MODULE: MANAGEMENT ACCOUNTING FOR DECISION MAKING

Transcription

1 PROGRAMME BSc (Hons) Accounting with Finance BSc (Hons) Banking and International Finance Diploma in Financial Management with Public Finance/Bsc (Hons) Financial Management with Sepcialisation in Public Finance COHORTS BACF/13B/PT BACF/14A/FT BBIF/14A/FT BBIF/13B/PT DFM/BFM/14A/PT Examinations for Academic Year Semester II / Academic Year 2015 Semester I MODULE: MANAGEMENT ACCOUNTING FOR DECISION MAKING MODULE CODE: ACCF2118 Duration: 2 ½ Hours Reading time: included Instructions to Candidates: 1. This question paper consists of Section A and Section B. 2. Section A is compulsory. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. Total Marks: 100 This Question Paper is printed on BOTH SIDES. This Question Paper Contains 5 questions and 10 pages. MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 1 of 10

2 SECTION A: COMPULSORY QUESTION 1: (40 MARKS) PART A (26 marks) Brick Construction (BC) is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have found that they are winning fewer GC contracts than expected. BC has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BC thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and hence make them more competitive. You are provided with the following data: Overhead Annual Activity driver Total number Category overheads of activities per year $ Supervisors 90,000 Site visits 500 Planners 70,000 Planning documents 250 Property related 240,000 Labour hours 40,000 Total 400,000 A typical GC costs $3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by a supervisor and needs only one planning document to be raised. The typical EX costs $8,000 in materials and takes 500 hours to complete. An EX requires six site visits and five planning documents. In all cases labour is paid $15 per hour. MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 2 of 10

3 Required: (i) Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the overheads. (ii) Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads. (10 marks) (iii) Please read the following case and critically evaluate the profitability report of the two products. (10 marks) Mauritius Drinks Ltd manufactures soft drinks, namely Swift-taste and Lemonade. Information about the two products is as follows: Volume Sales price Gross profit GP margin Cases per case per case % Swift-taste 10,000 Rs Lemonade 100,000 Rs It is observed that the high volume product, Lemonade yields a lower gross profit margin and that Mauritius Drinks Ltd allocates factory overhead using a traditional product costing approach. The company has used a direct labour hour rate for tracing overheads to products. At a recent meeting the production manager raised a pertinent point with respect to the GPM of the two products. He is categorical that something is drastically wrong with the company s present cost allocation system. He provides some additional information about the two products: Swift-taste requires extensive process preparation and sterilization prior to processing. The ingredients are imported from Africa, requiring complex import controls. The formulation is complex, and it is difficult to maintain quality. Lastly, the product is sold in small orders. Lemonade requires minor process preparation and there is no sterilization prior to processing. The ingredients are acquired locally, the formulation is simple, and it is easy to maintain quality. The drink is sold in large bulk orders. MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 3 of 10

4 PART B (14 marks) Andrea and Co. Ltd has been invited to tender for a contract. It is to produce 10,000 metres of an electrical cable in which the business specialises. The estimating department of the business has produced the following information relating to the contract: Materials The cable will require a steel core, which the business buys in. The steel core is to be coated with a special plastic, also bought in, using a special process. Plastic for the covering will be required at the rate of 0.10kg/metre of completed cable. Direct labour Skilled: 10 mins/metre; Unskilled: 5 mins/metre. The business already holds sufficient of each of the materials required to complete the contract. Information on the cost of the stocks is as follows: Steel core Plastic Rs/metre Rs/kg Historic cost Current buying-in-cost Scrap value 70 5 The steel core is in current use by the business for a variety of work that it regularly undertakes. The plastic is a surplus from a previous contract where a mistake was made and an excess quantity ordered. If the current contract does not go ahead, this plastic will be scrapped. Unskilled labour, which is paid at the rate of Rs 375 an hour, will need to be taken on specifically for the contract. The business is fairly quiet at the moment which means that a pool of skilled labour exists that will still be employed at full pay of Rs 600 an hour to do nothing if the contract does not proceed. The pool of skilled labour is sufficient to complete the contract. MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 4 of 10

5 Required: (a) Explain the principles of relevant costing techniques (4 marks) (b) Indicate the minimum price at which the contract could be undertaken, such that the business would be neither better nor worse off as a result of doing it. (10 marks) SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS) Kinston Co operates a chain of bakery shops, with each shop baking its own bread. The management accountant of Kinston Co is reviewing a proposal to open a new shop. The following estimates for the new shop are available: 1. Standard price and variable costs Rs per loaf Sales price 2.00 Ingredients (0.70) Electricity (0.10) Fixed costs per annum Rs Bakery Labour 20,000 Shop labour 16,000 Rent of bakery and shop 30,000 Total fixed costs per annum 66, Budgeted sales per annum are 70, 000 loaves MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 5 of 10

