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MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION
Marks Time: 3 Hours
Except for multiple-choice questions, all calculations must be shown to obtain full marks. 21 Question 1
Select the best answer for each of the following unrelated items. Answer each of these items in your
examination booklet by giving the number of your choice. For example, if the best answer for item (a)
is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will
not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.
3 marks each a. Which of the following statements is correct about the costs of quality?
1) Appraisal costs include external failure costs.
2) Prevention costs always exceed appraisal costs.
3) External failure costs typically are greater than internal failure costs because they are
4) Incurring prevention costs can lead to reductions in appraisal costs and internal and external
failure costs. b. Which of the following statements is incorrect for a manufacturing firm?
c. Inventoriable costs consist only of prime costs.
Inventoriable costs consist of prime costs and manufacturing overhead costs.
Inventoriable costs include both variable manufacturing and fixed manufacturing costs.
Inventoriable costs will never include any period costs. Which of the following statements about responsibility centres is correct?
1) A cost centre is a segment of a business in which the manager has control over costs as well as the
investments in operating assets of the segment.
2) A profit centre is a segment of a business in which the manager is responsible for the investments
in the operating assets of this segment since he or she has control over both cost and revenue.
3) A profit centre manager is usually not evaluated using measures such as return on investment or
4) Only managers of cost centres are evaluated using variance analysis. Continued...
EMA1M09 ©CGA-Canada, 2009 Page 1 of 7 School of Management,HUST
Use the following information to answer parts (d) and (e). PrufRite Company applies manufacturing overhead on the basis of direct labour-hours. On December 31,
the company’s manufacturing overhead account showed a $20,000 credit balance. The company estimated
that it would incur 200,000 direct labour-hours during the year. The actual number of direct labour-hours
was 220,000. Completed job cost sheets show that $330,000 in manufacturing overhead was transferred to
the finished goods account. There were no jobs in process at the beginning of the year and 1 job was
partially completed at the end of the year, with $110,000 in applied overhead.
d. What amount of manufacturing overhead cost would the company have estimated at the beginning of
$484,000 What is the amount of actual overhead cost incurred for the year?
Use the following information to answer parts (f) and (g). Rose Flour Company makes flour from high-protein lentils. It uses a process costing system. In the month
of January, the company started 11,350 units and completed and transferred out 8,000 units. The
inspection process occurs at the 60% point and the process results in normal spoilage of 13.5% of the good
units passed. There were no beginning inventories in January. January’s ending inventories were 75%
complete with respect to labour and overhead and 100% complete with respect to materials. There was no
abnormal spoilage during January. The company incurred $20,620 in conversion costs and $22,700 in
direct materials cost during January.
f. What is the number of spoiled units?
4) 3,350 g. What will be the cost per equivalent unit for labour and overhead costs?
4) EMA1M09 $1.80
$2.40 ©CGA-Canada, 2009 Page 2 of 7 School of Management,HUST
15 Question 2
The Vario Company’s 2009 forecast is to sell 54,000 units of a product it makes for $13,500,000 in
revenue. The following information is available:
• Variable manufacturing cost per unit is $145.
Variable selling expenses per unit is $20.
The fixed manufacturing cost per unit is $50 per unit, based on a normal volume of 60,000 units.
Fixed selling expenses are estimated to be $250,000 for the year. Required
10 a. Calculate the break-even sales in dollars. b. A cost-saving machine can be purchased. It will add $300,000 to the fixed manufacturing costs. The
machine will lead to a $5 reduction in variable manufacturing costs per unit. However, because of the
poor economy, the product has to be promoted more intensively and the promotion budget will have to
increase by $20,000. The company’s tax rate is 40%.
i) Calculate the sales revenue required to maintain the current level of after-tax profit if the new cost
structure is put in place after purchasing the new cost-saving machine. ii) Briefly explain whether you would recommend the new cost structure if the company expects to
achieve the sales revenue as calculated in part (i), regardless of the cost structure. No calculations
iii) Indicate at what level of sales you would change your recommendation in part (ii). EMA1M09 ©CGA-Canada, 2009 Page 3 of 7 School of Management,HUST
12 Question 3
The Alphabet Company manufactures 2 products. The company is considering discontinuing Product A
from its product line based on the following profitability report.
month ended February 28, 2009
2 3 4
5 6 Product B $300,000 $ 90,000 $ 210,000 132,000
$ 12,000 Sales
Amortization — equipment5
Amortization — office facilities5
Profit (loss) Product A 36,000
$ (1,800) 96,000
$ 13,800 Prime costs include 10% of sales commission, based on sales dollars.
