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KAPLAN PU BL ISHING 41

ANSWERS

F IA MA 1 - MA NA GEMENT INFORMATION

42 KAPLAN PU BL ISHING

BUSINESS ORGANISATION

1 D

The financial accounts report on past performance and are prepared for the shareholders. Management accounting helps managers plan for the future.

2 INFORMATION AND DATA

(a) Data can be described as the 'raw material'. The raw material needs to be processed in some way in order to make it information.

Data must be processed, formatted or modified in some way in order to make it meaningful to the recipient.

Data + Meaning = Information

Alternatively:

Data + Processing = Meaningful information

Something that represents information to one person could be data to another. For instance, the fact that a customer has exceeded a credit limit may be information to the credit controller but would be data to the personnel manager because it has no significance or meaning to him or her.

The function of the system is to convert data into information. It needs to be flexible because of the different formats required for the different management levels within the organisation.

(b) Information should have the following qualities:

(i) Timeliness It is generally recognised that information loses its value over time. It is important, when designing systems, to meet the user's requirements in terms of speed of processing. The chief executive's office can reasonably expect a monthly management information package to be delivered within, say, six days of the end of the last accounting period. Some managers may regard this as quite unacceptable and may require the information even earlier in order to satisfy some tactical purpose.

(ii) Accurate/reliable Information must be accurate for planning, controlling or decision-making purposes. Accuracy, however, is a matter of perception. If it is too accurate it may present a good deal of trivia that will dilute the effect of the information on the reader; it will also be expensive to produce. For example, the production of financial data in pounds and pence may be strictly accurate but very tiresome for the reader who may only require it to the nearest thousand pounds. Information should therefore be sufficiently accurate for its purpose, and therefore reliable.

(iii) Relevant Information should be relevant to the decision-making. Important items in reports may be overlooked if contained within a large document where all the details are not relevant to the decision under consideration.

LECTURER RESOURCE PACK : ANSWERS


(iv) Economical Economical can mean both 'economical to use' and 'economical to provide'. Information has no intrinsic value. Its value can be judged by the benefit that is provided to the user. Similarly, economical information does not mean swamping the user with facts, whether they are wanted or unwanted. Information should only be supplied if management can be satisfied that some benefit will accrue as a result. The cost of the information provided by the system should not outweigh the value of information to the organisation.

(v) Understandable Information must be understandable to the person who needs to use it. In practice, many management reports are not understandable because they are written in technical language that the user cannot understand, or are just badly written. Reports may also be difficult to understand when they are very long.

3 C

4 A



MANAGEMENT INFORMATION

5 C

Data is unprocessed facts. (a) (b) and (d) all involve a degree of analysis and are therefore information.

6 B

A cost unit is a unit of production or service. (b) is a cost centre.

7 C

Cost accounts are for internal use and do not have to comply with accounting standards.

8 C

Item B describes the costs of an activity or cost centre. Item A describes cost units. Item D describes budget centres. A cost centre is defined as a production or service location, function, activity or item of equipment for which costs can be ascertained.

9 CHARACTERISTICS

(a) Three characteristics of useful information are:

1 Objective. There should not be any bias in the information due to the way it has been produced or presented. For example, use of absorption costing to calculate profit for a period during which sales are constant but production is rising, may give a misleading impression of profitability simply because of the method of calculation.

2 Timely. The information must be produced in time for some action to be taken on it. If it is too late, it is worthless. For example, it would be of little value in the context of controlling costs if a business used year-end published accounts for comparison with budget: by the time published accounts are available, it will be too late for any effective control action to be taken.

3 Appropriate to the purpose. Information must be suitable for the purpose for which it is produced. The level of detail, for example, can vary according to the users needs. The Managing Director will not require a detailed analysis of direct labour booked to individual jobs a summary of direct labour costs will be sufficient; however, production scheduling and supervision would be particularly interested in such information.

Note: Other characteristics could be quoted.



(b) Non-financial information, such as the number of rejects, or expected competitors reaction is important for two main reasons:

It supplements financial information: the number of rejects may be as important as their cost.

It may have more immediate relevance to certain staff: reporting the number of rejects may have more meaning to workers directly involved with operating that process than the cost of the loss.

Nonfinancial information such as the number of rejects may be faster to produce than waiting for the cost of the loss to be calculated. This allows for faster corrective action to be taken.

It may allow external influences, such as the probability of competitor reaction, to be built into the analysis of say a capital investment project.



CLASSIFICATION OF COSTS AND COST BEHAVIOUR

10 D

A direct cost is a cost that can be directly identified with a cost unit. Material is the most common example.

11 D

Total variable cost must pass through the origin.

12 B

The cost is fixed at $60,000 between 50 and 150 units of output, but goes up a step to $90,000 when output is 200 or more. A step cost increase is due to an increase in an item of expenditure that is normally considered as a fixed cost item. Increased storage requirements would result in higher 'fixed costs' of rental for storage space, extra depreciation of the additional shelving or racking, and so on. Items A, C and D relate to variable cost items, and changes in these would not show step cost behaviour.

