POST EXM GUIE May 2001 Exam Management ccounting Fundamentals (FMF) IM publishes a Question and nswer booklet for each paper of the May 2001 exam which is essential reading for students and tutors. The published answers are written by the Examiner and should be read together with the post exam guide. The hartered Institute of Management ccountants 2001
Objective test questions are awarded 2 marks each. Explanations are provided for answers to objective test questions involving calculations. Question 1.1 XYZ Ltd operates an integrated accounting system. The material control account at 31 March 2001 shows the following information: Material control account alance b/d 50,000 Production overhead control account 10,000 reditors 100,000? 125,000 ank 25,000 alance c/d 40,000 175,000 175,000 The 125,000 credit entry represents the value of the transfer to the cost of sales account. finished goods account. profit and loss account. work-in-progress account. The answer is. Question 1.2 P Ltd is preparing the production budget for the next period. ased on previous experience, it has found that there is a linear relationship between production volume and production costs. The following cost information has been collected in connection with production: Volume ost (units) 1,600 23,200 2,500 25,000 What would be the production cost for a production volume of 2,700 units? 5,400 25,400 27,000 39,150 The answer is. Post Exam Guide May 2001 2
for Question 1.2 Variable cost per unit = Units 2,500 25,000 1,600 23,200 900 1,800 1,800 900 = 2 Substitute in high activity: Total cost 25,000 Variable cost = 2,500 units x 2 5,000 Therefore fixed cost 20,000 Forecast for 2,700 units: Fixed cost 20,000 Variable cost 2,700 x 2 5,400 Total cost 25,400 Question 1.3 Ltd absorbs fixed production overheads in one of its departments on the basis of machine hours. There were 100,000 budgeted machine hours for the forthcoming period. The fixed production overhead absorption rate was 2 50 per machine hour. uring the period, the following actual results were recorded: Standard machine hours 110,000 Fixed production overheads 300,000 Which ONE of the following statements is correct? Overhead was 25,000 over-absorbed. Overhead was 25,000 under-absorbed. Overhead was 50,000 over-absorbed. No under- or over-absorption occurred. The answer is. 110,000 machine hours x 2 50 275,000 absorbed ctual incurred 300,000 Under absorbed 25,000 Post Exam Guide May 2001 3
Profit The following graph relates to questions 1.4 and 1.5 0 Level of activity K Question 1.4 Point K on the graph indicates the value of semi-variable cost. total cost. variable cost. fixed cost. The answer is. Question 1.5 This graph is known as a conventional breakeven chart. contribution breakeven chart. semi-variable cost chart. profit volume chart. The answer is. Post Exam Guide May 2001 4
The following information relates to questions 1.6 and 1.7 PP Ltd makes one product, which passes through a single process. The details of the process for period 2 were as follows: There were 400 units of opening work-in-progress, valued as follows: Material 49,000 Labour 23,000 Production overheads 3,800 No losses are expected in the process. uring the period, 900 units were added to the process, and the following costs occurred: Material 198,000 (900 units) Labour 139,500 Production overheads 79,200 There were 500 units of closing work-in-progress, which were 100% complete for material, 90% complete for labour and 40% complete for overheads. No losses were incurred in the process. PP Ltd uses weighted average costing. Question 1.6 How many equivalent units are used when calculating the cost per unit in relation to labour? 450 850 1,250 1,300 The answer is. Question 1.7 The value of completed output for the period was 171,555 201,500 274,488 322,400 The answer is. Post Exam Guide May 2001 5
for 1.6 and 1.7 Equivalent Unit Table escription Units Materials Labour Production overheads % eu % eu % eu Output 800 100 800 100 800 100 800 WIP 500 100 500 90 450 40 200 EU s 1,300 1,250 1,000 osts Period 198,000 139,500 79,200 OWIP 49,000 23,000 3,800 Total cost 247,000 162,500 83,000 ost per equivalent unit 190 130 83 Value of completed output = 800 x ( 190 + 130 + 83) = 322,400 Question 1.8 n engineering company has been offered the opportunity to bid for a contract which requires a special component. urrently, the company has a component in stock, which has a net book value of 250. This component could be used in the contract, but would require modification at a cost of 50. There is no other foreseeable use for the component held in stock. lternatively, the company could purchase a new specialist component for 280. What is the relevant cost of using the component currently held in stock for this contract? 50 250 280 300 The answer is. The 250 net book value is a sunk cost and therefore not relevant. Therefore the relevant cost is 50. Post Exam Guide May 2001 6
