Ma1 Lrp Answers d11

ANSWERS

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FIA – MA1 - MANAGEMENT INFORMATION

BUSINESS ORGANISATION 1

D The financial accounts report on past performance and are prepared for the shareholders. Management accounting helps managers plan for the future.

2

INFORMATION AND DATA (a)

Data can be described as the 'raw material'. The raw material needs to be processed in some way in order to make it information. Data must be processed, formatted or modified in some way in order to make it meaningful to the recipient. Data + Meaning = Information Alternatively: Data + Processing = Meaningful information Something that represents information to one person could be data to another. For instance, the fact that a customer has exceeded a credit limit may be information to the credit controller but would be data to the personnel manager because it has no significance or meaning to him or her. The function of the system is to convert data into information. It needs to be flexible because of the different formats required for the different management levels within the organisation.

(b)

42

Information should have the following qualities: (i)

Timeliness – It is generally recognised that information loses its value over time. It is important, when designing systems, to meet the user's requirements in terms of speed of processing. The chief executive's office can reasonably expect a monthly management information package to be delivered within, say, six days of the end of the last accounting period. Some managers may regard this as quite unacceptable and may require the information even earlier in order to satisfy some tactical purpose.

(ii)

Accurate/reliable – Information must be accurate for planning, controlling or decision-making purposes. Accuracy, however, is a matter of perception. If it is too accurate it may present a good deal of trivia that will dilute the effect of the information on the reader; it will also be expensive to produce. For example, the production of financial data in pounds and pence may be strictly accurate but very tiresome for the reader who may only require it to the nearest thousand pounds. Information should therefore be sufficiently accurate for its purpose, and therefore reliable.

(iii)

Relevant – Information should be relevant to the decision-making. Important items in reports may be overlooked if contained within a large document where all the details are not relevant to the decision under consideration.

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3

C

4

A

(iv)

Economical – Economical can mean both 'economical to use' and 'economical to provide'. Information has no intrinsic value. Its value can be judged by the benefit that is provided to the user. Similarly, economical information does not mean swamping the user with facts, whether they are wanted or unwanted. Information should only be supplied if management can be satisfied that some benefit will accrue as a result. The cost of the information provided by the system should not outweigh the value of information to the organisation.

(v)

Understandable – Information must be understandable to the person who needs to use it. In practice, many management reports are not understandable because they are written in technical language that the user cannot understand, or are just badly written. Reports may also be difficult to understand when they are very long.

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MANAGEMENT INFORMATION 5

C Data is unprocessed facts. (a) (b) and (d) all involve a degree of analysis and are therefore information.

6

B A cost unit is a unit of production or service. (b) is a cost centre.

7

C Cost accounts are for internal use and do not have to comply with accounting standards.

8

C Item B describes the costs of an activity or cost centre. Item A describes cost units. Item D describes budget centres. A cost centre is defined as ‘a production or service location, function, activity or item of equipment for which costs can be ascertained’.

9

CHARACTERISTICS (a)

Three characteristics of useful information are: 1

Objective. There should not be any bias in the information due to the way it has been produced or presented. For example, use of absorption costing to calculate profit for a period during which sales are constant but production is rising, may give a misleading impression of profitability simply because of the method of calculation.

2

Timely. The information must be produced in time for some action to be taken on it. If it is too late, it is worthless. For example, it would be of little value in the context of controlling costs if a business used year-end published accounts for comparison with budget: by the time published accounts are available, it will be too late for any effective control action to be taken.

3

Appropriate to the purpose. Information must be suitable for the purpose for which it is produced. The level of detail, for example, can vary according to the user’s needs. The Managing Director will not require a detailed analysis of direct labour booked to individual jobs – a summary of direct labour costs will be sufficient; however, production scheduling and supervision would be particularly interested in such information.

Note: Other characteristics could be quoted.

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(b)

Non-financial information, such as the number of rejects, or expected competitors’ reaction is important for two main reasons: •

It supplements financial information: the number of rejects may be as important as their cost.

•

It may have more immediate relevance to certain staff: reporting the number of rejects may have more meaning to workers directly involved with operating that process than the cost of the loss.

•

Non–financial information such as the number of rejects may be faster to produce than waiting for the cost of the loss to be calculated. This allows for faster corrective action to be taken.

•

It may allow external influences, such as the probability of competitor reaction, to be built into the analysis of say a capital investment project.

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CLASSIFICATION OF COSTS AND COST BEHAVIOUR 10

D A direct cost is a cost that can be directly identified with a cost unit. Material is the most common example.

11

D Total variable cost must pass through the origin.

12

B The cost is fixed at $60,000 between 50 and 150 units of output, but goes up a step to $90,000 when output is 200 or more. A step cost increase is due to an increase in an item of expenditure that is normally considered as a fixed cost item. Increased storage requirements would result in higher 'fixed costs' of rental for storage space, extra depreciation of the additional shelving or racking, and so on. Items A, C and D relate to variable cost items, and changes in these would not show step cost behaviour.

13

C A cost unit is a unit of product or service.

