Section A

May 2010
Q2 B) Explain how a manufacturing resource planning system would improve the planning
of purchases and production for the company.
The traditional approach to determine material requirements is to monitor inventories constantly;
whenever they fall to a predetermined level, a preset order is placed to replenish them. This
traditional approach (involving re-order levels and economic order quantity calculations) originates
in the pre-computer era.
A manufacturing resource planning system is a fully integrated computerised planning approach to
the management of all the companys manufacturing resources including inventory, labour and
machine capacity. It seeks to ensure that resources are available just before they are needed by
the next stage of production or despatch. It also seeks to ensure that resources are delivered only
when required so that raw material inventory is kept to a minimum.
The technique enables managers to track orders through the manufacturing process and helps the
purchasing and production control departments to move the right amount of material or sub-
assemblies at the right time to the right place.
The current inventory management system relies on the assumption that there is constant
demand. An MRP system begins with the setting of a master production schedule specifying both
the timing and quantity demanded of each of the finished goods items and then works backwards
to determine the resource requirements at each stage of the production process. It aims to
generate a planned schedule of materials requirements after taking account of scheduled receipts,
projected inventory levels and items already allocated to production. The EOQ model can be used
within MRP provided that the major assumption in the EOQ model of constant demand applies.

Q3
(b) Discuss three reasons why the use of a standard costing system is considered
inappropriate in a company that operates in an advanced manufacturing technology
environment.
Examiners note: the question asks for three reasons. Examples of points that would be
rewarded are given below.
In a JIT environment measuring standard costing variances may encourage dysfunctional
behaviour. A JIT production environment relies on producing small batch sizes economically by
reducing set up times. Performance measures that benefit from large batch sizes or producing for
inventory should therefore be avoided.
In an AMT environment the major costs are those related to the production facility rather than
production volume related costs such as materials and labour which standard costing is essentially
designed to plan and control. Fixed overhead variances dont necessarily reflect under or
overspending but may simply reflect differences in production volume. An activity based cost
management system may be more appropriate, focusing on the activities that drive the cost.
In a total quality environment, standard costing variance measurement places an emphasis on
cost control to the detriment of quality. Cost control may be achieved at the expense of quality and
competitive advantage.
A continuous improvement environment requires a continual effort to do things better rather than
achieve an arbitrary standard based on prescribed or assumed conditions. In todays competitive
environment cost is market driven and is subject to considerable downward pressure. Cost
management must consist of both cost maintenance and continuous cost improvement.
In a JIT/AMT/TQM environment the workforce is usually organised into empowered, multi-skilled
teams controlling operations autonomously. The feedback they require is real time. Periodic
financial reports are neither meaningful nor timely enough to facilitate appropriate control action.


September 2010
Q3(c)
The advantages of a standard costing system that uses planning and operational variances
are:
The use of planning and operational variances enables management to draw a distinction
between variances caused by factors extraneous to the business and planning errors (planning
variances) and variances caused by factors that are within the control of management (operational
variances).
Less time is spent on investigating variances that are uncontrollable and the de-motivational
effect of staff being held responsible for factors that they cannot influence is avoided.
Operational managers performance can be compared with the adjusted standards that reflect
the conditions the manager actually operated under during the reporting period. If planning and
operational variances are not distinguished, there is potential for dysfunctional behaviour
especially where the manager has been operating efficiently and effectively and is being judged by
factors he cannot control.
The use of planning variances allows management to assess how effective the companys
planning process has been. Where a revision of standards is required due to environmental
changes that were not foreseeable at the time the budget was prepared, the planning variances
are uncontrollable. However standards that failed to anticipate known market trends when they
were set will reflect faulty standard setting. It could be argued that some of the planning variances
due to poor standard setting are in fact controllable at the planning stage.