The following information relates to questions 1.9 and 1.10 company has budgeted to produce and sell 6,000 units of a single product. The standard cost per unit was as follows: irect materials 20 irect labour 15 Variable overhead 10 Fixed production overhead 5 In the period covered by the budget, the following actual results were recorded: Production and sales 7,000 units Fixed production overheads 28,000 Question 1.9 The fixed production overhead expenditure variance is 2,000 favourable. 2,000 adverse. 7,000 favourable. 7,000 adverse. The answer is. Fixed Production Overhead Expenditure Variance ctual expenditure 28,000 udgeted expenditure (6,000 units x 5) 30,000 2,000 (F) Question 1.10 The fixed production overhead volume variance is 2,000 favourable. 2,000 adverse. 5,000 favourable. 5,000 adverse. The answer is. Fixed Production Overhead Volume Variance ctual volume udgeted volume 7,000 units 6,000 units 1,000 units x 5 = 5,000 (F) Post Exam Guide May 2001 7
Question 1.11 The following details have been extracted from the debtor collection records of X Limited: Invoices paid in the month after sale 60% Invoices paid in the second month after sale 20% Invoices paid in the third month after sale 15% ad debts 5% redit sales for June to ugust 2001 are budgeted as follows: June 100,000 July 150,000 ugust 130,000 ustomers paying in the month after sale are entitled to deduct a 2% settlement discount. Invoices are issued on the last day of the month. The amount budgeted to be received in September 2001 from credit sales is 115,190 116,750 121,440 123,000 The answer is. Receipts in September from: June sales 100,000 x 15% 15,000 July sales 150,000 x 20% 30,000 ugust sales 130,000 x 60% less 2% settlement discount 76,440 Total receipts in September 121,440 Question 1.12 In a standard cost bookkeeping system, when the actual hourly rate paid for labour is less than the standard hourly rate, the double entry to record this is debit wages control account; credit labour rate variance account. debit work-in-progress control account; credit labour rate variance account. debit labour rate variance account; credit wages control account. debit labour rate variance account; credit work-in-progress control account. The answer is. Post Exam Guide May 2001 8
Question 1.13 The labour cost graph below depicts 0 Output a piece rate scheme with a minimum guaranteed wage. a straight piece rate scheme. a straight time rate scheme. a differential piece rate scheme. The answer is. Question 1.14 X Ltd produces and sells a single product, which has a contribution to sales ratio of 30%. Fixed costs amount to 120,000 each year. The number of units of sale required each year to break even is 156,000. is 171,428. is 400,000. cannot be calculated from the data supplied. The answer is. reakeven point in terms of sales value = This must now be divided by the selling price. 120,000 = 400,000 0.3 The breakeven point in terms of units cannot be derived because we do not know the unit selling price. Post Exam Guide May 2001 9
Question 1.15 P Ltd had an opening stock value of 2,640 (300 units valued at 8 80 each) on 1 pril. The following receipts and issues were recorded during pril: 10 pril Receipt 1,000 units 8 60 per unit 23 pril Receipt 600 units 9 00 per unit 29 pril Issues 1,700 units Using the LIFO method, what was the total value of the issues on 29 pril? 14,840 14,880 14,888 15,300 The answer is. The latest prices are used first: 600 units from 23 pril x 9 00 per unit 5,400 1,000 units from 10 pril x 8 60 per unit 8,600 100 units from opening stock x 8 80 per unit 880 Total 14,880 Question 1.16 The following data relates to stock item 452: verage usage Minimum usage Maximum usage Lead time EOQ 100 units per day 60 units per day 130 units per day 20-26 days 4,000 units The maximum stock level is 4,780 units. 5,080 units. 5,380 units. 6,180 units. The answer is. Maximum stock level = Reorder level (ROL) + EOQ (Minimum rate of usage x minimum lead time) ROL = Maximum usage x Maximum lead time = 130 x 26 = 3,380 units Maximum stock level = 3,380 + 4,000 (60 x 20) = 6,180 units Post Exam Guide May 2001 10