14

B Raw material costs are direct production costs. A period cost is a cost deducted from the profit in the period it is incurred rather than being included in the cost of the product

15

COST ANALYSIS Behavioural analysis of costs is important for planning, control and decision–making. Different costs may have different behaviour patterns in response to changes in activity. Certain costs may remain unaffected by changes in activity e.g. capacity costs such as rent and rates. This is unlikely to remain the case, however, for large changes in activity where step increases or decreases in costs are likely to occur. At the other extreme certain costs may be completely variable with activity e.g. raw materials. However, the change may not be exactly proportional due to relative efficiencies, or economics of scale, at different levels of activity. Other patterns of behaviour may be found. The fact that various patterns of cost behaviour exist highlights the importance of a behavioural analysis, in order to help to plan and control such costs on an ongoing basis and in order to help to identify incremental costs that may be incurred by decision alternatives.

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CODING OF COSTS AND INCOME 16

CODING SYSTEMS (a)

Sequence codes. Sequence codes allocate a number, or a letter, to items in a simple list. For example Code 01 02 03

Name ADAMS, John AITKEN, James ALCOCK, Fred BROWN, Joe etc

Their main advantage lies in simplicity of allocation, but they provide no correlation between the items and their code numbers, and insertions and deletions are not so easily handled. It is much better to have the code progressing in groups of say 10 so that room is left for insertions. (b)

Block codes. These allocate bands of numbers to particular categories. With each category there is usually a limited amount of possible expansion. They have the merit of simplicity and give a more direct relationship between items and codes, which may help with indexing or information retrieval. As an example, consider a beverage manufacturer who produces several types of tea, tea bags and coffees. He could assign a code to each particular brand as follows: Product type

Block code

Leaf teas Tea bags Coffees (c)

(d)

01 − 19 20 − 29 30 − 39

Significant digit codes - individual digits and letters are used to represent features of the coded item. The example given is one used to describe shampoo Code

Item

HS2425 FS125050

Herbal shampoo 24 x 250 ml Family shampoo 12 x 500 ml special offer

Faceted codes - the digits of the code are divided into facets of several digits and each facet represents some attribute of the item being coded. These codes are similar to significant digit codes but are purely numerical, which may be preferable in computer systems. The following example is a faceted code for types of carpet Facet 1 = type of weave (1 digit) 1

=

cord

2

=

twist

3

=

short tufted, etc

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Facet 2 = material (1 digit) 1

=

all wool

2

=

80% wool, 20% nylon

3

=

50% wool, 50% nylon, etc

Facet 3 = pattern (2 digits) 01

=

self colour (plain)

02

=

self colour (embossed)

03

=

fig leaf, etc

Facet 4 = colour (2 digits) 01

=

off white

02

=

jaundice yellow

03

=

scarlet fever, etc

A typical code would be 220302 representing a twist carpet in 80% wool, 20% nylon with a fig-leaf pattern in jaundice yellow.

17

D All these codes might be used in a computerised accounting system.

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MATERIALS COST 18

A Opening inventory Issue Receipt Issue Receipt Issue

400 250 500 150 190 400 310 290

$2.20 $2.20 $2.50 $2.20 $2.50 $2.70 $2.50 $2.70

=

550

= =

330 475

= =

775 783 ____ 2,913 ____

19

D Closing inventory

20

110

$2.70

=

297

=

550

=

850

= = =

1,080 400 88 _____

D Opening inventory Issue Receipt Issue Receipt Issue

400 250 500 340 400 400 160 40

$2.20 $2.20 $2.50 $2.50 $2.70 $2.70 $2.50 $2.20

2,968 _____

21

A Closing inventory

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110

$2.20

=

242

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22

B Opening inventory Issue Receipt

400 (250) 500 _____

$2.20 $2.20 $2.50

880 (550) 1,250 _____

Issue Receipt

650 (340) 400 _____

$2.43077 $2.43077 $2.70

1,580 (826) 1,080 _____

Issue

710 (600) _____

$2.5831 $2.5831

1,834 (1,550) _____

Closing inventory

110 _____

$2.582

284 _____

Issues = 550 + 826 + 1,550 = $2,926

23

C

24

A Date

50

12 August 15 August

Received Issued

(4,000 × $5) (3,900 × $5)

19 August

Received

(100 × $5) (1,200 × $6)

21 August

Issued

(100 × $5) + (1,000 x $6)

24 August

Received

(200 × $6) (2,800 × $7.5)

Balance units 4,000 (3,900) ––––– 100 1,200 ––––– 1,300 (1,100) ––––– 200 2,800 ––––– 3,000 –––––

Value $ 20,000 (19,500) –––––– 500 7,200 –––––– 7,700 (6,500) –––––– 1,200 21,000 –––––– 22,200 ––––––

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25

C Date

26

Units

1 May 5 May

Opening Receipts

200 at $5 300 at $4.50

7 May

Issues

300 at $4.50 + 100 at $5

12 May 22 May

Receipts Receipts

100 at $6 400 at $5.50

23 May

Issues

400 at $5.50

29 May

Receipts

200 at $7

30 May

Issues

200 at $7

200 300 –––– 500 (400) –––– 100 100 400 –––– 600 (400) –––– 200 200 –––– 400 (200) –––– 200 ––––

Inventory $ 1,000 1,350 ––––– 2,350 (1,850) ––––– 500 600 2,200 ––––– 3,300 (2,200) ––––– 1,100 1,400 ––––– 2,500 (1,400) ––––– 1,100 –––––

Issues $

1,850

2,200

1,400 5,450

B When raw material prices are rising, FIFO will issue materials to production at the earliest (lowest) prices. Lower material prices mean lower costs and higher profit. So statement 1 is false. Weighted average pricing will average earlier (lower) and later (higher) prices so production costs will be higher than if FIFO was used. So statement 2 is true.