November 2010
Q3 Discuss the ways in which the information obtained by the project team may be of
benefit to the management of the company.
(c) Under an activity based costing (ABC) system the various support activities that are
involved in the process of making products or providing services are identified. The cost
drivers that cause a change to the cost of these activities are also identified and used as the basis
to attach activity costs to a particular product or service. Through the tracing of costs to product in
this way ABC establishes more accurate costs for the product or service.
The identification of cost drivers provides information to management to enable them to take
actions to improve the overall profitability of the company. Cost driver analysis will provide
information to management on how costs can be controlled and managed. Variance analysis will
be more useful as it is based on more accurate costs. The establishment of more accurate
procedure costs should also help hospital managers to assess procedure profitability and make
better decisions concerning pricing and procedure mix decisions.
In the above example, the use of an ABC system has resulted in different levels of profit for each
of the procedures. It is apparent that the knee replacement procedure and the shoulder
replacement procedure are more profitable than was thought under the absorption costing system.
The shoulder replacement procedure however is making a significantly lower margin that the knee
replacement procedure. The hip replacement procedure is now shown to be loss making. This
additional information will enable management to make important decisions regarding pricing of
the procedures. The price of the knee replacement procedure could potentially be reduced to
make it more competitive and increase volumes. The price of both the hip replacement and
shoulder replacement procedures could be increased to make these procedures more profitable.
Before making any decision regarding pricing however they would need to review market prices
and consider the effect any adjustment would have on the companys market position. If market
conditions would not allow an increase in price of both hip and shoulder replacement procedures
they could look at ways to reduce the costs of these procedures. ABC gives more detailed
information about how costs are incurred and the potential for cost reduction by reducing activity
levels. Alternatively they may want to consider whether to discontinue the hip replacement
procedures altogether and replace them with a more profitable use of resources. This decision
may not be appropriate however if part of the marketing strategy is for the company to provide a
range of complementary procedures.
An activity based costing system can be extended beyond product and service costing to a range
of cost management applications known as activity based management. These include the
identification of value added and non value added activities and performance management in
terms of measuring efficiency through cost driver rates.

November 2011
Q2
(d) Explain THREE benefits that a company could gain from using environmental costing.
Examiners note: the question asks for three benefits. Examples of points that would be
rewarded are given below.
Increased awareness of the impact of environment related activities on their financial statements
Organisations that alter their management accounting practices to incorporate environmental
concerns will have greater awareness of the impact of environment related activities on their
financial statements. This is because conventional management accounting systems tend to
attribute many environmental costs to general overhead accounts with the result that they are
hidden from management.
Cost reduction
Organisations which adopt environmental cost management principles are more likely to identify
and take advantage of cost reduction and other improvement opportunities.
Improved decision making
A concern with environmental costs will also reduce the chances of employing incorrect pricing of
products and services and taking the wrong options in terms of mix and development decisions.
This in turn may lead to enhanced customer value while reducing the risk profile attaching to
investments and other decisions which have long term consequences.
Avoidance of costs of failure
A lack of concern for the environment can result in significant costs, for example the associated
costs of clean-up and financial penalties associated with environmental disasters.
Avoidance of damage to the companys reputation
A concern with environmental costs will also reduce the risk of damage to the companys
reputation. The well publicised Brent Spar incident that cost the oil company Shell millions of
pounds in terms of lost revenues via the resultant consumer boycott is an example of the powerful
influence that environmental concern has in todays business environment. Shell learned the
lesson, albeit somewhat belatedly and as a result completely re-engineered their environmental
management system.

Q3
(b) Discuss the usefulness of the planning and operational variances calculated in part (a)
for TPs management.
The calculation of planning and operational variances will be useful to TP for the following
reasons:
The use of planning and operational variances will enable TPs management to draw a distinction
between variances caused by factors extraneous to the business and planning errors (planning
variances) and variances caused by factors that are within the control of management (operational
variances). In this case they can separate the materials price variance caused by general price
rises (planning variance) and the price variance as a result of efficient or inefficient procurement.
The purchasing managers performance can be compared with the adjusted standards that
reflect the conditions the manager actually operated under during the reporting period. If planning
and operational variances are not distinguished, there is potential for dysfunctional behaviour
especially where the manager has been operating efficiently and effectively and performance is
being judged by factors outside the managers control. In the case of TP it became evident during
the period that the prevailing market prices for materials were significantly less than those set
during the budget process. It can be seen from the reconciliation statement that the operational
performance of the material buyers was poor with large adverse operational price variances on
both of the ingredients A and B which was slightly offset by a favourable variance on ingredient C.

