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December 2012 examination
P3. SME Management Accounting and Financial Control
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 candidate number on the top of each answer page.
5. Start each new question on a new page.
6. Include any workings.
Answer ANY FOUR questions
25 marks available per question
©IFA SME management accounting and financial control (December 2012)
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Question 1
CountMicro is a medium size company which competes with other similar companies in
manufacturing accounting software packages. It has recently launched its new accounting
software called ‘Fit Your Company’.
The Chief Operations Officer of CountMicro has been interviewed recently and was asked
“What is the secret behind the company’s success?” She replied, “Our company’s mission
statement includes the statement ‘…quality and price will always come first’”.
The product ‘Fit Your Company’ is unique and has sold over 2,000,000 in the last six months.
The Sales Director has also forecast that, by the end of the year, total sales will be
4,500,000. The company is very careful with the resources it uses in the production of new
products and ‘Fit Your Company’ is environmentally friendly.
One of the company’s strategic policies is to ensure a continuous total quality management
system operates in all functional areas of the business. The result of a survey of customers
who use the new product found that, although the product is reliable, it is not as quick in
processing data as would be expected.
The workforce employed by the company is very skilled and innovative, always looking to
create new products. The employees are keen to rectify the problem highlighted by the
customers’ survey and requested that the product be returned for repairs or replacement as
soon as possible.
Required:
(a) Write a report to the Chief Operations Officer discussing the key benefits of total quality
management (TQM) and also the quality assurance procedures that should be
implemented by the company relating to the case study above.
(10 marks)
(b) Identify how CountMicro is influenced by its external environment (using the PEST
model). You should also explain how the company has contributed to society and the
environment.
(5 marks)
(c) Cost reduction is a key component of being competitive. Explain the purpose of target
costing in the production process.
(5 marks)
(d) Compare the traditional absorption costing approach to the target cost approach for
pricing a product.
(5 marks)
(Total 25 marks)
©IFA SME management accounting and financial control (December 2012)
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©IFA SME management accounting and financial control (December 2012)
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Question 2
The Company Secretary of MuzicSound Studio, a medium size company, convened a
meeting of the Board of Directors to assess the performance against its budgetary control
targets for the quarter to 30 September 2011.
Information relating to the budgeted operating statement for the quarter to 30 September
2011 and the actual outcomes were as follows:
1.
The company budgeted to sell two types of CDs: 675,000 units of CD A and 1,125,000
units of CD B, at an average selling price of $30 per CD. The actual sales of each product
were 5% less than budgeted. There is no selling price variance.
2.
The company’s budgeted variable costs were:
$,000
Material
7,200
Labour
9,648
Production overhead
1,656
Distribution cost
2,160
Administrative cost
1,710
3.
The company’s actual variable costs were:
Material: $6,703,000
Labour: $9,624,000
Production overhead: $1,510,000
Distribution cost: The same per unit as the original budget.
Administrative cost: 102% of the flexed budgeted administrative cost.
4.
The company’s budgeted fixed overheads comprise: Labour $3,955,000,
Distribution cost $2,850,000, Production cost $2,000,000 and Administrative cost
$5,250,000. The actual fixed costs were the same as budgeted.
©IFA SME management accounting and financial control (December 2012)
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Required:
(a) Determine the relevant variances after flexing the original budgeted operating
statement for the quarter ended 30 September 2011 and provide the Board of Directors
with a commentary on those variances. (Round to the nearest whole number).
(10 marks)
It has come to the Production Manager’s attention that the stock control policy that was
being used throughout the period was not effective. The business did not order as much
surfacing material from their suppliers as necessary. This was the reason that fewer units
were sold than expected. The company shared the shortfall of the material evenly between
the two products, resulting in the 5% drop in sales for both products. The Finance Director
has now stated that this may not have been the most profitable strategy.
Both products use the same surfacing material. Material usage was 2 grams for each CD A
and 0.75 grams for each CD B. The contribution was $6.59 each for CD A and $10.98 each for
CD B. The supplier delivered 2,084,063 grams of material.
The budgeted sales units for CD B were the maximum units that could be sold, as it was a
fixed contract to one customer.
(b) Determine the contribution per limiting factor for each CD and suggest which product
the company should have produced first to maximise profit and how many of each
product should have been made.
