Management Accounting 2 nd Year Examination

Transcription

1 Management Accounting 2 nd Year Examination May 2017 Solutions, Examiners Comments & Marking Scheme

2 NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2017 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, Page 2 of 20

3 Accounting Technicians Ireland 2 nd Year Examination: May 2017 Paper: MANAGEMENT ACCOUNTING Monday 15 May p.m. to 5.30 p.m. INSTRUCTIONS TO CANDIDATES In this examination paper the / symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in Section A and ANY TWO of the three questions from Section B. If more than the required number of questions is answered, then only the requisite number, in the order filed, will be corrected. Candidates should allocate their time carefully. All figures should be labelled, as appropriate, e.g. / s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. Note: Examinees are permitted to use terminology of either International Accounting Standards (I.A.S s) or Financial Reporting Standards (F.R.S s) where appropriate (e.g. Receivables/Debtors) when preparing management accounting statements. Page 3 of 20

4 SECTION A Answer All Questions QUESTION 1 (Compulsory) Maximis Ltd. produced the following budgeted figures for a new product which it hopes to launch: Direct material Direct labour Variable production overhead Fixed production overhead Budgeted output Selling price / 20 per unit / 10 per unit / 16 per unit / 77,000 per month 11,000 units per month / 65 per unit The following levels of activity took place over the first two months of the products life: January February Production units 9,000 10,000 Sales units 8,500 9,500 Note: Actual prices and costs were the same as budgeted for the first two months. There was no opening inventory at 1 st January. Required: (a) Calculate the standard production cost per unit and standard profit per unit using Absorption costing principles. (4 Marks) (b) Prepare a profit statement for January and February (separately) on each of the following basis: i. Absorption costing ii. Marginal costing (12 Marks) (c) Prepare a reconciliation of the difference in profit reported in the profit statements prepared in part (b) above. (2 Marks) (d) Clearly explain the reason for the difference in reported profit under the two methods. (2 Marks) Total: 20 Marks Page 4 of 20

5 QUESTION 2 (Compulsory) Geometry plc. is in the process of preparing budgets for the period April to June The following information has been provided to assist in the budgeting process: 1. Budgeted monthly sales revenue is as follows: / March 55,000 April 60,000 May 80,000 June 70,000 July 85,000 Sales are 30% cash and 70% credit. Credit sales are collected over a two month period, 20% in the month of sale, 80% in the month following sale. 2. Cost of sales is expected to amount to 65% of sales revenue each month. 3. Closing inventory levels are held at 60% of the following month s cost of sales. Inventory at the beginning of April is expected to amount to / 23, % of inventory purchased is paid for in the month of purchase. The remaining 45% is paid for in the month following purchase. At the 31 st March trade payables are / 12, A grant of / 18,000 is expected to be received in early June. 6. A van which cost / 12,000 when purchased second hand three years ago is expected to be sold in June 2018 for / 5,000. At this time the expected net book value of the van is / 6, Equipment costing / 8,200 will be purchased and paid for in May. It will be depreciated on a straight line basis over four years. 8. Operating expenses are paid as incurred and have been estimated as follows: / April 14,500 May 17,300 June 18, The cash balance on 1 st April is expected to amount to / 68,000. Required: (a) Calculate the purchases figure for each month from April 2018 to June (5 Marks) (b) Prepare a cash budget on a monthly basis and in total for the period April 2018 to June (12 Marks) (c) Outline any three potential benefits from the preparation of a cash budget as prepared in part (b). (3 Marks) Total: 20 Marks Page 5 of 20

6 QUESTION 3 (Compulsory) A business manufactures high quality golf clubs. The following information relates to the business four different brands. Mike Edidas Pang Kobra / / / / Sales price Direct labour cost Direct materials cost Labour hours required per unit Materials required per unit 20kg 55kg 37kg 45kg Maximum sales demand (units) 15,000 25,000 18,000 20,000 Due to the specialist nature of the work, only 600,000 skilled labour hours will be available in the next quarter. Required: (a) Explain, using two examples what is meant by a limiting factor. (3 Marks) (b) For each of the limiting factors identified in part (a) above, provide two examples of how a company may overcome each of them. (5 Marks) (c) (i) Advise the business on the mix of products that it should produce during the quarter in order to maximise profit if skilled labour hours are limited to 600,000 hours. (6 Marks) (ii) Calculate the contribution for each product and in total which will arise as a result of the mix of products suggested in (i) above. (6 Marks) Total: 20 Marks Page 6 of 20