The use of planning variances will also allow TPs management to assess how effective the
companys planning process has been. Where a revision of standards is required due to
environmental changes that were not foreseeable at the time the budget was prepared, the
planning variances are uncontrollable. However standards that failed to anticipate known market
trends when they were set will reflect faulty standard setting. It could be argued that some of the
planning variances due to poor standard setting are in fact controllable at the planning stage.

(d) Explain the benefits that TP should gain from operating a JIT purchasing system for materials.
JIT purchasing involves having an arrangement with a small number of key suppliers where the
supplier is able to provide raw materials or components on demand or with a very short lead time.
This means that the company can hold zero or very little inventory thus reducing the costs
involved with holding inventory including storage costs, insurance costs and obsolescence costs.
The costs involved with ordering inventory may however increase. The use of a small number of
suppliers should also reduce administrative costs for the company and result in greater quantity
discounts. The successful operation of a JIT purchasing system involves the company working
together with their suppliers to ensure that they can rely on receiving supplies at the right time and
at the required quality level. This should result in a reduction in quality control costs for the
company. Quality standards should improve resulting in lower wastage in the production process.

March 2012
Q2
(d) Explain what is meant by both of these categories giving TWO examples of each type of
environmental cost.
Environmental internal failure costs
These are costs that are incurred after hazardous materials, waste and/or other contaminants
have been produced. The costs are incurred in order to comply with both externally and internally
imposed standards. Examples include treating and disposing of toxic materials and recycling
costs.
Environmental external failure costs
These are incurred when there are failures of internal control and hazardous materials, waste or
contaminants have been introduced into the environment. Examples of costs that an organisation
has to pay include decontaminating land or cleaning a river after leakages. Organisations may
also be subject to penalties imposed by the government for these external failures. These costs
can give rise to adverse publicity. Some external failure costs may be caused by the organisation
but paid by society.

Q3
(d) Explain the importance of separating variances into their planning and operational
components.
The calculation of planning and operational variances is important for the following reasons:
The use of planning and operational variances will enable management to draw a distinction
between variances caused by factors extraneous to the business and planning errors (planning
variances) and variances caused by factors that are within the control of management (operational
variances).
The managers performance can be compared with the adjusted standards that reflect the
conditions the manager actually operated under during the reporting period. If planning and
operational variances are not distinguished, there is potential for dysfunctional behaviour
especially where the manager has been operating efficiently and effectively and performance is
being affected by factors that the manager cannot control. In part c) the labour rate variance was
$1,108A however it can be clearly seen that $1,248A was a result of a planning error and was not
within the control of the operational managers.
The use of planning variances will also allow management to assess how effective the
companys planning process has been. Where a revision of standards is required due to
environmental changes that were not foreseeable at the time the budget was prepared, the
planning variances are uncontrollable. However standards that failed to anticipate known market
trends when they were set will reflect faulty standard setting. It could be argued that some of the
planning variances due to poor standard setting are in fact controllable at the planning stage.

