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Unformatted text preview: School of Management,HUST CGA-CANADA MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION March 2009 Marks Time: 3 Hours Note: 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. Note: 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 unpredictable. 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? 1) 2) 3) 4) 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 residual income. 4) Only managers of cost centres are evaluated using variance analysis. Continued... EMA1M09 ©CGA-Canada, 2009 Page 1 of 7 School of Management,HUST Note: 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 the year? 1) 2) 3) 4) e. $300,000 $400,000 $440,000 $484,000 What is the amount of actual overhead cost incurred for the year? 1) 2) 3) 4) $320,000 $420,000 $460,000 $504,000 Note: 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? 1) 270 2) 452 3) 1,350 4) 3,350 g. What will be the cost per equivalent unit for labour and overhead costs? 1) 2) 3) 4) EMA1M09 $1.80 $2.00 $2.20 $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 5 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 are needed. 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. ALPHABET COMPANY Profitability Report month ended February 28, 2009 Total 1 2 3 4 5 6 Product B $300,000 $ 90,000 $ 210,000 132,000 36,000 18,000 36,000 42,000 12,000 9,000 3,000 $ 12,000 Sales Expenses Prime costs1 Advertising2 General administrative3 Salaries4 Sales support5 Warehouse rent6 Amortization — equipment5 Amortization — office facilities5 Profit (loss) Product A 36,000 10,800 5,400 18,000 14,000 3,600 3,000 1,000 $ (1,800) 96,000 25,200 12,600 18,000 28,000 8,400 6,000 2,000 $ 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 Sales support Warehouse rent Amortization — equipment Advertising time Orders Square metres Machine time used A B 37% 2,520 2,400 30% 63% 5,880 13,600 70% Required 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) Dr Accounts payable for June 2009 June 1 Opening balance June 30 Payment on account, May purchases June 30 Payment on account, June purchases June 30 Ending balance Cr $ 3,500 $ 3,500 11,250 $ 3,750 Accounts receivable for June 2009 June 1 Opening balance 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 64,000 $ 2,240 19,200 31,360 640 960 Opening balance Sales data: Month Sales April May June July August (Actual) $32,000 (Actual) $48,000 (Expected) $64,000 (Expected) $56,000 (Expected) $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 May June July $14,000 $15,000 $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 Required 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 4,800 units 6,000 units $1,015,200 $220/unit $120/unit $70/unit 81,000 units 18,000 units 22,000 units $5,584,000 $300/unit $200/unit $80/unit Actual data Industry sales Company sales Selling price 64,000 units 6,000 units $200/unit 96,000 units 16,000 units $300/unit River City Marine uses the high-low method for determining its budgeted costs. Required 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: Canoes Kayaks EMA1M09 $ 336,914 F 546,667 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: Budget Actual Activity Direct materials quantity Direct materials cost Direct labour-hours Direct labour cost 1,900 nets 10,640 metres $42,560 2,850 hours $17,100 2, 000 nets 12,000 metres $45,000 2,900 hours $18,850 Required 8 a. Calculate the following variances and indicate if the variance is favorable (F) or unfavourable (U): i) ii) iii) 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). Question 7 Swan River Limited produces a single product. The cost per unit is comprised, in part, of the following: Cost per unit Direct materials Direct labour Variable overhead Variable selling expenses Fixed overhead $ 12 8 6 5 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. Required 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 Compute). 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 between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. 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 classes. 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. (Also Draw) 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. Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario. Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example. Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Justify Prove or give reasons for decisions or conclusions. List Present an itemized series or tabulation. Be concise. Point form is often acceptable. Outline 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. Prove Establish that something is true by citing evidence or giving clear logical reasons. Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario. Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another. Review Examine a subject critically, analyzing and commenting on the important statements to be made about it. State Clearly provide a position based on an evaluation, e.g., Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate) Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. Trace In narrative form, describe progress, development, or historical events from some point of origin. School of Management,HUST CGA-CANADA MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION March 2009 SUGGESTED SOLUTIONS Marks 21 Time: 3 Hours Question 1 Note: 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 = $400,000. 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 1,350 2,000 8,000 810 1,500 10,310 Completed and transferred out Spoiled (60% complete) Ending work in process (75% complete) Total Cost per equivalent unit is $20,620 / 10,310 = $2 15 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) $250.00 $ 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) Fixed costs Income before tax Tax at 40% Profit after tax $ 4,590,000 3,250,000 1,340,000 536,000 $ 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 12 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 Prime costs Sales commission Total Contribution margin 102,000 30,000 132,000 168,000 27,000 9,000 36,000 54,000 75,000 21,000 96,000 114,000 Fixed expenses Advertising Salaries Sales support Warehouse rent Amortization equipment Segment traceable fixed costs Segment profit General advertising General administration Amortization — office Common costs 34,500 36,000 42,000 12,000 9,000 133,500 34,500 1,500 18,000 3,000 22,500 12,765 18,000 12,600 1,800 2,700 47,865 $ 6,135 21,735 18,000 29,400 10,200 6,300 85,635 $ 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 16 3 Question 4 a. Source: Topics 4.3 and 6.7 (Level 1) Cash balance for June Beginning cash balance Collections in June April sales May sales June sales Payments in June May purchases June purchases Selling and administrative expenses Variable cost1 Fixed cost2 $ 3,500 2,240 19,200 31,360 52,800 3,500 11,250 (14,750) 6,720 1,500 (8,220) Ending cash balance 1 2 3 $ 33,330 0.105 × $64,000 = 6,720 $2,000 – $500 = $1,500 b. Source: Topic 6.7 (Level 1) Collection percentages Month April May June 2 c. Percentage [($ 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 Month 1 May June2 1 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 Cash Budget 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 25,600 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 1 11 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: Canoe Unit selling price Kayak $ 220 Unit manufacturing cost Unit selling and administrative expense Total cost per unit Expected sales Maximum sales Total cost at maximum sales Total cost at expected sales Difference in sales Difference in quantity Unit variable cost Unit contribution margin (BUCM) $ 120 70 $ 190 4,800 units 6,000 units $ 1,015,200 912,000 $ 103,200 1,200 units $ 300 $ 200 80 $ 280 18,000 units 22,000 units $ 5,584,000 5,040,000 $ 544,000 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 Budget Sales Canoe Kayak Total 1 2. Sales Mix Actual – Anticipated Sales at × BUCM Sales Sales Mix Variance 4,800 18,000 0.21 0.79 6,000 16,000 4,6201 17,3802 $ 184,920 F 226,320 U $ 41,400 U $134 $164 (6,000 + 16,000) × (0.21) = 4,620 (22,000 – 4,620) = 17,380 ii) Sales quantity variance Actual Sales Canoe Kayak Total Sales Mix Budget – Anticipated Sales at × BUCM Sales Sales Mix 6,000 16,000 0.21 0.79 4,800 18,000 4,620 17,380 Variance $134 $164 $ 24,120 U 101,680 U $ 125,800 U iii) Market share variance Actual – Sales Canoe Kayak Total 2 c. 6,000 16,000 Actual × Market Volume 64,000 96,000 Anticipated Market Share × BUCM Variance 4,800 / 42,000 18,000 / 81,000 $134 $164 $ 176,114 U 874,667 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 10 8 Question 6 a. Source: Topic 7.3 (Level 1) Materials variances 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 Labour variances 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. Alternative solution: Cost to Make Variable manufacturing cost or purchase cost Fixed overhead Variable selling Fixed selling Total $ 468,000 (18,000 × $26) 20,000 90,000 (18,000 × $5) 40,000 $ 618,000 Cost to Buy $ 504,000 (18,000 × $28) 20,000 90,000 40,000 $ 654,000 Difference (Make – Buy) $ (36,000) 0 0 0 $ (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 20,000 units. Do Not Bid Units Revenue 18,000 $ 720,000 Costs Variable manufacturing @$26/unit 468,000 Variable selling @ $5/unit on 18,000 units 90,000 Variable selling@ $1/unit on 10,000 units Fixed costs 60,000 Net profit $ 102,000 Bid Difference 28,000 $ 720,000 + $ 10,000P 728,000 90,000 10,000 160,000 10,000P – 268,000 10,000 10,000P 260,000 0 10,000 100,000 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. Alternative solution: 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 4 27 10 $ 37 ©CGA-Canada, 2009 Page 8 of 8 School of Management,HUST CGA-CANADA MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION March 2009 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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