Module Title: Advanced Management Accounting 1

Transcription

1 CORK INSTITUTE OF TECHNOLOGY INSTITIÚID TEICNEOLAÍOCHTA CHORCAÍ Semester 1 Examinations 2009/10 Module Title: Advanced Management Accounting 1 Module Code: ACCT7001 School: Business Studies (Department of Accounting and Info Systems) Programme Title: BBus Accounting (year 3) External Examiner(s): Internal Examiner(s): Mr. Eoin Langan Sylvia Dempsey Instructions: Answer TWO questions (50 marks each). Duration: 2 hours Sitting: Winter 2009 Requirements for this examination: Calculator Present Value Tables (attached) Note to Candidates: Please check the Programme Title and the Module Title to ensure that you have received the correct examination paper. If in doubt please contact an Invigilator. Page 1 of 7

2 QUESTION 1 INM Limited makes three types of gold watch the Idol (I), the Normal (N) and the Model (M). A traditional product costing system is used at present; although an activity based costing (ABC) system is being considered. Details of the three products for a typical period are: Hours per unit Materials Cost per Production in Labour Hours Machine Hours unit ( ) units Product I ½ 1½ Product N 1½ ,250 Product M ,000 Direct labour costs 6 per hour and production overheads are absorbed on a machine hour basis. The fixed overheads are allocated to each unit based on an absorption rate of 28 per machine hour. You are required to: (a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis of machine hours. (5 marks) (b) Further analysis shows that the total production overheads can be divided as follows: % Costs relating to set-ups 35 Costs relating to machinery 20 Costs relating to materials handling 15 Costs relating to inspection 30 Total production overhead 100 The following total activity volumes are associated with each product line for the period as a whole: Number of Set-ups Number of movements of materials Product I Product N Product M Number of inspections Calculate the cost per unit for each product using ABC principles (work to two decimal places). (20 marks) (c) (d) Explain why costs per unit calculated under ABC are often very different to costs per unit calculated under more traditional methods. Use the information from INM Limited to illustrate. (10 marks) Selling price was a mark-up of 20% on the traditional cost, discuss the financial and non-financial implications of a switch to ABC on pricing and profitability (15 marks) All calculations must be presented clearly [Total 50 marks] Page 2 of 7

3 QUESTION 2 O Callaghan Ltd manufactures and sells 8,000 laptop computers per annum. The company s Profit and Loss account is as follows: Sales (8,000 units) 4,000,000 Less: Production costs: Direct Materials 1,200,000 Direct Labour 1,560,000 Variable Overheads 680,000 Fixed Overhead 200,000 3,640,000 Gross Profit 360,000 Less Expenses: Variable Selling and Distribution 160,000 Fixed Selling and Distribution costs 100,000 (260,000) Net Profit 100,000 The owners of O Callaghan Ltd are not happy with these results and have asked your advice on how to boost profitability. Below are two suggestions that your team have come up with. You are required to: (a) Prepare a statement of income from the above information. From this calculate the breakeven point in units and sales revenue ( ) (5 marks) (b) Suggestion 1) The direct labour cost seems very high. It could outsource some of the production for one year only for a fixed fee of 468,000 to Outsource Ltd, a new production company in Poland. This would increase the fixed costs but result in a reduction of the direct labour cost by 30%. Prepare the revised statement of income and compute the company s revised breakeven point if it outsources some of the production. (5 marks) (c) Sales are volatile. For example if sales fall by 10% next year, do you think it is a good idea to outsource production? (include calculations of profits and commentary on operating leverage and other qualitative factors in your answer) (17 marks) (d) Suggestion 2) Instead of outsourcing, in an effort to achieve a profit of 150,000, management is considering the use of higher quality raw materials. This would increase the material cost by 20 per unit, but the quality inspector who is paid a salary of 25,000 per annum could be eliminated. This would result in a higher quality laptop. So O Callaghan Ltd feels it can charge a higher selling price for the laptop. Assuming it sells 8,000 units, to achieve a target profit of 150,000, what selling price should O Callaghan charge for these higher quality laptops? (8 marks) (e) One of the managers in O Callaghan has said that our product has a very elastic demand, so an increase in selling price will be devastating for the company s profit. What does he mean by this and how can it be overcome? (15 marks) All calculations must be presented clearly [Total 50 marks] Page 3 of 7

4 QUESTION 3 Shandon Ltd has the capacity to manufactures 100,000 units each month. At the moment it is only working to 70% capacity. The following statement shows the costs and revenues a month: Sales 6,552,000 Raw Materials: 1kg * 70,000 units * 20 per kg = 1,400,000 Delivery: 15,000 per batch*7 batches= 105,000 Labour: (25% is fixed, 75% is variable) 1,800,000 Production Overheads (40% fixed, 60% variable) 1,553,000 Packaging: 70,000 units * 5 350,000 Distribution: 18,000 per batch of 5,000 units 252,000 5,460,000 Profit 1,092,000 The Managing Director of Shandon is anxious to find profitable ways to use the spare capacity. He is aware that a competitor Bells ltd has a shortage of capacity and is interested in ordering 20,000 units from Shandon. The accountant of Shandon has put together the following costing information for these 20,000 units: i) Bell has rigorous quality standards. For 20,000 units of good output, Shandon would have to produce 30,000 units, the excess must be disposed of, at a cost of 16 per unit. ii) Suppliers of raw materials can supply more materials at the usual purchase price and usual delivery charge. iii) One third of the direct labour used in producing extra output would have to be paid time and a half (ie overtime at a rate of 50% higher than normal wage rate). iv) Bell requires only a simplified form of packaging, so Shandon would incur only a fifth of the normal packaging per unit v) Bell would collect the product from Shandon s factory, so there would be no distribution charge for Shandon. vi) The accountant spent 3 hours putting this information together. He is paid 2,000 per week, for a 40 hour week. vii) The quote should be based on half of the mark-up that is currently applied to the total cost in arriving at selling price. You are required to: Write a report to the management team, in which you should: (5 marks) (a) Calculate the price you would quote to Bell Ltd (20 marks) (b) Discuss other factors you would consider before taking up the contract. (12 marks) (c) Explain to the team, who have a problem understanding the numbers, how you arrived at the labour cost, accountants costs and the mark-up figure (15 marks) (d) State whether or not you think Shandon should go ahead with this contract (3 marks) All calculations must be presented clearly [Total 50 marks] Page 4 of 7

5 APPENDIX 1: PRESENT VALUE TABLES Page 5 of 7

6 Page 6 of 7

7 APPENDIX II: CUMULATIVE PRESENT VALUE TABLES Page 7 of 7