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August 2014
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A2014 Management Accounting (MA)
NOTES TO USERS ABOUT THESE SOLUTIONS
The solutions in this document are published by Accounting Technicians Ireland. They are
intended to provide guidance to students and their teachers regarding possible answers to
questions in our examinations.
Although they are published by us, we do not necessarily endorse these solutions or agree
with the views expressed by their authors.
There are often many possible approaches to the solution of questions in professional
examinations. It should not be assumed that the approach adopted in these solutions is the
ideal or the one preferred by us. Alternative answers will be marked on their own merits.
This publication is intended to serve as an educational aid. For this reason, the published
solutions will often be significantly longer than would be expected of a candidate in an
examination. This will be particularly the case where discursive answers are involved.
This publication is copyright 2014 and may not be reproduced without permission of
Accounting Technicians Ireland.
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A2014 Management Accounting (MA)
Accounting Technicians Ireland
2nd Year Examination: Autumn 2014
Paper: MANAGEMENT ACCOUNTING
Monday 18th August 2014 – 2.30 p.m. to 5.30 p.m.
INSTRUCTIONS TO CANDIDATES
In this examination paper the €/£ symbol may be understood and used by candidates in Northern Ireland
to indicate the UK pound sterling and the €/£ symbol may be understood by candidates in the Republic of
Ireland to indicate the Euro.
If more than the required number of questions is answered, then only the requisite number, in the order
filed, will be corrected.
Note:
Examinees are permitted to use terminology of either International Accounting Standards (I.A.S’s) or Financial
Reporting Standards (F.R.S’s) where appropriate (e.g. Receivables/Debtors) when preparing management
accounting statements.
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A2014 Management Accounting (MA)
SECTION A
ANSWER ALL THREE QUESTIONS
QUESTION 1 (Compulsory)
Stars Ltd. is concerned that two of its products, Mercury and Jupiter may not be appropriately costed and
priced. This is as a result of declining sales volumes. You have therefore been asked to make relevant
calculations, using both ‘traditional’ and ‘modern’ overhead costing methods, to assist with pricing decisions.
The company calculates its selling prices based on cost plus a mark-up.
The company uses a pre-determined overhead absorption rate based on the predominant factor, machine hours.
The overhead absorption rate is calculated at the start of each year based on budgeted information as follows:
Unit costs
Mercury Jupiter
Direct materials cost € / £ 350 € / £ 480
Machine hours 90 30
Set-up hours 2 3
Mark-up 60% 50%
The production overheads can be divided into the following cost pools;
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A2014 Management Accounting (MA)
QUESTION 1 (Cont’d)
Required:
(a) Using machine hours as the basis, calculate the pre-determined overhead absorption rate.
2 Marks
(b) Calculate the standard cost and the standard selling price of both Mercury and Jupiter, using
the pre-determined overhead absorption rate that you have calculated in part (a).
6 Marks
(c) In relation to the information given in this question identify suitable cost pools and cost drivers if Stars
Ltd were to use activity based costing.
2 Marks
(d) Calculate suitable activity-based overhead rates for each of the cost pools you have identified in part
(c).
4 Marks
(e) Calculate the standard cost and the standard selling price of both Mercury and Jupiter, using the
activity-based overhead rates that you have calculated in part (d).
6 Marks
Total: 20 Marks
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A2014 Management Accounting (MA)
QUESTION 2 (Compulsory)
Planet plc. uses a standard costing system. The following information relates to the company’s product Earth,
for the month of August:
Production
Materials used per unit (kg) 1.75 2.00
Materials price per kg (£/€) 8.50 9.00
Labour hours per unit 0.65 0.85
Labour rate per hour (£/€) 10.80 10.50
Required:
(a) Prepare a statement showing the budgeted profit and the actual profit for August.
4 Marks
(b) Calculate the following variances:
i. Sales Price
ii. Sales Volume
iii. Materials Price
iv. Material Usage
v. Labour rate
vi. Labour efficiency
(c) Outline the key factors that should be considered before deciding whether or not a variance should be
investigated.
4 Marks
Total: 20 Marks
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A2014 Management Accounting (MA)
QUESTION 3 (Compulsory)
Moone Ltd. has produced the following budgeted figures for a new product that it hopes to launch.
The following levels of activity took place over the first two months of the products life:
Month 1 Month 2
Production units 10,000 12,000
Sales units 8,800 10,500
Note: Actual prices and costs were the same as budgeted for the first two months.
Required:
(a) Calculate the standard cost per unit and standard profit per unit under Absorption costing principles.
