Accounting Technicians Ireland
2nd Year Examination: Summer 2015
Paper: MANAGEMENT ACCOUNTING
Monday 18 May 2015
2.30 p.m. to 5.30 p.m.
INSTRUCTIONS TO CANDIDATES
PLEASE READ CAREFULLY
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 out of THREE questions in 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 labeled, 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.
SECTION A
Answer All Questions
QUESTION 1 (Compulsory)
Taurus plc. is in the process of preparing budgets for the period January 2015 to March 2015. The following
information has been provided to assist in the budgeting process.
1.
The cash balance on 1st January 2015 is expected to amount to €/£14,000.
2.
Budgeted monthly sales units for the first four months of 2015 are as follows:
January
February
March
April
12,000
18,000
15,000
14,000
Sales price is €/£5 per unit for January rising to €/£7 in March.
3.
Sales are 30% cash and 70% credit. Credit sales are collected over a three month period, 10% in the
month of sale, 60% in the month following sale and 30% in the second month following sale.
Total sales revenue in November 2014 and December 2014 amounted to €/£45,000 and €/£54,000
respectively.
4.
Cost of sales is expected to be 75% of sales revenue each month.
5.
The business maintains its closing inventory levels at 60% of the following month’s cost of sales.
Inventory at the beginning of January is expected to amount to €/£27,000.
6.
65% of inventory purchased is paid for in the month of purchase and the remaining 35% is paid for in
the month following purchase. At the 31st December 2014 amounts owed for purchases are €/£13,800.
7.
A loan of €/£40,000 is expected to be received in January. The company will repay this loan evenly
over 20 months commencing in February.
8.
A van which cost €/£8,000 when purchased second hand three years ago is expected to be sold in March
2015 for €/£3,300. The expenses associated with this sale are expected to be €/£300.
9.
Equipment costing €/£12,000 will be purchased in January and paid for in February. This equipment
will be depreciated on a straight line basis over three years.
10. Operating expenses are paid as incurred. These have been estimated as follows:
€/£
January
12,800
February
18,900
March
14,600
The above figures include depreciation on existing assets (excluding planned purchases/disposals
detailed above) of €/£2,000 per month.
Required:
(a) Calculate the purchases requirement for each month from January 2015 to March 2015.
5 Marks
(b)
Prepare a monthly cash budget for January, February and March 2015.
12 Marks
(c)
Outline any three potential benefits from the preparation of the cash budget as prepared in part (b).
3 Marks
Total: 20 Marks
QUESTION 2 (Compulsory)
Venus plc. is reviewing its portfolio of products and has provided you with the following information in
relation to budgeted sales for the product Pisces.
Sales units
Sales price per unit
Variable costs per unit
Net profit/loss
100,000
€/£
15
11
140,000
In order to assist the sales manager with further analysis, you are asked to prepare a number of calculations
relative to this product line.
Required:
(a) Calculate the total fixed costs attributable to Pisces.
2 Marks
(b) Calculate the Contribution/Sales ratio for Pisces.
2 Marks
(c)
Explain the term ‘breakeven’ and calculate the breakeven point for the product Pisces expressed in both
sales units and sales turnover.
4 Marks
(d) Explain the term ‘margin of safety’ and calculate the margin of safety percentage for Pisces.
4 Marks
(e) Venus plc. is considering a policy of requiring a target profit of 20% of turnover on all business lines.
Calculate the activity required by the product Pisces in order to generate this target profit.
4 Marks
(f)
Cost Volume Profit (CVP) analysis is a model that is designed to help with decision-making. However
it is not without its assumptions and limitations that affect its validity.
List four limitations of CVP analysis.