7 QUESTION 4 Explain the differences between each of the following: SECTION B Answer ANY TWO of the following questions (a) Variable and Fixed cost; (b) Normal and Abnormal loss; (c) Payroll accounting and Labour cost accounting; (d) FIFO and LIFO methods of inventory valuation; (e) Sunk and Incremental costs; Note: Each section carries equal marks. Total: 20 Marks QUESTION 5 During the next year Protractor Ltd. is planning to launch a new product and budgets to use 68,200 units of a special material. The material will be used during the year at an even rate. The purchasing manager has decided he is going to place orders for 2,200 units at regular intervals during the year. The costs associated with the material are as follows: 1. Purchase price / 4.80 per unit. 2. Ordering costs / 8 per order. 3. Holding costs per unit are 20% of the purchase price. Required: (a) Calculate the annual ordering and annual holding costs based on the suggested order quantity of 2,200 units per order. (4 Marks) (b) Explain what is meant by the Economic Order Quantity (EOQ) and calculate Protractor Ltd s EOQ. (6 Marks) (c) Calculate the difference in the ordering and holding costs between the order quantities suggested in parts (a) and (b). (4 Marks) (d) The supplier is keen to encourage Protractor Ltd. to order in bulk and has offered a discount of 10% on all purchases for an order quantity of 8,000 units. Advise whether or not this discount is financially beneficial to Protractor Ltd. In answering part (d) assume the order quantity prior to the discount offer is the amount calculated using the EOQ as calculated in part (b) above. (6 Marks) Total: 20 Marks Page 7 of 20

8 QUESTION 6 The following information relates to Germ plc. a manufacturing business that is considering the introduction of a piece-work incentive scheme in one of its departments, which has 4 employees. Basic working week Over-time premium: Grade A Grade B Normal grade A pay rate is Normal grade B pay rate is Current Payroll 38 hours 25% of normal pay 20% of normal pay / 30 per hour / 26 per hour Employee Normal Hours Worked Normal Pay Grade 1 49 A B A B 230 Normal Units Produced Piecework Incentive Scheme Proposal Under the proposed incentive scheme, the standard time allowance would be 30 minutes per unit. The piecework rate would be based on grade A labour rates, with a standard piecework enhancement of 8%. All employees would receive the same piecework rate. Required: (a) Outline the purpose of an incentive scheme. (b) Calculate the normal pay due to each employee based on the current payroll terms. (c) Calculate the standard piecework rate on the basis of the proposed incentive scheme. (d) Calculate the normal pay under the proposed incentive scheme. (e) List four benefits of an employee incentive scheme. (4 Marks) (4 Marks) (4 Marks) (4 Marks) (4 Marks) Total: 20 Marks Page 8 of 20

9 2 nd Year Examination: May 2017 Management Accounting Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No Average Mark (%) Nos. Attempting General Comments: Statistical Analysis - Overall Pass Rate 87% Average Mark 68% Range of Marks Nos. of Students and over 397 Total No. Sitting Exam 813 Total Absent 106 Total Approved Absent 46 Total No. Applied for Exam 965 This paper was divided into two sections A and B each consisting of three questions. All three questions in section A were compulsory and candidates had a choice of two from three questions from section B. All of the questions carried 20 marks each. Five out of the six questions were mainly computational with some narrative elements whilst question 4 was all narrative. Questions 1,2,3,5 and 6 examined five areas of the syllabus in detail whilst question 4 required an explanation of management accounting terms relating to another five areas of the syllabus. All of the areas examined are key elements of the syllabus and given the depth of their coverage in the study text, past exam papers and sample papers they should not have posed any difficulty. Overall, I am very happy with the performance of candidates sitting this paper. There was less evidence of rote learning and it was obvious that most candidates were well prepared for the questions which were examined. The majority of scripts were very well presented. Page 9 of 20

10 However as in previous years there was no evidence of workings. Candidates presented a final figure rather than showing the workings which lead to this figure. If this final figure is not correct then valuable marks are lost for workings. Furthermore, candidates should be aware that marks are awarded if the principle is correct even if the incorrect figures are used. In order to answer some parts of a question the solution to a previous part is required. If the figures carried forward are incorrect marks will not be lost if the principle is correct. The candidate will not be penalised twice, so it is important that all parts of a question are attempted. Page 10 of 20