13 C

A cost unit is a unit of product or service.

14 B

Raw material costs are direct production costs. A period cost is a cost deducted from the profit in the period it is incurred rather than being included in the cost of the product

15 COST ANALYSIS

Behavioural analysis of costs is important for planning, control and decisionmaking.

Different costs may have different behaviour patterns in response to changes in activity. Certain costs may remain unaffected by changes in activity e.g. capacity costs such as rent and rates. This is unlikely to remain the case, however, for large changes in activity where step increases or decreases in costs are likely to occur. At the other extreme certain costs may be completely variable with activity e.g. raw materials. However, the change may not be exactly proportional due to relative efficiencies, or economics of scale, at different levels of activity. Other patterns of behaviour may be found.

The fact that various patterns of cost behaviour exist highlights the importance of a behavioural analysis, in order to help to plan and control such costs on an ongoing basis and in order to help to identify incremental costs that may be incurred by decision alternatives.



CODING OF COSTS AND INCOME

16 CODING SYSTEMS

(a) Sequence codes. Sequence codes allocate a number, or a letter, to items in a simple list. For example

Code Name 01 ADAMS, John 02 AITKEN, James 03 ALCOCK, Fred BROWN, Joe etc

Their main advantage lies in simplicity of allocation, but they provide no correlation between the items and their code numbers, and insertions and deletions are not so easily handled. It is much better to have the code progressing in groups of say 10 so that room is left for insertions.

(b) Block codes. These allocate bands of numbers to particular categories. With each category there is usually a limited amount of possible expansion. They have the merit of simplicity and give a more direct relationship between items and codes, which may help with indexing or information retrieval.

As an example, consider a beverage manufacturer who produces several types of tea, tea bags and coffees. He could assign a code to each particular brand as follows:

Product type Block code

Leaf teas 01 19 Tea bags 20 29 Coffees 30 39

(c) Significant digit codes - individual digits and letters are used to represent features of the coded item. The example given is one used to describe shampoo

Code Item

HS2425 Herbal shampoo 24 x 250 ml FS125050 Family shampoo 12 x 500 ml special offer

(d) Faceted codes - the digits of the code are divided into facets of several digits and each facet represents some attribute of the item being coded. These codes are similar to significant digit codes but are purely numerical, which may be preferable in computer systems. The following example is a faceted code for types of carpet

Facet 1 = type of weave (1 digit)

1 = cord

2 = twist

3 = short tufted, etc



Facet 2 = material (1 digit)

1 = all wool

2 = 80% wool, 20% nylon

3 = 50% wool, 50% nylon, etc

Facet 3 = pattern (2 digits)

01 = self colour (plain)

02 = self colour (embossed)

03 = fig leaf, etc

Facet 4 = colour (2 digits)

01 = off white

02 = jaundice yellow

03 = scarlet fever, etc

A typical code would be 220302 representing a twist carpet in 80% wool, 20% nylon with a fig-leaf pattern in jaundice yellow.

17 D

All these codes might be used in a computerised accounting system.



MATERIALS COST

18 A

Opening inventory 400 $2.20 Issue 250 $2.20 = 550 Receipt 500 $2.50 Issue 150 $2.20 = 330 190 $2.50 = 475 Receipt 400 $2.70 Issue 310 $2.50 = 775 290 $2.70 = 783 ____

2,913 ____

19 D

Closing inventory 110 $2.70 = 297

20 D

Opening inventory 400 $2.20 Issue 250 $2.20 = 550 Receipt 500 $2.50 Issue 340 $2.50 = 850 Receipt 400 $2.70 Issue 400 $2.70 = 1,080 160 $2.50 = 400 40 $2.20 = 88

_____

2,968 _____

21 A

Closing inventory 110 $2.20 = 242



22 B

Opening inventory 400 $2.20 880 Issue (250) $2.20 (550) Receipt 500 $2.50 1,250 _____ _____

650 $2.43077 1,580 Issue (340) $2.43077 (826) Receipt 400 $2.70 1,080 _____ _____

710 $2.5831 1,834 Issue (600) $2.5831 (1,550) _____ _____

Closing inventory 110 $2.582 284 _____ _____

Issues = 550 + 826 + 1,550 = $2,926

23 C

24 A

Date Balance Value units $ 12 August Received (4,000 $5) 4,000 20,000 15 August Issued (3,900 $5) (3,900) (19,500) (100 $5) 100 500 19 August Received (1,200 $6) 1,200 7,200 1,300 7,700 21 August Issued (100 $5) + (1,000 x $6) (1,100) (6,500) (200 $6) 200 1,200 24 August Received (2,800 $7.5) 2,800 21,000 3,000 22,200



