MANAGEMENT ACCOUNTING

FORMATION 2 EXAMINATION - APRIL 2016

Section A - Questions 1 and 2 are compulsory. You have to answer Part A or Part B only of Question 2. Should
NOTES:

you provide answers to both Part(s) A and B of Question 2, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for this question will be marked.
Section B - You are required to answer any three out of Questions 3 to 6. Should you provide answers to all of
Questions 3 to 6, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise,
only the first three answers to hand for these four questions will be marked.

3 hours, plus 10 minutes to read the paper.

TIME ALLOWED:

During the reading time you may write notes on the examination paper but you may not commence
INSTRUCTIONS:

writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE ENVELOPE
PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

 THe InSTITuTe Of CerTIfIeD PuBlIC ACCOunTAnTS In IrelAnD

MANAGEMENT ACCOUNTING
fOrMATIOn 2 eXAMInATIOn - APrIl 2016
Time allowed: 3 hours, plus 10 minutes to read the paper.
Section A: Answer Question 1 and either Part A or Part B of Question 2.
Section B: You are required to answer any three out of Questions 3 to 6.

SECTION A - QUESTIONS 1 AND 2 ARE COMPULSORY

Keypuzzle limited manufactures a novelty keyring which it sells to conference and event organisers. The keyring
comprises a basic metal ring to attach keys and a wooden puzzle which was invented by the managing director
1.
and founder of the company, Paul Crean. Having successfully developed and patented the prototype of the keyring,
the company commenced production in ennis five years ago. The manufacturing facility has a maximum production
capacity of 500,000 keyrings, which is well in excess of current sales. The production director has advised Paul
that “it doesn’t make sense not to use the available capacity to produce more keyrings as they will be sold over
the coming years”. Consequently, over the past four years the company has produced more key rings than it has
sold and has built up a substantial inventory.

for its management accounts the company uses variable (marginal) costing and Paul has raised concerns with
the management accountant regarding the declining profit levels. It was agreed that the management accountant
would prepare the management accounts for the current year and prior year using absorption costing, highlighting
the differences compared to variable costing. unfortunately, the management accountant is ill and has not
completed the absorption and variable cost comparison. Information that had been compiled relating to the
comparison is shown below.

Budgeted annual fixed production overhead €105,625 €105,625

31 March 2016 31 March 2015

Sales (units) 350,000 319,500

Opening inventory (units) 19,500 18,000
Closing inventory (units) 22,000 19,500
Direct material (per unit)
- Steel ring @ €0.08
- Varnished beech @ €0.12
Direct labour: 4 mins per unit @ €9 per hour
Variable overhead: 10% of direct labour cost

The keyring sells for €1.95. Direct material and direct labour costs have not increased over the two year period.

fixed production overheads are absorbed based on units of production assuming that the company is operating
at 65% of its maximum capacity. The company’s actual annual fixed production overhead is equal to the budgeted
amount.

REQUIREMENT:

(a) Show the product cost for one keyring under variable (marginal) costing and absorption costing. (4 marks)

(b) Prepare management accounts for the year ending 31 March 2016 and 2015 showing profit calculated using:

(i) Variable (marginal) costing

(ii) Absorption costing (14 marks)

(c) reconcile the profit calculated at (b) (i) and (ii) above. (3 marks)

(d) from the perspective of Keypuzzle limited, outline TWO benefits and TWO limitations of using absorption costing.

(4 marks)

[Total: 25 Marks]

Page 1
 ANSWER PART (A) OR PART (B)

You are a trainee CPA accountant with a medium sized firm and have been asked by your manager to prepare a
2.
briefing note to explain the difference between management accounting and financial accounting, and the benefits
(A)

that good management accounting information may bring to a business. It is intended that the briefing note will be
distributed to existing and potential SMe clients to explain the importance to their business of good management
accounting information.

In your briefing note:

REQUIREMENT:

(a) Outline the main differences between management accounting and financial accounting. (4 marks)

(b) Describe the factors that have contributed to the growth and importance of management accounting. (4 marks)

explain the role of the management accountant in terms of the type of information that he/she may provide to a
business.
(c)

(6 marks)

format and Presentation (1 mark)

[Total: 15 Marks]

OR
Denis flynn has just established his company, Df Biscuits limited, and hopes to commence production next
month. While he has extensive experience in the food industry, specifically biscuits and confectionery, he has very
(B)

little management accounting knowledge. To finance his manufacturing operation Denis has applied for a bank loan.
However, the bank manager has reviewed the application and is seeking further information. He has asked to see
the budget for Df Biscuits limited for the year ahead. In addition, he has also requested a monthly cash budget
for the first year of trading. Denis is unsure how to proceed and has asked for your help with this matter.