4 Marks
Total 20 Marks
QUESTION 3 (Compulsory)
Capricorn plc. makes three main products, using broadly the same production methods and equipment for
each. The company uses a traditional product costing system and absorbs its overheads on a labour hour
basis. However it is considering an activity based costing (ABC) system. Details of the three products for a
typical period are:
Product A
Product B
Product C
Per unit
Labour hours
Machine hours
Material cost
Labour cost
3
1
€/£40
€/£20
3
2
€/£24
€/£25
2
6
€/£50
€/£28
Number of units produced
1,500
2,500
14,000
Production overheads can be analysed into the following cost pools:
€/£
235,000
155,200
103,000
206,800
700,000
Set-ups
Machinery
Materials handling
Inspection
Total production overhead
The following total activity volumes are associated with the product line for the period as a whole:
Number of set ups
Number of material movements
Number of inspections
Product A
180
24
300
Product B
330
42
360
Product C
665
176
1,340
Required:
(a) Explain the terms ‘cost pools’ and ‘cost drivers’.
3 Marks
(b) Calculate the cost per unit for each product using Capricorn plc’s current method of absorbing overheads.
5 Marks
(c) Calculate the cost per unit for each product using ABC principles.
10 Marks
(d) Provide an explanation for the different costs per unit produced by (b) and (c) above.
2 Marks
Total: 20 Marks
SECTION B
Answer any two of the following questions
QUESTION 4
You have been asked by your manager to assist with the induction of a new member of the finance team.
After a number of days, the new staff member approached you with a number of queries about the
differences between the following terms which they have heard being used, but which they don’t understand:
1.
2.
3.
4.
5.
Absorption and marginal costing
The FIFO and LIFO methods of inventory valuation
Process costing and batch costing
Cost centre and profit centre
Profit and cash-flow
Conscious of the importance placed upon clear guidance by your manager, and in order to provide
documentation for future reference, you decide that the best approach is for you to provide a written
explanation of each term.
Required:
Prepare brief notes which explain the difference between any four of the five above terms.
(Each part carries equal marks)
Total: 20 Marks
QUESTION 5
Arena plc. requires 3,000 composite hockey sticks for use in a project for one of its most highly valued
customers. Arena plc has never previously produced hockey sticks. However, management are currently deciding
whether to purchase the hockey sticks from another company at a price of €/£193,000 or to produce the
hockey sticks themselves.
A junior member of the accounts department has estimated that the costs incurred by Arena plc in producing
3,000 hockey sticks would be as follows:
Material Carbon
Material Kevlan
Material Resin
Skilled Direct Labour
Unskilled Direct Labour
Depreciation of Equipment
Fixed Overheads
10,000 kg
8,000 kg
6,000 kg
85hrs.
110 hrs.
Note
1
1
1
2
2
3
€/£
85,000
88,000
24,000
3,900
1,900
11,000
20,000
233,800
The following additional information is available in respect of the cost items listed above.
1. Arena plc. uses three types of materials in the production of its product. They already have sufficient stock
on hand for the production of the hockey sticks. The following price data is available in respect of each of
these raw materials:
Original purchase price
Current purchase price
Realisable Value
Carbon
Alpha
€/£ per kg
8.5
9.5
7.0
Kevlan
€/£ per kg
11.0
13.0
10.5
Resin
€/£ per kg
4.0
5.0
nil
Arena plc. always maintains a stock of material carbon as it is used in virtually all of its production
processes.
The stock on hand of material Kevlan was purchased several years ago for another project which was
cancelled at short notice. Management does not have any use for material kevlan other than in the
production of hockey sticks.
If the stock of material Resin is not used in the production of the sticks it will have to be disposed of at
cost of €/£0.80 per kg.
2.
Skilled direct labourers are paid a fixed weekly wage and are currently under-utilised. It is expected that
the hours of skilled labour required for hockey sticks will be met out of what is currently classified as
idle time.
The unskilled direct labour relates to hours worked by casual employees who are employed as required
and paid an hourly rate.
3.
If the company decides to produce hockey sticks it is estimated that incremental fixed overheads
incurred directly in respect of producing hockey sticks will amount to €/£8,300
4.
If the equipment is not required for the production of the hockey sticks, it may be hired out for
€/£1,500.
Required:
(a)
On the basis of the financial information provided above, recommend whether Arena plc. should
produce hockey sticks internally or purchase them from another company.
