ca_exm_ma1_2009-06 - School of Management,HUST CGA-CANADA...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: School of Management,HUST CGA-CANADA MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION June 2009 Marks Time: 3 Hours Note: Except for multiple-choice questions, all calculations must be shown to obtain full marks. 24 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. The 2009 static budget for Xylophone Company estimates a fixed manufacturing overhead cost of $200,000. The actual production quantity for 2009 was within the relevant range and the overhead volume variance was unfavourable. Based on this information, which of the following statements is true? 1) The flexible budget, based on actual quantity, will show that the fixed overhead cost is less than $200,000. 2) The flexible budget will show that the fixed overhead cost is more than $200,000. 3) There was no fixed overhead spending variance for 2009. 4) The company produced less than the quantity on which the static budget was based. b. The cost of production report for the fabrication department of a company shows that during July, total costs accounted for were $4,689. During the month, transferred-in costs were $1,333; raw material costs were $2,100; direct labour was $855; and overhead cost was $401. The department transferred out $4,500 at the end of the month. What was the cost of beginning work in process for July? 1) 2) 3) 4) c. $ 0 $ 189 $ 1,256 $ 3,356 Beginning work in process in the assembly department of a company was 3,000 units and 50% completed. During the year, 20,000 units were completed and delivered to customers. Ending work in process was 5,000 units and 80% completed with respect to conversion. What are the equivalent units for conversion, assuming the weighted-average method is used? 1) 2) 3) 4) 22,500 23,500 24,000 25,000 Continued... EMA1J09 ©CGA-Canada, 2009 Page 1 of 7 School of Management,HUST d. Which of the following is one reason that estimated overhead costs rather than actual overhead costs are used in the costing process? 1) Actual costs cannot be determined accurately. 2) Customers do not want to pay the actual costs because they believe that management will have no reason to be efficient. 3) Managers are more concerned that operations are running smoothly and do not want to waste time. 4) Managers want to know the accounting system’s valuation of completed jobs before the end of the period. e. The following journal entry records the application of manufacturing overhead for the month of August: Work in process .................................................................................................... Manufacturing overhead ................................................................................ 90,000 90,000 The overhead is applied on the basis of direct labour-hours. During August, 15,000 direct labour-hours were incurred. The budgeted direct labour-hours for the month was 12,000 hours. Job Z used 10,000 direct labour-hours during August. What will the job cost sheet for Job Z show for manufacturing overhead cost added during August? 1) 2) 3) 4) f. $60,000 $72,000 $75,000 $90,000 The degree of operating leverage for Balloon Company is 7 and the degree of operating leverage for Dirigible Company is 4. The two companies have identical sales levels and net incomes. Which of the following statements is incorrect? 1) 2) 3) 4) The break-even quantity for Balloon will be more than that for Dirigible. The margin of safety for Balloon will be less than that for Dirigible. The contribution margin for Balloon will be more than that for Dirigible. A 10% reduction is sales will cause net income for Dirigible to be lower than that for Balloon. g. Panktual Company uses just-in-time inventory methods to manage its inventories. Which of the following statements is incorrect concerning this company? 1) Inventory costs will fluctuate greatly from month to month because of variability in sales. 2) The net income from the absorption costing method will be approximately equal to the net income from the variable costing method. 3) There will typically be very low levels of inventories period to period. 