BMAC5203/MAY 2010-F/FA

INSTRUCTIONS: 1. THERE ARE FIVE (5) QUESTIONS IN THIS PAPER.

2. ANSWER FOUR (4) QUESTIONS ONLY.

Question 1

A company which produces a range of products is facing two situations where decisions
need to be made. The company’s total budgeted production overhead is RM160,000.
The production overhead consists of both variable and fixed costs and it is calculated in
the following proportion:

RM
Variable production costs (40%) 64,000
Fixed production costs (60%) 96,000

Problem 1
The normal selling price of product X is RM22 and production costs for one unit is:

RM
Direct materials 8
Direct labour 4
Production overhead (variable and fixed) 8
20

There is a possibility of supplying a special order for 2,000 units of product X at

RM16 each. If the order were accepted, the normal budgeted sales would not be
affected and the company has the necessary capacity to produce the additional
units.

Problem 2

The cost of making component Q, which forms part of product Y is stated below:

RM
Direct materials 4
Direct labour 8
Production overhead (variable and fixed) 16
28

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Component Q could be bought from an outside supplier for RM20.

Assuming that fixed production costs will not change, you are required to:

a. State whether the company should:

i) accept the special order in Problem 1; or

ii) continue making component Q or buy it from outside in Problem 2.
(Hint: Your statements must be supported by details of costs)

[10 marks]
b. Comment on the principle which you have followed in your cost analysis to arrive at your
decisions to the two problems.
[8 marks]

c. Company Z absorbs overheads on a labour hour basis. The management of

company Z has collected overhead information for the last four months and this is
shown below:
Hours worked Overhead cost
RM
Month 1 9,300 115,000
Month 2 9,200 113,600
Month 3 9,400 116,000
Month 4 9,600 116,800

Required:
Using the high-low method, estimate the overhead cost for Company Z if the hours
worked was 10,000 in Month 5.
[7 marks]
[TOTAL: 25 MARKS]

Question 2

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Ehsan Company has established the following cost pools for 2007:
Cost Pools Committed Cost Drivers Level
Costs
RM
Maintenance 20,000 Machine hours 10,000
Materials handling 25,000 Number of moves 250
Machine setup 30,000 Setup hours 1,000
Inspection 25,000 Number of 500
inspections

Total
100,000

The following information pertains to two representative jobs completed during January
2007:
Item J101 J102
Direct materials cost RM10,000 RM7,500
Direct labour cost RM8,000 RM5,500
Number of units 2,000 1,500
Direct labour hours 640 400
Machine hours 700 650
Number of material moves 40 15
Number of setup hours 80 40
Number of inspections 35 15

Required:

a. Determine the unit cost of each job using machine hours to allocate all support costs.
[6 marks]
b. Determine the unit costs of each job using activity-based costing.
[14 marks]
c. Which of the two above methods produces more accurate estimates of job costs?
Explain.
[5 marks]

[TOTAL: 25 MARKS]

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Question 3

Y and Z are two divisions of a large company that operate in similar markets. The divisions
are treated as investment centres and every year they prepare an operating statement to be
submitted to the parent company. The operating statements of the two divisions are shown
below:

Y Z
(RM’000) (RM’000)
Sales 10,800 6,660
Less cost of goods sold 4,140 3,744
Gross profit 6,660 2,916
Less: Other Expenses 5,196 2,664
Net profit 1,464 252
Total divisional net assets (RM’000) RM9,670 RM1,260

The company has a target return on capital of 12%. However, the company believes its cost
of capital is likely to rise and is considering increasing the target return on capital. At present
the performance of each division and the divisional management are assessed primarily on
the basis of return on investment (ROI).

Required:

a. Calculate the return on investment (ROI) for division Y and division Z. Discuss the
relative performance of the two divisions using the ROI data and other information
given above.
[10 marks]

b. Calculate the residual income (Rl) for division Y and division Z. Explain the
implication of this information for the evaluation of the divisions' performance.
[8 marks]

c. Identify and explain TWO (2) other types of responsibility centres.

[7 marks]
[TOTAL: 25 MARKS]

Question 4

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Massey Bhd uses a comprehensive budgeting process and compares actual results to
budgeted amounts on a monthly basis. Each month, Massey Bhd's accounting department
prepares a variance analysis and distributes the report to all responsible parties. The production
manager is upset about the results for May. The production manager, who is responsible for
the cost of goods manufactured, has implemented several cost-cutting measures in the
manufacturing area and is discouraged by the unfavorable variance in variable costs.

Massey Bhd
Operating Results for the Month of May
Master Budget Actual Variance
Units sold 5,000 4.800 200 U
RM RM RM
Revenue 1,200,000 1,152,000 48,000 U
Less: Variable cost 760,000 780,000 20,000 U
Contribution margin 440,000 372,000 68,000 U
Less: Fixed overhead 180,000 180,000 -
Fixed general and administrative cost 120,000 115,000 5,000 F
Operating income 140,000 77,000 63,000

When the master budget was prepared, the cost accountant supplied the following unit costs:
i) Direct material, RM60
ii) Direct labour, RM44
iii) Variable overhead, RM36
iv) Variable selling, RM12

The total variable costs of RM780,000 for May include the following:
i) RM320,000 for direct material
ii) RM192,000 for direct labour
iii) RM176,000 for variable overhead
iv) RM92,000 for variable selling expenses.

The cost accountant believes that Massey’s monthly reports would be more meaningful to
everyone if the company adopted flexible budgeting and prepared more detailed analyses.

Required:

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a. Prepare a flexible budget for Massey Bhd for the month of May that includes separate
variable-cost budgets for each type of cost (direct material, etc.).
[8 marks]

b. Determine the variance between the flexible budget and actual cost for each cost item.
[4 marks]

c. Discuss how the revised budget and variance data are likely to impact the behaviour of the
production manager.
[8 marks]

d. What is the interpretation of a favourable direct material price variance and an

unfavourable material usage variance?
[5 marks]

[TOTAL: 25 MARKS]
Question 5

a. A commitment to ethical professional practice includes overarching principles that

express our value and standards that guide our conduct.

Identify and explain the relevant ethical principles that professionals should adhere
to.
[10 marks]
b. Sonita manufactures and sells compact discs. Price and cost data are as follows:

RM
Selling price per unit (package of two CDs) 25
Variable costs per unit:
Direct material ..................................................... 10.50
Direct labour ....................................................... 5.00
Variable manufacturing overhead ...................... 3.00
Selling expenses ........................................... 1.30
Total variable costs per unit 19.80
Annual fixed costs:
Manufacturing overhead RM192,000
Selling and administrative RM276,000
Total fixed costs RM468,000
Forecasted annual sales volume (120,000 units) RM3,000,000
Ignore income taxes.

Required:

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i) Calculate and explain Sonita’s break-even point in units.

ii) Calculate and explain the company's break-even point in sales dollars.

iii) How many units would Sonita have to sell in order to earn RM260,000?

iv) Calculate and explain the firm's margin of safety.

v) Management estimates that direct-labour costs will increase by 8 percent next year.
How many units will the company have to sell next year to reach its break-even
point?
[15 marks]
[TOTAL: 25 MARKS]

QUESTION PAPER ENDS HERE