Foundation Level

Management Accounting Fundamentals

2
INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions You are allowed three hours to answer this question paper.

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21 November 2001 Day 3 afternoon

Answer the ONE question in section A (this has 25 sub-questions, and is on pages 2 8). Answer the ONE question in section B (this is on page 9) Answer ONE question ONLY from section C (these questions are on pages 10 and 11). Write your examination number in the boxes provided on the front of the answer book. Write FMAF on the line marked "Subject" on the front of the answer book. Write your examination number on the special answer sheet for section A. Detach the sheet from the booklet and insert it into your answer book before you hand this in. Do NOT write your name or your student registration number anywhere on your answer book. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.

The Chartered Institute of Management Accountants 2001

SECTION A 50 MARKS ANSWER ALL TWENTY-FIVE SUB-QUESTIONS 2 MARKS EACH

Each of the sub-questions numbered from 1.1 to 1.25 inclusive, given below, has only ONE correct answer. Question One 1.1 A B C D A standard cost is the planned unit cost of a product, component or service in a period. the budgeted cost ascribed to the level of activity achieved in a budget centre in a control period. the budgeted production cost ascribed to the level of activity in a budget period. the budgeted non-production cost for a product, component or service in a period.

1.2 A B C D

The term budget slack refers to the extended lead time between the preparation of the functional budgets and the master budget. difference between the budgeted output and the breakeven output. additional capacity available which can be budgeted for. deliberate over-estimation of costs and under-estimation of revenues in a budget.

The following information is required for sub-questions 1.3 and 1.4 RS Ltd is currently preparing the production budget for Product A and the material purchase budget for material X for the forthcoming year. Each unit of Product A requires 5 kgs of material X. The anticipated opening stock for Product A is 5,000 units and the company wishes to increase the closing stock by 30% by the end of the year. The anticipated opening stock for material X is 50,000 kgs and in order to avoid stockouts the required closing stock has been increased to 60,000 kgs. The Sales Director has confirmed a sales requirement of 70,000 units of Product A. How many units of Product A will need to be produced? 68,500 units. B 71,500 units. C 76,500 units. D 80,000 units.

1.3 A

1.4 A

What will be the purchases budget for material X? 347,500 kgs. B 350,000 kgs. C 357,500 kgs. D 367,500 kgs.

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1.5

S Ltd absorbs overheads on the basis of direct labour hours. Details of budgeted and actual figures for the latest period are as follows: Overheads Output Labour hours Budget 350,000 70,000 units 35,000 hours Actual 400,000 60,000 units 30,000 hours

Which ONE of the following statements is correct? A B C D Overheads were 50,000 over-absorbed. Overheads were 50,000 under-absorbed. Overheads were 100,000 over-absorbed. Overheads were 100,000 under-absorbed.

1.6

PP Ltd has recorded the following distribution costs during the last three months: Month 1 2 3 Volume units 32,000 40,000 50,000 Total cost 100,000 120,000 145,000

What will be the distribution costs (to the nearest ) in month 4 when the expected activity level is 42,500 units? A 126,250. B 127,500. C 129,861. D 132,813.

The following information is required for sub-questions 1.7 and 1.8 ZK Ltd has been asked to quote a price for a special job that must be completed within one week. The job requires a total of 100 skilled labour hours and 50 unskilled labour hours. The current employees are paid a guaranteed minimum wage of 525 for skilled workers and 280 for unskilled workers for a 35-hour week. Currently, skilled labour has spare capacity amounting to 75 labour hours each week and unskilled labour has spare capacity amounting to 100 labour hours each week. Additional skilled workers and unskilled workers can be employed and paid by the hour at rates based on the wages paid to the current workers. The materials required for the job are currently held in stock at a book value of 5,000. The materials are regularly used by ZK Ltd and the current replacement cost for the materials is 4,500. The total scrap value of the materials is 1,000. What is the total relevant cost to ZK Ltd of using skilled and unskilled labour on this job? Nil. B 375. C 775. D 1,540.

1.7 A

1.8 A

What is the relevant cost to ZK Ltd of using the materials in stock on this job? 1,000. B 3,500. C 4,500. D 5,000.

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1.9 A B C D

Which ONE of the following statements is true? The total variable cost varies with a measure of activity. A variable cost is an unavoidable cost. A variable cost is not relevant for decision-making. A variable cost becomes fixed in the long run.

1.10

ABC Ltd operates an integrated cost accounting system. The fixed production overhead account at 31 July 2001, which is ABC Ltds year end, showed the following information: Fixed production overhead account Trade creditors Bank Depreciation Salaries Materials 50,000 20,000 5,000 40,000 10,000 125,000 Work-in-progress ? 120,000 5,000

125,000

The 5,000 credit entry represents the value of the transfer to the A B C D profit and loss account for the under-recovery of fixed production overheads. profit and loss account for the over-recovery of fixed production overheads. work-in-progress account for the under-recovery of fixed production overheads. following period.