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27

OMEGA (a)

$2,618.00 – 92.40 + 1,930.00 = $4,455.60. Receipts Issues Qty kg

Total $

Qty kg

Unit price $

Balance Total $

Opening balance Day 1 Purchase

2,800

2,184

Average Day 2 Issue

3,400

Day 3 Return to inventory

0.770

Unit price $

Qty kg 6,080

0.765

2,800 _____

0.780 2,184.00 _____ ________

8,880

0.770

2,618 (3,400) _____

Value at issue value ($0.770 per kg)

Total $ 4,651.20

6,835.20 (2,618.00) ________

5,480

4,217.20

120 _____

0.770 92.40 _____ ________

5,600

0.770

4,309.60

Day 4 Purchase

3,260 2,536.28

3,260

2,536.28

Return to supplier

Value at original purchase price (= $0.780)

(440) _____

(343.20) ________

8,420 Day 5 Issue

2,500

0.772

1,930 (2,500) _____ 5,920 _____

52

0.772

6,502.68 (1,930.00) ________ 4,572.68 ________

(b)

5,920 kg valued at $4,572.68 (see part (a)).

(c)

Closing inventory is valued at $4606.58 and net issues are valued at $2601.00 + $1,912.50 − $91.80 = $4,421.70

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Receipts Qty Unit price Opening balance Day 1 Day 2

2,800

Issues Qty

Day 4

(440)

3,400

0.765p

(120)

0.765p

2,500

0.765p

0.778p 0.78

Day 5

28

$

0.78p

Day 3 3,260

Balance Qty

$

6,080 8,880 (3,400) ______ 5,480 ______ 120 ______ 5,600 3,260 (440) ______ 8,420 (2,500) ______ 5,920 ______

4,651.20 6,835.20 (2,601.00) ________ 4,234.20 ________ 91.80 ________ 4,326.00 2,536.28 (343.20) ________ 6,519.08 (1,912.50) ________ 4,606.58 ________

INVENTORY TRANSACTIONS (a) (b) Date (March)

Units

1 Bal b/f 3 Receipt 8 Issue

350 500 (650)

Transaction Rcpt FIFO date $ 2,800 4,125 1 (2,800) 3 (2,475) ____ (5,275) ____

10 Receipt 18 Issue

23 Issue

25 Receipt

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500 (425)

(100)

500

3 10

1 10

LIFO $ 2,800 4,125 (1,200) (4,125) ____

Units

Inventory FIFO $

850

6,925

6,925

(5,325) ____

200

1,650

1,600

4,325

700

5,975

5,925

275

2,378.75

2,248.75

LIFO $

4,325 (1,650) (1,946.25) _______

(3,676.25) _______

(3,596.25) _______

(3,676.25) _______

(865.00) _______

(200.00) (648.75) _______

(865.00) _______

(848.75) _______

175

1,513.75

1,400.00

3,950

3,950

675

5,463.75

5,350.00

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The values of the issues under the two methods are shown in bold in the last two ‘transaction’ columns; the closing inventory values are shown in bold at the bottom of the last two ‘inventory’ columns.

29

BROADVALE Principal material pricing methods –

First-in, first-out (FIFO)

–

Last-in, first-out (LIFO)

–

Weighted average (AVCO)

Note: Other methods exist and are acceptable.

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LABOUR COSTS 30

A A straight piece rate system is a variable cost so cost increases in direct proportion to output.

31

D $

32

Product A Product B

Skilled labour 1,750 units × 2 × $10 5,000 units × 2 × $10

Unskilled labour Product A Product B

1,750 units × 3 hours/unit × $7 /hour 5,000 units × 4 hours/unit × $7 /hour

Total =

$311,750

35,000 100,000 ––––––– 135,000 ––––––– 36,750 140,000 ––––––– 176,750 –––––––

C Employees At start of year Recruited during the year

At end of year Therefore leavers during the year

4,600 1,800 ––––– 6,400 5,500 ––––– 900 –––––

Average number of employees = (4,600 + 5,500)/2 = 5,050. Labour turnover rate = (900/5,050) × 100% = 17.8%, or 18% to the nearest percentage figure.