Advertising cost allocated to products on the basis of sales dollars. The monthly total includes $1,500
general advertising, which was spent on enhancing the overall company’s brand image and is unrelated
to a specific product.
General administrative expense allocated to products on the basis of sales dollars. This expense is
related to the overall administration of the company as a whole.
Salary expenses are for personnel associated with each product.
Sales support and amortization expenses are allocated to each product in accordance with company
policy (one-third to Product A and two-thirds to Product B). Amortization expense for office facilities is
related to overall administration of the company as a whole.
Warehouse rent expense is allocated on the basis of sales dollars. Although all expenses, other than prime costs, are fixed with respect to sales and output, the following
additional information shows the consumption of resource drivers for some of the non-prime costs by each
product. The remaining non-prime costs cannot be associated with any specific product.
Resource Consumption for February 2009 by Product
Expenses Resource Advertising
Amortization — equipment Advertising time
Machine time used A B 37%
9 a. Prepare a segmented income statement using the contribution format. 3 b. Indicate whether you would recommend discontinuing Product A and briefly explain why. EMA1M09 ©CGA-Canada, 2009 Page 4 of 7 School of Management,HUST
16 Question 4
You have been asked to prepare the monthly cash budget for June and July for the Low Tide Company.
The assignment file contains a partially completed T-account analysis of cash, accounts payable and
accounts receivable, tracing the effect of projected sales revenues and projected merchandise purchases.
This analysis, with other additional data, is shown below. Today is May 31, 2009. All dollar amounts are
in thousands of dollars.
Information from the T-accounts (Dates shown are expected posting dates)
Accounts payable for June 2009
June 30 Payment on account, May purchases
June 30 Payment on account, June purchases
June 30 Ending balance Cr
$ 3,500 $ 3,500
$ 3,750 Accounts receivable for June 2009
June 30 Sales revenue on account, June
June 30 Collections, April sales
June 30 Collections, May sales
June 30 Collections, June sales
June 30 Cash discount on June sales
June 30 Write-off, uncollectable April sales
June 30 Ending balance $ 36,800 Cash
June 1 $ 3,500 $ 27,200
960 Opening balance Sales data:
Sales April May June July August (Actual)
$72,000 Selling price per unit: $16.00
Selling and administrative expenses (S&A)
These expenses are projected using the following cost equation:
Budgeted monthly total S&A = 2,000 + 0.105 × Sales revenue 1
1 The cost data used to estimate the cost equation included $500 in monthly amortization expense. The
expense is paid as incurred each month. Merchandise purchases
$16,000 The cost to purchase each unit of product is $4. All purchases are paid in full by the end of the month
following the purchase. Customers are offered a 2% cash discount if they pay within the month. Continued...
EMA1M09 ©CGA-Canada, 2009 Page 5 of 7 School of Management,HUST
3 a. 3 b. Calculate the percentages of April, May, and June sales the company expects to collect in June. 2 c. 8 d. Prepare Low Tide Company’s cash budget for July, in good form. 11 Calculate the expected ending cash balance for June. Calculate the percentages of May and June merchandise purchases the company expects to pay in
June. Question 5
River City Marine manufactures canoes and kayaks. The 2009 budget and actual sales and market data for
River City’s 2 products is shown below:
Canoes Kayaks Budget data
Expected total industry sales
Expected company sales
Maximum company sales
Total cost at maximum sales
Expected selling price
Unit manufacturing cost at expected sales
Unit selling and administrative expense at expected sales 42,000 units
$70/unit 81,000 units
$80/unit Actual data
Selling price 64,000 units
$200/unit 96,000 units
$300/unit River City Marine uses the high-low method for determining its budgeted costs.
4 a. Calculate the budgeted contribution margin per unit for a canoe and a kayak. 5 b. Calculate the following variances for each product:
i) Sales mix
ii) Sales quantity
iii) Market share 2 c. State 2 reasons why, as president of River City Marine, you will or will not be satisfied with the
performance of the marketing and sales personnel, by referring to the calculations from part (b).