4 Marks
(b) Prepare a profit statement for each month (separately) on each of the following basis:
i. Absorption Costing
ii. Marginal Costing
12 Marks
(c) Prepare a reconciliation of the difference in profit reported in the profit statements prepared in part (b)
above.
2 Marks
(d) Clearly explain the reason for the difference in reported profit under the two methods.
2 Marks
Total: 20 Marks
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A2014 Management Accounting (MA)
SECTION B
ANSWER TWO OUT OF THE FOLLOWING THREE QUESTIONS
QUESTION 4
Required:
Total 20 Marks
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A2014 Management Accounting (MA)
QUESTION 5
Pluto Ltd. manufactures plastic storage boxes. The following is a budgeted Income Statement for the business
for September 2013:
€/£
Sales Revenue 35,000
Variable Fixed
Direct Materials 100% n/a
Labour €/£1,400 €/£1,100
Production Overhead €/£2,100 €/£1,700
Selling Overhead n/a 100%
Required:
(b) Prepare a clearly labelled breakeven chart, showing the breakeven point, margin of safety and expected
profit.
6 Marks
(c) In deciding whether to make or buy the labels that are glued to the storage boxes, list any two
qualitative factors that would need to be considered in making this decision.
2 Marks
Total: 20 Marks
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A2014 Management Accounting (MA)
QUESTION 6
A business manufactures high quality bags. The following information relates to the business’ four different
products.
Due to the specialist nature of the work, only 150,000 skilled labour hours are available in the next quarter.
Required:
(c) Advise the business on the mix of products that it should produce during the quarter in order to maximise
profit if labour hours are limited to 150,000 hours.
12 Marks
Total 20 Marks
END OF PAPER
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A2014 Management Accounting (MA)
2nd Year Examination: August 2014
Management Accounting
Suggested Solutions
and
Examiner’s Comments
Students please note: These are suggested solutions only; alternative answers may also be deemed to be
correct and will be marked on their own merits.
General Comments:
The majority of the scripts were very well presented scripts but there is still scope for improvement in some
cases.
Overall the level of knowledge and the standard of answers have improved. However it is still very obvious that
candidates are experiencing difficulty with standard costing and variance analysis.
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A2014 Management Accounting (MA)
Examiner’s Comments on Question One
This question was compulsory and tested the candidate’s knowledge of the traditional method of costing and
activity based costing.
Whilst the question was generally well answered it was evident that candidates had a better understanding of
activity based costing compared to their understanding of traditional costing.
Suggested Solution 1
(b) Standard Cost & Standard Selling Price using Pre-determined Overhead Absorption Marks
Rate Allocated
€/£ €/£
Mercury Jupiter
Direct Materials cost (given) 350.00 480.00 1
Direct Labour cost (labour hours x pay rate) 300.00 500.00 1
Production Overhead (Machine hours x OAR) 1,080.00 360.00 2
Standard Cost 1,730.00 1,340.00
Mark Up (60%) 1,038.00 (50%) 670.00 2
Standard Selling Price 2,768.00 2,010.00
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A2014 Management Accounting (MA)
(d) Activity-based Overhead Rate
(e) Standard Cost & Standard Selling Price using an activity-based overhead rate
Production Overheads
Set-Up Cost (2/3 x € / £ 75 per Set-up Hour) 150.00 225.00 1
Maintenance costs (90/30 x € / £ 2 per machine hour) 180.00 60.00 1
Cutting Costs (90/30 x € / £ 4 per machine hour) 360.00 120.00 1
Assembly Costs (DL x € / £ 6 per direct labour hour) 90.00 150.00 1
Standard cost 1,430.00 1,535.00
Mark Up (60%) 858.00 (50%) 767.50 1
Standard Selling 2,288.00 2,302.5
Price
As evidenced from previous sittings the area of standard costing and variance analysis is an area that candidates
seem to be struggling with.
Most candidates only got half of the variance calculation correct thereby losing valuable marks.