May 2012
Q2 Explain the benefits that should result from the company using a centralised
purchasing system.
The advantages of a centralised purchasing system are as follows:
A centralised buyer is able to order in larger quantities and may be able to negotiate bulk buying
discounts.
A centralised buyer may have a wider network of suppliers than a local buyer and should be able
to ensure that the best available prices are identified.
With centralised purchasing it is easier to enforce common quality standards for purchased
materials.
Centralised purchasing should result in more efficient management of inventory. The buyer
should have access to information about the current inventory levels at all locations in the
organisation and where appropriate can arrange for inventory to be transferred from one location
to another to avoid purchasing additional quantities.
In an organisation where the operating units are all within a small geographical area it should
also be possible to operate a single centralised stores location. It should be easier to control
inventory levels within a centralised store rather than with several localised stores.
The company should benefit from economies of scale and the reduction in administration costs.
As larger orders are being placed with suppliers it will also reduce inventory ordering and handling
costs.
Centralised purchasing should enable closer relationships with suppliers and allow the use of JIT
inventory management techniques.

Q3
(c) Explain the arguments for the use of traditional absorption costing rather than marginal
costing for profit reporting and inventory valuation.
The arguments used in favour of using absorption costing for profit reporting and inventory
valuation are as follows:
Fixed production overheads can be a large proportion of total production costs. It is therefore
important that these costs are included in the measurement of product costs as they have to be
recovered to make a profit.
Absorption costing follows the matching concept by carrying forward a proportion of the fixed
production overhead costs in the inventory valuation to be matched against the sales revenue
generated when the items are sold.
It is necessary to include fixed production overheads in inventory valuations for financial
statements.
It has been argued that in the longer term all costs are variable and it is appropriate to try to
identify overhead costs with the products or services that cause them.

September 2012
Q2
c) Explain the disadvantages for a company of using a centralised purchasing system.
The disadvantages of a centralised purchasing system are as follows:
It may result in increased transport costs with a consequential impact on the environment.
A centralised purchasing system is likely to be more bureaucratic and unable to respond to
inventory shortages as quickly as a local buyer.
A local buyer may be more flexible and able to respond to temporary reductions in local prices
that a central purchasing manager may be unaware of.
Local buyers may be able to develop stronger relationships with local suppliers thus possibly
ensuring greater reliability of supply and the opportunity for JIT purchasing and reduced
inventories.
Local suppliers may offer varied products thus enabling differentiation of finished products.
The opportunity to delegate responsibility for aspects of the management of the business and the
benefits in terms of management development will not be available.
A centralised purchasing system is not appropriate where managers have been given
responsibility for the financial management of their particular operating unit. Where this is the case
the responsibility for purchasing and inventory management decisions should also be given to the
managers.

Q3
(b) Explain the benefits to the company of separating the sales volume profit variance into
the sales mix profit margin variance and the sales quantity profit variance. You should use
the figures calculated in part (a) to illustrate your answer.
By separating the sales volume profit variance into the quantity and mix variance, we can explain
how the sales volume is affected by a change in the total physical volume of sales and a change in
the relative mix of products. The sales quantity profit variance indicates that if the original planned
sales mix had been maintained for the actual sales volume of 4,500 units, profits would have
increased by $25,844. However because the actual sales mix was not in accordance with the
budgeted sales mix, an adverse mix variance of $1,969 occurred. The adverse mix variance arose
because there was an increase in the percentage of units sold of Product B which has the lowest
profit margin and a decrease in the percentage sold of Product C which has the highest profit
margin.
The separation of the sales volume variance into the quantity and mix components demonstrates
that increasing or maximising sales volume may not be as beneficial as promoting the sales of the
most profitable mix of products.

(c) Explain TWO reasons why a standard costing system may not be considered
appropriate in a modern manufacturing environment.
Examiners note: the question asks for TWO reasons. Examples of points that would be rewarded
are given below.
In a JIT environment measuring standard costing variances may encourage dysfunctional
behaviour. A JIT production environment relies on producing small batch sizes economically by
reducing set up times. Performance measures that benefit from large batch sizes or producing for
inventory should therefore be avoided.
In an AMT environment the major costs are those related to the production facility rather than
production volume related costs such as materials and labour which standard costing is essentially
designed to plan and control. Fixed overhead variances do not necessarily reflect under or
overspending but may simply reflect differences in production volume. An activity based cost
management system may be more appropriate, focusing on the activities that drive the cost.
In a total quality environment, standard costing variance measurement places an emphasis on
cost control to the detriment of quality. Cost control may be achieved at the expense of quality and
competitive advantage.
A continuous improvement environment requires a continual effort to do things better rather than
achieve an arbitrary standard based on prescribed or assumed conditions. In todays competitive
environment cost is market driven and is subject to considerable downward pressure. Cost
management must consist of both cost maintenance and continuous cost improvement.
In a JIT/AMT/TQM environment the workforce is usually organised into empowered, multi-skilled
teams controlling operations autonomously. The feedback they require is real time. Periodic
financial reports are neither meaningful nor sufficiently timely to facilitate appropriate control
action.