4) The cost of a unit of product will be different between the variable and absorption costing methods. h. Guido’s Auto Repair has estimated the annual wage cost of its mechanics in the repair department to be $348,000. Other costs in the department have been estimated at $204,000. The budgeted repair hours for 2009 are 24,000 hours and the owner wants to earn a profit of $7 per repair-hour. The parts department applies a mark-up of 15% for the parts used in repairs. For 2009, the company has estimated that it will require $400,000 of parts. The parts department is budgeted to incur $120,000 in labour and other costs during 2009. What will be the labour rate per repair-hour and the material loading charge for 2009? 1) 2) 3) 4) EMA1J09 $7 per hour and 15% $8.50 per hour and 15% $30 per hour and 30% $30 per hour and 45% ©CGA-Canada, 2009 Page 2 of 7 School of Management,HUST 16 Question 2 Jape Company’s income statement for the most recent month is given below: Sales (19,000 units) Variable expenses Contribution margin Fixed expenses Operating loss $ 570,000 $ 399,000 $ 171,000 $ 175,500 $ (4,500) Required 4 a. 4 b. The company intends to increase promotion of its products by increasing its monthly advertising budget by $15,000. As a consequence, sales are expected to increase by $90,000 each month. Calculate the monthly operating income if these changes occur. 4 c. 4 d. The production manager does not want to implement either of the marketing-oriented proposals in parts b) and c). Instead he proposes that operations should be automated to achieve a reduction in variable manufacturing costs of $1 per unit. The cost to automate operations is expected to be $1,500,000. The equipment is expected to last for 4 years and have a salvage value of $60,000 at the end of the 4th year. The company intends to write off the equipment using straight-line depreciation over the 4 years. Calculate how many units must be sold each month to break even. EMA1J09 Compute the company’s monthly break-even point in units and in dollars. Instead of increasing advertising, an alternative proposal is to alter the packaging of the product. The alteration is expected to cost an additional $1 per unit. The company wants to earn $12,000 each month after taxes. Assuming a tax rate of 40%, determine how many units must be sold to achieve the stated target after-tax income. Round up to the next whole unit. ©CGA-Canada, 2009 Page 3 of 7 School of Management,HUST 15 Question 3 Absorbo Company makes and sells computer stands for the home office market. The following information is available regarding the company’s operations, sales, and costs. 2008 (Actual) Sales Quantity Revenue Production Quantity Costs Cost of goods manufactured Fixed expenses Selling and administrative Net income (absorption costing) Fixed manufacturing costs deferred in inventory Fixed manufacturing costs released from inventory 2009 (Expected) 54,000 units $ 13,500,000 54,000 units $ 13,500,000 60,000 units 50,000 units $ 11,800,000 $ 10,250,000 $ $ $ $ $ $ 300,000 ? ? 0 300,000 560,000 100,000 250,000 Note: All unit variable costs were assumed in 2009 to remain at their 2008 levels. In addition, fixed manufacturing costs were also assumed to be the same in 2009 as in 2008. Required 3 a. Calculate the variable costing net income for 2009 by adjusting the absorption costing net income. 6 b. Determine the following: i) Fixed manufacturing cost per unit in 2009 ii) Total fixed manufacturing costs for 2009 iii) Contribution margin for 2009 6 EMA1J09 c. Prepare a variable costing income statement for 2009 showing the variable selling, variable manufacturing, and fixed selling costs. ©CGA-Canada, 2009 Page 4 of 7 School of Management,HUST 8 Question 4 Cloverfield Manufacturing produces machined parts for small motors using job-order costing. Its sales are from bidding on orders. There are two support departments and two producing departments. The budgeted costs and the normal activity levels for each department are given below. Support Departments Department P Department Q Overhead costs Number of employees Maintenance hours Machine hours Labour hours $ 200,000 8 200 $ 100,000 4 2,000 Producing Departments Department R Department S $ 100,000 30 6,000 9,000 1,000 $ 50,000 30 2,000 1,000 1,000 The costs of Department P are allocated on the basis of maintenance hours and the costs of Department Q are allocated on the basis of number of employees. Departments R and S assign overhead costs on the basis of machine hours and labour hours respectively. The company is preparing a bid on a job that requires 3 machine hours per unit produced in Department R and no time in Department S. The prime costs per unit have been estimated to be $67. Under the present system of allocating overhead costs, the overhead cost per unit is $113.33. Typical industry practice is to prepare a bid of full cost plus 20% markup. Required 5 a. 1 b. Set up the equations that should be solved if the reciprocal method to determine service department cost allocations is used. Do not solve the equations. 