1
June 2013 exam
(5MA) SME management accounting and financial controls
Instructions to candidates
1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes
reading time.
2. This is a closed book examination.
3. Use of a silent, non-programmable calculator, which is NOT part of a
mobile phone or any other device capable of communication, is allowed.
4. Put your student number on the top of each answer page.
5. Start each answer on a new page.
6. Include any workings.
Answer any 4 questions
25 marks available per question
©IFA SME management accounting and financial controls June 2013
2
Question 1
Zeta Company is a small company which specialises in producing household equipment and
kitchen utensils. The company is developing a new range of kitchen trays. The company is
currently having disagreements internally with regard to the selling price for the trays. As a
potential selling price is yet to be determined, costing for the new trays has not yet been
prepared.
The finance director thinks that the price of the trays should be set low, in order to
encourage high sales volume. The production director believes that the company should
invest in high quality materials and devote significant time to the design phase, so that a
high selling price can be set for the trays. Market research suggests that the average price
for a kitchen tray is $9 per tray. The managing director has agreed with the finance director,
and the company is now seeking to set a low price. They have stated that they want to set
their selling price 10% lower than the average market price. Zeta Company expects to
achieve a 25% margin on all of its products.
Required:
(a)
Explain the term ‘target costing’ and calculate the target cost to achieve the
expected 25% profit margin.
(6 marks)
The company have now researched all appropriate costs of producing the product, but the
forecasted cost is higher than the desired target cost. The profit margin cannot be
compromised and the selling price cannot be increased. Zeta Company are looking to
operate a scheme of value analysis and value engineering to ensure the target cost can be
met without compromising the quality of the product.
(b)
Prepare a report to the finance director explaining the steps that Zeta Company
would need to take to apply value analysis and value engineering to the new
product. Your report should consider the term ‘value’ and should also focus on the
different types of costs.
(15 marks)
(c)
Describe an internal and external quality cost that Zeta Company might face with
regards to this new product
(4 marks)
(Total 25 marks)
©IFA SME management accounting and financial controls June 2013
3
Intentionally left blank
©IFA SME management accounting and financial controls June 2013
4
Question 2
Alpha Company prepares its periodic budgets using absorption costing. The company
revised the budget during the period due to an unexpected sales order.
The original and revised budgets, along with the actual results have been provided.
Original budget Revised budget
Actual
Units produced
20,000
21,000
22,200
Units sold
20,000
21,000
21,500
$
$
$
2,000,000
2,100,000
2,257,500
-
-
-
Material costs
160,000
168,000
188,700
Labour costs
120,000
126,000
133,200
Production overheads
55,000
57,000
58,620
Total production cost
335,000
351,000
380,520
-
-
11,998
Cost of sales
335,000
351,000
368,522
Gross profit
1,665,000
1,749,000
1,888,978
Distribution costs
220,000
220,000
265,000
Administration costs
216,000
216,000
210,000
1,229,000
1,313,000
1,413,978
Sales revenue
Cost of sales
Opening inventory
Closing inventory
Non production costs
Net profit
©IFA SME management accounting and financial controls June 2013
5
Notes
(i) Material and labour costs are variable.
(ii) Production overheads are semi-variable.
(iii) Closing inventory is valued at full absorption cost per unit where appropriate.
(iv) Production overheads are absorbed on a units basis.
Required:
(a)
Prepare a flexible budget statement, with variances, applying marginal costing
principles. The statement should apply the correct treatment of production and nonproduction costs, and closing inventories.
(12 marks)
(b)
Give reasons why the flexible budget variances may have occurred.
(8 marks)
(c)
Explain the principle of activity based budgeting and how it differs to traditional
absorption costing.
(5 marks)
(Total 25 marks)
©IFA SME management accounting and financial controls June 2013
6
Question 3
Beta is a small company. It operates a standard cost system using absorption costing, where
both variable and fixed overheads are absorbed on labour hours. The budgeted number of
units was 1,800. The company produces one product; Product X. Cost cards are prepared at
the start of the period.
The forecasted selling price per Product X is $200
Product
Quantity
Cost per unit $
6 kgs
8 per kg
48.00
Labour
1.50 hours
16 per hour
24.00
Variable overheads
1.50 hours
9 per hour
13.50
Fixed overheads
1.50 hours
10 per hour
15.00
Component A
Standard cost per unit
Total $
$100.50
Actual number of units produced and sold of Product X = 2,000 units
The total cost of Component A was $75,000 and 9,900kg of material was purchased.
The total cost of labour was $48,000 and 2,300 hours were paid.
The total cost of variable overheads was $38,000
Fixed overheads were $30,000
9,000kg of Component A was used in production.
There were no opening or closing inventories of finished goods.
There were 300 hours of idle time.
Actual sales revenue was $420,000
Required:
(a)
(b)
Calculate the following variances for the period:
(i) Material price variance.
(ii) Material usage variance.
(iii) Closing stock of raw materials variance.
(iv) Labour rate variance.
(v) Labour efficiency variance.
(vi) Idle time variance.
(vii) Fixed overhead expenditure variance.
(viii) Sales price variance.
(ix) Sales volume variance.
(18 marks)
Briefly explain the purpose of material mix and yield variances. You do not need to
prepare any calculations.
(4 marks)
©IFA SME management accounting and financial controls June 2013
7
The standard cost for labour was calculated before annual pay rises were taken into
account. The average pay rise was 6%.
(c)
Recalculate the labour rate variance calculating how much of the variance is due to
the pay increase.
(3 marks)
(Total 25 marks)
Question 4
©IFA SME management accounting and financial controls June 2013
8
Internal financial controls are necessary to help an organisation accomplish specific
goals and objectives. They also contribute to preventing and detecting fraud and to
the protection of an organisation’s physical and intangible resources.
Required:
Prepare a report for a managing director working for a newly established company,
regarding the internal controls required within his organisation. The report should
include an explanation of:
(i) responses to risk: avoid, mitigate and transfer
(ii) compliance risk; stating the effective internal controls required
(iii) operational risk; stating the effective internal controls required
(iv) management information systems (MIS) and their benefit to small and
medium-sized enterprises (SMEs).
(Total 25 marks)
Question 5
©IFA SME management accounting and financial controls June 2013
9
A small company, in the car sales industry, is reviewing the way in which expenses are
claimed by and reimbursed to employees. Employees are provided with credit cards by the
company and all business expenses are paid using the credit card. Where a credit card has
reached its limit, or when an employee has left the credit card at home, employees use their
personal credit or debit cards, and then make an expense claim for reimbursement.
The finance director is concerned that there is a lack of internal controls over the process
and that there may also be accounting and tax implications.
Required:
(a)
Discuss the control objectives that should be achieved by the company’s expense
system. Your answer should refer to the methods that can be used to verify the
validity of the expense claims, authorisation and any other controls that could be
implemented to improve the process. You should also state the possible fraud risk
and any possible regulatory accounting or tax implications of the current system.
(20 marks)
(b)
State the additional costs to the employer of implementing better controls and the
possible costs if they choose not to improve their system.
(5 marks)
(Total 25 marks)
©IFA SME management accounting and financial controls June 2013