Question 1.17 company has been asked to quote for a job. The company aims to make a net profit of 30% on sales. The estimated cost for the job is as follows: irect materials 10 kg @ 10 per kg irect labour 20 hours @ 5 per hour Variable production overheads are recovered at the rate of 2 per labour hour. Fixed production overheads for the company are budgeted to be 100,000 each year and are recovered on the basis of labour hours. There are 10,000 budgeted labour hours each year. Other costs in relation to selling, distribution and administration are recovered at the rate of 50 per job. The company quote for the job should be 572. 637. 700. 833. The answer is. irect materials 10 x 10 100 irect labour 20 x 5 100 Prime cost 200 Variable production overheads 20 x 2 40 Fixed production overheads 20 x 10* 200 Total production cost 440 Other costs 50 Total cost 490 = 70% Profit 210 = 30% Quote for the job 700 = 100% * 100,000 overheads = 10 per hour 10,000 hours Question 1.18 The master budget comprises the budgeted profit and loss account, budgeted balance sheet and budgeted cash flow. the budgeted profit and loss account and budgeted balance sheet. the budgeted profit and loss account. the budgeted cash flow. The answer is. Post Exam Guide May 2001 11
Question 1.19 RJ Ltd produces a single product. The managers currently use absorption costing, but are considering using marginal costing in future. The fixed production overhead absorption rate is 68 per unit. There were 200 units of opening stock for the period and 360 units of closing stock. If marginal costing principles were applied, the profit for the period compared to the absorption costing profit would be 6,800 lower. 10,880 lower. 10,880 higher. 24,880 lower. The answer is. Opening stock losing stock Stock increase 200 units 360 units 160 units x 68 = 10,880 (carried forward in stock under absorption costing) Under marginal costing the profit will be 10,880 lower than the absorption costing profit. Question 1.20 company is launching a new product. In order to manufacture this new product, two types of labour are required skilled and semi-skilled. The new product requires 5 hours of skilled labour and 5 hours of semi-skilled labour. skilled employee is available and is currently paid 10 per hour. replacement would, however, have to be obtained at a rate of 9 per hour, for the work which would otherwise be done by the skilled employee. The current rate for semi-skilled workers is 5 per hour and an additional employee would be appointed for this work. The relevant cost of labour to be used in making one unit of the new product would be 25. 70. 75. 120. The answer is. Skilled labour replacement 5 hours x 9 45 Semi-skilled labour 5 hours x 5 25 Relevant cost 70 Post Exam Guide May 2001 12
Question 1.21 ost centres are units of output or service for which costs are ascertained. functions or locations for which costs are ascertained. a segment of the organisation for which budgets are prepared. amounts of expenditure attributable to various activities. The answer is. Question 1.22 company is currently preparing a material usage budget for the forthcoming year for material Z that will be used in product XX. The production director has confirmed that the production budget for product XX will be 10,000 units. Each unit of product XX requires 4 kgs of material Z. Opening stock of material Z is budgeted to be 3,000 kgs and the company wishes to reduce stock at the end of the year by 25%. What is the usage budget for material Z for the forthcoming year? 34,750 kgs 39,250 kgs 40,000 kgs 40,750 kgs The answer is. 10,000 units produced x 4 kgs = 40,000 kgs Question 1.23 Which of the following are characteristics of job costing? (i) ustomer-driven production (ii) Long production cycle (iii) Homogeneous products (i) only. (i) and (ii) only. (i) and (iii) only. ll of them. The answer is. Post Exam Guide May 2001 13
Question 1.24 flexible budget is a budget which by recognising different cost behaviour patterns is designed to change as the volume of activity changes. a budget for a defined period of time which includes planned revenues, expenses, assets, liabilities and cash flow. a budget which is prepared for a period of one year which is reviewed monthly, whereby each time actual results are reported, a further forecast period is added and the intermediate period forecasts are updated. a budget of semi-variable production costs only. The answer is. Question 1.25 Which of the following are characteristics of service costing? (i) High levels of indirect costs as a proportion of total cost (ii) Use of composite cost units (iii) Use of equivalent units (i) only. (ii) only. (i) and (ii) only. ll of them. The answer is. Post Exam Guide May 2001 14