Draft a memorandum for Denis flynn that:

REQUIREMENT:

(a) Differentiates between functional budgets and cash budgets. (4 marks)

(b) explains the benefits of preparing budgets. (7 marks)

(c) Outlines potential problems that may arise when setting budgets. (3 marks)

format and Presentation (1 mark)

[Total: 15 Marks]

Page 2
 SECTION B - ANSWER ANY THREE QUESTIONS.
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer
sheet provided indicate for each question, which of the options you think is the correct answer. Marks will
not be awarded where you select more than one answer for any question.

1. Cost details relating to one unit of product Z are shown below.

€
Direct materials 8.00
Direct labour 1.20
Direct expenses 0.75
Production overhead 2.18

The prime cost of one unit of product Z is:

(a) €9.20
(b) €12.18
(c) €9.95
(d) €11.38

The following information relates to Questions 2, 3 and 4:

On 1 April there were no units of B613 in inventory.

All inventory movements for material B613 for the month of April were as follows:
8 April 4,000 units received, total cost €20,000
15 April 3,900 units issued
19 April 1,200 units received, total cost €7,200
21 April 1,100 units issued
24 April 2,800 units received, total cost €21,000

2. On 30 April, inventory valuation using a lIfO basis is:

(a) €22,100
(b) €22,500
(c) €15,000
(d) €18,000

3. On 21 April, the value of the issue using a fIfO basis is:

(a) €6,600
(b) €8,250
(c) €6,500
(d) €5,500

4. On 30 April, inventory valuation using (weighted) average basis is:

(a) €22,185
(b) €22,046
(c) €18,075
(d) €18,500

5. During July, Black limited produced 10,000 units of product B and sold 9,400 units of product B. In July:

(a) Profits reported using absorption costing will be lower than profits reported using variable (marginal) costing.
(b) Profits reported using absorption costing and using variable (marginal) costing will be the same.
(c) Profits reported using absorption costing will be greater than profits reported using variable (marginal)
costing.
(d) Profits reported using variable (marginal) costing will be greater than profits reported using absorption
costing.

Page 3
6. Which of the following statements is nOT true:

(a) relevant costs change according to the decision.

(b) fixed costs can never be relevant costs.
(c) relevant costs are always future costs.
(d) relevant costs are incremental costs.

7. red limited operates a bonus scheme to increase production. Details are available for one employee:

employee wage rate €9 per hour

Time allowed for job 40 minutes
Time taken for job 25 minutes
The company calculates the bonus payable to the employee as 45% of the time saved on the job.

The bonus for the employee is calculated as (to nearest two decimal places):

(a) €2.25
(b) €1.01
(c) €3.75
(d) €1.69

8. Yellow limited had the following information relating to output levels and overhead costs:
January December
units produced 36,000 42,000
Total overhead costs €173,600 €198,660

The cost increased by 5% between January and December. The variable cost per unit, at January price levels (to
nearest two decimal places) is:

(a) €2.60
(b) €2.68
(c) €4.52
(d) €3.55

[Total: 20 Marks]

Page 4
 Deasgreen limited is a clothing manufacturer specialising in sustainable ladies fashion. The company has been
in operation for ten years and during that time has built up a loyal and expanding customer base. Deasgreen
4.
limited has three signature garments, a white blouse, a navy skirt and a grey dress, all produced from organically
grown and dyed linen fabric. Successful marketing and sales of these garments has resulted in the company
exceeding full capacity at its current manufacturing base in limerick. Consequently the directors are considering
expanding production capacity over the next few years and are examining a number of possibilities.

However, for the current year the company has a total of 15,000 machine hours and 20,000 direct labour hours
available for production at its limerick manufacturing base. Production and sales details relating to the signature
garments are shown below:

Direct materials: linen @ €6 per metre 1.5 metres 1.25 metres 2.5 metres
Blouse Skirt Dress

Direct labour: @ €12 per hour 0.25 hour 0.25 hour 0.5 hour
Variable overhead: 150% of direct labour cost
Machine hours required 0.3 hour 0.2 hour 0.25 hour
Sales demand for the year (units) 30,000 18,000 15,000
Selling price per unit €54 €80 €105

Budgeted fixed production overhead is estimated to be €95,200 per month and the company has also budgeted
for selling and administration expenses of €128,000 per quarter.