2 c. EMA1J09 Determine the bid price per unit for the job if the step method is used to allocate service department costs to the producing departments. Assume that the total costs to be allocated for Department P is $216,868 and for Department Q is $143,374, after solving the equations for the reciprocal method. Allocate these costs to the appropriate departments using the reciprocal method. ©CGA-Canada, 2009 Page 5 of 7 School of Management,HUST 21 Question 5 Cagney Company applies overhead to the single product it manufactures on the basis of standard direct labour-hours (DLH). Each unit of product is expected to require 4 direct labour-hours and 10 kg of direct materials. The variable overhead application rate is $5/DLH. The standard hourly wage rate is $25, the standard overhead cost per unit is $30, and the standard price per kilogram of direct materials is $6. Total monthly overhead cost in the flexible budget is predicted by the following cost equation: $15,000 + $20 × Quantity of production During September, the company produced 1,200 units using 5,200 DLH and 12,500 kg of direct materials. It incurred overhead costs of $41,000, of which $26,000 was variable overhead. There was 2,000 kg of direct materials in inventory at the beginning of September and the company purchased 10,500 kg of direct materials for $65,000. Cagney’s average wage rate in September was $26.65 per hour. Required 12 a. Calculate the following variances: i) ii) iii) iv) v) 9 EMA1J09 Materials price variance Materials quantity variance Labour rate variance Variable overhead spending variance Variable overhead efficiency variance b. Calculate the fixed overhead volume variance. ©CGA-Canada, 2009 Page 6 of 7 School of Management,HUST 16 Question 6 Baker and Charlie Company makes and sells two products, Baker and Charlie. The financial results for the year ended December 31, 2008 are as follows: Baker Charlie Total Unit sales Revenues Cost of sales Variable Fixed Gross margin Selling and administrative expenses Variable Fixed 250,000 $ 50,000 93,750 $ 43,125 343,750 $ 93,125 17,500 14,450 18,050 11,250 8,340 23,535 28,750 22,790 41,585 10,000 5,050 $ 3,000 6,000 8,910 $ 8,625 16,000 13,960 11,625 Organization-wide costs Fixed costs Equipment lease expense Equipment rental revenue Income 16,210 5,000 6,000 $ (3,585) To address the poor financial performance in 2008, the company is considering adding a new product, Able. 1. The company expects to sell 5,000 units of Able at a price of $9.25 per unit. Variable manufacturing cost per unit will be $2.85 and the variable selling and general administrative expense per unit will be $2.70. 2. The introduction of Able is expected to add $4,290 to the fixed manufacturing costs of Able. 3. Of the present fixed organization-wide costs of $16,210, $6,210 will be allocated to the fixed manufacturing cost of Able; and $5,000 will be allocated to the marketing of Able. 4. Currently, the company is earning rental revenue of $6,000 by renting equipment that it did not require for either Baker or Charlie. The company is leasing this equipment for $5,000 per year. This equipment will now be used for making Able. 5. The product manager of Charlie has indicated that the sales of Charlie will decline by one-third from its present level with the addition of Able, as these products compete in the same market. Due to this decline, the company will no longer require leased space that is being used for the purpose of selling and administrative activities of Charlie and the company will allow the lease to expire. The annual lease payments for leasing the space have been $5,000. Required Determine whether the company should introduce Able. Show all calculations. END OF EXAMINATION 100 EMA1J09 ©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 6 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 June 2009 SUGGESTED SOLUTIONS Marks 24 Time: 3 Hours Question 1 Note: 3 marks each Sources/explanations and calculations: a. 4) Topic 8.4 (Level 1) An unfavourable overhead volume variance occurs when the quantity of overhead driver allowed for the actual output produced is less than the budgeted quantity of the overhead driver from the static budget. This will occur only if the actual output is less than the budgeted output in the static budget. b. 1) Topic 3.3 (Level 1) The total costs added during the period equal the costs accounted for. Hence there is no beginning work in process inventory. c. 3) Topic 3.4 (Level 1) During the year a total of 20,000 whole units plus 80% × 5,000 = 24,000 equivalent units were processed with regard to conversion. d. 4) Topic 2.1 (Level 1) Managers want to know the value of jobs before the end of the period to assist in pricing and managing the completion of jobs. The other options are incorrect since each of these asserts a falsehood about cost systems, managers’ motivation, or customers’ beliefs. e. 1) Topic 2.3 (Level 1) Budgeted OH application rate is $90,000/15,000 = $6 / DLH. Applied OH to Job Z is $6 × 10,000 = $60,000. f. 4) Topic 4.7 (Level 1) A 10% reduction in sales will affect the company with the higher DOL more. This is Balloon Company. Its net income will be lower than that of Dirigible Company. g. 1) Topic 6.4 (Level 1) Inventory costs will be based on the inventory levels not on the sales variability. Hence, option 1) is an incorrect statement. h. 4) Topic 10.4 (Level 1) Total cost to bill for in the repair shop is $348,000 + $204,000 + $7 × 24,000 = $720,000. On a per-hour basis, this is $720,000 / 24,000 = $30. In the parts department, the amount to bill is $120,000 + 15% × Invoice value of $400,000 = $180,000. This is a 45% ($180,000 / $400,000) loading charge. SMA1J09 ©CGA-Canada, 2009 Page 1 of 7 School of Management,HUST 16 4 Question 2 a. Source: Topic 4.7 (Level 1) The contribution margin per unit = $171,000 / 19,000 = $9. Unit selling price = 570,000 / 19,000 = $30 Break-even sales (units) = Fixed cost / Contribution margin per unit = $175,500 / $9 = 19,500 units or 19,500 × $30 = $585,000 or, Break-even sales ($) = F E CM R = $ , , / , = $585,000 4 b. Source: Topic 4.6 (Level 1) Sales (22,000 units) Variable expenses Contribution margin Fixed expenses ($175,500 + $15,000) Operating income 4 c. $ 660,000 $ 462,000 $ 198,000 $ 190,500 $ 7,500 Source: Topic 4.8 (Level 1) Desired income before tax is after-tax target income / (1 – Tax rate) = $12,000 / 0.6 = $20,000 Let the required sales quantity be Q. The proposal will reduce the unit contribution by $1 from $9 to $8. Therefore, $8Q – $175,500 = $20,000 Q = 24,438 units 4 d. Source: Topic 4.7 (Level 1) The new equipment will increase fixed costs per month by ($1,500,000 – $60,000) / (4 × 12) = $30,000 to $205,500 (175,500 + 30,000). The unit contribution margin will improve by $1 to $10 per unit. Break-even sales quantity = $205,500 / $10 = 20,550 units SMA1J09 ©CGA-Canada, 2009 Page 2 of 7 School of Management,HUST 15 3 Question 3 a. Source: Topic 6.2 (Level 1) Net income, variable costing approach: $560,000 – $100,000 + $250,000 = $710,000. 6 b. Source: Topic 1.7 (Level 2) and Topic 6.2 (Level 1) i) Fixed manufacturing cost per unit, in 2009: Fixed costs in ending inventory / Units in ending inventory = $100,000 / 2,000* = $50. * Ending inventory is 6,000 + 50,000 – 54,000 = 2,000 units Alternative solution (high/low approach) Variable manufacturing cost per unit = $ , , $ $ , , $ , , = $155 Total manufacturing cost per unit = $10,250,000 / 50,000 = $205 Fixed manufacturing cost per unit = $205 – $155 = $50 ii) Total fixed costs of manufacturing = $50 × 50,000 = $2,500,000 iii) Contribution margin = Variable costing net income + Fixed costs = $710,000 + 2,500,000 + 300,000 = $3,510,000 6 c. Source: Topic 6.2 (Level 1) Variable format income statement: Sales Variable selling expense Variable manufacturing cost Contribution margin Fixed manufacturing cost Fixed selling expense Net income 1 $ 13,500,000 1,620,000 1 8,370,000 2 3,510,000 2,500,000 300,000 $ 710,000 Variable selling expense can be determined independently from the approach shown in part a): Net income, variable costing approach: $560,000 – $100,000 + $250,000 = $710,000. Fixed manufacturing costs are: $2,500,000 ($50 × 50,000 units). See note 2. Fixed selling expense is $300,000. Therefore, contribution margin is: $710,000 + 2,500,000 + 300,000 = $3,510,000. Variable manufacturing cost per unit is: $155. See note 2. Variable cost of sales is $155 × 54,000 = $8,370,000. Therefore, variable selling expense is: $3,510,000 + $8,370,000 – $13,500,000 = $1,620,000. 