25 C

Date Units Inventory Issues $ $ 1 May Opening 200 at $5 200 1,000 5 May Receipts 300 at $4.50 300 1,350 500 2,350 7 May Issues 300 at $4.50 + 100 at $5 (400) (1,850) 1,850 100 500 12 May Receipts 100 at $6 100 600 22 May Receipts 400 at $5.50 400 2,200 600 3,300 23 May Issues 400 at $5.50 (400) (2,200) 2,200 200 1,100 29 May Receipts 200 at $7 200 1,400 400 2,500 30 May Issues 200 at $7 (200) (1,400) 1,400 200 1,100 5,450

26 B

When raw material prices are rising, FIFO will issue materials to production at the earliest (lowest) prices. Lower material prices mean lower costs and higher profit. So statement 1 is false.

Weighted average pricing will average earlier (lower) and later (higher) prices so production costs will be higher than if FIFO was used. So statement 2 is true.



27 OMEGA

(a) $2,618.00 92.40 + 1,930.00 = $4,455.60.

Receipts Issues Balance

Unit Unit Qty Total Qty price Total Qty price Total kg $ kg $ $ kg $ $

Opening balance 6,080 0.765 4,651.20

Day 1 Purchase 2,800 2,184 2,800 0.780 2,184.00 _____ _____ ________

Average 8,880 0.770 6,835.20

Day 2 Issue 3,400 0.770 2,618 (3,400) (2,618.00) _____ ________

5,480 4,217.20

Day 3 Return to inventory Value at issue value ($0.770 per kg) 120 0.770 92.40 _____ _____ ________

5,600 0.770 4,309.60

Day 4 Purchase 3,260 2,536.28 3,260 2,536.28

Return to supplier Value at original purchase price (= $0.780) (440) (343.20)

_____ ________

8,420 0.772 6,502.68

Day 5 Issue 2,500 0.772 1,930 (2,500) (1,930.00) _____ ________

5,920 4,572.68 _____ ________

(b) 5,920 kg valued at $4,572.68 (see part (a)).

(c) Closing inventory is valued at $4606.58 and net issues are valued at $2601.00 + $1,912.50 $91.80 = $4,421.70



Receipts Issues Balance Qty Unit

price Qty $ Qty $

Opening balance 6,080 4,651.20 Day 1 2,800 0.78p 8,880 6,835.20 Day 2 3,400 0.765p (3,400) (2,601.00) ______ ________ 5,480 4,234.20 ______ ________ Day 3 (120) 0.765p 120 91.80 ______ ________ 3,260 0.778p 5,600 4,326.00 3,260 2,536.28 Day 4 (440) 0.78 (440) (343.20) ______ ________ 8,420 6,519.08 Day 5 2,500 0.765p (2,500) (1,912.50) ______ ________ 5,920 4,606.58 ______ ________

28 INVENTORY TRANSACTIONS

(a) (b)

Date Transaction Inventory

(March) Units Rcpt FIFO LIFO Units FIFO LIFO date $ $ $ $ 1 Bal b/f 350 2,800 2,800 3 Receipt 500 4,125 4,125 850 6,925 6,925 8 Issue (650) 1 (2,800) (1,200) 3 (2,475) (4,125) ____ ____

(5,275) (5,325) 200 1,650 1,600 ____ ____

10 Receipt 500 4,325 4,325 700 5,975 5,925 18 Issue (425) 3 (1,650) 10 (1,946.25) (3,676.25) _______ _______

(3,596.25) (3,676.25) 275 2,378.75 2,248.75 _______ _______

23 Issue (100) 1 (200.00) 10 (865.00) (648.75) _______ _______

(865.00) (848.75) 175 1,513.75 1,400.00 _______ _______

25 Receipt 500 3,950 3,950 675 5,463.75 5,350.00



The values of the issues under the two methods are shown in bold in the last two transaction columns; the closing inventory values are shown in bold at the bottom of the last two inventory columns.

29 BROADVALE

Principal material pricing methods

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

Weighted average (AVCO)

Note: Other methods exist and are acceptable.



LABOUR COSTS

30 A

A straight piece rate system is a variable cost so cost increases in direct proportion to output.

31 D

$ Skilled labour Product A 1,750 units 2 $10 35,000 Product B 5,000 units 2 $10 100,000 135,000 Unskilled labour Product A 1,750 units 3 hours/unit $7 /hour 36,750 Product B 5,000 units 4 hours/unit $7 /hour 140,000 176,750 Total = $311,750

32 C

Employees At start of year 4,600 Recruited during the year 1,800 6,400 At end of year 5,500 Therefore leavers during the year 900

Average number of employees = (4,600 + 5,500)/2 = 5,050.

Labour turnover rate = (900/5,050) 100% = 17.8%, or 18% to the nearest percentage figure.

33 A

Good output = 210 17 = 193 units.