Support your answer with relevant workings.
16 Marks
(b)
Suggest any four qualitative factors which Arena plc. should consider before arriving at a
decision whether to produce the hockey sticks internally or source them externally.
4 Marks
Total: 20 Marks
QUESTION 6
The Irish division of Acquaris plc. has taken over the production and sale of the product Star-2. The
product is made to order, so no inventories are carried. Acquaris plc. operates an absorption costing
system.
You have been provided with the following budget data for the first quarter:
Standard data for the first quarter
.
Sales price
Materials
Direct Labour
Variable Overhead
Fixed Overhead
Total costs
€/£ per unit
85.00
4 kg
2 hours
2 hours
2 hours
Budgeted production
20.00
18.00
22.00
10.00
70.00
8,000 units
Actual results for the first quarter
Production and sales
7,500 units
Sales
Materials (36,000 kg)
Direct Labour (18,000 hrs.)
Variable Overhead
Fixed Overhead
€/£
685,000
208,800
158,600
172,000
95,000
Required:
(a) Prepare a statement which reconciles the actual with budgeted profit, after identifying all variances.
16 Marks
(b) Outline two benefits and two limitations of a standard costing system.
4 Marks
Total 20 Marks
END OF PAPER
Management Accounting
May 2015
2nd Year Paper
Management Accounting
2nd Year Examination
May 2015
Exam Paper, Solutions & Examiner’s Comments
Page 1 of 19
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
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 2015 and may not be reproduced without permission of Accounting
Technicians Ireland.
© Accounting Technicians Ireland, 2015.
Page 2 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
2nd Year Examination: May 2015
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 (%)
1
54
2
51
3
53
4
52
5
35
6
42
Nos. Attempting
725
721
726
606
391
647
Statistical Analysis – Overall
57%
Pass Rate
52%
Average Mark
Range of Marks
Nos. of Students
0-39
214
40-49
96
50-59
125
60-69
128
70 and over
164
Total No. Sitting Exam
729
154
Total Absent
44
Total Approved Absent
927
Total No. Applied for Exam
Page 3 of 19
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
General Comments:
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 completely narrative.
In section B question 5 proved unpopular with candidates. The majority of candidates attempted questions 4 and 6
from this section.
Questions 1,2,3,5 and 6 examined five areas of the syllabus in detail whilst question 4 required an explanation of the
difference between management accounting terms spread across five areas of the syllabus. All of the areas which
were examined represented key elements of the syllabus. All of the examined areas of the syllabus were sufficiently
covered in the study text, past exam papers and sample papers and therefore should not have created any difficulties.
My marking scheme is set out in such a way that candidates will gain marks for correct workings that lead to a final
answer. In many scripts candidates did not produce any workings and seemed to carry out calculations on calculators
and then writing down the final answer. Therefore marks could not be awarded due to the lack of workings and thus
valuable marks were lost.
The majority of the scripts were very well presented but there is still scope for improvement in some cases.
i.
ii.
iii.
iv.
The handwriting in some cases was very poor.
The questions were not labelled.
There was no logical sequence to some answers.
There were parts of questions mixed together
It is very important to read the requirements of the question carefully. Some valuable marks were lost in question 4 as
a result of candidates not reading the requirements.
Page 4 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
Examiner Comments on Question One
This question was compulsory and tested the candidate’s knowledge of budgetary planning and control.
Part (a) of the question required candidates to calculate the purchases requirement for the three months to March
2015.
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 students wasted time by setting out three separate budgets, one for each month rather
than incorporating all three months within the one budget.
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 1
(a)
Cost of sales
Sales revenue
Cost of sales
(75%)
Closing
inventory
Apr.
Total
Marks
Allocated
Dec.
Jan.
Feb.
Mar.
€/£
54,000
€/£
60,000
€/£
90,000
€/£
105,000
€/£
98,000
40,500
45,000
67,500
78,750
73,500
27,000
40,500
47,250
44,100
Jan.