2 Variable manufacturing cost per unit is: Total manufacturing cost per unit – Fixed manufacturing cost per unit = $205 – $50 = $155. Fixed manufacturing costs per unit are $100,000 / 2,000 (that is, fixed costs deferred in inventory divided by the units in ending inventory). Variable manufacturing costs for 2009 = 54,000 × $155 = $8,370,000. SMA1J09 ©CGA-Canada, 2009 Page 3 of 7 School of Management,HUST 8 Question 4 Source: Topic 5.5 (Level 1) 5 a. The step method allocation is as follows: Step Method Support Departments Producing Departments Department P Department Q Department R Department S Overhead costs Allocation: Department P (2/10, 6/10, 2/10) Department Q (30/60, 30/60) Total 1 2 $ 200,000 $ 100,000 40,000 1 $(200,000) 0 $ 100,000 $ (140,000) 0 120,000 40,000 70,000 2 290,000 $450,000 70,000 160,000 $450,000 (2,000 / 10,000) × $200,000 = $40,000 (30 / 60) × $140,000 = $70,000 Overhead application rate for Department R Overhead application rate for Department S $290,000 / 9,000 = $32.22 / MH $160,000 / 1,000 = $160 / LH Unit cost for the job Prime cost Overhead: Department R (3 MH at $32.22 / MH) Total cost Bid price (1.2 × Unit cost) 1 $ 50,000 $ 67.00 $ 96.66 $ 163.66 $ 196.39 b. The equations to solve if the reciprocal method is used are: Let P denote the costs to be allocated from Department P (direct plus costs allocated from Department Q). Let Q denote the costs of Department Q to be allocated, which includes the costs within the department plus the costs allocated from Department P. P = $200,000 + 8 / 68 × Q Q = $100,000 + 2,000 / 10,000 × P 2 c. Reciprocal method of cost allocation: Reciprocal Method Producing Departments Support Departments Department P Department Q Department R Department S Overhead costs ($) Allocation ($): Department P (2/10, 6/10, 2/10) Department Q (8/68, 30/68, 30/68) Total SMA1J09 200,000 100,000 100,000 50,000 450,000 (216,868) 43,374 130,121 43,373 0 16,868 0 (143,374) 0 63,253 293,374 63,253 156,626 0 450,000 ©CGA-Canada, 2009 Page 4 of 7 School of Management,HUST 21 12 Question 5 a. Source: Topic 7.3 (Level 1) i) Materials price variance (AP – SP) × Quantity purchased = ($6.19 – $6) × 10,500 = $1,995 U or 65,000 – (6 × 10,500) = 2,000 U ii) Materials quantity variance (AQ – SQ) × SP = (12,500 – 12,000) × $6 = $3,000 U iii) Labour price variance (AW – SW) × AH = (26.65 – 25) × 5,200 = $8,580 U iv) Variable overhead spending variance (AR – SR) × AH = ($26,000 / 5,200 – $5) × 5,200 = 0 v) Variable overhead efficiency variance (AH – SH) × SR = (5,200 – 4 × 1,200) × $5 = $2,000 U 9 b. Source: Topic 8.4 (Level 1) Fixed overhead volume variance Standard fixed overhead rate = Total OH per unit – Variable OH per unit = $30 – 4 × $5 = $10 Budgeted denominator level of volume = Budgeted fixed OH / $10 = $15,000 / $10 = 1,500 units. Variance = (Denominator volume – Actual volume) × Application rate i) Using output units: (1,500 – 1,200) × $10 = $3,000 U ii) Using labour hours: (1,500 × 4 – 1,200 × 4) × $10 / 4 = $3,000 U SMA1J09 ©CGA-Canada, 2009 Page 5 of 7 School of Management,HUST 16 Question 6 Source: Topic 9.2 (Level 1) Five alternative solution approaches will be illustrated. Regardless of the approach the recommendation is to introduce Able. The company’s profit will improve by $4,585. 