Assume that the market volume variances for each product is as follows:
Kayaks EMA1M09 $ 336,914 F
$ 883,581 F ©CGA-Canada, 2009 Page 6 of 7 School of Management,HUST
10 Question 6
Enduro Health Inc. makes a variety of health aids and accessories, including a mosquito net. For the month
of April, the budget (reflecting company standards) and the actual results for the manufacture of mosquito
nets are shown below:
Direct materials quantity
Direct materials cost
Direct labour cost 1,900 nets
$17,100 2, 000 nets
8 a. Calculate the following variances and indicate if the variance is favorable (F) or unfavourable (U):
iv) 2 15 Materials price variance
Materials quantity variance
Labour rate variance
Labour efficiency variance b. If variable manufacturing overhead is applied on the basis of direct labour-hours, explain what you
can conclude regarding the variable overhead efficiency variance, if anything, from your calculations
in part (a).
Swan River Limited produces a single product. The cost per unit is comprised, in part, of the following:
Cost per unit
Variable selling expenses
Fixed overhead $ 12
1 The fixed overhead cost of $1 per unit is based on the production quantity of 20,000 units in the master
budget. If more than 20,000 units are produced, the company will incur an additional $100,000 of fixed
overhead costs. Swan River’s fixed selling and administrative expense is $40,000, regardless of the
number of units sold.
8 a. Assume Michelangelo Ltd. offers to supply this product to Swan River at a cost of $28 per unit. Swan
River is expecting to sell 18,000 units in the upcoming year.
Explain whether Swan River should accept or reject the offer from Michelangelo. Provide supporting
calculations. 7 b. For this part of the question, ignore part (a). Swan River expects to sell 18,000 units during the year at
$40 per unit. It has been invited to bid to supply a special order for 10,000 units. Swan River expects
to incur only $1 per unit in variable selling expenses to fill the special order; all other variable costs
will remain unchanged. Swan River plans to fill the order by adding the 10,000 units to its regular
production schedule. Calculate the minimum price per unit Swan River should bid that would make
the special order acceptable.
END OF EXAMINATION 100 EMA1M09 ©CGA-Canada, 2009 Page 7 of 7 School of Management,HUST
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1]
EXAMINATION Before starting to write the examination, make sure that it is complete and that there are no
printing defects. This examination consists of 7 pages. There are 7 questions for a total of
100 marks. READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED. School of Management,HUST
To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996).
Copyright David Palmer.
Calculate Compare Contrast Criticize Define Describe
Design Determine Diagram Discuss Evaluate Mathematically determine the
amount or number, showing
formulas used and steps taken. (Also
Examine qualities or characteristics
that resemble each other. Emphasize
similarities, although differences
may be mentioned.
Compare by observing differences.
Stress the dissimilarities of qualities
or characteristics. (Also Distinguish
Express your own judgment
concerning the topic or viewpoint in
question. Discuss both pros and
Clearly state the meaning of the
word or term. Relate the meaning
specifically to the way it is used in
the subject area under discussion.
Perhaps also show how the item
defined differs from items in other
Provide detail on the relevant
characteristics, qualities, or events.
Create an outcome (e.g., a plan or
program) that incorporates the
relevant issues and information.
Calculate or formulate a response
that considers the relevant
qualitative and quantitative factors.
Give a drawing, chart, plan or
graphic answer. Usually you should
label a diagram. In some cases, add
a brief explanation or description.
This calls for the most complete and
detailed answer. Examine and
analyze carefully and present both
pros and cons. To discuss briefly
requires you to state in a few
sentences the critical factors.
This requires making an informed
judgment. Your judgment must be
shown to be based on knowledge and
information about the subject. (Just
stating your own ideas is not
sufficient.) Cite authorities. Cite
advantages and limitations. Explain In explanatory answers you must
clarify the cause(s), or reasons(s).
State the “how” and “why” of the
subject. Give reasons for differences
of opinions or of results.
Distinguish and specify the important
issues, factors, or items, usually based
on an evaluation or analysis of a
Make clear by giving an example,
e.g., a figure, diagram or concrete
Translate, give examples of, solve, or
comment on a subject, usually
making a judgment on it.
Prove or give reasons for decisions or
Present an itemized series or
tabulation. Be concise. Point form is
This is an organized description. Give
a general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form.
Omit minor details.