$ 100 units at $0.20 20.00 93 units at $0.30 27.90 For 193 good units 47.90



34 TWISTER

Tutorial note:

Make it very clear what each part of your answer represents, and show all your workings to gain maximum marks. You are told about overtime payments and idle time; these will need to be split out as they are treated as overheads. You are given total hours worked and basic hours which will allow you to calculate overtime.

(a) Total wages = $106,956.80.

Basic hours = 80 workers 4 weeks 38 hours per week = 12,160 hours

Overtime = Total hours worked Basic hours = 13,056 12,160 = 896 hours

Total wages = basic pay + overtime premium = (13,056 8.00)

+ (896 $8.00 35%)

= $104,448.00 + $2,508.80

= $106,956.80

(b) Labour overheads = $5,516.80.

$

Idle time = 376 hours $8.00 = 3,008.00

Overtime premium = 2,508.80 _______

Labour overheads = 5,516.80 _______

35 PIECEWORK BONUS

(a) Piecework

80 units $35.20 (guaranteed minimum wage) 120 units $36.00 210 units $63.00

Working

Guaranteed wage = 80% (8 $5.50)

= $35.20

80 units standard time 80 3 = 240 minutes

Piecework = $24

Pay guaranteed wage


Piecework = $36


Piecework = $63



(b) Premium bonus

80 units $44.00 120 units $44.00 210 units $54.31

Working

Basic pay = 8 $5.50 = $44

Units Time taken Time Saved (minutes) allowed

80 480 240 - 120 480 360 - 210 480 630 150

Bonus for 210 units

60150

75% $5.50 = $10.31

Total wage = $44.00 + $10.31 = $54.31



EXPENSES AND ABSORPTION OF OVERHEADS

36 EXPENSE CLASSIFICATION

Tutorial notes:

(1) A fairly straightforward question on fundamental cost accounting topics.

(2) Most of part (a) is obvious and students should be able to gain a majority of the marks using very little time.

(3) Part (b) requires some thought. (a) Ref no. Production Selling & Admin R&D overhead dist overhead overhead overhead 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10 x 11 x 12 x 13 x 14 x 15 x 16 x (b) Direct production labour costs are treated as fixed because:

(i) workers are often paid on a time basis and have secured, guaranteed wages;

(ii) employees are not hired and fired with small changes in activity - in this way they tend to be more a type of stepped cost, not a true variable cost;

(iii) bonuses and other incentives invalidate uniform unit cost assumptions.

37 B

hours labourBudgeted

overheadsBudgeted =

500,48125,691$

= $14.25

38 C

Incurred = $746,625

Absorbed 49,775 $14.25 = $709,294 ________

Under absorbed 37,331 ________



39 A

Budgeted hours = 32$

000,216$

= 6,750

40 B

Actual overhead $225,900

Overhead absorbed 7,530 $32 $240,960

_______ Over absorbed 15,060 _______

41 A

Actual overhead $170,800 Over absorption 6,000 ________ Overhead absorbed 176,800 ________

OAR = 000,34800,176

= $5.20 per hour

Budgeted hours = 20.5000,156

= 30,000

42 C

The question must be asking about Cost Centre A only, since there is insufficient information for Cost Centre B.

Absorption rate, Cost Centre A = $140,000/40,000 = $3.50 per machine hour.

$ Overhead absorbed (21,500 machine hours $3.50)

75,250

Overhead incurred 73,500Over-absorption of overhead 1,750

43 C

The answer has to be A or C. A supervisors time is probably more likely to be spent on supervising employees in proportion to the hours worked rather than in proportion to the numbers of employees. However, answer A should also be acceptable.



44 C

$ Actual overheads 500,000 Over-absorbed overhead 50,000 Absorbed overheads 550,000

Units produced: 110,000

Absorption rate = $550,000/110,000 = $5 per unit.

45 PRIDE CERAMICS

(a) Overhead apportionment for the year ending 30 June 20X3

Overheads Basis Total Production Dept A

Production Dept B

Service Dept X

Service Dept Y

$ $ $ $ $ Allocated overheads

Given 280,000 141,345 82,655 32,000 24,000

Electricity Floor area * 24,000 10,500 9,750 2,250 1,500 (21:19.5:4.5:3) Indirect labour

No of employees

36,000 12,000 12,000 6,000 6,000

(2:2:1:1) Rent Floor area 64,000 28,000 26,000 6,000 4,000Machine maintenance

Machine hours (12:10:1.5:0.5)

12,000 6,000 5,000 750 250

416,000 197,845 135,405 47,000 35,750

(b)

Re-apportion

Service Dept Y (50:30:20)

Nil 17,875 10,725 7,150 (35,750)

54,150 Nil Service Dept X

(40:60:Nil) Nil 21,660 32,490 (54,150)

416,000 237,380 178,620 Nil Nil

* Electricity could have been apportioned on the basis of machine operating hours.