1. Non-incremental approach, absorption format (relevant costs only): Able Unit sales Revenues Cost of sales Variable Fixed Gross margin Lease rental revenue Selling and administrative expenses Variable Fixed Segment income Organization-wide costs Fixed costs Income Baker Charlie 5,000 $ 46,250 250,000 $ 50,000 62,500 $ 28,750 $ 17,500 $ 14,450 $ 18,050 $ 7,500 $ 8,340 $ 12,910 $ 39,250 $ 32,080 $ 53,670 $ 10,000 $ 5,050 $ 3,000 $ 4,000 $ 3,910 4 $ 5,000 $ 27,500 $ 8,960 $ 17,210 $ 14,250 $ 9,290 $ 22,710 1 $ 13,500 $ 02 $ 9,210 Total 3 317,500 $ 125,000 $ 16,210 $ 1,000 5 1 $4,290 + 5,000 Marketing and selling expense 3 Sales of Charlie product is reduced by 1/3 4 $8,910 – $5,000 (savings from expiry of lease) 5 Represents the remaining untraceable cost from before the introduction of Able 2 2. The above analysis can also be presented in the contribution format (relevant costs only): Able Revenues Variable manufacturing Variable selling and administrative Contribution margin Fixed manufacturing Fixed selling and administrative Segment income Organization-wide costs (fixed) Net income $ 46,250 $ 14,250 $ 13,500 $ 18,500 $ 9,290 $ 0 $ 9,210 Baker $ $ $ $ $ $ $ Charlie Total 50,000 17,500 10,000 22,500 14,450 5,050 3,000 $ 28,750 $ 7,500 $ 4,000 $ 17,250 $ 8,340 $ 3,910 $ 5,000 $ 125,000 $ 39,250 $ 27,500 $ 58,250 $ 32,080 $ 8,960 $ 17,210 $ 16,210 $ 1,000 3. Incremental (differential) cost analysis. Revenue (Able) Variable manufacturing cost Variable selling and administrative Contribution margin Incremental fixed manufacturing cost Loss of lease revenue Loss of Charlie contribution Saving from lease expiry Incremental profit (loss) 1 $ 46,250 $ 14,250 $ 13,500 $ 18,500 $ (4,290) $ (6,000) $ (8,625) 1 $ 5,000 $ 4,585 1/3 × ($43,125 – $11,250 – $6,000) = $8,625. Continued... SMA1J09 ©CGA-Canada, 2009 Page 6 of 7 School of Management,HUST 4. Non-incremental approach, absorption format (all costs): Able Unit sales Revenues Cost of sales Variable Fixed Gross margin Lease rental revenue Selling and administrative expenses Variable Fixed Organization wide costs Fixed costs Income Baker Charlie 5,000 $ 46,250 250,000 $ 50,000 62,500 $ 28,750 $ 17,500 $ 14,450 $ 18,050 $ 7,500 $ 8,340 $ 12,910 $ 39,250 $ 38,290 $ 47,460 $ 10,000 $ 5,050 $ 4,000 $ 3,910 4 $ 27,500 $ 13,960 $ 5,000 $ $ $ 14,250 $ 15,500 $ 16,500 1 $ 13,500 $ 5,000 2 $ (2,000) $ 3,000 Total 3 312,500 $ 125,000 5,000 1,000 5 1 $4,290 + $6,210 + 5,000 Marketing and selling expense 3 Sales of Charlie product is reduced by 1/3 4 $8,910 – $5,000 (savings from expiry of lease) 5 Represents the remaining untraceable cost from before the introduction of Able 2 5. The above analysis can also be presented in the contribution format (all costs): Able Revenues Variable manufacturing Variable selling and administrative Contribution margin Fixed manufacturing Fixed selling and administrative Organisation-wide cost (fixed) Net income Baker Charlie Total $ 125,000 $ 39,250 $ 27,500 $ 58,250 $ 38,290 $ 13,960 $ 5,000 $ 1,000 $ 46,250 $ 14,250 $ 13,500 $ 18,500 $ 15,500 $ 5,000 $ $ $ $ $ $ 50,000 17,500 10,000 22,500 14,450 5,050 $ 28,750 $ 7,500 $ 4,000 $ 17,250 $ 8,340 $ 3,910 $ (2,000) $ 3,000 $ 5,000 The above analysis shows that profits will improve by $4,585. The profit after introducing Able will be: ($3,585) + $4,585 = $1,000. Therefore, Able should be introduced. END OF SOLUTIONS 100 SMA1J09 ©CGA-Canada, 2009 Page 7 of 7 School of Management,HUST CGA-CANADA MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION June 2009 EXAMINER’S COMMENTS General Comments Student performance on this examination was very good on Questions 2, 4(a), 5(a), and 6. Students had difficulty on questions where it was necessary to manipulate the given data to obtain the information required to construct a solution (for example, Question 3). Additionally, students seemed to have been unprepared for some of the topics covered on the examination. Specifically, overhead volume variance, a common examination topic, and reconciling variable and absorption costing net incomes, were topics on which students appeared to have difficulty in demonstrating their knowledge. These topics are listed on the examination blueprint. Students are reminded that they should construct their examination preparation strategies using the blueprint. Any topic on the blueprint is examinable in accordance with the weighting specified on the blueprint. Specific Comments Question 1 Multiple choice (Levels 1 and 2) Performance on this question was unsatisfactory. Parts (a), (b), (c), (e), and (f) were poorly done. The topics were manufacturing cost flows, processing costing methods, and operating leverage. These topics are tested regularly on the MA1 examinations and students should be ready for them. Students should further note that although these topics individually may not be weighted highly on the examination blueprint, collectively they can