Question 2 (a) alculate the production plan that will maximise profit for the year ending 31 May 2002. (7 marks) (b) ased on the production plan you have recommended in part (a), present a profit statement for the year ending 31 May 2002 in a marginal costing format. (9 marks) (c) iscuss two problems that may arise as a result of your recommended production plan. (4 marks) (d) Explain why the contribution concept is used in limiting factor decisions. (5 marks) Total marks = 25 Rationale The question examines the application of marginal costing in a limiting factor decision-making situation. It is designed to encompass as many aspects as possible within this area. It is important that candidates have a good understanding of this topic as it forms the basis of the underpinning knowledge required for decision making at the Intermediate level. In part (a), candidates are asked to calculate the optimum production plan as a result of the limiting factor and then in part (b) to calculate the profit derived from this plan. In part (c), candidates are then asked to discuss two problems which may arise as a result of the company not being in a position to fully satisfy demand. Part (d) of the question then asks candidates to comment on why the contribution concept is used in limiting factor decisions. Parts (c) and (d) require candidates to adopt a critical approach by asking them to discuss/ comment on the methods and techniques used and any problems arising as a result of the limiting factor. Suggested pproach Part (a) Identify the limiting factor. alculate the contribution per unit. alculate the contribution per unit of limiting factor. Rank the products in the order that maximises contribution per unit of limiting factor. llocate scarce resources according to the ranking. evise the production plan. Part (b) alculate the profit generated by the plan using marginal costing principles. Marking Guide Marks awarded (a) Production plan 7 (b) Marginal costing format & contribution calculation 9 (c) Problems 4 (d) Explanation 5 Post Exam Guide May 2001 15
Examiner s omments This question examined the application of marginal costing in a limiting factor decision - making situation in section (iv) of the syllabus. Marginal costing is fundamental to candidates understanding of management accounting and therefore it was surprising how poor the performance was on this question. etter performance would have been expected as a similar question appeared on the pilot paper. isappointingly in a number of cases it was evident that some candidates had little or no knowledge of what a limiting factor was, or of how to deal with a limiting factor decision - making situation. Part (a) asked for the production plan resulting from the limiting factor. Many candidates derived the plan by incorrectly ranking on the basis of total profit, completely ignoring the limiting factor. Other candidates incorrectly derived the plan on the basis of profit per unit of limiting factor and only a small number of candidates correctly derived the plan on the basis of contribution per unit of limiting factor. Part (b) asked for a marginal costing profit statement based on the plan recommended in part (a). isappointingly a large number of candidates did not know how to calculate contribution or how to present the information in a marginal costing format. The most common error when calculating contribution was to exclude the variable selling and distribution overheads from variable cost. large number of candidates incorrectly adopted an absorption costing approach and apportioned the common overheads between the two products. The common overheads should have been charged as a period cost in full against the contribution. Part (c) was well answered with many candidates offering well thought out and structured answers to the problems associated with their recommended plans. Part (d) was avoided by many candidates especially those who did not apply a marginal costing approach in parts (a) and (b). Many candidates who attempted this part of the question correctly defined contribution and how the contribution concept is applied in limiting factor decisions, yet their calculation of contribution and the application of the contribution concept was incorrect in parts (a) and (b). This demonstrated that many candidates had rote learned the definition of contribution and limiting factors but did not really understand the application of the contribution concept to limiting factor decisions. ommon Errors Using absorption costing and ranking products on the basis of profit per unit of limiting factor rather than contribution per unit of limiting factor. Forgetting to include other variable costs, i.e. variable selling and distribution costs, in the calculation of contribution. djusting the fixed costs in line with the change in activity. Post Exam Guide May 2001 16