Feb.
Mar.
€/£
€/£
€/£
27,000
40,500
47,250
1
58,500
74,250
75,600
1
-40,500
-47,250
-44,100
1
45,000
67,500
78,750
2
Purchases
Opening
Inventory
Purchases
(balancing
figure)
Closing
inventory
Cost of sales
Page 5 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
(b)
Cash budget for January, February and March 2015
Cash receipts
Sales Revenue (working 2)
Loan
Sale of van (net proceeds)
January
February
March
€/£
54,330
40,000
______
94,330
€/£
69,840
€/£
89,250
_______
69,840
3,000
92,250
75,127
2,000
10,800
62,625
68,738
2,000
12,000
16,900
99,638
14,000
94,330
(62,625)
45,705
45,705
69,840
(99,638)
15,907
15,907
92,250
(89,727)
18,430
Total
Marks
Allocated
2
1
1
Cash payments
Purchases (working 1)
Loan repayments
Purchase of equipment
Operating expenses
Opening balance
Receipts
Payments
Closing balance
51,825
12,600
89,727
3
1
1
1
2
(c) Benefits of preparing a budget
1. Planning orientation. The process of preparing a budget takes management away from its short-term, day-today management of the business and allows it to deal with long term strategy. This is the main goal of budgeting,
which means even if management do not succeed in meeting its goals as outlined in the budget - at least it is
thinking about the company's competitive and financial position and how to improve it.
2. Profitability review. A properly structured budget points out what aspects of the business produce money and
which ones use it, which forces management to consider whether it should drop some parts of the business, or
expand in others.
3. Performance evaluations. Management can work with employees to set up their goals for a budgeting period,
and possibly also tie bonuses or other incentives to how they perform. Management can then create budget versus
actual reports to give employees feedback regarding how they are progressing toward their goals. This approach is
most common with financial goals, though operational goals (such as reducing the product rework rate) can also be
added to the budget for performance appraisal purposes. This system of evaluation is called responsibility
accounting.
4. Funding planning. A properly structured budget should derive the amount of cash inflow or outflow that the
company will produce or which will be needed to support operations. This information is used by the treasurer to
plan for the company's funding needs.
5. Cash allocation. There is only a limited amount of cash available to invest in fixed assets and working capital,
and the budgeting process forces management to decide which assets are most worth investing in.
Total Marks Allocated
1 mark per relevant point = 3 marks
Page 6 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
WORKINGS
Working 1 - Payment for purchases
CASH PAYMENTS
Purchases
€/£
13,800
Payable @ 31 Dec 2014
Jan.
€/£
13,800
Feb.
€/£
Jan. 2015
58,500
38,025
20,475
Feb. 2015
74,250
Mar. 2015
75,600
Total payments
Mar.
€/£
48,263
25,987
49,140
51,825
68,738
75,127
Working 2 - Sales revenue
CASH RECEIPTS
Nov. 2014
Sales
€/£
45,000
Cash
€/£
13,500
Credit
€/£
31,500
Dec. 2014
54,000
Nov.
€/£
13,500
3,150
16,200
37,800
Jan. 2015
60,000
18,000
42,000
Feb. 2015
90,000
Dec.
€/£
Jan.
€/£
18,900
9,450
16,200
3,780
22,680
11,340
18,000
4,200
25,200
12,600
27,000
6,300
37,800
69,840
31,500
7,350
89,250
27,000
63,000
Mar. 2015
105,000
Feb.
€/£
31,500
73,500
Total receipts
54,330
Page 7 of 19
Mar.
€/£
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
Examiner Comments on Question Two
This question was compulsory and tested the candidate’s knowledge of cost volume profit analysis.
Parts (a) to (e) required calculations of fixed costs, contribution to sales ratio, breakeven point, margin of safety and
activity required to produce a certain profit. The question was generally well answered with most candidates
demonstrating a full understanding of the concepts underlying CVP analysis.
