Accounting Technicians Ireland 2 nd Year Examination: Summer 2016 Paper: MANAGEMENT ACCOUNTING

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1 Accounting Technicians Ireland 2 nd Year Examination: Summer 2016 Paper: MANAGEMENT ACCOUNTING Monday 16 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 1 of 9 Mgmt Accounting (MA) S2016

2 SECTION A Answer All Questions QUESTION 1 (Compulsory) a) Foxclover plc. has employed a number of trainee accountants as part of its graduate programme. They are having difficulty understanding certain types of costs such as those listed below. The financial controller has asked you to briefly explain, with the aid of an example, each of the following cost classifications: (i) Variable cost; (ii) Fixed cost; (iii) Mixed cost (Semi variable / semi fixed cost). 6 Marks b) The following information has been supplied for Foxclover plc. for the forthcoming financial year. Activity Production (units) 80, ,000 Sales (units) 76, ,000 Costs Direct material 208, ,000 Direct labour 296, ,000 Factory overhead 410, ,000 Selling and distribution 118, ,000 Administration 130, ,000 Prepare a table summarising the variable cost per unit and total fixed cost for each of the five cost headings above. 10 Marks c) Using your answer to part (b) calculate the total estimated cost for an activity level of production of 75,000 units and sales of 68,000 units. Please apportion the costs between their variable and fixed elements. Total: 20 Marks Page 2 of 9 Mgmt Accounting (MA) S2016

3 QUESTION 2 (Compulsory) Heuston plc. is involved in the design and manufacture of train engines. The company has just received an enquiry about the possibility of supplying 30 engines to a privatised transport company Colbert plc. The finance director of Colbert plc. has informed Heuston plc. that they have just received quotes from other manufacturers of train engines and that the most reasonable quote was 145,000 per engine. The management accountant of Heuston plc. has provided you with the following details relating to the costs involved in the construction of the train engines: 1. Each engine will require 12 litres of oil. The company has 300 litres of oil in stock and if the oil is not used it will be disposed of immediately. The costs of disposal is 1,850. The original purchase price of the oil in stock was 340 per litre. The replacement cost of a litre of oil is Each engine will also require 15 sheets of alloy steel. The purchase price of a sheet of steel is 3,800 for all purchases up to and including 300 sheets. The supplier has agreed to offer a discount of 10% on the purchase price on all purchases over 300 sheets. 3. Additionally, each engine will require 1 slab of cast iron and this type of iron is used regularly by Heuston plc. The company holds 22 of these slabs in the warehouse at present. These slabs of cast iron cost 3,150 each one month ago and because cast iron is in limited supply the replacement cost is now 3,415 per slab. 4. The construction of the engines will require a combination of skilled and unskilled labour. Each engine will require 35 skilled labour hours and 10 unskilled labour hours. The skilled labourers are paid 180 per hour and the unskilled labourers are paid 55% of the skilled hourly rate. If this contract does not go ahead there will be 300 skilled idle hours and the company is reluctant to make redundancies due to continued loyalty towards its staff. The unskilled labour will have to be hired in for the contract. 5. The project will require a project manager to oversee the work. Heuston plc. currently employs a manager with the necessary experience who will be transferred to the proposed project should it go ahead. This manager currently earns 78,000 per annum. Due to the size of this project Heuston plc. has agreed to pay him an additional 5% of his current salary. The project manager will then be replaced by a less experienced manager who will be paid an annual salary of 65, Variable overheads are absorbed at a rate of 102 per skilled labour hour. 7. Fixed overheads will increase from their current level of 1,360,000 to 2,175,000 if the project to produce the engines is undertaken. 8. In order to assess the practicalities of taking on this project Heuston plc. employed a company to research the availability of materials and experienced labour. This research cost 11,000 and 4,000 is still outstanding. If Heuston takes on the project future research into safety issues will be required at a cost of 5,500. a) Provide a brief explanation for each of the following terms: (i) Sunk cost; (ii) Committed cost; (iii) Incremental cost. 6 Marks Page 3 of 9 Mgmt Accounting (MA) S2016

4 b) Using relevant costing principles, determine whether or not Heuston plc. should undertake the contract. Your answer must include an explanation for the inclusion or exclusion of each of the points 1 to 8 above. 10 Marks c) List four qualitative factors that should be considered before a final decision is made. Total 20 Marks Page 4 of 9 Mgmt Accounting (MA) S2016