46 XJ PRODUCTS

(a)

Hours Cutting Assembly

Number of labour hours expected to be worked XJ1 2.5 hours 20,000 units 50,000 XJ1 0.75 hours 20,000 units 15,000 XJ2 1 hour 10,000 units 10,000 XJ2 1 hour 10,000 units 10,000 _____ _____

60,000 25,000 _____ _____

Total overhead $67,000 $42,000

Overhead absorption rate

hours 000,60000,67$ $1.12 per labour hour

hours 25,000000,42$ $1.68 per labour hour

(b) Overheads included in the cost of each product

Product XJ1 $

Cutting 2.5 hours $1.12 2.80 Assembly 0.75 hours $1.68 1.26 ____

4.06 ____

Product XJ2

Cutting 1 hour $1.12 1.12 Assembly 1 hour $1.68 1.68 ____

2.80 ____



47 REDGATE

(a) Re-apportionment of service department overheads

Basis Total

$

Production Depts Service Depts

Cutting $

Assembly $

Stores $

Maint. $

Apportioned overheads

340,000 210,000 80,000 22,000 28,000

Storeroom re-apportionment

Material requisitions

14,000 6,000 (22,000) 2,000

Maintenance re-apportionment

Maintenance hours

21,000 9,000 (30,000)

Total $340,000 $245,000 $95,000

(b) Overhead absorption rates

Basis Cutting Dept Assembly Dept Total overheads as (a) above

$245,000 $95,000

Cutting department Machine hours 8,750

Assembly department Labour hours 19,000

Absorption rates $28 per machine hour $5 per labour hour



MARGINAL COSTING AND ABSORPTION COSTING

48 C

$ Absorption costing profit 26,500

Decrease in inventory 200 $7.40 1,480 ______ Marginal costing profit 27,980 ______

49 C

Increase in inventory 14,200 13,500 = 700 units Profit difference $84,500 78,550 = $5,950 OAR $5,950/700 = $8.50

50 A

Fixed costs = $40 45% 18 = $18

Increase in inventory 24,000 20,000 units = 4,000 units

As inventory is increasing absorption profit will be higher by 4,000 units $18 = $72,000.

51 B

$ Sales price per unit 50.00 Variable cost per unit ($7.50 + $4.50 + $15.75) 27.75 Contribution per unit 22.25 Units of production/sale 50,000 Budgeted contribution (50,000 $22.25) $1,112,500

52 D

Inventory would be valued at marginal production cost:

= 4,200 units $27.75 = $116,550.

53 C

Budgeted fixed overhead cost per unit = $6

Budgeted production = 50,000 units.

Budgeted fixed overhead costs = $6 50,000 = $300,000.



54 B

Sales = 50,000 4,200 45,800 units $ Contribution (45,800 units $22.25) 1,019,050Fixed costs 300,000Profit 719,050

55 B

Sales = 50,000 4,200 45,800 units $ Sales (45,800 units $50) 2,290,000Full cost of sales (45,800 units $33.75) 1,545,750Profit 744,250

Note: Since actual production and budgeted production volumes are the same, there is no over-absorbed overhead or under-absorbed overhead adjustment to profit.

56 BUHNER

(a) (i) Cost of sales = 3 + 6 + 2 = $11

Marginal costing $ $Sales 3,000 21 63,000Cost of sales Opening inventory 1,000 11 11,000 Production 6,000 11 66,000 Closing inventory (4,000) 11 (44,000)

______ (33,000)

______Contribution 30,000Less actual fixed overheads (25,000)Variable selling costs 3,000 $5 (15,000)

______Loss for the period (10,000)

_______(ii) Absorption costing

Cost of sales = 3 + 6 + 2 + 4 = $15

$ $ Sales 3,000 21 63,000 Cost of sales Opening inventory 1,000 15 15,000 Production 6,000 15 90,000 Closing inventory (4,000) 15 (60,000)

______

(45,000) ______

18,000 Under absorption (W1) (1,000) Variable selling costs 3,000 $5 (15,000)

______ Profit for the period 2,000

_______



Working

(W1)

$ Amount absorbed = 6,000 $4 24,000 Amount spent 25,000

Under-absorbed 1,000

(b) Reconciliation

$ Marginal costing loss (10,000) Add: increase in inventory fixed production overhead per unit (3,000 $4)

12,000

Absorption costing profit 2,000

57 PERIOD 1 AND PERIOD 2

(a) Income statement

Period 1 Period 2 $000 $000

(1) Sales 1,275 1,350 (2) Manufacturing cost of sales (680) (720)

Gross profit 595 630 (3) (Under-)/over- absorbed manufacturing overhead (40) 7

Adjusted gross profit 555 637 (4) Selling and administration overhead absorbed (323) (342) (5) (Under-)/over- absorbed selling and administration overhead (15) -

Net profit 217 295

Notes:

(1) Period 1: 85,000 $15

Period 2: 90,000 $15

(2) Period 1: 85,000 $8

Period 2: 90,000 $8

(3) Period 1: Expenditure $320,000 Absorbed $280,000 (80,000 $3.50)

Period 2: Expenditure $315,000 Absorbed $322,000 (92,000 $3.50)

(4) Period 1: 85,000 $3.80

Period 2: 90,000 $3.80

(5) Period 1: Expenditure $270,000 Absorbed $255,000 (85,000 $3.00)

Period 2: Expenditure $270,000 Absorbed $270,000 (90,000 $3.00)



(b) In a marginal costing system, fixed manufacturing overheads are not included in the valuation of inventory. As a result fixed overhead costs are charged against profit in the period in which they are incurred and profit is not affected, (as in the full absorption method used in (a) above), by production being greater/less than sales.