11 Examiner Comments on Question One This question was compulsory and tested the candidate s knowledge of absorption and marginal costing. Parts (a) required candidates to calculate the production cost per unit for a product. Most candidates calculated this correctly but some were unable to calculate the production overhead cost per unit which was required as part of this calculation. Part (b) of this question required candidates to prepare a profit statement for each month using both absorption and marginal principles. The standard of answers for part (b) was higher than for previous years and but many students lost valuable marks because they did not disclose the opening and closing inventories in both statements. In line with previous years quite a number of candidates omitted the calculation of the under/over absorption of fixed overheads which was required as part of those profit statements. Part (c) required the reconciliation of the profit calculated under both measures and part (d) required an explanation of the difference. I noticed that many could reconcile the amounts but were unable to explain it. This is evidence of rote learning. Solution 1 (a) / / Selling Price 65 Direct Material 20 Direct Labour 10 Variable Production Overheads Marginal Cost per unit Fixed Production Overheads(W1) 7 Standard production cost (Absorption Costing) 53 Profit per unit 12 (b) (i) Absorption Costing January February / / Revenue 552, ,500 Opening Inventory (500 x / 53) 0 26,500 Cost of Production (9,000 x / 53) (10,000 x / 53) 477, ,000 Closing Inventory (500 x / 53) (1,000 x / 53) (26,500) (53,000) Cost of Sales 450, ,500 Profit 102, ,000 Under Absorption of Fixed Production Overhead(W2) Adjusted profit (14,000) 88,000 (7,000) 107,000 Workings: (W1) Production overhead cost per unit / 77,000 11,000 = / 7 (W2) Under Absorption of Fixed Manufacturing Overhead: / / Overhead absorbed (9,000 x / 7) (10,000x / 7) 63,000 70,000 Actual overhead 77,000 77,000 Under absorption 14,000 7,000 Page 11 of 20

12 (ii) Marginal Costing January February / / Revenue 552, ,500 Opening Inventory (500 x / 46) 0 23,000 Cost of Production (9,000 x / 46) (10,000 x / 46) 414, ,000 Closing Inventory (500 x / 46) (1,000 x / 46) (23,000) (46,000) Variable Cost of Sales 391, ,000 Contribution 161, ,500 Fixed Cost (77,000) (77,000) Profit 84, ,500 (c) Reconciliation of Profit Absorption Costing 88, ,000 Marginal Costing 84, ,500 Difference 3,500 3,500 Being Opening / 7 per unit 0 (3,500) Closing / 7 per unit 3,500 7,000 3,500 3,500 (d) The reason for the difference in profit is due to the difference in the valuation of inventory. For example in January the difference is 1,500. This is due to the fact that under absorption costing / 3,500 worth of the fixed overhead is not written off but instead is carried forward to February. This does not happen in marginal costing as fixed overheads are not included in inventory valuation. Page 12 of 20

13 Examiner Comments on Question Two This question was compulsory and tested the candidate s knowledge of the preparation of a cash budget. Part (a) of the question required candidates to calculate the purchases requirement for the three months to June The standard of answers was mixed. Many candidates scored full marks whilst others seemed to have difficulty with this calculation. The starting point was candidate s awareness that opening inventories plus purchases minus closing inventories equals cost of sales. It was obvious that a number of candidates were not familiar with this concept. Part (b) of this question required candidates to prepare a cash budget for the three months. A surprising number of candidates were not familiar with the layout of a cash budget with many not separating inflows and outflows. Other candidates wasted time by setting out three separate budgets, one for each month rather than incorporating all three months within the one budget. However those candidates were in the minority. Part (c) required knowledge of three potential benefits as a result of the preparation of a cash budget. This part of the question was answered very well. Solution 2 (a) April May June July / / / / Sales 60,000 80,000 70,000 85,000 Cost of Sales (65%) 39,000 52,000 45,500 55,250 Opening Inventory 23,000 31,200 27,300 Purchases (balancing figure) 47,200 48,100 51,350 Closing Inventory (31,200) (27,300) (33,150) Cost of sales 39,000 52,000 45,500 (b) April May June Total / / / / Inflows Receipts from sales (W1) 57,200 68,800 75, ,600 Grant 18,000 18,000 Sale of van 5,000 5,000 57,200 68,800 98, ,600 Outflows Equipment 8,200 8,200 Operating expenses 14,500 17,300 18,100 49,900 Purchases (W2) 38,560 47,695 49, ,143 53,060 73,195 67, ,243 Net Cashflow 4,140 (4,395) 30,612 30,357 Opening balance 68,000 72,140 67,745 68,000 Closing balance 72,140 67,745 98,357 98,357 Workings (W1) Receipts for sales Page 13 of 20