33

A Good output = 210 – 17 = 193 units. 100 units at $0.20 93 units at $0.30 For 193 good units

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$ 20.00 27.90 –––– 47.90 ––––

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34

TWISTER Tutorial note: Make it very clear what each part of your answer represents, and show all your workings to gain maximum marks. You are told about overtime payments and idle time; these will need to be split out as they are treated as overheads. You are given total hours worked and basic hours which will allow you to calculate overtime. (a)

Total wages = $106,956.80. Basic hours = 80 workers × 4 weeks × 38 hours per week = 12,160 hours Overtime = Total hours worked – Basic hours

= 13,056 – 12,160 = 896 hours

Total wages = basic pay + overtime premium

= (13,056 × £8.00) + (896 × $8.00 × 35%) = $104,448.00 + $2,508.80 = $106,956.80

(b)

Labour overheads = $5,516.80. $

35

Idle time = 376 hours × $8.00 =

3,008.00

Overtime premium =

2,508.80 _______

Labour overheads =

5,516.80 _______

PIECEWORK BONUS (a)

Piecework 80 units $35.20 (guaranteed minimum wage) 120 units $36.00 210 units $63.00 Working =

80% (8 × $5.50)

=

$35.20

80 units standard time 80 × 3

=

240 minutes

∴ Piecework

=

$24

120 units standard time 120 × 3

=

360 minutes

∴ Piecework

=

$36

210 units standard time 210 × 3

=

630 minutes

∴ Piecework

=

$63

Guaranteed wage

∴ Pay guaranteed wage

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(b)

Premium bonus 80 units 120 units 210 units

$44.00 $44.00 $54.31

Working Basic pay = 8 × $5.50 = $44 Units

Time taken (minutes)

Time allowed

Saved

80 120 210

480 480 480

240 360 630

150

Bonus for 210 units

150 × 75% × $5.50 = $10.31 60 Total wage = $44.00 + $10.31 = $54.31

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EXPENSES AND ABSORPTION OF OVERHEADS 36

EXPENSE CLASSIFICATION Tutorial notes:

(1)

A fairly straightforward question on fundamental cost accounting topics.

(2)

Most of part (a) is obvious and students should be able to gain a majority of the marks using very little time.

(3) (a)

Part (b) requires some thought. Ref no. Production Selling & Admin overhead dist overhead overhead 1 x 2 x 3 x 4 5 x 6 x 7 x 8 x 9 x 10 x 11 x 12 13 x 14 x 15 x 16 x Direct production labour costs are treated as fixed because:

(b)

37

x

workers are often paid on a time basis and have secured, guaranteed wages;

(ii)

employees are not hired and fired with small changes in activity - in this way they tend to be more a type of ‘stepped cost’, not a true variable cost;

(iii)

bonuses and other incentives invalidate uniform unit cost assumptions.

B =

$691,125 48,500

=

$14.25

C Incurred Absorbed 49,775 × $14.25 Under absorbed

58

x

(i)

Budgeted overheads Budgeted labour hours

38

R&D overhead

= =

$746,625 $709,294 ________ 37,331 ________

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39

A Budgeted hours

= =

40

B Actual overhead Overhead absorbed 7,530 × $32 Over absorbed

41

$225,900 $240,960 _______ 15,060 _______

A Actual overhead Over absorption Overhead absorbed OAR

= =

Budgeted hours

= =

42

$216,000 $32 6,750

$170,800 6,000 ________ 176,800 ________ 176,800 34 ,000 $5.20 per hour 156,000 5.20 30,000

C The question must be asking about Cost Centre A only, since there is insufficient information for Cost Centre B. Absorption rate, Cost Centre A = $140,000/40,000 = $3.50 per machine hour. $ 75,250 Overhead absorbed (21,500 machine hours × $3.50) Overhead incurred 73,500 Over-absorption of overhead 1,750

43

C The answer has to be A or C. A supervisor’s time is probably more likely to be spent on supervising employees in proportion to the hours worked rather than in proportion to the numbers of employees. However, answer A should also be acceptable.

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44

C Actual overheads Over-absorbed overhead Absorbed overheads

$ 500,000 50,000 ––––––– 550,000 –––––––

Units produced: 110,000 Absorption rate = $550,000/110,000 = $5 per unit.

45

PRIDE CERAMICS (a)

Overhead apportionment for the year ending 30 June 20X3 Overheads Basis Total Productio Production n Dept A Dept B $ $ $ Allocated Given 280,000 141,345 82,655 overheads Electricity Floor area * 24,000 10,500 9,750 (21:19.5:4.5:3) Indirect No of 36,000 12,000 12,000 labour employees (2:2:1:1) Rent Floor area 64,000 28,000 26,000 Machine Machine maintenance hours 12,000 6,000 5,000 (12:10:1.5:0.5) –––––– ––––––– ––––––– 416,000 197,845 135,405 –––––– ––––––– –––––––

Service Dept X $

Service Dept Y $

32,000

24,000

2,250

1,500

6,000

6,000

6,000

4,000

750

250

––––– 47,000 –––––

––––– 35,750 –––––

7,150

(35,750)

––––– 54,150

–––––– Nil

(b) Reapportion

Service Dept Y (50:30:20)

Service Dept X (40:60:Nil)

Nil

Nil

17,875

21,660

10,725

32,490

(54,150)

–––––– ––––––– ––––––– ––––– –––––– 416,000 237,380 178,620 Nil Nil –––––– ––––––– ––––––– ––––– –––––– * Electricity could have been apportioned on the basis of machine operating hours.