6 Required: (a) Calculate the following figures for the proposed new shop: (i) The contribution to sales ratio; (ii) The break-even point in sales revenue per annum; (iii) The break-even point in loaves sold per annum; (iv) The number of loaves to be sold to achieve a target profit of Rs 12,000 (v) The margin of safety in loaves per annum. (vi) Interpret your results briefly (12 marks) (b) Using the graph paper provided, draw and label a break-even chart for the proposed new shop. (c) Discuss briefly four limitations of break even analysis. (d) At the end of the first year of operations the new shop had sold 50,000 loaves at an average price of $2.20 per unit. Calculate the sales price and sales volume contribution variances and explain the meaning of each variance. QUESTION 3: (30 MARKS) Medley Limited manufacturers and sells four products. For the coming month it has produced the following information: Product A B C D per per per per Unit Unit Unit Unit Selling price Direct Materials Direct Labour (Note 1) Variable Production Overhead (Note 2) Fixed Production Overhead (Note 2) Profit MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 6 of 10

7 Sales (units) 1, Note: (1) Direct Labour is paid 10 per hour. (2) Production Overheads are absorbed as a percentage of direct labour cost. Fixed production overheads are not product specific and the total Fixed Production Overheads will not be affected by a change in output. There are no opening or closing inventories and production is expected to equal sales. Required: (a) Prepare an operating statement for Medley Limited for the coming period showing contribution and profit. (6 Marks) (b) The production manager has suggested that Product A be discontinued because it is unprofitable. Advise the production manager as to the financial effect of such a decision and advise what other factors would need to be considered. (8 Marks) (c) If direct labour hours are limited to 2,800 hours for the period; (i) Calculate the shortfall in hours required to meet the above sales; (ii) Prepare a production schedule in order to calculate the maximum profit achievable. (10 Marks) (d) The company has decided to outsource any shortfall in the production of the products. Explain briefly Four qualitative factors that are important for such a decision. MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 7 of 10

8 QUESTION 4: (30 MARKS) Clavis Ltd operates a standard absorption costing system for the manufacture of Product KL. The standard cost for Product KL is as follows: Rs Standard selling price 600 Direct materials Rs60 per kg 120 Direct labour 1.25 Rs120 per hour 150 Variable overheads 1.25 Rs60 per hour 75 Fixed overheads 1.25 Rs120 per hour 150 The company budgets for 10,000 standard direct labour hours per month and production overheads are absorbed on a direct labour hour basis. Actual information for the month of March 2015 revealed the following: Actual sales 8,750 units Rs 5,040,000 Direct materials 16,900 kgs Rs 1,034,280 Direct labour 10,780 hours Rs 1,358,280 Variable overheads Rs 660,000 Fixed overheads Rs 1,368,000 Required: (a) Prepare an operating statement reconciling the original monthly budgeted profit with the actual monthly profit using variance analysis. You should show all workings. (24 marks) (b) Explain the possible reasons that might have led to the following variances in March 2015: i. Direct Materials Price Variance ii. Direct Labour Rate Variance iii. Direct Labour Efficiency Variance MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 8 of 10

9 QUESTION 5: (30 MARKS) Shine Ltd produces and sells Product P. The unit cost structure of the product is as follows:- Rs Raw Materials: 125 Direct Labour: 60 Variable Expenses: 17 The Budgeted Sales in Units for five months are given below: April 2015 May 2015 June 2015 July 2015 August ,950 2,300 2,500 3,000 3,200 The following additional information is provided: i. The Stock of Product P at 30April 2015was 1,850 units and it was 1,700 units at 31 March ii. As from May 2015, Shine Ltd will keep stock levels equivalent to meet the Budgeted next month s sales. iii. The company plans to buy direct materials that will only meet current month s requirements. iv. Payment for Materials will be effected as follows:- i. 50% in the month of purchase; and ii. 50% in the month following purchase v. Direct Labour and Variable Expenses are paid in the month of production. vi. The Budgeted Sales Price is to be Rs 310 per unit. vii. Fixed overheads are expected to be Rs50,000 per month. This will include a depreciation charge of Rs12,500. Fixed overhead costs are paid as incurred. MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF2118 Page 9 of 10

10 viii. Corporation Tax of Rs42,700 will have to be paid in June ix. 10% of sales are on cash basis and credit sales are subject to a one month credit period. 95% of credit customers are expected to pay within the agreed credit terms and the remaining is not expected to be recovered. x. The closing cash balance on 30April 2015 stands at Rs16,240. Required: (a) Prepare a cash budget for the three months ending 31 July 2015, showing cash inflows and outflows for each month and the opening and closing balance for each month. (24 marks) (b) Discuss the limitations of traditional budgeting. ***END OF QUESTION PAPER*** MANAGEMENT ACCOUNTING FOR DECISION MAKING-ACCF Page 10 of