In Period 1, profit using marginal costing would be greater than that under absorption costing as production is less than sales, and thus overheads within inventory are reduced and charged against profits. The reverse would be the case in Period 2.

58 DUO

(a) Income statement for the period under marginal costing

$ $

Sales 327,000 Less: Cost of sales Opening inventory Production 168,500 Less: Closing inventory (W1) (13,800) ______

(154,700) _______

Contribution 172,300 Less: Fixed overheads (110,000) _______

Profit 62,300 _______

(b) Income statement for the period based on absorption costing

$ $

Sales 327,000 Less: Cost of sales Opening inventory Production 278,500 Less: Closing inventory (W2) (22,800) ______

(255,700) _______

Profit 71,300 _______

(c) Inventory levels are rising over the period thus, total absorption costing, which includes a share of fixed costs in the inventory valuation gives a higher reported profit than marginal costing which charges the fixed costs against profit in the period in which they are incurred.

The reported profit under total absorption costing is $9,000 more over the two periods; as $9,000 of fixed costs are carried forward from this period to the next.



Workings

Alpha Beta Total (W1) MC per unit ($) 45 32 Closing inventory units 200 150 value ($) 9,000 4,800 13,800 (W2) TAC per unit MC ($) 45 32 Overheads

)750,12(+)500,23(000,110$ = $10 per labour hour 30 20

__ __

75 52 __ __

Closing inventory units 200 150 value ($) 15,000 7,800 22,800



JOB, BATCH AND PROCESS COSTING

59 C

Use % of labour cost as the overhead absorption method.

Total labour cost ($14,500 + $3,500 + $24,600) = $42,600

CC20 600,42$600,24$ $126,000 = $72,761

60 C

Total Cost BB15

Opening WIP $42,790 Labour $3,500 Overheads

600,42$500,3$ $126,000 $10,352 _______

Total Cost $56,642 _______

Selling Price = 66667.642,56$

= $84,963

61 D

Job BB15 was completed in the period and therefore there is no WIP value.

Job CC20 ($18,500 + $24,600 + $72,761) = $115,861

Job AA10 ($26,800 + $17,275 + $14,500) +

(600,2$500,14$

$126,000) = $101,462

_______

$217,323 _______



62 JOB X

PRODUCT X JOB COST CARD

Department Total A B C $ $ $ $ Direct materials 700 800 850 2,350.00Direct labour 1,260 350 200 1,810.00Factory overhead (W) 630 280 250 1,160.00

TOTAL PRODUCTION COST 5,320.00

Administration overhead ($5,320 12%) 638.40

TOTAL COST 80% 5,958.40

Profit 20% 1,489.60

SELLING PRICE 100% 7,448.00

Working

Factory overheads:

A $72,000/24,000 = $3 per hour 210 hours = $630

B $80,000/20,000 = $4 per hour 70 hours = $280

C $60,000/12,000 = $5 per hour 50 hours = $250

63 D

Input = 8,500 + 4,250 = 12,750 kg

Normal loss = 4% 12,750 = 510 kg

Scrap value = 510 $0.20 = $102

64 D

kg Input 12,750 Output: Normal loss 510 ______ Finished goods 12,700 ______

13,210 ______

Abnormal gain 460 ______



65 B

Total input cost: $ Process 1 8,500 $2.68 = 22,780 Materials 1,615 Labour 2,278 Overheads $2,278 1.5 = 3,417 Normal loss scrap value (102) ______

29,988 12,240 ______ Cost per kg of output = $2.45.

66 A

An abnormal gain occurs when actual output from a process exceeds the expected output. This occurs when actual loss is less than the expected (normal) loss.

67 B

All units, including abnormal loss or abnormal gain, are converted to equivalent units. Partly finished units are valued at less than 1 equivalent unit each.

68 C

Closing inventory = Input Output = 300 250 = 50 units.

Closing inventory equivalent units = (100% 50) 50 equivalent units of materials

(50% 50) 25 equivalent units of labour and overhead (conversion costs).