November 2012
Q4
(c) Explain TWO factors related to JKs approach to environmental issues that should be
considered before making a final decision about the project.
There are a number of environmental factors that are difficult to quantify as follows:
The investment offers significant reduction in waste and external failure costs. The company may
place a value on these above the quantifiable cost savings particularly in view of its commitment
and previous proactive approach to minimising negative environmental impact.
Potential impact on the company image and future sales from being seen as an environmentally
friendly company.
Potential savings in environmental costs relating to pollution and the consequential cost to health
care and the global environment.
Potential saving in future compliance costs if the government changes the compliance levels
required.
The pressure from government, shareholders and other stakeholders to improve environmental
management.

Q3
(b) Explain why an activity based costing system may produce more accurate product
costs than a traditional absorption costing system.
Under an activity based costing (ABC) system the various support activities that are involved in
making products or providing services are identified. ABC recognises that there are many different
drivers of cost not just production or sales volume. The cost drivers are identified in order to
recognise a causal link between activities and costs. They are then used as the basis to attach
activity costs to a particular product or service. Through the tracing of costs to cost objects in this
way, ABC establishes more accurate costs for the product or service.
(c) Explain the possible other benefits to the company of introducing an activity based costing
system. You should use the figures calculated in part (a) to illustrate your answer.
The cost drivers identified under an ABC system provide information to management to enable
them to take actions to improve the overall profitability of the company. Cost driver analysis will
provide information to management on how costs can be controlled and managed. Variance
analysis will also be more useful as it is based on more accurate product costs. The establishment
of more accurate product costs should also help managers to assess product profitability and
make better decisions concerning pricing and product mix.
Based on the existing method of absorbing production overheads, the profitability for each model
is as
The Ultra model is even less profitable than originally thought and the company will need to look at
ways that profitability can be improved. Cost driver analysis may give an indication of how this
might be achieved. Alternatively, depending on market conditions, the company may have to
consider increasing the price of this model. The Deluxe model under the ABC system is more
profitable than the Superior model. The company may wish to direct its marketing efforts towards
this model to increase the volume sold and the overall company profitability.
An ABC system can be extended beyond product costing to a range of cost management
applications known as activity based management. These include the identification of value added
and non value added activities and performance management in terms of measuring efficiency
through cost driver rates.

March 2013
Q3)
(b) Explain how the information obtained from the activity based costing system might be
used by the management of the company.
Using an activity based costing (ABC) system the cost drivers that cause a change to the cost of
activities are identified. These cost drivers provide information to management to enable them to
take actions to improve the overall profitability of the company. Cost driver analysis will provide
information to management about how costs can be controlled and managed. Variance analysis
will also be more useful as it is based on more accurate costs. The establishment of more
accurate product costs should also help managers to assess product profitability and make better
decisions concerning pricing and product mix.
In this example the use of an ABC system has resulted in different levels of profit for each of the
product groups. It is apparent that the Clothing product group is less profitable than thought and
that both Electrical and Homeware are more profitable using the ABC system than using the
absorption costing system. This information will enable management to make important decisions
regarding pricing of the product groups. The prices in both the Electrical and Homeware product
groups could potentially be reduced to make them more competitive and increase volumes. The
prices in the Clothing product group could be increased to make the product group more
profitable. Before making any decisions however managers would need to review market prices
and consider the effect of any adjustment on the companys market position. If market conditions
would not allow an increase in price they could look at ways to reduce costs of clothing in
particular. ABC gives more detailed information about how costs are incurred and the potential for
cost reduction by reducing activity levels. The company may also consider the possibility of
discontinuing the clothing product group as it is loss-making or allocating less store space to that
product group.
An activity based costing system can be extended beyond product costing to a range of cost
management applications known as activity based management. These include the identification
of value added and non value added activities and performance management in terms of
measuring efficiency through cost driver rates.