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46

XJ PRODUCTS (a) Hours Cutting

Number of labour hours expected to be worked XJ1 2.5 hours × 20,000 units XJ1 0.75 hours × 20,000 units XJ2 1 hour × 10,000 units XJ2 1 hour × 10,000 units

50,000 15,000 10,000

Total overhead Overhead absorption rate

(b)

Assembly

$67,000 60,000 hours

$1.12 per labour hour

$42,000 25,000 hours

$1.68 per labour hour

_____

10,000 _____

60,000 _____

25,000 _____

$67,000

$42,000

Overheads included in the cost of each product Product XJ1 $ Cutting Assembly

2.5 hours 0.75 hours

× ×

$1.12 $1.68

2.80 1.26 ____ 4.06 ____

Product XJ2

Cutting Assembly

1 hour 1 hour

× ×

$1.12 $1.68

1.12 1.68 ____ 2.80 ____

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47

REDGATE (a)

Re-apportionment of service department overheads Total $

Basis

Apportioned overheads Storeroom reapportionment Maintenance reapportionment

340,000 Material requisitions Maintenance hours

Total (b)

$340,000

Cutting $

Service Depts

Assembly $

Stores $

Maint. $

80,000

22,000

28,000

210,000 14,000

6,000 (22,000)

21,000

9,000

2,000 (30,000)

$245,000 $95,000

Overhead absorption rates Basis

Total overheads as (a) above Cutting department

Machine hours

Assembly department

Labour hours

Absorption rates

62

Production Depts

Cutting Dept

$245,000

Assembly Dept

$95,000

8,750 19,000 $28 per machine hour

$5 per labour hour

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MARGINAL COSTING AND ABSORPTION COSTING 48

C $ 26,500 1,480 ______ 27,980 ______

Absorption costing profit Decrease in inventory 200 × $7.40 Marginal costing profit

49

C Increase in inventory 14,200 – 13,500 Profit difference $84,500 – 78,550 OAR $5,950/700

50

= 700 units = $5,950 = $8.50

A Fixed costs = $40 × 45%

18

=

$18

Increase in inventory 24,000 – 20,000 units = 4,000 units As inventory is increasing absorption profit will be higher by 4,000 units × $18 = $72,000.

51

52

B Sales price per unit Variable cost per unit ($7.50 + $4.50 + $15.75) Contribution per unit

$ 50.00 27.75 22.25

Units of production/sale Budgeted contribution (50,000 × $22.25)

50,000 $1,112,500

D Inventory would be valued at marginal production cost: = 4,200 units × $27.75 = $116,550.

53

C Budgeted fixed overhead cost per unit = $6 Budgeted production = 50,000 units. Budgeted fixed overhead costs = $6 × 50,000 = $300,000.

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54

B Sales = 50,000 – 4,200 – 45,800 units Contribution (45,800 units × $22.25) Fixed costs Profit

55

$ 1,019,050 300,000 719,050

B Sales = 50,000 – 4,200 – 45,800 units $ 2,290,000 Sales (45,800 units × $50) 1,545,750 Full cost of sales (45,800 units × $33.75) Profit 744,250 Note: Since actual production and budgeted production volumes are the same, there is no over-absorbed overhead or under-absorbed overhead adjustment to profit.

56

BUHNER (a)

(i)

Cost of sales = 3 + 6 + 2 = $11 Marginal costing Sales Cost of sales Opening inventory Production Closing inventory

Contribution Less actual fixed overheads Variable selling costs

3,000 × 21 1,000 × 11 6,000 × 11 (4,000) × 11

$

$ 63,000

11,000 66,000 (44,000) ______

3,000 × $5

Loss for the period (ii)

(33,000) ______ 30,000 (25,000) (15,000) ______ (10,000) _______

Absorption costing Cost of sales = 3 + 6 + 2 + 4 = $15 $ Sales Cost of sales Opening inventory Production Closing inventory

Under absorption (W1) Variable selling costs Profit for the period

64

$ 63,000

3,000 × 21 1,000 × 15 6,000 × 15 (4,000) × 15

3,000 × $5

15,000 90,000 (60,000) ______ (45,000) ______ 18,000 (1,000) (15,000) ______ 2,000 _______

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Working

(W1) $ 24,000 25,000 ––––– 1,000 –––––

Amount absorbed = 6,000 × $4 Amount spent Under-absorbed (b)

Reconciliation

Marginal costing loss Add: increase in inventory × fixed production overhead per unit (3,000 × $4) Absorption costing profit

57

$ (10,000) 12,000 ––––– 2,000 –––––

PERIOD 1 AND PERIOD 2 (a)

Income statement

(1) (2)

Sales Manufacturing cost of sales

(3)

Gross profit (Under-)/over- absorbed manufacturing overhead

(4) (5)

Adjusted gross profit Selling and administration overhead absorbed (Under-)/over- absorbed selling and administration overhead Net profit

Period 1 $000

Period 2 $000

1,275 (680) ––––– 595 (40) ––––– 555 (323)

1,350 (720) ––––– 630 7 ––––– 637 (342)

(15) ––––– 217 –––––

––––– 295 –––––

Notes:

(1) (2) (3) (4) (5)

Period 1:

85,000 × $15

Period 2:

90,000 × $15

Period 1:

85,000 × $8

Period 2:

90,000 × $8

Period 1:

Expenditure $320,000 – Absorbed $280,000 (80,000 × $3.50)

Period 2:

Expenditure $315,000 – Absorbed $322,000 (92,000 × $3.50)

Period 1:

85,000 × $3.80

Period 2:

90,000 × $3.80

Period 1:

Expenditure $270,000 – Absorbed $255,000 (85,000 × $3.00)

Period 2:

Expenditure $270,000 – Absorbed $270,000 (90,000 × $3.00)

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(b)

In a marginal costing system, fixed manufacturing overheads are not included in the valuation of inventory. As a result fixed overhead costs are charged against profit in the period in which they are incurred and profit is not affected, (as in the full absorption method used in (a) above), by production being greater/less than sales. In Period 1, profit using marginal costing would be greater than that under absorption costing as production is less than sales, and thus overheads within inventory are reduced and charged against profits. The reverse would be the case in Period 2.

58

DUO (a)

Income statement for the period under marginal costing $ Sales Less:

$ 327,000

Cost of sales Opening inventory Production Less: Closing inventory (W1)

168,500 (13,800) ______ (154,700) _______

(b)

Contribution Less: Fixed overheads

172,300 (110,000) _______

Profit

62,300 _______

Income statement for the period based on absorption costing $ $ Sales Less:

327,000 Cost of sales Opening inventory Production Less: Closing inventory (W2)

− 278,500 (22,800) ______

(255,700) _______ Profit (c)

71,300 _______

Inventory levels are rising over the period thus, total absorption costing, which includes a share of fixed costs in the inventory valuation gives a higher reported profit than marginal costing which charges the fixed costs against profit in the period in which they are incurred. The reported profit under total absorption costing is $9,000 more over the two periods; as $9,000 of fixed costs are ‘carried forward’ from this period to the next.

66

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LECTURER RESOURCE PACK : ANSWERS

Workings

(W1)

(W2)

MC per unit ($) Closing inventory

units value ($)

TAC per unit MC ($) Overheads $110,000 = $10 per labour hour (3 × 2,500) + (2 × 1,750)

Closing inventory

KAPLAN PUBLISHING

units value ($)

Alpha 45 200 9,000

Beta 32 150 4,800

45

32

30

20

__

__

75 __

52 __

200 15,000

150 7,800

Total

13,800

22,800

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FIA – MA1 - MANAGEMENT INFORMATION

JOB, BATCH AND PROCESS COSTING 59

C Use % of labour cost as the overhead absorption method.

60

Total labour cost ($14,500 + $3,500 + $24,600)

=

$42,600

CC20 $24 ,600 $42,600 × $126,000

=

$72,761

C Total Cost BB15 Opening WIP Labour Overheads $3,500 $42,600 × $126,000

$42,790 $3,500 $10,352 _______

Total Cost

Selling Price

$56,642 _______ =

$56,642

=

61

.66667

$84,963

D Job BB15 was completed in the period and therefore there is no WIP value. Job CC20

($18,500 + $24,600 + $72,761)

Job AA10

($26,800 + $17,275 + $14,500) +

(

$14 ,500 × $126,000) $2,600

=

$115,861

=

$101,462 _______ $217,323 _______

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LECTURER RESOURCE PACK : ANSWERS

62

JOB X PRODUCT X – JOB COST CARD Department Total B C $ $ $ $ 700 800 850 2,350.00 1,260 350 200 1,810.00 630 280 250 1,160.00 5,320.00

A

Direct materials Direct labour Factory overhead (W)

TOTAL PRODUCTION COST Administration overhead

($5,320 × 12%) 638.40 80% 5,958.40

TOTAL COST Profit

20% 1,489.60 100% 7,448.00

SELLING PRICE Working

Factory overheads:

63

64

A

$72,000/24,000 = $3 per hour × 210 hours = $630

B

$80,000/20,000 = $4 per hour × 70 hours = $280

C

$60,000/12,000 = $5 per hour × 50 hours = $250

D Input

=

8,500 + 4,250

=

12,750 kg

Normal loss

=

4% × 12,750

=

510 kg

Scrap value

=

510 × $0.20

=

$102

D Input Output:

Normal loss Finished goods

kg 12,750 510 ______ 12,700 ______ 13,210 ______

Abnormal gain

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460 ______

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FIA – MA1 - MANAGEMENT INFORMATION

65

B Total input cost: Process 1 8,500 × $2.68 = Materials Labour Overheads $2,278 × 1.5 = Normal loss scrap value

$ 22,780 1,615 2,278 3,417 (102) ______ 29,988 ÷ 12,240 ______

Cost per kg of output = $2.45.

66

A An abnormal gain occurs when actual output from a process exceeds the expected output. This occurs when actual loss is less than the expected (‘normal’) loss.

67

B All units, including abnormal loss or abnormal gain, are converted to equivalent units. Partly finished units are valued at less than 1 equivalent unit each.

68

C Closing inventory = Input – Output = 300 – 250 = 50 units. Closing inventory equivalent units = (100% × 50) 50 equivalent units of materials (50% × 50) 25 equivalent units of labour and overhead (conversion costs).