69 D

(340 [100 10 5])% = 340 0.85 = 400



70 INDUSTRIAL SOLVENTS LIMITED

Mixing process account

Litres $

Materials: A (W1) 6,000 48,000 B 4,000 24,000 C 2,000 7,800

______

_______

12,000 79,800 Labour and overheads 41,280

______

_______

12,000 121,080

______

_______

Litres $

Normal loss 600 Abnormal loss 100 1,100 (W2) Completed production 9,500 104,500 (W2) Closing WIP 1,800 15,480 (W2)

______

_______

12,000 121,080

______

_______

Workings

(W1) Material cost: A B C 63 12,000 62 12,000 61 12,000

= 6,000 $8 = 4,000 $6 = 2,000 $3.90 = $48,000 = $24,000 = $7,800 (W2) Statement of equivalent units:

Labour and Material overheads

% EU % EU

Completed production 100 9,500 100 9,500 Abnormal loss 100 100 100 100 Closing WIP: Material 100 1,800 Labour and overheads 40 720

______

______

Equivalent units 11,400 10,320

______

______

Process costs $79,800 $41,280

Cost per equivalent unit $7.00 $4.00

Value of output: 9,500 ($7 + $4) = $104,500

Value of closing WIP: (1,800 $7) + (720 $4) = $15,480

Value of abnormal loss: 100 ($7 + $4) = $1,100



71 PRODUCT XK

(a) Physical flow of units:

Opening WIP + Units started = Units completed + Closing WIP 0 + 2,400 = 2,200 + 200

Equivalent units

Material Labour/Overhead % EUs % EUs

Completed units (2,200) 100 2,200 100 2,200 Closing WIP (200) 100 200 30 60 Equivalent units produced 2,400 2,260 Costs per EU

400,2280,5$

= $2.20 260,2

*2260,2$= $2

* This absorbs the overheads at 100% of the labour costs

Values of units

Goods transferred to Process 2: 2,200 $(2.20 + 2) = $9,240 Closing WIP: Materials 200 $2.2 = $440 Lab/oh 60 $2 = $120 $560 ____ _____

$9,800 _____

Check: $5,280 + ($2,260 2) = $9,800

(b) Value of goods transferred to finished goods

$

From Process 1 (as above) 9,240 Added material 9,460 Direct labour 10,560 Factory overhead (2/3 labour) 7,040 _____

Finished goods value 36,300 _____

Value per unit 200,2

300,36$ = $16.50



72 LUDLUM PLC

(i) A normal loss is an expected loss. It is a natural part of the process, e.g. evaporation, sawdust from making furniture, etc, and does not indicate inefficient working.

Normal loss does not pick up a share of the process costs. Normal loss is shown in the process account at its scrap value if it has one.

(ii) An abnormal loss is a loss greater than expected. It is not a natural part of the process and it does indicate inefficient working.

Abnormal loss does pick up a share of the process costs. It is costed on the same basis as ordinary output. The abnormal loss is credited out of the process account to an abnormal loss account and from there to the income statement.



BASIC BUDGETING

73 B

Comparing actual figures with budgets enables managers to see where things have not gone to plan and control those areas better in the future.

74 D

Preparation of the annual budget is a key planning technique.

75 C

Selecting a strategy is one aspect of decision making.

76 D

Sales include 5,000 x 3 units of X = 15,000

Inventories of finished goods increase by 200 units x 3 = 600

Inventories of component X = 400

Total purchases will need to be 15,000 + 600 + 400 = 16,000 units

77 C

Sales include 8,000 x 1.2 units = 9,600

Inventories of finished goods decrease by 500 units x 1.2 = (600)

Increase in inventories of raw material = 900

Total purchases will need to be 9,600 - 600 + 900 = 9,900 kg

78 A

By definition.

79 C

Options A and B are incorrect since a flexible budget includes all costs and is not changed to reflect the number of days in the month. A flexible budget may be an update of the fixed budget to reflect actual volume of activity but it does not incorporate actual costs. Thus the answer is option C.

80 C

Purchases = usage + increase in inventory = (5,000 3) + 200 = 15,200



COMPARISON OF INFORMATION AND PERFORMANCE INDICATORS

81 D

Only an investment centre would be applicable since the manager would have control of the capital employed on which to calculate the interest charge.

82 CONTROL RATIOS

Activity ratio = 630,3502,3

100 / 1 = 96.5%

Efficiency ratio = 471,3502,3

100 / 1 = 100.9%

Capacity ratio = 630,3471,3

100 / 1 = 95.6%

83 TEES R US

Budgeted Actual

Cost of tea pickers as a % of turnover 16.76% 13.33%

Cost of tea processor operators as a % of turnover 4.44% 4.44%

Cost of seeds and fertilizer as a % of turnover 9.52% 6.67%

Gross profit margin 61.65% 70.22%

Operating profit margin 4.51% 25.78%

Return on capital employed 3.79% 24.37%

Asset turnover 0.84 0.95

84 BEAUTIFUL GIRLS (2)

GG YF Sales price per unit ($) Direct material cost per unit of sales ($) Direct labour cost per unit of sales ($) Fixed production overheads cost per unit of sales ($) Advertising cost as a percentage of turnover (%) Net profit margin (%) Return on capital employed (%)