Question 3 (a) Prepare the contract account in the books of SS evelopments Ltd for the year ended 31 ecember 2000. (8 marks) (b) alculate and explain the amount of profit (if any) to be recognised on the contract for the year ended 31 ecember 2000. (8 marks) (c) Explain why interim profits can be recognised on contracts. (5 marks) (d) Explain briefly two non-financial factors which may arise as a result of the increase in residential accommodation in Toyville. (4 marks) Total marks = 25 Rationale This question examines candidates understanding of contract costing. This is a new syllabus area at the Foundation level and therefore the question is designed to encompass as many aspects of contract costing as possible. In part (a), candidates are asked to prepare a contract account for SS evelopments Ltd. They are then asked in part (b) to calculate the amount of profit (if any) to be recognised on the contract for the year. Part (c) asks the candidates to explain why interim profits are calculated on contracts. It seeks to test the candidates understanding of the answer that they have calculated in part (b). Finally in part (d), candidates are asked to discuss non-financial factors arising as a result of the contract. This part of the question requires candidates to apply some common sense. Suggested pproach Part (a) raw up the T account entering the various costs associated with the contract. Enter the closing balances for stock of raw materials and the net book value (NV) of plant at the end of the period. lose off the contract account, the balancing figure being the cost of work not yet certified. Part (b) alculate the profit expected from the contract. Take a proportion of the profit expected according to the degree of completion to date; this will then be the profit recognised for the contract. Part (c) In your own words explain why companies recognise interim profits on contracts. Part (d) pplying a common sense approach consider two non-financial implications of a development of this nature. Post Exam Guide May 2001 17
Marking Guide Part (a) Entries into the contract account djust for depreciation and the NV of the plant Part (b) alculation of the expected profit and the profit recognised Explanation of the calculation Marks awarded 5 3 5 3 Part (c) Provide an explanation incorporating the length of the contract, fluctuation in the reported results and prudence 5 Part (d) Two problems for Toyville associated with the residential development 4 Examiner s omments This question examined candidates understanding of contract costing in section (iii) of the syllabus. Performance was either very good or very poor. It was evident that a large number of candidates had never studied contract costing but preferred to answer this question rather than the other optional question on standard costing and variance analysis. In part (a) candidates were required to prepare a contract account. This was reasonably well answered but many candidates included non-cost items in the contract account e.g. value of work certified to date, cash receipts. lso many candidates correctly calculated annual depreciation but did not charge the correct proportion (10/12ths) to the contract account. In part (b) candidates were required to calculate and explain the amount of profit to be recognised on the contract. Many candidates correctly calculated the amount of profit to be recognised on the contract, but only a small number explained the result. Some candidates simply calculated a profit as at 31 ecember 2000 and used this as the profit recognised for the year. andidates should have calculated the expected profit for the whole contract and then taken a prudent proportion that represented the profit recognised as at 31 ecember 2000. Part (c), concerning the reasons why interim profits are recognised on contracts, was well answered by most candidates. Many earned full marks on this part of the question. Part (d) was well answered. There were some well thought out and structured answers with many candidates earning full marks. ommon Errors Including non-cost items in the contract account e.g. value of work certified to date, cash receipts. Forgetting to adjust for depreciation and charging the contract with the full cost of the plant. harging a full year s depreciation when the contract only commenced on 1 March. Not adjusting the final expected profit to recognise a profit at this stage in the contract. Post Exam Guide May 2001 18