1.11

The following budgeted information is available for a company that manufactures four types of specialist paints: Product W per litre 2000 960 360 680 12 Product X per litre 1500 600 300 600 10 Product Y per litre 1500 960 2.10 330 7 Product Z per litre 1750 850 210 690 11

Selling price Variable overhead Fixed overhead Profit Machine hours per unit

All four products use the same machine. In a period when machine hours are in short supply, the product that makes the most profitable use of machine hours is A product W. B product X. C product Y. D product Z.

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1.12

For decision-making purposes, which of the following are relevant costs? (i) (ii) (iii) (iv) Avoidable cost Future cost Opportunity cost Differential cost

A B C D

(i), (ii), (iii) and (iv). (i) and (ii) only. (ii) and (iii) only. (i) and (iv) only.

The following information is required for sub-questions 1.13 to 1.15 A company produces a single product that passes through two processes. The details for process 1 are as follows: Materials input Direct labour Production overheads 20,000 kg at 250 per kg 15,000 150% of direct labour

Normal losses are 15% of input in process 1 and without further processing any losses can be sold as scrap for 1 per kg. The output for the period was 18,500 kg from process 1. There was no work-in-progress at the beginning or end of the period.

1.13

What value (to the nearest ) will be credited to the process 1 account in respect of the normal loss? Nil. B 3,000. C 4,070. D 5,250.

1.14

What is the value (to the nearest ) of the abnormal loss/gain for the period for process 1? 6,104. B 6,563. C 7,257. D 7,456.

1.15 A

What is the value (to the nearest ) of the output to process 2? 88,813. B 90,604. C 91,956. D 94,063.

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1.16

A joint product is (i) (ii) (iii) the incidental product produced as a result of a process. not saleable at the point of separation and must always be processed further. one of two or more products separated during processing, each having a significant sales value.

Which of the above is/are correct? A B C D (iii) only. (i) and (iii) only. (ii) and (iii) only. (i), (ii) and (iii).

1.17

BH Ltd is currently undertaking a contract to build an apartment block. The contract commenced on 1 January 2001 and is expected to take thirteen months to complete. The contract value is 54 million. The contractors financial year ends on 30 September. The contract account for the building of the apartment block indicates the following situation at 30 September 2001: Value of work certified Costs incurred to date Future costs to completion 30 million 20 million 28 million

The amount of profits to be recognised is based on the value of work certified to date. It is company policy not to recognise profit on contracts unless the value certified is at least 50% of the total contract value. The maximum amount of profit/loss for the contract that can be taken to the profit and loss account for the year ended 30 September 2001 is A nil. B 199 million. C 333 million. D 555 million.

1.18

XX Ltd absorbs overheads based on units produced. In one period, 23,000 units were produced, actual overheads were 276,000 and there was 46,000 under-absorption.

The budgeted overhead absorption rate per unit was A 10. B 12. C 13. D 14.

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1.19

RD Limited uses the LIFO system for valuing material issues from stores to production. The Materials account had an opening value of 850 on 1 October 2001: 500 units at 120 purchased 12 September 2001 200 units at 125 purchased 27 September 2001 The following receipts and issues were recorded during October: 8 October 2001 20 October 2001 29 October 2001 Receipts 600 units Receipts 600 units Issues 130 per unit 150 per unit 1,500 units

What was the total value (to the nearest ) of the issues on 29 October? A 1,930. B 1,969. C 1,997. D 2,050.

1.20 A B C D

During a period of rising prices, which ONE of the following statements is correct? The LIFO method will produce lower profits than the FIFO method, and lower closing stock values. The LIFO method will produce lower profits than the FIFO method, and higher closing stock values. The FIFO method will produce lower profits than the LIFO method, and lower closing stock values. The FIFO method will produce lower profits than the LIFO method, and higher closing stock values.

1.21 A B C D

The economic order quantity is the order quantity which minimises the total of stock ordering and holding costs. the order quantity used for special ordering purposes. the order quantity used for buffer stock. the order quantity used to avoid stock outs.

1.22

In a standard cost bookkeeping system, when the actual material price exceeds the standard price, the double entry to record the difference in price is debit the material price variance account and credit the raw material control account. credit the material price variance account and debit the raw material control account. debit the material price variance account and credit the work-in-progress account. credit the material price variance account and debit the work-in-progress account.

A B C D

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1.23 A B C D

An overhead absorption rate is used to allocate overhead costs to cost centres. attribute overheads to products. spread indirect cost across a number of cost centres. control overheads.

1.24

A company operates a premium bonus system by which employees receive a bonus of 75% of the time saved compared with a standard time allowance (at the normal hourly rate). Details relating to employee X are shown below: Employee X Actual hours worked Hourly rate of pay Output achieved Standard time allowed (per unit of Y) 42 hours 10 400 units of product Y 7 minutes

The bonus payable (to the nearest ) to employee X is A 35. B 47. C 70. D 82.

1.25

HD Ltd currently uses absorption costing to calculate profit. During the last period, the fixed production overhead absorption rate was 25 per unit. There were 500 units of opening stock for the period and 350 units of closing stock.

If marginal costing principles had been used, the profit for the period compared to the absorption costing profit would have been A B C D 3,750 lower. 3,750 higher. 8,750 lower. 8,750 higher.

