UNIVERSITY OF EAST ANGLIA Norwich Business School UG Main Series Examination 2012-13 MANAGEMENT ACCOUNTING NBS-2F1Y 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-2F1Y Module Contact: Dr Nor Abdul Kadir, NBS Copyright of the University of East Anglia Version 1
2 Section A 1. QPRZ provides a caravan holiday throughout the year. The fee charged to guests is inclusive of accommodation and all meals. Due to the competitive market environment, the company is only able to generate profit by maintaining a strict financial control of all its activities. The company s restaurant is an area that requires constant monitoring of costs. Given below is the performance statement of the restaurant for the month of 31 May. QPRZ Restaurant Performance Statement for the month ended 31 May Actual Budget Variance (over)/under Number of guests 11,160 9,600 (1,560) Food 25,000 23,000 (2,000) Cleaning 2,000 1,900 (100) materials Heat, light, and power 2050 2400 350 Catering costs 8,800 7,200 (1,600) Rent, rates, 1860 1800 (60) insurance and depreciation 39,710 36,300 (3410) Assumptions: i) The budget has been calculated on the basis of a 30-day calendar month with the cost of rents, rates, insurance and depreciation being an apportionment of the fixed annual charged. ii) All other budgeted costs are variable costs based on the number of guests. a) You are required to prepare the revised performance statement using flexible budget. (12 marks) b) Comment on the result of the revised performance statement in (a). (7 marks) c) Discuss the implication of the performance result on the motivation of managers. (6 marks)
3 2. LKJ Property Limited values, advertises, and sells residential property on behalf of its customers. The company has been in the business for a short time and is preparing a cash budget for the first four months of 2013. Expected sales of residential properties are as follows: 2012 2013 2013 2013 2013 Month December January February March April Units sold 15 15 18 25 30 i) The average price of the property is 250,000 and the company charges a 3% fees for each property sold. The company receives 1% of its fees in the month of sales and the remaining 2% in the month after sale. The company has 9 employees who are paid on monthly basis. The average salary per employee is 35,000 per year. If more than 20 properties sold in a given month, each employee is paid a bonus of 180 for each additional property sold in that month. ii) Variable expenses are incurred at the rate of 0.8% of the value of each property sold and these expenses are paid in the month of sale. iii) Fixed overheads of 4,500 per month are paid in the month in which they arise. The company pays interest every three months on a loan of 200,000 at a rate of 6% per year. The last interest payment in each year is paid in December. iv) The cash balance at the start of January is expected to be a deficit of 53,000. a) Prepare a monthly cash budget for the period from January to April 2013. Your budget must indicate each item of income and expenditure and the opening and closing monthly cash balances. (20 marks) b) Explain the meaning of self-imposed budget, its major advantages and cautions that need to be exercised in its application. PLEASE TURN OVER
4 3. YumYum is a chocolate factory that produces three main products, M, N, and O. Each product uses the same resources, with different quantities. The budgeted data for 2013 are shown below: Product M N O Budgeted 3000 5000 8000 production Direct labour 4 8 6 hours per unit Machine hours 6 4 6 per unit Batch size 100 200 1000 Machine setups 4 6 2 per batch Purchase orders 8 8 12 per batch Material movements per batch 20 10 8 YumYum budgeted production overhead costs for 2013 are 800,000 and current practice is to absorb these costs into product costs using the absorption rate based on direct labour hours. As a result, the production overhead cost attributed to each product unit is: Product M: 32 Product N: 64 Product 0: 48 The management team is considering changing to an activity based costing. It has identified the following cost drivers and related cost pools. Cost pool Cost driver Machine maintenance 200,000 Machine hours Machine setups 140,000 Machine setups Purchasing 180,000 Purchase orders Material handling 120,000 Material movements The remaining 160,000 of overhead costs are caused by a number of different factors and activities that are mainly labour related and are to be attributed to products on the basis of labour hours. a) Calculate the production overhead cost attributed to each product unit using an activity based costing approach. (20 marks)
