This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

279 0097 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diploma in Economics and Access Route for Students in the External Programme

Management Accounting

Friday, 1 June 2007 : 2.30pm to 5.30pm Candidates should answer FOUR of the following EIGHT questions: TWO from Section A, ONE from Section B and ONE further question from either section. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. 8-column accounting paper and graph paper are provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book.

University of London 2007 UL07/533

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SECTION A Answer two questions from this section and not more than one further question. (You are reminded that four questions in total must be attempted, with a least one from Section B). 1. A company makes and sells two products, clarinets and saxophones. The cost and revenue per unit information is predicted to be as follows: Unit costs and revenues Selling price Variable costs Material Variable overhead Instrument case Allocated fixed costs Direct labour Overhead: machine related other Total cost Profit clarinet 300 saxophone 345

70 10 40

60 15 40

60 40 20 240 60

90 30 30 265 80

Labour is a fixed cost as the skilled personnel are paid by salary. They cannot easily be replaced. The allocation is based on a rate of 15 per hour and an assumption that 10,800 hours will be worked each year. Machine related costs refer to a specialist machine which is required for both types of musical instrument. The availability of this machine is 1800 hours per year and the fixed costs are 72,000. Other overhead is allocated based on skilled labour hours. Required: (a) Past experience indicates that instruments are sold in the ratio 3 clarinets to 2 saxophones; calculate the number of each instrument which should be sold to break even for the year and the maximum profit which could be made with the current ratio of sales, given the skilled labour and specialist machine constraints. (10 marks) The company would like to use the labour time and machine time to their maximum and would be prepared to incur additional advertising of 12,000 to change the sales mix if necessary. Calculate the optimal annual sales mix for the company and the profit improvement, assuming the company incurred the proposed advertising expenditure. (10 marks) Explain the meaning of the term shadow price and explain how a shadow price can be used in decision making. (5 marks)

(b)

(c)

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2.

Westward Ltd makes one type of component and uses a standard absorption costing system. The standards set for the month of May were as follows: Production and sales 8,000 units Selling price (per unit) 160 Material 007 6 kilos per unit at 12.25 per kilo Material XL 90 3 kilos per unit at 3.20 per kilo Direct, variable labour 4 hours per unit at 8.40 per hour Machine hours used per unit 3 hours Variable labour overhead 1 per direct labour hour Variable machine overhead 2 per direct machine hour Set up costs* 0.50 Fixed overheads^ 1.75 per direct labour hour * The set-up costs are 500 per batch and are allocated to products at 0.50 per product. The product is usually made in batches of 1000 units although this can vary. ^ The Fixed overheads budget is 56,000 and relates to two departments: Maintenance 24,000 and General production 32,000. During the month of May a competitor company faced production difficulties enabling Westward Ltd to achieve additional sales from new customers. The actual data for the month of May are as follows: Production and sales 8,600 units, which generated total sales of 1,401,800. Material 007 Used 50,960 kilos at a total cost of 634,452. Material XL 90 Used 25,600 kilos at a total cost of 81,664 Direct, variable labour Paid an actual rate of 8.60 per hour. The total amount paid was 306,934 Machine hours Machine hours used 25740 hours Variable labour overhead Total 38,425 Variable machine overhead Total 51,080 Batches 7 Batches: Total set-up costs 3860 Fixed overhead Maintenance 23,260 expenditure General production 33,600 Required: (a) Prepare statements of standard cost for one unit of the product, the budgeted profit and the actual profit for the month of May. (8 marks) Calculate all possible variances and reconcile the actual profit with the budgeted profit (for fixed overhead, provide spending, efficiency and capacity variances). (12 marks) Comment on the information revealed by the variances. (5 marks)

(b)

(c)

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3.

Smooth Running Ltd operates a process costing system. Details for the most recent period were as follows. Opening work-in-progress of 600 units was valued as follows: 100% complete in respect of materials: 30% complete in respect of labour and overhead 68,160 51,600.