1.20

0.25

0.20

0.40

5.00

4.17

1.67

0.20

0.20

1.56

0.33

25.00

13.21

15.42



EXCEPTION REPORTING AND VARIANCES

85 C

Budgeted material cost per unit $25,500/600 = $42.50

$

580 units should cost ( $42.50)

24,650

did cost 25,839 ______

Total material variance 1,189 A

86 A

Original budgeted labour cost = 8,000 x $6 = $48,000

Actual cost of labour = $47,600

Variance = $400 F

87 D

Original budgeted material cost = 6,500 x $12 = $78,000

Actual cost of material = $79,840

Variance = $1,840 A

88 B

Flexed budget = 8,800 x $5 = $44,000

Original budget = 9,000 x $5 = $45,000

Variance = $1,000 F

89 B

Flexed budget sales: 12,000 units @ price of $20 = 240,000 Actual sales: 12,000 units @ price of $21 = 252,000 Difference 12,000

90 A

By definition.

B would give the variance due to price and efficiency differences.

C would give the variance due to activity volume differences.

91 B

Lower quality materials are likely to result in more waste and hence an adverse materials usage variance



REPORTING AND DATA PRESENTATION

92 C

The technical wizardry available should not distract the audience.

93 FAMILIES

(a) A percentage component bar chart could be used to compare these two sets of data, as each family has a different total net monthly income.

Family 1 Family 2 Item expenditure expenditure $ % cum % $ % cum %

Food and drink 540 23.4 23.4 180 22.8 22.8Housing 730 31.6 55.0 370 46.8 69.6Fuel and light 125 5.4 60.4 84 10.6 80.2Transport 600 26.0 86.4 124 15.7 95.9Other 315 13.6 100.0 32 4.1 100.0 ____ ____ ___ ____

2,310 100.0 790 100.0 ____ ____ ___ ____

% Component bar charts: family expenditure

Family 1 Family 20

20

40

60

80

100

% Expenditure

Food & drink Housing Fuel & light

Transport Other



(b) Both families spend a similar proportion of their income on food and drink, but family 2 spend a far higher proportion of their income on housing even though their actual monthly expenditure on housing is less than that of family 1. Similarly, a higher proportion of family 2s income is spent on fuel and light and a lower proportion on transport and other.

94 D

95 C

To be effective, communication must be clear, complete for its purpose and relevant to the purpose. It does not have to be complex. On the contrary, complex information is undesirable if it is not clear and understandable.



SPREADSHEETS

96 SPREADSHEETS

Advantages of spreadsheets include:

Automatic recalculation of values whenever any number is changed.

The ability to process large quantities of data.

The automatic recalculation of formula values means that spreadsheets are particularly useful for:

Planning, when the planner wants to produce a series of revised plans with different figures each time.

Sensitivity analysis, whereby a plan or forecast can be tested for risk, by altering some of the number values in the table and seeing how this affects the other figures. For example, a forecast of future profits growth can be tested by altering the assumed rate of annual sales growth. If the assumed rate of growth is entered in a spreadsheet cell, all that is needed to do the sensitivity analysis is to alter the number in that cell.

Since a spreadsheet is used to create tables of figures, its usefulness for accounting might be readily apparent. Spreadsheets are widely used to:

prepare financial forecasts

prepare budgets and other plans

produce reports comparing actual results with the budget

prepare cash flow forecasts

prepare an income statement and balance sheet.

There are also limitations and problems associated with the use of spreadsheets that need to be controlled. These include the following:

Spreadsheets for a particular budgeting application will take time to develop. The benefit of the spreadsheet must be greater than the cost of developing and maintaining it.

Data can be accidentally changed (or deleted) without the user being aware of this occurring.

Errors in design, particularly in the use of formulae, can produce invalid output. Due to the complexity of the model, these design errors may be difficult to locate.

A combination of errors of design, together with flawed data, may mean that decisions are made that are subsequently found out to be wrong and cost the firm money. This is known as "spreadsheet risk" and is a serious problem. For example, a "cut and paste error" cost TransAlta $24 million when it underbid on an electricity supply contract.

Data used will be subject to a high degree of uncertainty. This may be forgotten and the data used to produce, what is considered to be, an "accurate" report.

Security issues, such as the risk of unauthorised access (e.g. hacking) or a loss of data (e.g. due to fire or theft).



97 PRESENTATION (1)

Bar chart

98 PRESENTATION (2)

Line chart

99 PRESENTATION (3)

Pie chart

100 PRESENTATION (4)

Scatter diagram

101 FORMULAE (1)

There are several possible answers:

=B4+B5+B6+B7+B8

=SUM(B4:B8)

102 FORMULAE (2)

=AVERAGE(B4:B8)

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