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A2014 Management Accounting (MA)
Suggested Solution 2
Cost of Sales
Materials Cost (20,000 x 1.75 kg x £/€8.50) 297,500 0.5
Labour Cost (20,000 x 0.65 x £/€10.80) 140,400 0.5
437,900
Budgeted Profit (£/€ 2.105 per unit) 42,100 0.5
Actual Profit
Cost of Sales
Materials Cost (18,500 x 2 kg x £/€9) 333,000 0.5
Labour Cost (18,500 x 0.85 x £/€10.50) 165,112 0.5
498,112
Actual Profit 29,138 0.5
(b) Variances
£/€ Marks
Allocated
18,500 units generated revenue of 18,500 units x £/€28.50 527,250 1
18,500 units should have generated revenue of 18,500 units x £ / € 24.00 444,000 1
per unit
83,250 F
or
(Actual Sales Volume x Actual Selling Price) – (Actual Sales Volume x Standard Selling Price)
(18,500 units x £ / € 28.50 per unit) - (18,500 units x £ / € 24.00 per unit)
£ / € 527,250 - £ / € 444,000 = £ / € 83,250 favourable
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A2014 Management Accounting (MA)
ii. Sales Volume Variance
units Marks
Allocated
Planet plc. actually sold 18,500 1
Planet plc. Should have sold 20,000 1
1,500 A
x standard contribution per unit ( £/€ 2.105) £/€3,157.5 A
or
£/€ Marks
Allocated
37,000 kg of materials actually cost (37,000 x £/€9) 333,000 1
37,000 kg of materials should have cost (37,000 x £/€8.50) 314,500 1
18,500 A
or
(Actual Quantity of Inputs x Actual Price) – (Actual Quantity of Inputs x Standard Price)
(37,000 kg x £ / € 9 per kg) - (37,000 kg x £ / € 8.50 per kg)
£ / € 333,000 - £ / € 314,500= £ / € 18,500 adverse
kg Marks
Allocated
Planet plc. actually used (18,500 x 2 kg) 37,000 1
Planet plc. Should have used (18,500 x 1.75 kg) 32,375 1
4,625A
x standard cost per kg ( £/€ 8.50) £/€39,312.5 A
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A2014 Management Accounting (MA)
or
(Actual Quantity of Inputs x Standard Price) – (Flexed Quantity of Inputs x Standard Price)
(37,000 kg x £ / € 8.50 per kg) - ((18,500 units x 1.75 kg per unit) x £ / € 8.50 per kg)
£ / € 314,500 - £ / € 275,187.5 = £ / € 39,312.5 adverse
£/€ Marks
Allocated
15,725 labour hours actually cost (15,725 x £/€10.50) 165,112.50 1
15,725 labour hours should have cost (15,725 x £/€10.80) 169,830.00 1
4,717.50F
or
(Actual Labour Hours x Actual Pay Rate) – (Actual Labour Hours x Standard Pay Rate)
(15,725 hours x £ / € 10.50 per hour) - (15,725 hours x £ / € 10.80 per hour)
£ / € 165,112.50- £ / € 169,830.00= £ / € 4,717.50 Favourable
hours Marks
Allocated
Planet plc. actually used (18,500 x 0.85 hours) 15,725 1
Planet plc. should have used (18,500 x 0.65 hours) 12,025 1
3,700A
or
(Actual Labour Hours x Standard Rate) – (Flexed Labour Hours x Standard Rate)
(15,725 hours x £ / € 10.80 per hour) - ((18,500 units x 0.65 hours per unit) x £ / € 10.80 per hour)
£ / € 169,830 - £ / €129,870 = £ / € 39,960 adverse
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A2014 Management Accounting (MA)
Examiner’s Comments on Question Three
There was a clear improvement in the calculation and use of the fixed overhead absorption rate as required in
part (a) of the paper since the May 2014 paper.
As evidenced in previous sittings, candidates are still failing to identify opening and closing inventories and the
under/over absorption of fixed production overhead as required in part (b).
Parts (c) and (d) were generally well answered, with most candidates able to reconcile and explain the reason for
any difference in reported profit as a result of using the two different bases of costing.
Suggested Solution 3
(a)
€/£ € /£ Marks
Allocated
Selling Price 40
Direct Material 15
Direct Labour 8
Variable Production Overheads 6
Fixed Production Overheads(W1) 3
Production cost 32 3
Profit per unit 8 1
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A2014 Management Accounting (MA)
(ii) Marginal Costing
(c)
€/£ €/£
Absorption Costing 70,400 90,000
Marginal Costing 66,800 85,500
Difference 3,600 4,500
Being:
Opening Inventory @ € /£ 3 / unit 0 3,600
(d)
The reason for the difference in profit is due to the difference in the valuation of inventory.
For example in month 1 the difference is €3,600.
This is due to the fact that in absorption €3,600 worth of the fixed overhead is not written off but instead is
carried forward to Month 2. This does not happen in marginal costing as fixed overheads are not included in
inventory valuation.