(c) Explain the circumstances under which an activity based costing system would produce
similar product costs to those produced using a traditional absorption costing system.
Using an activity based costing (ABC) system the various support activities that are involved in
making products or providing services are identified. ABC recognises that there are many different
drivers of cost, not just production or sales volume. The cost drivers are identified in order to
recognise a causal link between activities and costs. They are then used as the basis to attach
activity costs to a particular product or service. However in some circumstances an activity based
costing system will produce similar product costs to those produced using a traditional absorption
costing system as follows:
When consumption of overheads is primarily driven by volume.
When overhead costs are low relative to direct costs.
Where there is little diversity in the product range resulting in similar overhead resource input to
all products.
Where products are not complex or where products are mass produced.

May 2013
Q3
(c) Explain why planning and operational variances provide better information for planning
and control purposes.
The calculation of planning and operational variances is useful for the following reasons:
The use of planning and operational variances will enable management to draw a distinction
between variances caused by factors uncontrollable by the business and planning errors (planning
variances) and variances caused by factors that are within the control of management (operational
variances). In this case they can separate the materials usage variance caused by the substitute
material (planning variance) and the variance as a result of efficient or inefficient production.
The managers performance can be compared with the adjusted standards that reflect the
conditions the manager actually operated under during the reporting period. If planning and
operational variances are not distinguished, there is potential for dysfunctional behaviour
especially where the manager has been operating efficiently and effectively and performance is
being judged according to factors outside the managers control.
The use of planning variances will also allow management to assess how effective the
companys planning process has been. Where a revision of standards is required due to
environmental changes that were not foreseeable at the time the budget was prepared, the
planning variances are uncontrollable. However standards that failed to anticipate known market
trends when they were set will reflect faulty standard setting. It could be argued that some of the
planning variances due to poor standard setting are in fact controllable at the planning stage.
The information used in setting the ex-post standards can be used in future budget periods. The
planning variances may also indicate problems in the standard setting process and the reasons for
this can be identified and improvement made to the process.

(d) Explain TWO factors that a company should consider before deciding whether to
investigate a variance.
The size of the variance
It is not possible to budget with complete accuracy therefore a company will need to decide how
large a variance needs to be before it is considered abnormal and worthy of investigation.
The likelihood of the variance being controllable
Some variances particularly those that arise as a result of external factors may be uncontrollable
and therefore the costs of the investigation would result in no benefit to the company.
The likely cost versus the potential benefits of the investigation
The company will need to weigh up the costs of the investigation versus the benefit from avoiding
the variance occurring in the future.
The interrelationship between variances
A favourable variance in one area may result in an adverse variance in another area. For example,
the decision to use lower quality material may result in a favourable material price variance but an
adverse material usage variance.

September 2013
Q2
c) Explain the potential benefits for a company from using a just-in-time (JIT) production
system.
A just-in-time (JIT) production system is based on actual demand. JIT production aims to produce
the right parts or finished goods at the right time only when they are needed. A JIT production
system is a pull system where parts or goods move through the production system based on
demand.
The use of a JIT production system should result in the following benefits:
Low levels of work in progress and finished goods and consequently a reduction in the costs
involved in holding inventory.
The elimination of waste which is defined as anything that does not add value to the product.
The elimination of any non-value added activities including inspections, movement of materials
and part-completed work and storage of inventory. This involves moving from a batch production
functional factory layout to a cellular flow line manufacturing system to avoid move times and
queue times.
An increase in quality since low quality materials will result in disruption to the production
process, increased inspection time and wastage.
JIT production techniques can also lead to JIT purchasing whereby the delivery of materials
immediately precede their use. This will bring the following additional benefits:
Low levels of raw materials and of the costs involved with holding raw materials.
A reduction in quality control costs for the company as a result of the close relationships with a
small number of suppliers.
An increase in quality standards resulting in lower wastage in the production process and hence
reduced wastage costs.