14 March April May June / / / / Revenue 55,000 60,000 80,000 70,000 Receipts Cash (30%) 16,500 18,000 24,000 21,000 Credit 38,500 42,000 56,000 49,000 (W2) 20% same month 7,700 8,400 11,200 9,800 80% following month 30,800 33,600 44,800 39,200 44,800 54,600 Total Receipts 57,200 68,800 75,600 Payment for Purchases April May June / / / Purchases 47,200 48,100 51,350 Paid 55% in month purchases 25,960 26,455 28,243 45% in month following purchase 12,600 21,240 21,645 38,560 47,695 49,888 (c) 1. A cash budget should be one component of a company's financial goals. Budgeting cash and tracking actual cash provides a way to monitor the company's financial operations and to make planning adjustments where necessary. A cash budget also helps everyone focus on company finances. 2. By planning cash receipt and payments, a company can operate its business with less working capital. In addition, a cash budget indicates when surplus cash is available to make short-term investments. This improves the use of money. 3. When cash is available, the purchasing manager can use it to negotiate purchasing discounts with vendors. 4. If the company needs a loan, the lender will request information in order to assess the financial health of the company. The cash budget provides some of the information required. 5. A cash budget helps you track expenses more closely. 6. Repaying debt on time is critical in maintaining a good credit rating and maintaining good relationships with suppliers. A cash budget provides the person responsible for finances a means to ensure that bills are paid on time. If there is an anticipated shortfall, the financial manager will know he may have to borrow money in the short term. Page 14 of 20

15 Examiner Comments on Question Three This question was compulsory and tested the candidate s knowledge of limiting factors. Part (a) of the question required candidates to explain a limiting factor and part (b) required an explanation of four ways which would help to overcome a labour constraint. Part (c) required candidates to identify the optimum mix of products that should be produced taking into account that labour is limiting. The majority of candidates ranked the products according to the highest contribution unit rather than the highest contribution per labour hours. Part (d) required the calculation of the maximum contribution achievable from the mix of products identified in (c). This part was answered very well. Candidates did not lose marks in this part if they did not identify the correct mix as required in part (c) provided the process was correct. Solution 3 (a) A limiting factor is a resource that is in short supply. An example is materials or labour. (b) 1. Some of the work that cannot be carried out in-house due to the constraint could be subcontracted out. 2. Some lower level workers could be re trained and they could then work on these products. 3. A recruitment campaign could be launched and new workers could be sourced. 4. Productivity and efficiency could be improved to reduce the time required per unit. (c) STEP 1 Mike Edidas Pang Kobra Contribution per unit / / / / Sales price Direct labour Direct material Contribution per unit STEP 2 Contribution per unit of limiting factor Mike Edidas Pang Kobra CPU ( ) Labour hours per unit Contribution per Labour Hour ( / ) STEP 3 Rank the products Rank Page 15 of 20

16 STEP 4 Prepare the optimal production plan Production Hours Contribution / Units Kobra 20,000 20,000 x / ,000 1,200,000 Edidas 25,000 25,000 x / 6 150, ,000 Mike 15,000 15,000 x / 9 135, ,000 Pang 7,500 7,500 x / 10 75, , ,000 2,355,000 Examiner Comments on Question Four This question was optional and tested the candidate s knowledge of the difference between five sets of management accounting terms. For those candidates that did opt for this question it was generally well answered with candidates demonstrating an excellent knowledge of the costing terms examined. Solution 4 (a) All the costs faced by companies can be broken into two main categories: fixed costs and variable costs. Fixed costs are costs that are independent of output. These remain constant throughout a relevant range. An example of a fixed cost would be rent. Variable costs are costs that vary with output. As the activity level varies so would the variable cost. Material cost or sales commission would be examples of variable costs. (b) Normal costs are the normal or regular costs which are incurred in the normal conditions during the normal operations of the organization. They are the sum of actual direct materials cost, actual labour cost and other direct expense. Example: repairs, maintenance, salaries paid to employees. Abnormal costs are the costs which are unusual or irregular and which are not incurred due to abnormal situations of the operations or productions. Example: destruction due to fire, shut down of machinery, lock outs, etc. (c) Payroll Accounting is the computation of the gross pay for each employee and calculation of payments to be made to employees, government, pension funds, etc. Labour Cost Accounting is the allocation of labour costs to jobs, overhead account and capital accounts (d) FIFO and LIFO methods are accounting techniques used in managing inventory. They show the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold. LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Page 16 of 20