REQUIREMENT:

Based on the information provided, state whether Deasgreen limited has sufficient production capacity to satisfy
sales demand for the coming year. You should provide calculations to support your answer.
(a)

(4 marks)

Compute the optimal production plan for Deasgreen limited for the current year, clearly showing total profit
expected.
(b)

(13 marks)

(c) explain the meaning of the following terms:

(i) Opportunity cost

(ii) limiting factor (3 marks)

[Total: 20 Marks]

Page 5
 Door Dezigns limited manufactures high quality oak doors from reclaimed wood. The company is based in Wicklow
and was founded in 1999. Previously the company experienced strong growth and made significant profits but this
5.
changed during the recent recession when the company almost went out of business. In the past two years, Door
Dezigns limited has seen an increase in its business and based on the company’s prior experience, the directors
are keen to ensure that costs are tightly controlled. The company operates a standard absorption costing system.
The following details relating to the most recent financial period are available:

€
Direct materials
Standard cost card for one oak door:

- reclaimed oak: 1.75 square metres @ €22 per square metre 38.50
- Oak dowels:16 @ €0.25 each 4.00
Direct labour : 0.75 hours @ €20 per hour 15.00
Variable production overhead: 0.75 hour @ €4.60 per direct labour hour 3.45
fixed production overhead: @ €5.10 per door 5.10
Total 66.05

The company budgeted to produce 10,000 oak doors during the period.

€
Direct materials
Actual results from production of 9,500 oak doors:

- reclaimed oak (17,100 square metres) 375,345

- Oak dowels (159,600 dowels) 41,496
Direct labour (6,650 hours) 139,650
Variable overhead 29,925
fixed overhead 50,100

using the information provided above:

REQUIREMENT:

(a) Prepare a cost statement showing the original budget, flexed budget and actual results. (5 marks)

(b) Calculate all variances in as much detail as the information permits. (12 marks)

(c) Outline TWO possible reasons to explain the direct labour variances that you have calculated at (b) above.

(3 marks)

[Total: 20 Marks]

Page 6
 Groovy Covers limited manufactures tablet covers in a range of designs using a highly resilient fabric. Sales are
made exclusively online and the company’s website allows for customisation of covers based on buyer preferences.
6.
up until 2013, the company operated a traditional absorption costing system however at that time Joan Darcy, a
qualified CPA, was employed and she oversaw the successful implementation of an activity based costing (ABC)
system. The directors of Groovy Covers limited are very happy with the new system as they were aware that
overheads had become a much more significant part of the product cost.

When an order is placed for a tablet cover the requisitions department reserves the material and labour necessary
to produce it. The design costs and production scheduling costs both relate to the customer preferences; the more
detailed the tablet cover the more machines involved and the more set ups required. The tablet covers are inspected
during the production process to ensure that they meet quality standards. Once produced the tablet covers are
finished and packaged. A margin of 45% on selling price is achieved on each cover sold.

Cost and activity information for the current year is shown below.

requisition costs €30,960

Design costs €133,110
Production scheduling costs €78,030
Quality control costs €52,779
Sundry finishing costs €5,550

finishing department labour hours 7,500

number of inspections 57,840
number of machine set ups 76,500
Total orders placed 36,000

Details relating to two tablet cover orders are as follows:

Direct materials €4.10 €6.25

Order 1203 Order 4569

Direct labour €2.50 €2.95

number of inspections 2 4
number of machine set ups 3 6
finishing labour hours 12.5 mins 12.5 mins

REQUIREMENT:

Calculate the total cost of each of the two orders referred to above using activity based costing (ABC) to allocate
overheads.
(a)

(13 marks)

(b) using the company’s policy, compute the selling price that would be charged for the orders referred to at (a) above.

