ACC1511 MANAGEMENT ACCOUNTING FUNDAMENTALS

CHAPTER 1 & 2: INTRODUCTION TO MANAGEMENT ACCOUNTING & COST

CLASSIFICATIONS
Exercises
1. Happy Rainbow Co. operates a chain of 24 department stores. Two years ago, the board
directors of Happy Rainbow Co. approved a large scale remodeling of its stores to attract
a more upscale clientele. Before finalizing this plan, two stores were remodeled as a test.
Ali, the management accountant, is in the team who in charge to oversee the
financial performance for these test stores. His team is offered bonuses based on the
sales growth and profitability of these test stores. While completing the financial reports,
Ali discovered a sizeable inventory of outdated goods that should have been discounted
for sale or returned to the manufacturer. He discussed the situation with his management
colleagues; the consensus was to ignore reporting the inventory as obsolete, as
reporting it would diminish the financial results and their bonuses.
According to IMAs Statement of Ethical Professional Practice, would it be ethical for
Ali not to report the inventory as obsolete? Explain and please incorporate one Islamic
principle/value in your answer.
2. Identify the following costs as product or period cost, and then, specify whether the
cost is variable or fixed.
a.
Wages of a site supervisor in a small construction company.
b.
Rental payment for office space in a administrative office building.
c.
Advertising costs planned by a local boutique.
d.
Training costs for new administrative employees.
e.
Electricity used in operating factory machinery.
f.
Straight-line depreciation on office furniture.
g.
The wages of table service personnel in a restaurant.
h.
Tires used in the production of trucks.
i.
Truck fuel consumed by a road construction company.
j.
Wood used in furniture production
3. The following data for the current year relate to Pelangi Card Co., a greeting card
manufacturer:
Service department cost1
Direct labour: Wages
Direct labour: Fringe benefits
Total overtime premiums paid2
Production supervisors salary
Security guards (office): Wages
Security guards (factory): Wages
Administrative costs
Product promotion costs
Rental of office space for sales personnel3
Depreciation on factory building
Depreciation on office equipment

RM50,000
258,000
62,000
26,200
7,500
2,000
3,400
75,000
5,000
7,500
57,500
12,600

Cost of idle time: production employees

Sales commissions
Advertising expense
Direct materials
1
2

13,800
1,900
46,800
890,000

All support services are provided to production department.

The premiums are paid to production employees.

Calculate:
a. Total prime costs
b. Total manufacturing overhead costs
c. Total conversion costs
d. Total period costs
4. Neptune Rentals operates a car rental service. Consider the following costs of the
company over the relevant range of 2,000 to 5,000 hours of operating time for its cars:
Hours of Operating Time
2,000
3,000
4,000
5,000
Total costs (RM):
?
?
?
Variable cost
15,000
?
?
?
Fixed cost
120,000
?
?
?
Total
135,000
Cost per hour (RM):
?
?
?
?
Variable cost
?
?
?
?
Fixed cost
?
?
?
?
Total
Compute the missing amounts, assuming that cost behaviour patterns remain unchanged
within the relevant range of 2,000 and 5,000 hours.
5. Evan Co. manufactures toasters. During the first year, the company sold 500,000
toasters and reported the following operating results:
RM
Sales

7,000,000

Cost of Goods Sold

4,000,000

Gross Profit

3,000,000

Operating Expenses

2,000,000

Income

1,000,000

Additional information:
Cost of goods sold is 40% variable and 60% fixed. Operating expenses are 90% fixed and
10% variable. For next year, the company expects to sell 600,000 toasters.
Calculate the expected income for next year assuming the price per unit and costs are
constant.