69

D (340 ÷ [100 – 10 – 5])% = 340 ÷ 0.85 = 400

70

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LECTURER RESOURCE PACK : ANSWERS

70

INDUSTRIAL SOLVENTS LIMITED Mixing process account

Materials: A (W1) B C

Labour and overheads

Litres

$

$

6,000 4,000 2,000 ______

48,000 24,000 7,800 _______

12,000

79,800

– ______

41,280 _______

______

_______

12,000 ______

121,080 _______

12,000 ______

121,080 _______

Litres

Normal loss Abnormal loss Completed production Closing WIP

Workings (W1) Material cost:

A 6 × 12,000 = 6,000 × $8 = $48,000 (W2) Statement of equivalent units:

B 6 × 12,000 = 4,000 × $6 = $24,000

3

2

Material % EU

Completed production Abnormal loss

100 100

9,500 100

Closing WIP: Material Labour and overheads

100

1,800 ______

600 100

– 1,100 (W2)

9,500 1,800

104,500 (W2) 15,480 (W2)

C 6 × 12,000 = 2,000 × $3.90 = $7,800 1

Labour and overheads % EU

100 100

9,500 100

40

720 ______

Equivalent units

11,400 ______

10,320 ______

Process costs

$79,800

$41,280

$7.00

$4.00

Cost per equivalent unit Value of output: 9,500 × ($7 + $4) = $104,500

Value of closing WIP: (1,800 × $7) + (720 × $4) = $15,480 Value of abnormal loss: 100 × ($7 + $4) = $1,100

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71

PRODUCT XK (a)

Physical flow of units: Opening WIP + Units started 0 + 2,400

= Units completed = 2,200

+ +

Closing WIP 200

Equivalent units Material

% Completed units (2,200) Closing WIP (200)

EUs 100 100

Equivalent units produced Costs per EU

2,200 200 ––––– 2,400 –––––

$5,280 = $2.20 2,400

Labour/Overhead % EUs

100 30

2,200 60 ––––– 2,260 –––––

$2,260 × 2 * = $2 2,260

* This absorbs the overheads at 100% of the labour costs Values of units

Goods transferred to Process 2: 2,200 × $(2.20 + 2) = Closing WIP: Materials = 200 × $2.2 Lab/oh = 60 × $2

$9,240 $440 $120 ____

$560 _____ $9,800 _____

Check: (b)

$5,280 + ($2,260 × 2) = $9,800

Value of goods transferred to finished goods $ From Process 1 (as above) Added material Direct labour Factory overhead (2/3 labour)

9,240 9,460 10,560 7,040 _____

Finished goods value

36,300 _____

Value per unit

72

$36,300 = $16.50 2,200

KAPLAN PUBLISHING

LECTURER RESOURCE PACK : ANSWERS

72

LUDLUM PLC (i)

A normal loss is an expected loss. It is a natural part of the process, e.g. evaporation, sawdust from making furniture, etc, and does not indicate inefficient working. Normal loss does not pick up a share of the process costs. Normal loss is shown in the process account at its scrap value if it has one.

(ii)

An abnormal loss is a loss greater than expected. It is not a natural part of the process and it does indicate inefficient working. Abnormal loss does pick up a share of the process costs. It is costed on the same basis as ordinary output. The abnormal loss is credited out of the process account to an abnormal loss account and from there to the income statement.

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BASIC BUDGETING 73

B Comparing actual figures with budgets enables managers to see where things have not gone to plan and control those areas better in the future.

74

D Preparation of the annual budget is a key planning technique.

75

C Selecting a strategy is one aspect of decision making.

76

D Sales include 5,000 x 3 units of X = 15,000 Inventories of finished goods increase by 200 units x 3 = 600 Inventories of component X = 400 Total purchases will need to be 15,000 + 600 + 400 = 16,000 units

77

C Sales include 8,000 x 1.2 units = 9,600 Inventories of finished goods decrease by 500 units x 1.2 = (600) Increase in inventories of raw material = 900 Total purchases will need to be 9,600 - 600 + 900 = 9,900 kg

78

A By definition.

79

C Options A and B are incorrect since a flexible budget includes all costs and is not changed to reflect the number of days in the month. A flexible budget may be an update of the fixed budget to reflect actual volume of activity but it does not incorporate actual costs. Thus the answer is option C.

80

C Purchases = usage + increase in inventory = (5,000 × 3) + 200 = 15,200

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LECTURER RESOURCE PACK : ANSWERS

COMPARISON OF INFORMATION AND PERFORMANCE INDICATORS 81

D Only an investment centre would be applicable since the manager would have control of the capital employed on which to calculate the interest charge.