(3 marks)

Outline TWO advantages and TWO disadvantages of activity based costing compared to a traditional absorption
costing system.
(c)

(4 marks)

[Total: 20 Marks]

END OF PAPER

Page 7
 SUGGESTED SOLUTIONS
THe InSTITuTe Of CerTIfIeD PuBlIC ACCOunTAnTS In IrelAnD

MANAGEMENT ACCOUNTING
fOrMATIOn 2 eXAMInATIOn - APrIl 2016

SOLUTION 1

Workings

W1 Fixed overhead production cost per unit

Total annual fixed production overhead (x) €105,625

2016 & 2015

65% production capacity (units) (y) 325,000

fixed production overhead per unit (x/y) €0.325

2016 2015

Closing inventory 22,000 19,500

W2 Calculation of production units units

Sales 350,000 319,500

Total 372,000 339,000
Opening inventory 19,500 18,000
Production 352,500 321,000

W3 Calculation of Under/Over absorbed overhead

2016 2015
€ €
Budgeted fixed production overhead 105,625 105,625
Absorbed fixed production overhead 114,563 104,325
(Over)/under absorbed overhead -8,938 1,300

(a) Product cost for one keypuzzle keyring

2016 & 2015
€
Direct materials
- Steel ring 0.08
- Varnished beech 0.12
Direct labour 0.60
Variable overhead 10% direct labour 0.06
0.86
fixed production overhead (W1) 0.325
Product cost under variable costing

1.185
(4 marks)
Product cost under absorption costing

Page 8
(b) Profit statements for Keypuzzle Limited for 2016 and 2015

Using Variable costing (Product cost = €0.86 see (a)) 2016 2015
€ €
Sales 682,500 623,025

Cost of Sales:
Opening inventory 16,770 15,480
+ Production (see W2) 303,150 276,060
- Closing inventory 18,920 16,770
Production cost of sales 301,000 274,770

Contribution 381,500 348,255

fixed costs
Production overhead costs 105,625 105,625
Profit 275,875 242,630

Using Absorption costing (Product cost = €1.185 see (a)) 2016 2015
€ €
Sales 682,500 623,025
Cost of Sales:
Opening inventory 23,108 21,330
+ Production (see W2) 417,713 380,385
- Closing inventory 26,070 23,108
414,751 378,608
under/(over) absorbed overhead (see W3) -8,938 1,300
Production Cost of Sales 405,813 379,908
Profit 276,687 243,118

(14 marks)

(c) Reconcilation of Absorption and Variable costing profit figures

2016 2015
€ €
Profit per absorption costing 276,687 243,118
less fixed production overhead in inventory
(19,500 - 22,000) * €0.325 -812

(18,000 - 19,500) * €0.325 -488

Profit per variable costing 275,875 242,630

(3 marks)

Page 9
(d) Outline TWO benefits and TWO limitations of using absorption costing

Benefits of using absorption costing

Any TWO of the following:

 Conforms with accrual concept of matching costs with revenues

 Stock valuation complies with financial reporting standard IAS2

 By analysing over/(under) absorption of overheads any inefficient utilisation of resources may be

revealed

 By apportioning and allocating fixed production overheads to cost centres the company can make
managers more aware of costs/services provided by each cost centre and this may facilitate cost
reduction

 If the company uses absorption costing it will base its pricing policy on full product cost and this ensures
all costs are covered (provided that budgeted activity is achieved to avoid under absorption)

 fixed costs are becoming more significant in business operations. Absorption costing emphasises the
importance of such costs by including them in the cost of production

limitations of using absorption costing

Any TWO of the following:

 Absorption costing is more complex in its application and the company will have to recognise this in
preparing its management accounts

 Absorption costing is not as useful as variable costing for short-term decision making purposes due to
the inclusion of fixed costs

 As the absorption rate of fixed production overhead is based on anticipated production and the
overheads are estimated there is a greater likelihood of under or over absorption

 By using absorption costing the compay may have the difficulty of dividing fixed overhead expenses
between production and service departments. Sometimes this may result in arbitrary and inaccurate
allocations.
(4 marks)

[Total: 25 Marks]

Page 10
SOLUTION 2
(A)

(a) There are a number of areas where management accounting differs from financial accounting:
BRIEFING NOTE

There is no legal requirement to prepare There is a legal requirement for companies to

Management Accounting Financial Accounting

management accounts. prepare financial statements.

Management accounting has an internal focus. It is financial accounting has an external focus. It is
designed to assist company managers in planning, designed to provide information to users who are
controlling and decision-making activities. external to an organisation.

Management accounting information may focus on financial accounting focuses on the organisation
many areas as required by the company. as a whole.