Part (f) required candidates to list the limitations of CVP analysis. The vast majority of candidates were not aware
of these limitations (including candidates who scored very highly in the previous parts).
SOLUTION 2
(a)
Total
Marks
Allocated
Fixed costs
Sales
€/£
1,500,000
Variable costs
1,100,000
Contribution
Net profit
400,000
Fixed costs
260,000
(a)
1
140,000
1
Contribution /sales ratio
€/£400,000/€/£1,500,000 = 26.7%
or
€/£40/€/£15 = 26.7%
(b)
2
Breakeven point
The breakeven point is the number of sales units (or revenue) at
which a product does not make a profit or a loss. It can be found by
dividing fixed costs by contribution per unit.
2
Breakeven point: €/£260,000/€/£4 = 65,000 units.
Breakeven turnover: 65,000 units x €/£15 = €/£975,000.
(c)
The margin of safety is the difference between the breakeven sales
and the actual sales as a percentage of actual sales.
Margin of safety: 100,000units - 65,000 units = 35,000 units
100,000 units =
35%
(d)
2
Margin of safety
2
1
Activity to generate a certain profit
Page 8 of 19
Management Acc S2015
Management Accounting
May 2015
Target profit €/£1,500,000 x 20% = €/£300,000
2nd Year Paper
4
Activity required: €/£260,000 + €/£300,000
€/£4
140,000 units
(e) Limitations of CVP analysis
i. Selling price remains constant and will not change as volume
changes.
ii. Costs are linear throughout the entire relevant range.
iii. Costs can be accurately classified as either variable as fixed.
iv. The variable element of costs is assumed to remain constant per
unit and the fixed cost element is assumed to remain constant in total
over the entire relevant range.
1
1
1
1
20
Page 9 of 19
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
Examiner Comments on Question Three
This question was compulsory and tested the candidate’s knowledge of activity based costing.
Part (a) required an explanation of cost pools and cost drivers. This part was very well answered with students
demonstrating a comprehensive knowledge of those terms and the difference between them.
Part (b) required candidates to calculate the cost per unit of a product using the traditional method of absorption
costing. Candidates demonstrated a poor command of the traditional method of accounting. Many candidates were
unable to calculate the overhead absorption rate per labour hour. Others did calculate the overhead absorption rate
per hour correctly but failed to then convert it to a cost per unit.
Part (c) required candidates to calculate the cost per unit of a product using an activity based costing approach. This
part of the question was exceptionally well answered in the vast majority of cases.
Part (d) required candidates to explain why the costs are different under the traditional method and the activity
based costing method.
This part was not well answered and displayed that even though many candidates had the ability to perform the
previous calculations, there was a lack of understanding as to the reason for the cost per unit difference under both
methods.
SOLUTION 3:
Total
Marks
Allocated
(a) Cost pool
An activity cost pool is the total of all costs associated with a particular business activity.
Activity costs are itemized for company leaders to use in making financial decisions. Under
ABC the areas where the overheads were caused is the cost pools.
1.5
Cost driver
This is the measure of activity which causes overhead costs. In ABC products consume
activities and activities consume resources. A cost driver is any factor which causes a
change in the cost of an activity.
1.5
Page 10 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
(a) Cost per unit using absorption
costing principles
Product
A
3
Labour hours per unit
Product
B
Product C
3
2
Number of units produced
1,500
2,500
14,000
Total labour hours
4,500
7,500
28,000
Total
40,000
Overhead absorption rate:
€/£700,000/40,000 hrs = €/£17.50 per
labour hour
2
(a) Cost per unit using
activity based costing
principles
Overhead Costs
Cost Driver
Set-Ups
€/£
235,000
1,175
no Set ups
Machinery
155,200
90,500
Material Movements
103,000
242
Inspections
206,800
2,000
No set ups
Mat.
Movements
No.