Q3
(b) Explain why separating the sales volume variance into a sales mix and a sales quantity
variance will provide useful information for the companys sales manager. You should use
the variances calculated in (a) to illustrate your answer
The sales volume variance will enable the sales manager to identify the effect on contribution of
the sales teams failure to meet the revised sales budget. By separating this into a sales mix and a
sales quantity variance the sales manager will be able to determine how much of the total adverse
variance was due to the failure to meet the total budget sales quantity and how much was due to
the actual sales being at a different mix from the budget mix.
The sales quantity contribution operational variance compares the actual volume sold at the
budgeted mix with the budgeted volume at the budgeted mix. The budgeted figures used are the
revised budget after taking account of the planning variances. The variance is adverse and
indicates that if 2,000 additional units had been sold at the budgeted mix a further $255,000
contribution would have been earned.
The sales mix contribution operational variance compares the actual units sold at the budgeted
mix with the actual units sold at the actual mix. The budgeted figures used are the revised budget
after taking account of the planning variances. It indicates the effect that a change of mix has had
on the contribution earned. The variance is adverse as sales of both the deluxe and the superfast
models were lower than expected using the budgeted mix. Sales of the premium model were
higher than expected under the budget mix but this model has the lowest contribution.

(c) Explain why separating variances into their planning and operational components
provides better information for planning and control purposes.
Planning and operational variances provide better information for planning and control purposes
for the following reasons:
The use of planning and operational variances will enable management to draw a distinction
between variances caused by factors outside the control of the business and planning errors
(planning variances) and variances caused by factors that are within the control of management
(operational variances). In this case they can separate the sales quantity contribution variance to
show the variance caused by inaccurate planning as a result of not considering the impact of the
competitors failure on sales volume (planning variance) and the operational variance as a result of
efficient or inefficient selling.
The managers performance can be compared with the adjusted standards that reflect the
conditions the manager actually operated under during the reporting period. If planning and
operational variances are not distinguished, there is potential for dysfunctional behaviour
especially where the manager has been operating efficiently and effectively and performance is
being judged by factors outside the managers control.
The use of planning variances will also allow management to assess how effective the
companys planning process has been. Where a revision of the budget is required due to changes
that were not foreseeable at the time the budget was prepared, the planning variances are
uncontrollable. However budgets that failed to anticipate foreseeable market trends when they
were set will reflect faulty planning. It could be argued that some of the planning variances are in
fact controllable at the planning stage.
The information used in setting the ex-post standards can be used in future budget periods. The
planning variances may also indicate problems in the standard setting process and the reasons for
this can be identified and improvement made to the process

November 2013
Q2
e) Explain THREE ways in which an environmental costing system can lead to improved
financial performance.
Examiners note: the question asks for three ways. Examples of points that would be rewarded are
given below.
Cost reduction
Organisations that have an effective environmental costing system are more likely to identify and
take advantage of cost reduction and other improvement opportunities. Cost reductions will arise
as a result of reduction in wastage and disposal costs. Organisations that are aware of
environmental costs have benefited from additional revenues as a result of recycling waste.
Increased revenues
An awareness of the extent of environmental costs may result in the production of products that
meet the environmental needs of or concerns of customers. This can result in an improved
company image which can lead to increased sales. It may also be possible to sell these products
at a premium price.
Improved decision making
An awareness of environmental costs will also reduce the chances of employing incorrect pricing
of products and services and taking the wrong options in terms of mix and development decisions.
This in turn may lead to enhanced customer value while reducing the risk profile attaching to
investments and other decisions which have long term consequences.
Avoidance of costs of failure
A lack of awareness of environmental costs can result in environmental failures and significant
additional costs, for example the associated costs of clean-up and financial penalties associated
with environmental disasters. The well publicised BP oil spill in the Gulf of Mexico has so far cost
the oil company billions of dollars in penalties and fines.