Establish that something is true by
citing evidence or giving clear logical
Recommend Propose an appropriate solution or
course of action based on an
evaluation or analysis of a scenario.
Show how things are connected with
each other or how one causes another,
correlates with another, or is like
Examine a subject critically,
analyzing and commenting on the
important statements to be made
Clearly provide a position based on
an evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Summarize Give the main points or facts in
condensed form, like the summary of
a chapter, omitting details and
In narrative form, describe progress,
development, or historical events
from some point of origin. School of Management,HUST
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION
21 Time: 3 Hours
3 marks each Sources/explanations and calculations:
a. 4) Topic 10.5 (Level 2)
Options 1), 2), and 3) are false generalizations. Option 4) is correct because the purpose of
prevention of poor quality is to avoid the costs of appraisal and failure related costs. b. 1) Topics 1.7 (Level 2) and 1.8 (Level 1)
Only manufacturing costs are carried in inventory. These costs are direct labour, direct materials,
and manufacturing overhead costs. These are not period costs. Manufacturing costs have both
fixed and variable cost components. As a consequence, only option 1) is incorrect since it
excludes manufacturing overhead costs.
c. 3) Topic 8.7 (Level 2)
The manager of a cost centre does not have control over investment funds and hence the
investments in operating assets. Managers of profit centres also do not control investments.
Variance analysis can involve costs and revenues; therefore, such analyses will not be restricted
only to managers of cost centres. The correct answer is option 3), since it would be inappropriate
to evaluate a profit centre manager on measures that focus on how well investments in assets have
paid off. d. 2) Topics 2.1 and 2.4 (Level 1)
The overhead application rate is $Applied overhead / Actual hours = ($330,000 + $110,000) /
220,000 = $2 per direct labour-hour. Given that a total of 200,000 direct labour-hours were
budgeted for the year, the estimated amount of manufacturing overhead cost is $2 × 200,000 =
e. 2) Topics 2.1 and 2.4 (Level 1)
The amount of applied overhead is $440,000, and a credit balance of $20,000 implies overhead
was over-applied. Therefore, actual overhead will be $20,000 less than the applied overhead, that
is, $440,000 – $20,000 = $420,000. f. 3) Topic 3.6 (Level 1)
Since inspection occurs at the 60% point and work in process is 75% complete, all units placed
into production have passed through inspection. Therefore, the total of the good units plus the
spoiled units must equal 11,350. That is,
Good units + 0.135 Good units = 11,350 units or
Good units = 11,350 / 1.135 = 10,000 units
Spoiled units = 0.135 × 10,000 = 1,350 units
Continued... SMA1M09 ©CGA-Canada, 2009 Page 1 of 8 School of Management,HUST
g. 2) Topic 3.6 (Level 1)
The total number of equivalent units is as follows:
Physical Units Equivalent Units 8,000
10,310 Completed and transferred out
Spoiled (60% complete)
Ending work in process (75% complete)
Cost per equivalent unit is $20,620 / 10,310 = $2
5 Question 2
a. Source: Topic 4.7 (Level 1)
Break-even quantity = Fixed costs / Unit contribution margin
Fixed costs = $50 × 60,000 + $250,000 = $3,250,000
Unit contribution margin = $13,500,000 / 54,000 – $165 = $250 – $165 = $85
Break-even quantity ($3,250,000 / $85)
Price per unit ($13,500,000 / 54,000)
Break-even sales dollars 10 38,235.29 units (or 38,236 units)
$ 9,558,822.50 (or $9,559,000) b. Source: Topic 4.8 (Level 1)
i) Step 1: Find the current after tax profit.
Contribution margin ($85 × 54,000)
Income before tax
Tax at 40%
Profit after tax $ 4,590,000
$ 804,000 Step 2: Determine the cost structure of the new machine and the unit contribution margin.
The new fixed costs will be $320,000 higher than before and will equal $3,570,000.
The new variable cost per unit will be $165 – $5 = $160.
Price per unit is unchanged at $250.
The new unit contribution margin will be $90.
Step 3: Calculate the required sales to meet the profit target.
Let the required sales be Q units. Then, ($90Q – $3,570,000) × 0.60 = $804,000.
Thus, Q = 54,555.555 or 54,556.