Inspections
Total Production overhead
700,000
Cost per
Driver
€/£
200
per set up
1
1.7
per mch. Hour (*)
1
425.6
per mat. Movt. (*)
103.4
per inspection (*)
(* - rounded)
Page 11 of 19
Management Acc S2015
1
1
Management Accounting
Overhead costs
Set-ups
Machinery
Material movements
Inspections
Total overhead
Number of units produced
Overhead per unit
COST PER UNIT
Direct materials
Direct labour
Overheads
Cost per unit
2nd Year Paper
May 2015
Product A
€/£
36,000
2,550
10,214
31,020
79,784
Product B
€/£
66,000
8,500
17,875
37,224
129,599
Product C
€/£
133,000
142,800
74,906
138,556
489,262
1,500
53.2
2,500
51.8
14,000
34.9
Product A
€/£
40.0
20.0
53.2
113.2
Product B
€/£
24.0
25.0
51.8
100.8
Product C
€/£
50.0
28.0
34.9
112.9
1
1
1
1
2
(a) Explanation of the difference between the cost per unit using traditional
costing and activity based costing principles
Cost per unit -Traditional
Cost per unit- ABC
Product A
€/£
112.5
113.2
0.7
Product B
€/£
101.5
100.8
0.7
Product C
€/£
113.0
112.9
0.1
Product A has the highest cost per unit under ABC. This is because it has the greater number of
activities and it is activities that cause costs per ABC.
2
Product B has the lowest cost per unit under ABC. This is because it has the lowest number of
activities and it is activities that cause costs per ABC.
Page 12 of 19
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
Examiner Comments on Question Four
This question was optional and tested the candidate’s knowledge of the difference between certain management
accounting terms. This question was generally well answered with candidates exhibiting a thorough understanding
of management accounting terms and the difference between them.
Those candidates that did not score highly in this question merely explained each term individually rather than
explaining the actual difference between the terms.
SOLUTION 4:
Absorption and marginal costing
Under Absorption costing fixed production costs are incorporated as part of the cost of a unit of output in
the calculation of cost of sales. Therefore it is treated as a product cost.
Under marginal costing a unit of output is costed using only variable costs. The total fixed costs incurred for
the period are written off and therefore treated as period costs. Therefore the inventory valuations and profit
will be different under both methods. The difference in profits is the difference between the opening and
closing inventories multiplied by the fixed overhead rate per unit.
FIFO and LIFO methods of inventory valuation
The FIFO method assumes that the first items of materials received into the stores are the first materials to
be issued from stores and into production. This means that the oldest materials are expected to be issued
first.
The LIFO method assumes that the most recent or last items of materials received into the stores are the first
materials to be issued from stores and into production. This means that the most recently or newest
materials are expected to be issued first.
Process costing and batch costing
Process costing is the costing method applicable where goods or services result from a sequence of
continuous or repetitive operations or processes. Costs are averaged over the units produced during the
period". Process costing is suitable for industries producing homogeneous products and where production is a
continuous flow. A process can be referred to as the sub-unit of an organization specifically defined for cost
collection purpose.
Batch costing is a system where the cost of making a product is calculated by the batch rather than by the
individual item, including comparing the costs of different sized batches made under different conditions.
Cost centre and profit centre
A cost centre is a division of a company that does not produce direct profit and adds to the cost of running a
company. Examples of cost centres include research and development departments, marketing departments,
help desks and customer service/contact centres.
A profit centre is a division of a company that is treated as a separate business. Thus profits or losses for a
profit center are calculated separately. A profit center manager is held accountable for both revenues, and
costs (expenses), and therefore, profits. What this means in terms of managerial responsibilities is that the
manager has to drive the sales revenue generating activities which leads to cash inflows and at the same time
control the cost (cash outflows) causing activities. This makes the profit center management more
challenging than cost centre management. Profit centre management is equivalent to running an independent
business because a profit center business unit or department is treated as a distinct entity enabling revenues
and expenses to be determined and its profitability to be measured.
Page 13 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
Profit and cash flow
Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing
activities.
Profit, also called net income, is what remains from sales revenue after all the firm's expenses are subtracted.