Q4
(c) Explain THREE non-financial factors that JK would need to consider before deciding
whether to outsource production
Examiners note: the question asks for three factors. Examples of points that would be
rewarded are given below.
Quality: can the outsourcing company produce the same quality of product as JKs other models?
JK has a reputation for high quality and this reputation could easily be destroyed if the outsourcing
company are unable to produce the new model to the same quality standard.
Reliability: can the outsourcing company be relied on to deliver the products when required by
JKs customers? This may especially be a potential problem as the outsourcing company is based
overseas and if the product is only for the home market. This may result in the need to maintain
high stocks of the product and if the outsourcing company is unable to meet the delivery schedule
result in lost sales for this model and potentially in lost sales for JKs other models.
Management control: the company would need to manage the relationship with the outsourcing
company. The fact that the outsourcing company is based overseas may make the relationship
more difficult to manage. This may involve some additional costs that have not been considered in
the net present value calculations.
Financial strength of the outsourcing company: JK is reliant on the outsourcing company being
able to provide the new model for at least the period of the outsourcing contract.

March 2014
Q2
e) Explain THREE benefits that may arise for a company that uses an environmental
costing system.
Examiners note: the question asks for three benefits. Examples of points that would be rewarded
are given below.
Increased awareness of the impact of environment related activities on their financial statements
Organisations that use an environmental costing system will have greater awareness of the impact
of environment related activities on their financial statements. This is because conventional
management accounting systems tend to attribute many environmental costs to general overhead
accounts with the result that they are hidden from management.
Cost control / reduction
Organisations which adopt environmental cost management principles are more likely to identify
and take advantage of cost reduction and other improvement opportunities. Identifying and
monitoring the usage and cost of resources such as water, electricity and fuel will result in better
control of the cost of these resources and identification of potential for cost reduction.
More accurate product costs / improved decision making
A good environmental costing system will produce more accurate product costs. This will reduce
the chances of employing incorrect pricing of products and services and taking the wrong options
in terms of mix and development decisions. Lack of cost information can result in the cross
subsidisation of environmentally damaging products.
Environmental risk management
Improved environmental cost information will enable environmental considerations to form part of
investment decisions. The likelihood and impact of environmental risks can also be assessed.

Q3
(c) Explain why a standard costing system may not be considered appropriate in a modern
manufacturing environment.
In a JIT environment measuring standard costing variances may encourage dysfunctional
behaviour. A JIT production environment relies on producing small batch sizes economically by
reducing set up times. Performance measures that benefit from large batch sizes or producing for
inventory should therefore be avoided.
In an AMT environment the major costs are those related to the production facility rather than
production volume related costs such as materials and labour, which standard costing is
essentially designed to plan and control. Fixed overhead variances dont necessarily reflect under
or overspending but may simply reflect differences in production volume. An activity based cost
management system may be more appropriate, focusing on the activities that drive the cost.
In a total quality environment, standard costing variance measurement places an emphasis on
cost control to the detriment of quality. Cost control may be achieved at the expense of quality and
competitive advantage.
A continuous improvement environment requires a continual effort to do things better rather than
achieve an arbitrary standard based on prescribed or assumed conditions. In todays competitive
environment cost is market driven and is subject to considerable downward pressure. Cost
management must consist of both cost maintenance and continuous cost improvement.
In a JIT/AMT/TQM environment the workforce is usually organised into empowered, multi-skilled
teams controlling operations autonomously. The feedback they require is real time. Periodic
financial reports are neither meaningful nor timely enough to facilitate appropriate control action.