The required sales revenue is $250 × 52,556 = $13,639,000.
ii) I would not recommend the new structure. The company has to sell more to maintain its current
profit level, implying that if sales were to increase to 54,556 units, the company will earn more in
after-tax profit by staying with the old cost structure than it would under the new one.
iii) Current profit before tax is 85Q – $3,250,000 and the new profit before tax is 90Q – 3,570,000.
Setting these profit expressions equal, 5Q = 320,000 or Q = 64,000.
This means that at a sales quantity of 64,000 units both structures will yield identical profits. If
sales exceed 64,000 units, the new cost structure is preferred. SMA1M09 ©CGA-Canada, 2009 Page 2 of 8 School of Management,HUST
9 Question 3
a. Source: Topics 5.2 and 8.8 (Level 1)
Total Product A Product B $ 300,000 $ 90,000 $ 210,000 Variable expenses
Contribution margin 102,000
114,000 Fixed expenses
Segment traceable fixed costs
Amortization — office
Common costs 34,500
$ 6,135 21,735
$ 28,365 Sales Company profit
3 $ 12,000 b. Source: Topic 5.2 (Level 1)
Product A contributes $6,135 monthly and thus should not be discontinued. By properly assigning the
costs and expenses to each product, a more accurate picture of each product’s contribution emerges.
The traditional profitability report erroneously treated all of the non-prime costs as untraceable to the
products, thus distorting the contributions being made by each product. SMA1M09 ©CGA-Canada, 2009 Page 3 of 8 School of Management,HUST
3 Question 4
a. Source: Topics 4.3 and 6.7 (Level 1)
Cash balance for June
Beginning cash balance
Collections in June
Payments in June
Selling and administrative expenses
Fixed cost2 $ 3,500
31,360 52,800 3,500
11,250 (14,750) 6,720
1,500 (8,220) Ending cash balance
2 3 $ 33,330 0.105 × $64,000 = 6,720
$2,000 – $500 = $1,500 b. Source: Topic 6.7 (Level 1)
June 2 c. Percentage [($ Amount collected / $ Sales) × 100]
(2,240 / 32,000) × 100 = 7%
(19,200 / 48,000) × 100 = 40%
(31,360 + 640) × 100 / 64,000 = 50% Source: Topic 6.7 (Level 1)
Disbursement percentages for merchandise purchases
2 Percentage ($ Disbursed / $ Purchases)
(3,500 / 14,000) × 100 = 25%
(11,250 / 15,000) × 100 = 75% Payments toward May purchases / Value of May purchases
Payment toward June purchases / Value of June purchases Continued...
SMA1M09 ©CGA-Canada, 2009 Page 4 of 8 School of Management,HUST
8 d. Source: Topic 6.7 (Level 1)
Cash budget for July
LOW TIDE COMPANY
month ended July 31, 2009
Opening cash balance $ 33,330 July cash collections
May sales (7% of $48,000)
June sales (40% of 64,000)
July sales (50% × 98% × 56,000)1 3,360
27,440 56,400 July cash disbursements for merchandise purchases
June purchases (25% of $15,000)
July purchases (75% of $16,000) 3,750
12,000 (15,750) 5,880
1,500 (7,380) Selling and administration expenses
Variable expense (10.5% of $56,000)
Fixed expense ($2,000 – $500)
Ending cash balance
4 $ 66,600 This reflects the fact that only 98% of the payments made in the month of purchase by customers is
actually collected because of the discount of 2%: $31,360/($31,360 + $640) = 0.98. Question 5
a. Source: Topics 4.3 and 8.9 (Level 1)
For each product, we first calculate the unit variable cost using the high-low method:
Unit selling price Kayak
$ 220 Unit manufacturing cost
Unit selling and administrative expense
Total cost per unit
Total cost at maximum sales
Total cost at expected sales
Difference in sales
Difference in quantity
Unit variable cost
Unit contribution margin (BUCM) $ 120
1,200 units $ 300
4,000 units 86
$ 134 136
$ 164 Continued...