Cash flow is actually more important for the small business owner to focus on than profit. Companies can
make a profit but still have a negative cash flow and not be able to pay their bills. Not recognising this
difference is one of the biggest mistakes a small business owner can make. Small business owners need to
prepare monthly cash budgets in order to make sure they know their cash flow positions.
Total Marks Allocated
5 marks per part
Examiner Comments on Question Five
This question was optional and tested the candidate’s knowledge of decision making.
In order to perform well in this question candidates required a strong grasp of relevant costs for decision making.
This question proved very unpopular with candidates. Many did not attempt it. This area of the syllabus is covered
in depth in the study text and it also features in my sample papers.
Part (a) required candidates to recommend if hockey sticks should be produced internally or purchased externally. It
was clear that many candidates did not understand the concept of relevant costs.
Part (b) requested four qualitative factors that the company should consider before making a final decision. This
part was exceptionally well answered with most candidates gaining full marks.
SOLUTION 5
(a)
Calculation of relevant cost of producing the hockey sticks internally
€/£
Depreciation
Total
Marks
Allocated
1
Material Carbon
10,000 kg @ current purchase price of
€/£9.50 per kg
Material Kevlan
8,000 kg @ current selling price of €/£10.5
per kg
Material Resin
6,000kg @ disposal cost saved of €/£0.80
per kg
Skilled Direct Labour
95,000
2
84,000
2
-4,800
2
0
2
Unskilled Direct Labour
1,900
2
Hire of equipment
1,500
2
Fixed Overheads
8,300
2
Cost to produce internally
185,900
Cost to purchase externally
193,000
1
On the basis of the relevant costing exercise it appears more cost efficient to produce the sticks
internally.
Page 14 of 19
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
Notes
Material Carbon
As Material Carbon is used in virtually all of the company's production processes, any stock which is
utilised will have to be replaced at the current purchase price and therefore the current purchase price of
€/£9.50 should be used to determine the relevant cost of material carbon consumed.
Material Kevlan
Material Kevlan has no alternative use within Arena plc. and therefore it may be assumed that if it is
not required for the hockey sticks management will act rationally to optimise profitability and avail of
the opportunity to sell it at the current selling price of €10.50 per kg.
Skilled labour
As there is sufficient idle skilled labour hours to meet the requirements for the production of the hockey
sticks no extra charge will be incurred if the hockey sticks are produced and therefore the relevant cost
of skilled labour is zero.
Unskilled labour
The costs associated with unskilled direct labour are all relevant as unskilled labourers are employed as
required and therefore these costs will only be incurred if the hockey sticks are produced.
Depreciation
Depreciation costs are always irrelevant, how the contribution foregone as a result of not being able to
hire out the equipment is an opportunity cost incurred as a consequence of producing the hockey
sticks.
Fixed overheads
Only the €/£8,300 in fixed overheads which would specifically be incurred as a consequence of
producing the hockey sticks are relevant costs.
(b) Others answers to this question would be acceptable. These include the following:
(i)
Has the external supplier the skill to produce the sticks?
1
(ii) Will they be of a high quality because this is valued customer?
(iii)
1
How will staff react to the opportunity of engaging in the production of the hockey sticks?
(iv) Would the time involved in producing the sticks leave less time for the production of other
products?
Page 15 of 19
1
Management Acc S2015
1
1
Management Accounting
2nd Year Paper
May 2015
Examiner Comments on Question Six
This question was optional and tested the candidate’s knowledge of standard costing and variance analysis. It is
obvious from the standard of answers that standard costing and variance analysis is a problem area for students.
This has been a consistent pattern over the past few sittings despite the fact that this area is comprehensively
covered in the study text. It has also been examined at every sitting to date and also features prominently in the
sample papers.
Part (a) of the question required candidates to calculate variances and then prepare reconciliation between budgeted
and actual profit.
The standard of answers was very mixed. In relation to the calculations of the variances many candidates scored full
marks whilst others seemed to have difficulty with the calculation of the material usage, labour efficiency and
variable overhead efficiency variances.