(9 marks)
(c) Discuss the strategic usefulness of Activity Based Budgeting (ABB) and Zero Based
Budgeting (ZBB) for organisations trying to improve their competitive position.
(6 marks)
(Total 25 marks)
©IFA SME management accounting and financial control (December 2012)
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Question 3
DriedFruit4you is a medium size company and its main business operation is to provide the
wholesale food market with a variety of pre-packed dried fruits.
Pre-packing helps to reduce waste and non-value added costs are eliminated from its
products.
You are one of the Management Accountants and part of your role is to control costs,
through the company’s standard costing system, reporting on variances to the Head
Management Accountant on a monthly basis.
The following information for the month of January 2012 is available:
1.
Standard costs
(a) Variable sales overheads were $95,000
(b) Labour cost related to the production was $743,400 for 82,600 hours
(c) Fixed cost overheads were $76,700
(d) Material cost related to production was $424,800 for 35,400 kilograms
(e) Variable overheads related to production were $396,480 based on labour hours
(f) Administration costs were $230,100.
2.
Actual costs
(a) Variable overheads related to production were $5.84 absorbed based on labour
hours
(b) Fixed cost overheads increased by 2.5% compared to standard costs
(c) Variable sales overheads increased by 1.75% compared to standard costs
(d) Administration costs remained unchanged
(e) Labour cost related to the production was $10.95 per hour for 80,240 hours
(f) Material cost related to production was $14.22 for 36,000 kilograms.
During the month the average cost of material was $15.00 per kilograms.
3.
Sales
(a) Budgeted sales were 3,540,000 pre-packed dried fruits at an average price of $0.75
per pack
(b) Actual sales were:
(i) 2,260,000 pre-packed fruits at $0.75
(ii) 885,000 pre-packed fruits at $0.65
(iii) 395,000 pre-packed fruits at $0.60.
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Required:
a) Prepare a statement showing the budgeted and actual production costs, gross profit
and net profit or loss for the month of January 2012.
(8 marks)
b) Determine the following variances for January 2012:
i. Sales variance for price
ii. Operational and planning variances for material cost.
(7 marks)
c) Evaluate the possible reasons for the variances to the Head Management
Accountant in (b) above.
(4 marks)
d) The application of a standard costing system in some service organisations is not
easy to implement. Briefly explain two factors for this and how they can be resolved.
(6 marks)
(Total 25 marks)
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Question 4
The Enron case in 2001 highlighted that without effective internal control systems
implemented in companies, the efficiency of business operations is at very high risk.
The Corporate Governance team of PubLyshers, a medium size company in the media
industry, is reviewing the effectiveness of the company’s reporting and information output
from the management information system (MIS).
Required:
(a) All companies must ensure that a control system is in place to minimise or eliminate
fraudulent activities. Advise the Non-Executive Directors of six financial controls that
could be used to prevent fraud.
(12 marks)
(b) Advise the Corporate Governance team of the variety of sources from which
information can be obtained through MIS to enable them to monitor the effectiveness
of controls.
(6 marks)
(c) Outsourcing of the internal audit function of an organisation is becoming a service used
by many organisations. Advise the Non-Executive Directors on the potential issues
associated with using outsourced services instead of an internal audit function.
(7 marks)
(Total 25 marks)
©IFA SME management accounting and financial control (December 2012)
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Question 5
ComfortTravel is a medium size company operating in the transport industry.
The company’s internal audit department operates an efficient system of control over its
payroll through implementing controls for authorisation and recording.
An extract from the Income statement for the year ended 29 February 2012:
Wages and salaries
$000
525
An extract from the statement of financial statement as at 29 February 2012:
Current liabilities
HM Revenue and customs
$000
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The total wages and salaries for the year is shown in the extracted income statement,
costing the company $525,000 including all wages and employers’ National Insurance
Contribution (NIC). The $5,000 represents employers' and employees’ NIC and employee
income tax outstanding at the year-end in the extracted statement of financial position.
Required:
(a) Suggest the control objectives that would be expected for the payroll system. Your
answer should refer to the methods that can be used to verify the accuracy of the
income statement charge and the year-end employee income tax and National
Insurance Contribution liability stated above.
(20 marks)
(b) Explain the usefulness of the internal audit function in relation to payroll systems in a
company.
(5 marks)
(Total 25 marks)
©IFA SME management accounting and financial control (December 2012)