SMA1M09 ©CGA-Canada, 2009 Page 5 of 8 School of Management,HUST
5 b. Source: Topic 8.9 (Level 1)
i) Sales mix variance
Mix Actual – Anticipated Sales at × BUCM
Sales Mix Variance 4,800
17,3802 $ 184,920 F
$ 41,400 U $134
$164 (6,000 + 16,000) × (0.21) = 4,620
(22,000 – 4,620) = 17,380 ii) Sales quantity variance
Mix Budget – Anticipated Sales at × BUCM
Sales Mix 6,000
17,380 Variance $134
$164 $ 24,120 U
$ 125,800 U iii) Market share variance
2 c. 6,000
Market Share × BUCM Variance 4,800 / 42,000
18,000 / 81,000 $134
$164 $ 176,114 U
$ 1,050,781 U Source: Topic 8.9 (Level 1)
With the exception of the market volume variance, all other revenue variances are unfavourable. The
market volume variance is normally not within the control of management.
1) The sales mix variance indicates that the company sold more of the product with the lower
budgeted unit contribution margin and less of the product with the higher budgeted unit
contribution margin. The shift in mix was not profitable.
2) The sales quantity variance shows that the company did not sell as much as it had budgeted,
taking the expected sales mix into consideration.
In conclusion, despite the growth in market volume for both products, the firm’s sales mix
deteriorated unprofitably and its sales volume has not benefitted from the market growth. SMA1M09 ©CGA-Canada, 2009 Page 6 of 8 School of Management,HUST
8 Question 6
a. Source: Topic 7.3 (Level 1)
AQ × AP
$45,000 AQ × SP SQ × SP 12,000 × $42,560 / 10,640
= $48,000 2,000 × 10,640 / 1,900 × $42,560 / 10,640
= $44,800 i) Materials price variance: $45,000 – $48,000 = $3,000 F
ii) Materials quantity variance: $48,000 – $44,800 = $3,200 U
AH × AP
$18,850 AH × SP SH × SP 2,900 × $17,100 / 2,850
= $17,400 2,000 × 2,850 / 1,900 × $17,100 / 2,850
= $18,000 iii) Labour rate variance: $18,850 – $17,400 = $1,450 U
iv) Labour efficiency variance: $17,400 – $18,000 = $600 F
2 b. Source: Topic 7.3 (Level 1)
Since the base for applying overhead is direct labour-hours and there is a favorable labour efficiency
variance, the overhead efficiency variance will also be favorable. No additional calculations are
required to reach this conclusion. If management has been efficient in its use of the overhead
allocation base, then this efficiency will also be reflected in the application of variable manufacturing
overhead. The conclusion follows from observing what is happening to the base as opposed to the
behaviour of the overhead costs. 15
8 Question 7
a. Source: Topic 9.1 (Level 1)
There are a number of alternative ways to arrive at the solution. One way is as follows. We know that
the variable selling expense per unit is unavoidable, as are the fixed costs. Consequently, the relevant
cost of making one unit is $26 (Direct materials + Direct labour + Variable overhead cost). The cost to
buy is $28 per unit; the company will save $2 per unit for each unit that it makes, and therefore the
make alternative will save $36,000 in total over the buy alternative. The company should manufacture
the product itself.
Cost to Make
cost or purchase cost
Total $ 468,000 (18,000 × $26)
90,000 (18,000 × $5)
$ 618,000 Cost to Buy
$ 504,000 (18,000 × $28)
$ 654,000 Difference
(Make – Buy)
$ (36,000) The company will save $36,000 if it makes the product instead of buying it. Continued...
SMA1M09 ©CGA-Canada, 2009 Page 7 of 8 School of Management,HUST
7 b. Source: Topics 9.3 and 9.5 (Level 1)
The minimum price, $P, is the price at which the company will earn the same profit from accepting
the bid as the profit from not bidding at all. The analysis below recognizes that accepting the bid will
mean the company will incur an additional cost of $100,000 since the production must exceed
Do Not Bid
$ 720,000 Costs
Variable manufacturing @$26/unit
Variable selling @ $5/unit on 18,000 units
Variable selling@ $1/unit on 10,000 units
$ 102,000 Bid Difference 28,000
+ $ 10,000P
370,000 Equating the profit under each alternative, solve the price:
10,000P – 268,000 = 102,000
10,000P = 370,000
P = $37
Alternatively, solve for the price by setting the differential profit to 0.