Question 4 (a) alculate the standard costs of: (i) a general health assessment; (ii) a medical assessment. (5 marks) (b) Prepare an operating statement for the period using detailed variance analysis to reconcile the standard cost of the new specialist unit with the actual cost of the new specialist unit. (10 marks) (c) Referring to your analysis in part (b): (i) for each of the variances calculated suggest one possible reason why it may have occurred; (3 marks) (ii) discuss the possible difficulties of using standard costing in this type of organisation. (7 marks) Total marks = 25 Rationale This question examines the application of standard costing in a service environment. The question focuses on the labour and overhead cost variances. It is designed to encompass as many aspects as possible within this area. It is important that candidates have a good understanding of this topic as it forms the basis of the underpinning knowledge required for performance measurement at the Intermediate level. In part (a) candidates are required to calculate the standard cost for each type of assessment. This then forms the basis for calculating the labour and overhead cost variances in part (b). andidates are also asked in part (b) to prepare an operating statement reconciling the standard cost for the period with the actual cost. Part (c) asks candidates to give a reason for each of the variances arising and to explain the possible difficulties that this type of organisation may encounter when using standard costing. andidates should apply a common sense approach when answering this part of the question. Suggested pproach Part (a) Identify the standard costs for a general health assessment and a medical assessment. Part (b) raw up the pro-forma operating statement. Using the standard cost for each assessment calculate the total standard cost and insert the figure into the operating statement. alculate the actual cost and insert the figure into the operating statement. alculate and insert the variances. Part (c) Suggest some reasons why the variances calculated may have occurred. iscuss the difficulties of using standard costing in this type of organisation. Post Exam Guide May 2001 19
Marking Guide Marks awarded Part (a) Standard cost calculation 5 Part (b) Operating statement - format ctual cost and standard cost Variances 1 3 6 Part (c)(i) One reason for each variance calculated 3 Part (c)(ii) Key points explaining the difficulties of using standard costing in this organisation 7 Examiner s omments This question examined the application of standard costing in a service environment in section (ii) of the syllabus. It was reasonably well answered. In part (a), candidates were required to calculate the standard costs of a general health assessment and a medical assessment. Many candidates failed to earn marks because they prepared the budgeted costs for each type of assessment rather than a unit standard cost for each. In part (b), the preparation of an operating statement was required. Many candidates failed to earn presentation marks because they were unable to produce such a statement. Only a small number of candidates correctly calculated the standard cost for the new specialist unit. Many candidates incorrectly used the budgeted costs even though the question specifically asked for the reconciliation of standard cost to actual cost. The labour efficiency and labour rate variances were well done by the majority of candidates. However, the majority were unable to calculate the fixed overhead expenditure and fixed overhead volume variances, and tended to calculate only the total fixed overhead cost variance. Part (c)(i) was generally well answered. However some candidates, when offering their explanations for the variances arising, tended not to make them specific to the variances calculated in part (b) and simply offered a general explanation for variances occurring. In some cases candidates wrote about the material usage variance and the material price variance even though there were no materials to consider in the question! Part (c)(ii) required a general discussion of the possible difficulties of using standard costing in this type of organisation. Most candidates provided poor answers to this part of the question. iscussions were too general and in most cases too brief to warrant the award of seven marks. andidates failed to discuss the general problems associated with using standard costing in a service industry and in particular the problems encountered when setting a standard time per assessment in relation to the specialist unit. Many candidates believed that all organisations could easily use standard costing without any difficulties! Post Exam Guide May 2001 20
ommon Errors onfusing standard cost with budgeted cost. When explaining the reason for variances, failing to make the reasons specific to the variances calculated in part (b) and instead giving general reasons for variances occurring. elieving that all organisations can easily use standard costing without any difficulties. Post Exam Guide May 2001 21