During the period 13,375 units were started in production. Material costs were 1,433,500, labour and overheads were 1,050,180. At the end of the period the closing work-in-progress was 2400 units, which were 100% complete in respect of materials, and 60% complete in respect of labour and overheads. The balance of units was transferred to finished goods. Required: (a) Calculate the number of units transferred to finished goods during the period. (3 marks) Calculate the cost per equivalent unit, using both the FIFO and the weighted average methods. (6 marks) Prepare process accounts for the period, using both the FIFO and the weighted average methods. (8 marks) Explain how the information you have calculated would be used by the company. Indicate in your answer differences between the two computational methods you have used. (3 marks) Clearly explain the difference between job costing, batch costing and process costing. (5 marks)

(b)

(c)

(d)

(e)

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4.

To support its products, a manufacturing company, Watkins Ltd, has a call centre with three different functions: sales generation, customer advice and customer complaints. In May the company prepared a forecast for the forthcoming year commencing 1st July 2007. The expected annual costs of the call centre for the forthcoming year are as follows: Variable costs per call Labour cost Phone costs Staff training Annual Department costs based on 864,000 annual calls Staff supervision (see below) Fixed Establishment costs (including depreciation)

0.60 0.20 0.06

240,000 1,440,000

Staff supervision is semi-variable based on the number of calls. The calls and costs have been monitored over the past three months and it is assumed that the cost variability observed is due to the change in the number of calls. The costs were as follows: Staff supervision costs February March April Calls 70,000 80,000 68,000 Costs () 19,900 20,400 19,800

An external call centre has offered to take over the sales generation activity of the company at a cost of 1.50 per call from 1st July 2007. Customer advice and complaints would remain in house. The external call centre would purchase some of the call equipment currently owned by Watkins Ltd, paying 900,000 for it on 30th June 2007. This equipment has a book value at 30th June 2007 of 3,000,000 and the remaining life is three years. The disposal value at the end of the three years is estimated at 400,000. If the sales generation work were subcontracted: (1) Some of the supervisory staff would be made redundant. Redundancy payments would be payable on 30th June 2007 of 200,000. The fixed staff cost would be reduced by 140,000 per year from 1st July 2007. The space used by sales generation would be taken over by the sales ledger department saving the company 160,000 per year in rent.

(2)

The company wishes to evaluate the external call centres offer by comparing costs over the next three years, as the equipment would need to be replaced at the end of three years. (question continues on next page)

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The sales generation calls for the next three years are predicted to be: Year ended 30th June 2008 30th June 2009 30th June 2010 Required: (a) Provide calculations to determine whether, over the next three years it would be financially better to continue the sales generation calls in house or to outsource them. The companys cost of capital is 14% per year. Comment on your findings. (17 marks) How much would the external costs per call need to change in order to reverse the recommendation in part (a)? (3 marks) What other factors should be considered in making the above decisions? (5 marks) Calls 700,000 750,000 780,000

(b)

(c)

Present Value Table Year 0 1 2 3

14% Discount factor 1.000 0.877 0.769 0.675

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SECTION B Answer one question from this section and not more than one further question. (You are reminded that four questions in total must be attempted, with a least two from Section A).

5.

In a recent survey (Seigel G. and Sorensen J. 1999) which looked at managers financial information needs, respondents said that they required both actionable cost information and continuation of the use of traditional management accounting tools. Discuss how these needs would be met by the accounting department.

6.

Divisionalised companies, where divisions trade with each other, need to adopt a method of calculating transfer prices for use in inter-divisional trade. Discuss the factors to be considered when deciding on which transfer price method to adopt. You should illustrate your answer with examples of different transfer pricing methods and should include a brief discussion of multinational issues which need to be considered.

7.

Quality management requires the identification of financial and non financial indicators of quality. Explain the categories and measures of quality which can be identified and discuss the ways in which the information can be used by companies.

8.

Explain the role of cost in long-run and short-run pricing decisions. Incorporate the concepts of target costing and lifecycle costing into your answer.

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