Alternatively, using the equation method:
Sales (Price × Quantity) = Fixed costs + Variable costs + Profits
Profits without accepting the bid:
$40 × 18,000 = ($20,000 + $40,000) + $31 × 18,000 + Profits
Profits = ($40 – $31) × 18,000 – $60,000
Profits = $102,000
Price (P) of bid product to equal existing profits:
Total sales = Total fixed costs + Total variable costs + Total profits
$40 × 18,000 + $P × 10,000 = $60,000 + $100,000 + $31 × 18,000 + $27 × 10,000 + $102,000
10,000 P = $160,000 + $558,000 + $270,000 + $102,000 – $720,000
P = $370,000 / 10,000 = $37
The minimum price per unit Swan River should bid to make the special order acceptable is $37.
Current variable cost
Savings in variable selling expense
Revised variable cost
Additional cost of $100,000 for 10,000 units
Minimum selling price END OF SOLUTIONS 100 SMA1M09 $ 31
$ 37 ©CGA-Canada, 2009 Page 8 of 8 School of Management,HUST
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION
EXAMINER’S COMMENTS General Comments
Students performed well on questions where all of the required information was provided directly (for
example, Question 2(a) and Question 3). Students had more difficulty on questions where it was necessary
to manipulate the given data to obtain the information required to construct a solution (for example
Question 2(b) and Question 7(b)). Additionally, students need to remember that any topic on the blueprint
is examinable. Past examinations, while a useful guide, are not perfect predictors of future examination
coverage or topic emphasis. In this regard, Question 5 on revenue and market variances seemed to have
surprised many examination writers. Additionally, students appeared to have difficulty in demonstrating
their knowledge of responsibility centres, cost flows in job order systems, spoilage, ABC allocation, and
cash budgeting. These topics are listed on the examination blueprint. Students are reminded that they
should construct their examination preparation strategies around the blueprint. Specific Comments
Question 1 Multiple Choice (Levels 1 and 2)
Performance on this question was unsatisfactory. Parts (c), (d), (f), and (g) were poorly done. The topics
were responsibility centres, overhead costs and cost flows, and process costing and spoilage. Questions on
these topics appear regularly on the MA1 examinations and are also in the textbook. Scanning these
questions and reflecting on the requirements can help students to prepare better in the future.
Question 2 CVP and breakeven (Levels 1 and 2)
Performance on part (a) of this question was excellent and performance on part (b) was poor. In part (a), a
common error was to base fixed costs on actual volume instead of the “normal” volume. For part (b),
many students calculated a new price instead of a new sales level. Additionally in this part, many students
calculated a break-even quantity based on the new costs instead of calculating the indifference quantity at
which either cost structure will be equally acceptable.
Question 3 ABC costing approach (Level 1)
Performance on this question was acceptable. Students who had difficulty with this question did not
recognize that an activity-based approach was required or incorrectly allocated the costs.
Question 4 Cash budgeting (Level 1)
Performance on parts (a), (b), and (c) of this question was average. Performance on part (d) was poor. The
format of the information about the patterns of payments and receipts was unusual in this question. Many
students were able to correctly calculate the percentages. A common error was to average the payment and
receipt percentages over the three months. This average however is not useful for developing a budget for
a future period. This was the required in part (d). Some students prepared a budget for June instead of July.
Question 5 High-low method and revenue and market variances (Level 1)
Students had difficulty with this question. Part (a) required the application of the high-low method to
determine the unit variable costs to calculate the contribution margins. Part (b) required the calculated
contribution margins to be used to calculate the variances. The problem was set up to lead the students
sequentially through the steps. However, most students did not recognize the need to estimate the variable
costs and many could not remember the appropriate calculation procedures for computing the variances. Continued...
©CGA-Canada, 2009 School of Management,HUST
Question 6 Variances for prime costs and variable overhead in a standard cost system (Level 1)
Performance on this question was satisfactory. A common error in part (a) was that students did not scale the
variance in price (or quantity) by the volume; instead, calculations were made on a “per unit” basis. Some
students were not able to associate the labour efficiency with variable overhead efficiency when direct labourhours is the basis for overhead application.
Question 7 Relevant costs: Special orders and make versus buy (Level 1)
Performance on both parts of this question was satisfactory. Students had more difficulty with part (b) than
with part (a) of this question.
The key to part (a) of this question is treatment of the variable selling costs. These costs are common to make
and buy alternatives. Thus, an error in treating this cost as not applying to the make alternative biases the
conclusion in favour of the buy alternative. In part (b), it was important to not convert fixed costs to a unit
basis to be able to correctly arrive at the answer. MA1M09 ©CGA-Canada, 2009 ...
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- Spring '11