82

83

CONTROL RATIOS Activity ratio

=

3,502 × 100 / 1 3,630

=

96.5%

Efficiency ratio

=

3,502 × 100 / 1 3,471

=

100.9%

Capacity ratio

=

3,471 × 100 / 1 3,630

=

95.6%

TEES R US Budgeted

Actual

Cost of tea pickers as a % of turnover

16.76%

13.33%

Cost of tea processor operators as a % of turnover

4.44%

4.44%

Cost of seeds and fertilizer as a % of turnover

9.52%

6.67%

Gross profit margin

61.65%

70.22%

Operating profit margin

4.51%

25.78%

Return on capital employed

3.79%

24.37%

0.84

0.95

GG

YF

Asset turnover

84

BEAUTIFUL GIRLS (2)

Sales price per unit ($)

1.20

1.56

Direct material cost per unit of sales ($)

0.25

0.20

Direct labour cost per unit of sales ($)

0.20

0.20

Fixed production overheads cost per unit of sales ($)

0.40

0.33

Advertising cost as a percentage of turnover (%)

5.00

25.00

Net profit margin (%)

4.17

13.21

Return on capital employed (%)

1.67

15.42

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EXCEPTION REPORTING AND VARIANCES 85

C Budgeted material cost per unit $25,500/600 = $42.50 $ should cost (×

580 units $42.50) did cost

25,839 ______

Total material variance

86

24,650

1,189

A

A Original budgeted labour cost = 8,000 x $6 = $48,000 Actual cost of labour = $47,600 Variance = $400 F

87

D Original budgeted material cost = 6,500 x $12 = $78,000 Actual cost of material = $79,840 Variance = $1,840 A

88

B Flexed budget = 8,800 x $5 = $44,000 Original budget = 9,000 x $5 = $45,000 Variance = $1,000 F

89

B Flexed budget sales: Actual sales: Difference

90

12,000 units @ price of $20 = 12,000 units @ price of $21 =

240,000 252,000 12,000

A By definition. B would give the variance due to price and efficiency differences. C would give the variance due to activity volume differences.

91

B Lower quality materials are likely to result in more waste and hence an adverse materials usage variance

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LECTURER RESOURCE PACK : ANSWERS

REPORTING AND DATA PRESENTATION 92

C The technical wizardry available should not distract the audience.

93

FAMILIES (a)

A percentage component bar chart could be used to compare these two sets of data, as each family has a different total net monthly income. Family 1 Family 2 Item expenditure expenditure $ % cum % $ % cum % Food and drink Housing Fuel and light Transport Other

540 730 125 600 315 ____

23.4 31.6 5.4 26.0 13.6 ____

2,310 ____

100.0 ____

23.4 55.0 60.4 86.4 100.0

180 370 84 124 32 ___

22.8 46.8 10.6 15.7 4.1 ____

790 ___

100.0 ____

22.8 69.6 80.2 95.9 100.0

% Component bar charts: family expenditure % Expenditure 100

80

60

40

20

0

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Family 1

Family 2

Food & drink

Housing

Transport

Other

Fuel & light

77

FIA – MA1 - MANAGEMENT INFORMATION

(b)

94

D

95

C

Both families spend a similar proportion of their income on food and drink, but family 2 spend a far higher proportion of their income on housing even though their actual monthly expenditure on housing is less than that of family 1. Similarly, a higher proportion of family 2’s income is spent on fuel and light and a lower proportion on transport and ‘other’.

To be effective, communication must be clear, complete for its purpose and relevant to the purpose. It does not have to be complex. On the contrary, complex information is undesirable if it is not clear and understandable.

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LECTURER RESOURCE PACK : ANSWERS

SPREADSHEETS 96

SPREADSHEETS Advantages of spreadsheets include: •

Automatic recalculation of values whenever any number is changed.

•

The ability to process large quantities of data.

The automatic recalculation of formula values means that spreadsheets are particularly useful for: •

Planning, when the planner wants to produce a series of revised plans with different figures each time.

•

Sensitivity analysis, whereby a plan or forecast can be tested for risk, by altering some of the number values in the table and seeing how this affects the other figures. For example, a forecast of future profits growth can be tested by altering the assumed rate of annual sales growth. If the assumed rate of growth is entered in a spreadsheet cell, all that is needed to do the sensitivity analysis is to alter the number in that cell.

Since a spreadsheet is used to create tables of figures, its usefulness for accounting might be readily apparent. Spreadsheets are widely used to: •

prepare financial forecasts

•

prepare budgets and other plans

•

produce reports comparing actual results with the budget

•

prepare cash flow forecasts

•

prepare an income statement and balance sheet.

There are also limitations and problems associated with the use of spreadsheets that need to be controlled. These include the following: •

Spreadsheets for a particular budgeting application will take time to develop. The benefit of the spreadsheet must be greater than the cost of developing and maintaining it.

•

Data can be accidentally changed (or deleted) without the user being aware of this occurring.

•

Errors in design, particularly in the use of formulae, can produce invalid output. Due to the complexity of the model, these design errors may be difficult to locate.

•

A combination of errors of design, together with flawed data, may mean that decisions are made that are subsequently found out to be wrong and cost the firm money. This is known as "spreadsheet risk" and is a serious problem. For example, a "cut and paste error" cost TransAlta $24 million when it underbid on an electricity supply contract.

•

Data used will be subject to a high degree of uncertainty. This may be forgotten and the data used to produce, what is considered to be, an "accurate" report.

•

Security issues, such as the risk of unauthorised access (e.g. hacking) or a loss of data (e.g. due to fire or theft).

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97

PRESENTATION (1) Bar chart

98

PRESENTATION (2) Line chart

99

PRESENTATION (3) Pie chart

100 PRESENTATION (4) Scatter diagram

101 FORMULAE (1) There are several possible answers: =B4+B5+B6+B7+B8 =SUM(B4:B8)

102 FORMULAE (2) =AVERAGE(B4:B8)

80

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