17 (e) A sunk cost is a cost incurred in the past it cannot be reversed and as such it is irrelevant to any future decision. Examples of sunk costs would include the cost of research already carried out or the cost of materials previously purchased but only being used now. An incremental cost is a cost that will increase as a consequence of a decision that is it will be affected by the decision. Having to buy extra materials, employ extra staff as a consequence of a decision would all be incremental costs. Examiner Comments on Question Five This question was optional and examined the candidates knowledge of the ratios used in the management of inventory levels. This was the least popular question in section B of the paper. Part (a) required candidates to calculate the order cost and holding costs of a product. Most candidates calculated the order costs correctly but many were unable to calculate the holding costs due to their lack of knowledge of the assumption that inventories are used evenly throughout the year. Part (b) required an explanation and calculation of the Economic order quantity (EOQ). This part was answered quite well. If candidates had the incorrect amounts from part (a) they were not penalised provided they used the formula correctly. Part (c) required a calculation of the difference in cost as a result of using the EOQ and this was answered very well. Part (d) required a calculation of the difference in cost as a result of availing of a discount rather than use the EOQ and performance in this part was not good. Solution 5 (a) Order Cost 68,200 = 31 orders 2, x / 8 = / 248 Holding Cost 2,200 = 1, ,100 x / 0.96 = / 1,056 (b) EOQ = 2 x / 8 x 68,200 / 0.96 = 1,066 units This is the order quantity that minimises ordering and holding costs. Page 17 of 20

18 (c) EOQ Existing Diff Ordering Cost / / / Existing (68,200/2,200) x / EOQ (68,200/1,066) x / Holding Cost Existing (2,200/2) x / ,056 EOQ (1,066/2) x / Overall difference 808 (d) Existing Cost / Material 68,200 units x ,360 Ordering 512 Holding ,384 Revised Cost Material / 327,360 x 90% 294,624 Order (68,200 8,000) x / 8 68 Holding (8,000 2) x / , ,532 Therefore availing of the discount is financially worthwhile. There is a saving of / 29,852 Page 18 of 20

19 Examiner Comments on Question Six This question was optional and tested the candidate s knowledge of employee incentive schemes. Part (a) required an understanding of the purpose of an incentive scheme. This part was well answered with students demonstrating an in depth knowledge of those types of schemes. Part (b) was again very well answered and required the calculation of normal pay due to employees without an incentive scheme. Part (c) required the calculation of a standard piecework rate and this was required to be used in part (d) to calculate the pay due to employees under a proposed incentive scheme. Solution 6 (a) (b) Incentive schemes are a means of remuneration which relate payment to output. The aims of such schemes are to benefit employees by providing an opportunity to increase earnings, while encouraging performance and providing for increased productivity, which may result in reduced cost per unit. Incentive Schemes can be based upon individual performance or aimed at incentivising groups of employees. Incentive schemes should be based on efficient working methods following comprehensive work studies and may be financial or non-financial in nature. Normal pay on current payroll terms Employee Calculation / Employee 1 38 / 30 1, ( / 37.50) , Employee 2 38 / ( / 31.20) , Employee 3 38 / 30 1, ( / 37.50) , Employee 4 38 / (c) Standard piecework rate Standard weekly pay (Grade A) 1,140 Standard weekly production 38 hours = 2,280 minutes / units Basic piecework rate / 15 per unit Incentive element 8% / 1.20 Standard Incentive piecework rate / (d) Normal pay under the proposed incentive scheme / Employee units x / ,240 Page 19 of 20

20 Employee units x / ,564 Employee units x / ,916 Employee units x / ,726 (e) Benefits of having an employee evaluation in place (i) Improve morale. (ii) Reduce labour turnover. (iii) Increase productivity. (iv) Reduce friction and frustration. (v) Enhance communication between managers and employees. (vi) Instil a higher level of accountability for performance. Page 20 of 20