2) Time: 60 min Marks: 47 Question No: 1 ( Marks: 1 ) - Please choose one Which of the following product cost is Included