5 QUESTION 3 (Compulsory) Kensington plc. commenced production of a new product the Terex during the year. Management is concerned as to the performance of this new product and has provided you with the following information: Standard data for the first 6 months per unit Sales price Materials 2 kg Direct labour 1.5 hours Variable overhead 1.5 hours Fixed overhead 1.5 hours Total costs Budgeted production 12,000 units Actual results for the first 6 months Production and sales 11,200 units Sales price per unit 120 Materials (20 per kg) 483,000 Direct labour (19 per hr) 332,500 Variable overhead 175,000 Fixed overhead 112,000 a) Calculate the following variances: (i) Sales price; (ii) Sales volume; (iii) Material price; (iv) Material usage; (v) Labour rate; (vi) Labour efficiency; (vii) Fixed overhead expenditure; (viii) Fixed overhead volume. b) Explain the reasons for the occurrence of a fixed overhead expenditure and fixed overhead volume variance. 16 Marks 20 Marks Page 5 of 9 Mgmt Accounting (MA) S2016

6 SECTION B Answer any two of the following questions QUESTION 4 Due to an increasing workload your company has employed a trainee accountant to assist with routine transactions. The trainee is unsure of the differences between the following management accounting terms. 1. Direct costs and indirect costs 2. Product costs and period costs 3. Mixed costs and stepped costs 4. Normal loss and abnormal loss 5. Cost pool and cost driver The financial controller has asked you to provide written explanations of the differences between the terms, as she feels that the above terms are fundamental to an understanding of management accounting. Prepare brief notes which explain the difference between the management accounting terms in any four of the five groups above. (Each part carries equal marks). Total: 20 Marks Page 6 of 9 Mgmt Accounting (MA) S2016

7 QUESTION 5 The following information relates to Clayton plc. a manufacturing company that has two manufacturing departments and two service departments: Manufacturing Dept. 1 Manufacturing Dept. 2 Service Dept. 1 Service Dept. 2 Total Allocated overheads 48,600 43,800 18,600 19, ,275 General overheads Indirect labour 48,000 Heat & light 72,000 Factory repairs & maintenance 51,200 Staff canteen costs 8,000 Machine depreciation 21,000 Rent of building 24, ,200 Total overheads 354,475 The following additional information was extracted from the company s management accounting records. Manufacturing Dept. 1 Manufacturing Dept. 2 Service Dept. 1 Service Dept. 2 Floor space sq. m 5,000 8,000 2,000 1,000 Direct labour hours 60,000 30, Indirect labour hours 25,000 15, Direct labour rate per hour Number of staff Machine hours 5,000 30, Machine value 60, ,000 40,000 - Re-apportioned Service dept. overheads as follows: Service Dept. 1 overheads 40% 60% Service Dept. 2 overheads 70% 30% Data on two jobs being undertaken by the company is as follows: BEW 110 INT 120 Direct materials cost Machine hours Direct labour hours - Manufacturing Dept Manufacturing Dept a) Prepare a statement showing the overhead cost for each manufacturing department (include the basis of apportionment, where appropriate). 10 Marks b) Calculate a suitable overhead absorption rate for each manufacturing department, using a basis that you deem suitable. Page 7 of 9 Mgmt Accounting (MA) S2016

8 c) Show the total cost of jobs BEW 110 and INT Marks Total: 20 Marks Page 8 of 9 Mgmt Accounting (MA) S2016

9 QUESTION 6 Sweeney Ltd. manufactures street lamps for the City Council. The following is the budgeted Income Statement for the business for December 2015: '000 '000 Sales Revenue 21,200 Direct material 10,000 Direct labour 3,920 Production overhead 1,720 Selling overhead 2,120 17,760 Profit 3,440 The following information is also supplied: 1. The monthly budgeted production and sales is 5,000 units. 2. Fixed and variable costs can be broken down as follows: Variable % Fixed % Direct materials Labour Production overhead Selling overhead a) Calculate the following: (i) Total contribution for the year; (ii) Contribution per unit; (iii) Contribution / sales ratio; (iv) Breakeven sales volume; (v) Margin of safety %; (vi) Sales volume required to achieve a profit of 2,960,000. Note: Each section carries equal marks. 12 Marks b) Prepare a clearly labelled breakeven chart, showing the breakeven point, margin of safety and expected profit. c) CVP analysis is based on a number of underlying assumptions and limitations that affect its validity. List four limitations of CVP analysis. Total: 20 Marks Page 9 of 9 Mgmt Accounting (MA) S2016