AC2040 Examination

[Instructions to go on cover sheet]

This paper has four sections.

Answer ONE question from each section.
Each section carries 25 marks.

ANSWER EACH QUESTION IN A SEPARATE BOOKLET

Total marks = 100

Total time allowed = 3 hours

Calculators are permitted

SECTION A (Answer ONE question)

Question One

Fictional plc currently uses a traditional volume-based product costing system which uses
only a single direct labour allocation base. The accountant has gathered additional
information about costs and activities in order to change to an ABC costing system. This
information is given below.

Product X Product Y Product Z Total

Production and sales (units) 28,000 18,000 5,000

Raw materials (number of
components used) 3 3 5
Direct material cost £28 £22 £20
£1,280,000
Direct labour hours 2 3 1 115,000
Machine hours 1 3 2 92,000
Direct labour cost £7/hr £7/hr £7/hr
Number of production runs 4 8 20 32
Number of shipments to customers 36 12 80 128
Number of machine adjustments 12 8 20
40

Note that the company operates a just-in-time inventory policy and receives each component
once per production run.

Overhead costs:
Set-up £128,000 (varies with number of production runs)
Machines £920,000 (varies with machine hours)
Receiving £272,000 (varies with number of component orders received)
Packing £192,000 (varies with number of shipments)
Engineering £120,000 (varies with number of machine adjustments)
£1,632,000

Required:

(a) Calculate the unit cost for Products X, Y and Z using the company’s traditional
volume-based costing system. (4
marks)

(b) Using an ABC costing approach, calculate the unit costs for Products X, Y and Z
(note: round each allocated cost to two decimal places). (14
marks)

(c) Discuss the differences between your results in (a) and (b). (3
marks)

(d) Discuss the practical problems and limitations of using ABC costing approaches.
 (4
marks)

(Total = 25 marks)

Question Two

Fortune plc manufactures and sells three related products. Details of budgeted and actual
sales for these products in the first quarter of 1998 are given below:

Budgeted sales:

Product Number unit total

of units contribution margin contribution

Delta 10,000 £10 £100,000

Gamma 6,000 £14 £ 84,000
Foxtrot 24,000 £12 £288,000
40,000 £472,000

Actual sales:

Product Number unit total

of units contribution margin contribution

Delta 12,000 £10 £120,000

Gamma 10,000 £14 £140,000
Foxtrot 16,000 £12 £192,000
38,000 £452,000

The general manager is disappointed in the total contribution result and wants more
information on how sales have deviated from budget. She has accessed market research data
which indicates that the actual size of the market in which all three products are sold was
304,000 unit for the first quarter of 1998, compared to an original expected marked size of
400,000.

Required:

(a) Calculate Fortune plc’s sales mix and sales quantity variances for the first quarter of
1998.
(9 marks)
(b) Calculate the market size and market share variances, based on the market research data
and Fortune plc’s sales results. (6
marks)

(c) Write a brief summary report for the general manager which interprets and discusses your
results in (a) and (b) above. Suggest where you think the company’s priorities lie in
marketing its products for the remainder of 1998. (10 marks)
(Total = 25 marks)
 SECTION D (Answer ONE question)

Question Seven

“Traditional approaches to cost and management accounting often fail to capture the
organisation’s external environment. New approaches and techniques are needed
to solve this problem.”

Discuss the above statement, using examples of approaches and techniques covered in this
course to illustrate your discussion.
(25 marks)

Question Eight

“In this day and age there is no excuse for firms to be using simplistic, naive
techniques and approaches for capital investment analysis.”

Outline those capital investment analysis techniques and approaches that are generally
considered to be “sophisticated” (i.e. theoretically correct), and refer to them to discuss
whether you agree or disagree with the above statement.
(25 marks)