MODULE: MANAGEMENT ACCOUNTING.

EXAMINATION 2 hours 10 minutes.

SECTION A:
Question 1

York plc was formed three years ago by a group of research scientists to
market a new medicine that they had invented. The technology involved
in the medicines manufacture is both complex and expensive. Because of
this, the company is faced with a high level of fixed costs.
This is of particular concern to Dr Harper, the companys chief executive.
She recently arranged a conference of all management staff to discuss
company profitability. Dr Harper showed the managers how average unit
cost fell as production volume increased and explained that this was due
to the companys heavy fixed cost base. It is clear, she said, that as we
produce closer to the plants maximum capacity of 70 000 packs the
average cost per pack falls. Producing and selling as close to that limit as
possible must be good for company profitability. The data she used are
reproduced below:
Production

40000

50000

60000

70000

388

360

340

volume
(packs)
Average cost 430
per unit*

*Defined as the total of fixed and variable costs, divided by the production
volume
Current sales and production volume: 65 000 packs
Selling price per pack: 420
REQUIRED
(a) Calculate the amount of York plcs fixed costs and the profit of the
company at its current sales volume of 65 000 packs

(10 marks)
(b) The break-even point in units and the margin of safety expressed as a
percentage.
(8 marks)
(c) Refer to the original: Dr Harper had once more emphasized the need to
produce as close as possible to the maximum capacity of 70 000 packs.
The marketing director has the possibility of obtaining an export order for
an extra 5000 packs but, because the competition is strong, the selling
price would only be 330. Dr Harper has suggested that this order should
be rejected as it is below cost and so will reduce company profitability.
However, she would be prepared, on this occasion, to sell the packs on a
cost basis for 340 each, provided the order was increased to 15 000
packs:
(i) calculate the change in profits from accepting the order for 5000
packs at 330;
(ii) calculate the change in profits from accepting an order for 15 000
packs at 340;
(14 marks)
(d) Briefly explain and justify which proposal, if either, should be accepted.
(8 marks)
[Total 40 marks]

SECTION B

Question 2
The following data and estimates are available for ABC Limited for June,
July and August.

Sales
Wages
Overheads

June
()
45000
12000
8500

July
()
50000
13000
9500

August
()
60000
14500
9000

The following information is available regarding direct materials:

Opening

June
()
5000

July
()
3500

August
()
6000

stock
Material

8000

9000

10000

September
()
4000

usage
Notes
1. 10% of sales are for cash, the balance is received the following month.
The amount received in June for Mays sales is 29 500.
2. Wages are paid in the month they are incurred.
3. Overheads include 1500 per month for depreciation. Overheads are
settled the month following. 6500 is to be paid in June for Mays
overheads.
4. Purchases of direct materials are paid for in the month purchased.
5. The opening cash balance in June is 11 750.
6. A tax bill of 25 000 is to be paid in July.
REQUIRED

(a) Prepare a schedule of expected cash collections for June, July and
August.
(7 marks)
(b) Calculate the amount of direct material purchases in each of the
months of June, July and August.
(8 marks)
(c) Prepare cash budgets for June, July and August.
(10 marks)
(d) The principal purpose of the cash budget is to see how much cash
the company will have in the bank at the end of the period. Critically
discuss this statement
(5 marks)
[Total 30 marks]
Question 3
The following standard costs were developed for one of the products of
Larry Ltd.:

STANDARD COST CARD PER UNIT

Materials: 4 feet @ 14 per foot

56.00

Direct labour: 8 hours @ 10 per hour

80.00

Variable overhead: 8 hours @ 8 per hour

64.00

Fixed overhead: 8 hours @ 12 per hour

__96.00

Total standard cost per unit

296.00

The following information is available regarding the company's operations

for the period:
Units produced:

11,000

Materials purchased:

52,000 feet @ 13.70

per foot

Materials used:

40,000 feet

Direct labour:

84,000 hours costing

840,000

Manufacturing overhead incurred:

Variable

756,000

Fixed

1,000,000

Budgeted fixed manufacturing overhead for the period is 960,000, and

the standard fixed overhead rate is based on expected capacity of 80,000
direct labour hours.
REQUIRED
(a) Determine the following:

i.

price and quantity variances for direct materials

ii.

(6 marks)
rate and efficiency variances for direct labour

iii.

marks)
rate and

iv.

(6 marks)
rate and efficiency variance for fixed overhead

efficiency

variances

for

variable

(6
overheads

(6 marks)
(b)

Prepare

variances

report.

(6 marks)

[Total 30 marks]
Question 4
A. Meridian Ltd makes 30,000 units per year of part AS400 used in the
range of electrical goods it manufactures. The unit costs of this part are as
follows:

Direct Materials

24.70

Direct Labour

16.30

Variable manufacturing overhead

2.30

Fixed manufacturing overhead

13.40

Total

56.70

An outside supplier has offered to supply Meridian Ltd with as many of

these parts as it needs, for 44.50 each.
If the part were purchased from the outside supplier, all direct labour costs
associated with the product could be avoided, but in the short term, all
fixed overhead costs would have to be reapportioned over the remaining
product range.
REQUIRED
(i) Calculate the relevant cost per unit of part AS400 in relation to the
decision of whether to make or buy in the part.
(7 marks)
(ii) If Meridian accept the offer to purchase the part from the outside
supplier, the production facilities now being used to make the part could
be used to make 4,000 more units of its best-selling product, each of
which generate a contribution of 11.
Taking into account this additional information, what is the total additional
cost or saving of purchasing 30,000 units per year of AS400 rather than
making it?
(8 marks)
B. Charter Sports Equipment manufactures round, rectangular, and
octagonal trampolines. Data on sales expenses for the past month follow:
Trampoline
Total

Round

Rectangula Octagonal
r

Sales

1,000,000 140,000 500,000

360,000

Less variable expenses

410,000

60,000

200,000

150,000

Contribution margin

590,000

80,000

300,000

210,000

Advertising traceable 216,000

41,000

110,000

65,000

Depreciation of special 95,000

20,000

40,000

35,000

6,000

7,000

6,000

Less fixed expenses:

equipment
Line supervisors

19,000

salaries
General factory

200,000

28,000

100,000

72,000

Total fixed expenses

530,000

95,000

257,000

178,000

Net operating profit (loss)

60,000

(15,000) 43,000

32,000

overhead*

*A common cost that is allocated on the basis of sales

Additional information:
Management is concerned about the continued losses shown by the round
trampolines and wants a recommendation as to whether or not the line
should be discontinued. The special equipment used to produce the
trampolines has no resale value. If the round trampoline model is dropped,
the two line supervisors assigned to the model would be discharged.
REQUIRED
(i) Should production and sale of the round trampolines be discontinued?
You may assume that the company has no other use for the capacity now
being used to produce the round trampolines. Show computations to
support your answer.
(7 marks)
(ii) Recast the above data in a format that would be more usable to
management in assessing the long-run profitability of the various product
lines.
(8 marks)
[Total: 30 marks]
Question 5
(a) Critically discuss the cost-volume-profit analysis. In your discussion
you need to discuss how this analysis can be useful, list five assumptions
that

are

necessary

to

make

cost-volume-profit

analysis

tractable

(feasible), and explain the limitation of basic cost-volume-profit analysis

as it relates to an organization's sales mix.
(15 marks)
(b) Critically discuss the assumptions underlying the Balanced Scorecard.
In your discussion you should indicate features of a good Balanced
Scorecard and pitfalls when implementing a Balanced Scorecard and
general criticisms of the Balanced Scorecard.
(15 marks)

[Total: 30 marks]

END OF EXAMINATION