(Total = 50 marks)

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November 2001

SECTION B 25 MARKS ANSWER THIS QUESTION

Question Two SS Ltd makes and sells a single product "PP". The company uses a standard absorption costing system. The budgeted production and sales for the year ended 31 October 2001 were 59,500 units with a selling price of 2 each unit. The standard time for producing each unit was 3 minutes. The standard labour rate was 10 an hour. The standard material cost for one unit of PP was 075 per unit. Production overhead absorption rates were based on direct labour cost and were as follows: Variable overhead Fixed overhead Production and sales of PP Selling price for one unit Labour cost incurred for 3,500 hours Material cost for each unit Variable production overhead incurred Fixed production overhead incurred 35% of direct labour cost 40% of direct labour cost 62,000 units 200 38,500 075 9,500 9,500

For the year under review, the actual results were as follows:

There were no changes in any stock levels during the period.

Required:
(a) Prepare a statement that reconciles budgeted profit with actual profit for the year ended
31 October 2001, showing the analysis of variances in as much detail as possible from the information given.

(14 marks) (b) Referring to your analysis in part (a), suggest two possible reasons for the labour efficiency
variance and two possible reasons for the labour rate variance that you have calculated.

(4 marks) (c) Explain the factors that should be considered when selecting the most appropriate base to
use for an overhead absorption rate. Your answer should include a discussion of the method used by SS Ltd.

(7 marks) (Total = 25 marks)

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SECTION C 25 MARKS ANSWER ONE QUESTION ONLY

Question Three T Ltd is a newly-formed company that designs customised computer programs for its clients. The capital needed to fund the company will be provided by a venture capitalist who will invest 150,000 on 1 January 2002 in exchange for shares in T Ltd. The Directors are currently gathering the information needed to help in the preparation of the cash budget for the first three months of 2002. The information that they have is given below.

Budget details
The budgeted sales (that is, the value of the contracts signed) for the first quarter of 2002 are expected to be 200,000. However, as the company will only just have commenced trading, it is thought that sales will need time to grow. It is therefore expected that 15% of the first quarter's sales will be achieved in January, 30% in February and the remainder in March. It is expected that sales for the year ending 31 December 2002 will reach 1,000,000. Clients must pay a deposit of 5% of the value of the computer program when they sign the contract for the program to be designed. Payments of 45% and 50% of the value are then paid one and two months later respectively. No bad debts are anticipated in the first quarter. There are six people employed by the company, each earning an annual gross salary of 45,000, payable in arrears on the last day of each month. Computer hardware and software will be purchased for 100,000 in January. A deposit of 25% is payable on placing the order for the computer hardware and software, with the remaining balance being paid in equal amounts in February and March. The capital outlay will be depreciated on a straight-line basis over three years, assuming no residual value. The company has decided to rent offices that will require an initial deposit of 13,000 and an ongoing cost of 6,500 per month payable in advance. These offices are fully serviced and the rent is inclusive of all fixed overhead costs. Variable production costs are paid in the month in which they are incurred and are budgeted as follows: January 1,200 February 4,200 March 8,000 A marketing and advertising campaign will be launched in January at a cost of 10,000 with a further campaign in March for 5,000, both amounts being payable as they are incurred. Administration overhead is budgeted to be 500 each month: 60% to be paid in the month of usage and the balance one month later. Tax and interest charges can be ignored.

Required:
(a) Prepare the cash budget by month and in total for the first quarter of 2002. (15 marks) (b) Identify and comment on those areas of the cash budget that you wish to draw to the
attention of the Directors of T Ltd, and recommend action to improve cash flow.

(7 marks) (c) Briefly explain three advantages for T Ltd of using a spreadsheet when preparing a cash
budget.

(3 marks) (Total = 25 marks)

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Question Four P Ltd manufactures a specialist photocopier. Increased competition from a new manufacturer has meant that P Ltd has been operating below full capacity for the last two years. The budgeted information for the last two years was as follows: Annual sales demand (units) Annual production (units) Selling price (for each photocopier) Direct costs (for each photocopier) Variable production overheads (for each photocopier) Fixed production overheads Actual results for the last two years were as follows: Annual sales demand (units) Annual production (units) Selling price (for each photocopier) Direct costs (for each photocopier) Variable production overheads (for each photocopier) Fixed production overheads There was no opening stock at the beginning of year 1. Year 1 30 40 50,000 20,000 11,000 500,000 Year 2 60 60 50,000 20,000 12,000 530,000 Year 1 70 70 50,000 20,000 11,000 525,000 Year 2 70 70 50,000 20,000 12,000 525,000

Required:
(a) Prepare the actual profit and loss statements for each of the two years using:
(i) (ii)
absorption costing; marginal costing.

(14 marks) (b) Calculate the budgeted breakeven point in units and the budgeted margin of safety as a
percentage of sales for year 1 and then again for year 2.

(6 marks) (c) Explain how the change in cost structure (as detailed in the budgeted information) has
affected the values you have calculated in your answer to part (b).

(5 marks) (Total = 25 marks)

End of paper

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