Most candidates did not perform well in the production of an operating statement which was required in order to
reconcile budgeted with actual profit. This applied even in the case of students that performed well in the
calculation of the variances.
Part (b) of the question required candidates to outline two benefits and two limitations of standard costing. This
question was exceptionally well answered by the majority of candidates including those that did not perform well in
part (a).
SOLUTION 6
Sales price variance
Total
Marks
Allocated
€/£
7,500 units should have revenue of
(€/£85)
7,500 units did have revenue of
Variance
637,500
685,000
47,500F
1
Sales volume variance
Units
Budgeted sales volume
8,000
Actual sales volume
7,500
500A
x standard profit per unit €/£15
Variance
€/£7,500A
1
Material price variance
€/£
36,000 kg should have cost (x €/£5)
180,000
36,000 kg did cost
208,800
Variance
28,800A
1
Material usage variance
Kg
7,500 units should have used (7,500 x
4)
30,000
Page 16 of 19
Management Acc S2015
Management Accounting
7,500 units did use
2nd Year Paper
May 2015
36,000
6,000A
x standard cost per kg €/£5
Variance
€/£30,000A
1
Labour rate variance
€/£
18,000 hours should have cost
(18,000 x €/£9)
18,000 hours did cost
Variance
162,000
158,600
3,400F
1
Labour efficiency variance
Hrs.
7,500 units should have used (7,500 x
2))
7,500 units did use
15,000
18,000
3,000A
x standard cost per hr. €/£9.00
Variance
€/£27,000A
1
Variable overhead rate variance
€/£
18,000 hours should have cost
(18,000 x €/£11)
18,000 hours did cost
Variance
198,000
172,000
26,000F
1
Variable overhead efficiency
variance
Hrs.
7,500 units should have used (7,500 x
2))
7,500 units did use
15,000
18,000
3,000A
x standard cost per hr. €/£11.00
Variance
€/£33,000A
1
Fixed overhead expenditure
variance
Budgeted fixed overhead
€/£
80,000
Actual fixed overhead
95,000
Variance
15,000A
1
Fixed overhead volume variance
Hrs
Budgeted output 8,000 units x 2 hrs
16,000
Page 17 of 19
Management Acc S2015
Management Accounting
2nd Year Paper
May 2015
Actual output 7,500 units x 2 hrs
15,000
1,000
x standard rate per unit €/£5.00
€/£5,000A
Variance
1
Reconciliation of actual with
budgeted profit
€/£
€/£
Budgeted profit (8,000 x €/£15)
120,000
Sales volume variance
7,500A
Budgeted profit on actual sales
units
Revenue variance
Sales price
47,500F
28,800A
Direct material usage
30,000A
3,400F
Labour efficiency
Variable overhead rate
27,000A
26,000F
Variable overhead efficiency
33,000A
Fixed overhead expenditure
15,000A
Fixed overhead volume
6
112,500
Cost variances
Direct material price
Labour rate
€/£
________
_5,000 A
76,900F
136,300A
Actual profit
Page 18 of 19
61,900
A
50,600
Management Acc S2015
Management Accounting
May 2015
2nd Year Paper
(b) The benefits and limitations of a standard costing system
Benefits
i.
ii.
iii.
iv.
The use of standards costs is fundamental to the management by objectives approach. When costs
are out of control then managers can divert their attention to them.
They provide benchmarks for employees against which they can monitor their performance.
They can simplify book-keeping. Instead of recording actual costs the company book-keeper can
record standard costs.
Standard costs fit naturally in an integrated system of responsibility accounting.
Total Marks Allocated
2 marks
Limitations
i.
Variances can only be calculated after they have occurred.
ii.
Sometimes standards can be unattainable which causes negative morale amongst employees.
iii.
Labour rate and efficiency variances assume that labour cost is variable whereas it can be fixed.
iv.
Sometimes expensive to set up and manage.
(Other relevant answers will be accepted)
Total Marks Allocated
2 marks
Page 19 of 19
Management Acc S2015