Marks Allocated: 2
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A2014 Management Accounting (MA)
Examiner’s Comments on Question Four
This question was exceptionally well answered, with candidates demonstrating a very strong knowledge of the
budgetary process.
Suggested Solution 4
(a) There are many advantages to using budgets. The use of budgets:
Marks Allocated: 5
Budget revision
Marks Allocated: 6
(c) Activity Based Budgeting is a method of budgeting in which the activities that incur costs in every
functional area of an organisation are recorded and their relationships are defined and analyzed. Activity
based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's
budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides
opportunities to align activities with objectives, streamline costs and improve business practices.
A rolling budget is one that is revised at regular intervals by adding a new budget period to the full
budget as each budget period expires. A budget for one year, for example, could have a new quarter
added to it as each quarter expires.
In this way, the budget will continue to look one year forward. Cash budgets are often prepared on a
continuous basis.
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A2014 Management Accounting (MA)
Advantages of rolling budgets:
The budgeting process should be more accurate
Much better information upon which to appraise the performance of management
The budget will be much more ‘relevant’ by the end of the traditional budgeting period
Zero based budgeting is an alternative approach that is sometimes used particularly in government and
not for profit sectors of the economy. Under zero based budgeting managers are required to justify all
budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather
than last year's budget.
Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in
the usual master budget, the manager must prepare a series of decision packages in which all of the
activities of the department are ranked according to their relative importance and the cost of each activity
is identified. Higher level managers can then review the decision packages and cut back in those areas
that appear to be less critical or whose costs do not appear to be justified.
Marks Allocated: 3 x 3
Although part (a) was generally well answered question very few candidates attempted part (b) of the question
which required the construction of a breakeven chart. Those that did attempt it were unable to construct a graph
and fill in the elements required.
This difficulty with the construction of a breakeven chart has been evidenced in previous papers.
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A2014 Management Accounting (MA)
Solution 5
(a)
(i)
€ /£ € /£ Marks
Allocated
Sales Revenue 35,000
Variable Cost
Direct materials 5,600
Direct labour 1,400
Production overhead 2,100
9,100
Contribution 25,900 2
(ii)
€ /£ Marks
Allocated
Total contribution 25,900
Total units 7,000
CPU 3.70 2
or
€ /£ Marks
Allocated
Sales price per unit 5.00
Variable cost per unit 1.30
CPU 3.70 2
Marks
Allocated
C.P.U. / SP x 100
€3.70 / €5 x 100 = 74% 2
or
Marks
Allocated
Fixed Cost €3,774
CPU €3.70 = 1,020units 2
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A2014 Management Accounting (MA)
Marks
Allocated
Fixed Costs + Target Profit
C.P.U.
(€3,774 + €1,387.50) = 1,395 units
€3.70 2
(c) Factors that would need to be considered before deciding to make or buy the
Packaging for the toys:
3) The price quoted by the supplier and the risk of the supplier increasing the price of its product.
4) The benefit that the use of a supplier for packaging might bring in terms of being able to
concentrate on core competencies.
Marks Allocated: 6
Parts (a) and (b) of the question was exceptionally well answered with candidates demonstrating a clear
understanding of what is meant by and how to overcome a limiting factor. Part (c) required the calculation of the
maximum contribution achievable when labour hours were limiting.
Whilst the standard of answers had improved from previous sittings many candidates were unable to rank the
products according to the highest contribution per limiting factor. Many ranked them according to the highest
contribution per unit.
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A2014 Management Accounting (MA)
Solution 6
Marks Allocated: 3
(b)
1. Some of the work that cannot be carried out in-house due to the constraint could be subcontracted out.
2. Some lower level workers could be re trained and they could then work on these products.
3. A recruitment campaign could be launched and new workers could be sourced.
4. Productivity and efficiency could be improved to reduce the time required per unit.
Marks Allocated: 5
(c)
STEP 2 Marks
Allocated
Contribution per unit of limiting factor
Deluxe Grande Lite Midi
CPU (€) 42 169 144 134
Lab hours per unit 9 6 21 15
Contribution per Labour Hour (€) 4.67 28.16 6.85 8.93
3
STEP 3
Rank the products
Rank 4 1 3 2
3
STEP 4
Prepare the optimal production plan
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A2014 Management Accounting (MA)
Production Hours Contribution Marks
Allocated
£/€
Grande 15,000 units 15,000 x 6 hrs per unit 90,000 2,535,000
Midi 15,000 units 4,000 x 15 hrs per unit 60,000 536,000
150,000 3,071,000 3
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A2014 Management Accounting (MA)