5 b) Traditional cost control focused on cost containment rather than cost reduction. Today, cost management focuses on process of improvements which could result in cost reductions. Discuss how activity based management differs from the traditional costing approach and how it seeks to achieve cost reduction. 4. LR is a bindery company that uses traditional absorption costing to report its monthly profits. It is seeking to expand its business and now has the opportunity to prepare a quotation for a large organisation that currently requires a new catalogue for its services. A report on the resource requirements for the catalogue has been completed at a cost of 1,800 and its details are summarised below: Production period: It is expected that the total time required to print and dispatch the catalogue will be one week. Paper: 10,000 sheets of special paper will be required. This paper is regularly used by LR and the company has 3,400 sheets in inventory. These originally cost 1.80 per sheet but the current market price is 2.10 per sheet. The resale price of the sheets held in inventory is 1.20 per sheet. Ink: This is a special ink that LR needs to purchase at a cost of 10.50 per litre. 200 litres will be required for the catalogue but the supplier has a minimum order size of 250 litres. LR does not foresee any other use for the ink, but will hold the surplus in inventory. LR s policy is to review slow moving items regularly. The cost of any inventory item that has not been used for more than 6 months is accounted for as an expense of the period in which that review occurs. Direct labour: Sufficient staffs have already been employed by LR to print the catalogue, but some of the printing will require overtime due to the availability of a particular machine that is used on other work. The staff are paid 8.50 per hour, the order will require 200 hours of work and 50 of these hours will be in excess of the staff s normal working week. A rate of 15 per hour is paid for these overtime hours. Staffs are paid using an hourly rate with guaranteed minimum wage for their normal working week. Supervision: An existing supervisor will be responsible for the catalogue in addition to his existing duties. He is not fully employed and receives a salary of 500 per week. PLEASE TURN OVER
6 Machines: 2 different types of machines will be required: Printing machine will print the catalogues. This is expected to take 20 hours of machine time. The running cost of the machine is 7 per hour. There is currently 30 hours of unused time on the machine per week that is being sold to other printers for 15 per hour. Cutting machine will be used to cut and bind the catalogues. This machine is being used to full capacity in the normal working week and this is why there is a need to work overtime. The catalogue will require 25 machine hours and these have a running cost of 8 per hour. Despatch: There will be a delivery cost of 500 to transport the catalogues to the customer. Fixed overhead costs: LR uses a traditional absorption costing system to attribute fixed overhead costs to its work. The absorption rate that it uses is 20 per direct labour hour. Profit mark-up: The selling price is determined based on 30% mark-up to its costs. a) In assisting the LR management in preparing its quotation, prepare a schedule showing the relevant costs for the production of the catalogues. State clearly the reasons for including or excluding each value that has been provided above. (20 marks) b) Explain how the use of relevant costs as the basis of setting a selling price may be appropriate for short term pricing decisions but may be inappropriate for long term pricing decisions. Section B 5. You are responsible for managing the preparation of all revenue and cost budgets for a motor component manufacturer. You are aware that the external environment has a significant impact on the business activity and financial performance of your company and that the current information systems are underdeveloped and ineffective in this respect. i) Identify which aspect of the external environment you are likely to consider and give reasons for your choice. (15 marks)
7 ii) Identify where you might find the relevant sources of information. (10 marks) 6. A major source of information within many businesses is a system of standard costing and variance analysis. i) Describe briefly four purposes of standard costing system. (8 marks) ii) Explain the different levels of performance which may be incorporated into a system of standard costing and comment on how they relate to the purposes set out in (i) above. (12 marks) iii) Comment whether the standard costing applies in both manufacturing and service businesses and how it may be affected by modern initiatives of continuous performance improvement and cost reduction. 7. Just in Time (JIT) has its roots since 1920s in the Ford car manufacturing company and has been well established and developed by Toyota in Japan. i) Explain the meaning of JIT. ii) Discuss four key elements of JIT. (12 marks) iii) Explain the benefits of JIT and how it can improve the overall production systems. (8 marks) END OF PAPER