UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series Examination 2014-15 MANAGERIAL ACCOUNTING NBS-MC66 Time allowed: 3 hours Answer FOUR questions; THREE questions from Section A and ONE question from Section B. Candidates using a calculator are advised to include some working details in their answers. All questions carry equal marks. Notes are not permitted in this examination. Do not turn over until you are told to do so by the Invigilator NBS-MC66 Module Contact: Dr N Abdul Kadir, NBS Copyright of the University of East Anglia Version 1
Page 2 SECTION A Question 1: Variable costing and absorption costing The GW Company's reported profits are prepared using the absorption costing method. The company's first two years of operations are shown: Year 1 Year 2 Sales 2,000,000 2,500,000 Less: cost of goods sold: Opening stock 0 180,000 Add cost of goods 1,620,000 1,620,000 manufactured (@ 36) Goods available for sale 1,620,000 1,800,000 Less closing stock (@ 180,000 0 36) Cost of goods sold 1,440,000 1,800,000 Gross margin 560,000 700,000 Less selling and 420,000 460,000 administrative expenses * Profit 140,000 240,000 * 4 per unit variable; 260,000 fixed each year. The unit product cost of 36 is computed as follows: Direct materials 8 Direct labour 14 Variable manufacturing overhead 2 Fixed manufacturing overhead 12 ( 540,000/45,000 units) Unit product cost 36 Production and cost data for the two years are: Year 1 Year 2 Units produced 45,000 45,000 Units sold 40,000 50,000
Page 3 a) Prepare a profit and loss account for each year in the contribution format using variable costing. (15 marks) b) Reconcile the absorption costing and the variable costing profit figures for each year. c) Explain the reasons for the difference in profit between the two costing methods. Question 2: Activity Based Costing Chester Ltd manufactures sofas that are available in Deluxe and Regular models. The company has manufactured the Regular model for several years. The Deluxe model was introduced a few years ago to capture a new market segment. Since the introduction of the Deluxe model, the company's profits have steadily declined and management has become increasingly concerned about the accuracy of their costing system. Sales of the Deluxe model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of direct labour hours. For the current year the company has estimated that it will incur 1,800,000 in manufacturing overhead cost and produce 5,000 units of the Deluxe model and 40,000 units of the Regular model. The Deluxe model requires two hours of direct labour per unit and the Regular model requires one hour of direct labour per unit. Material and labour costs are as follow: Model Deluxe ( ) Regular ( ) Direct Materials 80 50 Direct Labour 28 14 a) Compute the predetermined overhead rate using the direct labour hours as a base for assigning the overhead cost to products. Determine the unit cost of each model. (6 marks) TURN OVER
Page 4 b) The management is considering using the activity based costing. The activity based costing system would have the following four activity cost centres: Activity cost pool Activity measure Estimated overhead cost ( ) Purchasing Purchase orders 408,000 issued Processing Machine-hours 364,000 Scrap/rework Scrap/rework orders 758,000 issued Shipping Number of shipments 270,000 1,800,000 Expected activity Activity measure Deluxe Regular Total Purchase orders issued 200 400 600 Machine-hours 20,000 15,000 35,000 Scrap/rework orders 1,000 1,000 2,000 issued Number of shipments 250 650 900 Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity based costing system. Determine the amount of manufacturing overhead cost per unit of each model. c) Compute the unit product cost of each model. (9 marks) (2 marks) d) From the data you have developed in (a) to (c) above, discuss factors that may account for the company's declining profit. (8 marks)
Page 5 Question 3: Decision making Mono Ltd normally produces and sells 60,000 units of MK5 every month. The selling price is 44 per unit; variable costs are 28 per unit, fixed manufacturing overhead costs total 300,000 per month, and fixed selling costs total 60,000 per month. There have been strikes in the companies that purchase the bulk of MK5. This has caused the sales of Mono Ltd to drop temporarily to 16,000 units per month. Mono Ltd estimates that the strikes will last for two months, after which the sales should return to normal. Due to the current low level of sales, Mono Ltd is thinking to close down its own plant during the two months of strikes. If Mono Ltd closes down its plant, it is estimated that fixed manufacturing overhead costs can be reduced to 210,000 per month and that fixed selling costs can be reduced by 20%. Start up costs at the end of the shutdown period would total 16,000. Since Mono Ltd uses just in time (JIT) production methods, no inventories are on hand. a) Assuming that the strikes continue for two months as estimated, would you recommend that Mono Ltd close its own plant? Support your answer with relevant computations. (15 marks) b) At what level of sales in units for the two month period should Mono Ltd be indifferent between closing the plant and keeping it open? Support your answer with relevant computations. (10 marks) TURN OVER
Page 6 Question 4: Pricing and intracompany transfers Iko Company's Audio Division produces speaker that is widely used by manufactures of various audio products. Sales and costs data of the speaker are as follow: Selling price per unit on 60 the intermediate market Variable costs per unit 42 Fixed costs per unit 8 (based on capacity) Capacity in units 25,000 Iko Company has just organised a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of 57 per speaker from another manufacturer. Iko Company evaluates divisional managers on the basis of divisional profits. Assume that the Audio Division is now selling 20,000 speakers per year to outside customers on the intermediate market. a) From the Audio Division standpoint, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? (3 marks) b) From the Hi-Fi Division standpoint, what is the highest acceptable transfer price for speakers purchased from the Audio Division? (3 marks) c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division? Explain your answer. d) From the standpoint of the entire company, should the transfer take place? Explain your answer. e) Discuss three common approaches that are used to set transfer price. (9 marks)
Page 7 Section B Question 5: Ethical issues BJ Roy is a managing director of JL-M Ltd, a company whose shares are traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Roy had predicted that the company 's earnings would grow by 20% this year. Unfortunately, sales have been less than expected, and Roy concluded within two weeks of the end of the financial year that it would be impossible to report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Roy has ordered that wherever possible, expenditures should be postponed to the new year (including deferring suppliers costs incurred this year to the next year, delaying planned maintenance of equipments used in the factory, staff training, and cutting back on end of the year advertising and promotion). Additionally, Roy ordered the company's management accountant to scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial stocks of work in progress and finished goods at the end of the year. a) Explain why reclassifying period costs as product costs would increase this period's reported earnings. b) Discuss the course of actions that should be taken by the management accountant in this situation. Apply the CIMA code of ethics in your discussion. ( 20 marks) Question 6: Balanced Scorecard Management accounting has a number of control systems including budgetary control which has been criticised as too focussed on financial performance measures. Balanced scorecard has been developed to provide a more diverse perspective. Discuss the benefits and attributes of budgets and Balanced scorecard and suggest why it is a good practice to have both. TURN OVER
Page 8 Question 7: Beyond Budgeting In the Beyond Budgeting report produced by CIMA (2007), it is argued that traditional budgeting is in need for serious revision. Discuss five limitations of traditional budgeting practices and provide five improvements that can be made to facilitate better planning and control. END OF PAPER