add up to 25% of an examination and thus these topics warrant careful attention. These topics are also dense conceptually and procedurally, and thus can be the basis for intricate calculations and manipulation of the given data. Question 2 Cost volume and profit analysis (Level 1) Performance on all parts of this question was excellent. Question 3 Absorption and variable costing (Levels 1 and 2) This question was not addressed satisfactorily and responses from students revealed that many were unable to derive the variable costing net income from the absorption costing net income, even though all of the required information was provided in the question and no manipulation of data or relationships was needed. In addition, responses often contained several fundamental misunderstandings of cost concepts. For example, many students indicated that the cost of goods manufactured was also the total variable cost, and thus computed contribution margin as the difference between sales revenue and the cost of goods manufactured. Many students incorrectly assumed that the variable selling expenses did not exist in this question. Additionally, there was often little consistency between the responses to parts (a), (b), and (c): the net income derived in part (a) was not the same as the net income shown in part (c) (they should be the same). Similarly the contribution margin in part (b) rarely equalled the contribution margin in part (c). Students are urged to study this question and solution carefully when reviewing this topic in the future. Question 4 Service department allocations (Level 1) Part (a) on the step method was well done. Parts (b) and (c) posed problems for students. Many were unable to write down the equations for the reciprocal method, and others did not know how to allocate costs based on this method. A common error was to reapply the step approach to the new cost data. Continued... MA1J09 ©CGA-Canada, 2009 School of Management,HUST Question 5 Cost variances (Level 1) Part (a) of this question was very well done. Students demonstrated convincingly that they could perform the calculations correctly. Part (b), on overhead volume variance, in contrast, was very poorly done. The calculation required should not have been too difficult; the only challenge in this question was to recognize that the actual fixed overhead (given in the question) and the budgeted fixed overhead cost (also given in the question) were identical, leading to a zero budget variance. Nonetheless there is a volume variance because the actual volume of 1,200 units (given in the question) differed from the denominator level, that is, the budgeted production of 1,500 units. In other words, a volume variance arises because the actual volume of production is different from the denominator volume. Unless students pointed this out in the solution full marks were not awarded. For 9 marks it was not sufficient to simply compute the difference between the budgeted fixed cost of $15,000 (given in the cost equation) from applied overhead of 1,200 × $10. For the few students that did at least provide such a response, part marks were awarded. Simply having the numerically correct value was insufficient in this case. Question 6 Relevant costs (Level 1) Performance on Question 6 was highly satisfactory. Students were able to demonstrate competency and receive part marks even if they were unable to address all aspects correctly. A common error here was to mix up a “differential or incremental” cost approach with a “total or direct cost approach.” Thus part of the analysis would use one approach, and then the student would inadvertently apply the incremental approach and thus make an error. The suggested solutions present 5 equivalent ways to arrive at a solution. Students should study these equivalent approaches and ensure that they fully understand their interrelatedness. Approach 4 was the most popular approach. One error that is worth pointing out is that many students did not adjust the variable costs of manufacture for a reduction in volume and instead only adjusted the revenues. MA1J09 ©CGA-Canada, 2009 ...
View Full Document

This note was uploaded on 03/30/2012 for the course ACCOUNTING 1204 taught by Professor Chang during the Spring '11 term at Nanjing University.

Ask a homework question - tutors are online