The layout and substance of management financial accounting information is presented in a

accounting information is decided by company format prescribed by law and by accounting
management. standards.

Management accounting information may include Most financial accounting information is expressed
both monetary and non-monetary information. in monetary terms.

Management accounting may be used for planning financial accounting information provides
purposes and also for presenting information on information on what has happened in the past.
past activities.

Management accounting information may be A detailed set of financial statements for a

prepared daily, monthly, weekly etc. as required. business is produced annually and in some cases
less detailed financial information may be
produced semi-annually.
(4 marks)

Management accounting has grown and become more important as a result of the following factors:
- Global market – with improvements in transportation and communication the market for customers has
(b)

expanded and so too have company operations. Management accounting enables cost information to
be provided and analysed across divisions, segments and countries to support overall activities of the
company.

- Changing cost structures – in the past materials and labour comprised the highest product costs but
this has changed, overheads are now more significant and need to be carefully monitored. Management
accounting facilitates the monitoring and control of costs.

- Increased competition – it is now more important than ever to have accurate cost information as
companies are competing not just in terms of product price but also other factors such as product
quality and customer service. Access to accurate product cost information allows companies to focus
attention away from pricing to other significant factors.

- Internet opportunities – the arrival of the internet has brought more opportunity to buy and sell products
and services more easily, and to monitor competitors and consumer trends. Management accounting
may be implemented to gather cost information from all sources easily.

- Changing customer needs – customers have become more discerning and it is now more important to
have pertinent information relating to customers and their profitability to a business. Management
accounting allows companies to use cost information and techniques to obtain data on the cost of
providing services to customers.

- Changing product lifecycles – due to intense competition and changing customer needs product
lifecycles are becoming shorter. Companies need to be ready and able to introduce new products
quickly and management accounting can facilitate this process by providing essential information for
costing and decision making.

- Any other relevant point (4 marks)

Page 11
 As part of his/her role the management accountant provides information to facilitate a range of activities
including:
(c)

It is important to allocate costs to products as accurately as possible in order to establish the profitability of
Allocation of costs between cost of goods sold and inventories

the business. The management accountant ensures that cost information is collected and correctly allocated
to cost of sales or inventories as appropriate. The management accountant may use techniques such as
activity based costing to allocate overheads to products or the first in first out (fIfO) method to value inventory.

To carry out their roles effectively the various managers in a business require information to assist them in
Planning and controlling

planning and controlling the operations of the organisation. Planning involves translating goals and objectives
into the specific activities and resources that are required to achieve the goals and objectives. The
management accountant is involved in the preparation of both long term and short term plans. Budgets are
short-term plans that are prepared in more detail than longer term plans. Control involves the process of
ensuring that actual outcomes conform to planned or expected outcomes. Budgets may be used to support
the controlling of activities by providing a measure against which actual performance may be compared.

The management accountant generates periodic reports, which compare actual performance to plan, and
Performance measurement

provides these to managers enabling them to determine if operations are proceeding as expected and to
identify where corrective action may be required. These periodic reports also allow managerial performance
to be evaluated and provide incentives for managers to try to achieve favourable results.

Managers also require information to assist them with routine and non-routine decision making. routine
Decision making

decisions relate to issues such as assessing the profitability of different segments of an organisation such as
products, services and customers. non-routine decisions are made infrequently and may relate to strategic
issues such as the introduction of new products or services. The information provided by the management
accountant to support these decisions may be financial or non-financial in nature, depending on what best
meets the needs of management. In many instances cost information accumulated by the management
accountant is relied upon to inform decisions, and therefore it is critical that such information is of a high
quality.
(6 marks)

(format and presentation 1 mark)

[Total: 15 Marks]

MeMOrAnDuM
(B)

To: Denis flynn, Df Biscuits limited

from: A Management Accountant
Subject: Budgets
Date: April 2016

further to your request for assistance, the information regarding budgeting is presented below. This memorandum
describes what budgeting is, differentiating between functional budgets and cash budgets. It presents the benefits
that may accrue to a business by preparing budgets but also identifies potential problems that may arise from the
process.

A budget is a plan expressed in monetary terms and prepared for a specific period of time. It usually shows
(a) Description of budgets

expected income to be generated and expenditure to be incurred during the period, and the capital to be
employed to achieve a given target. Generally, budgets are developed within the context of an ongoing
business and based on previous decisions that have been made within the long-term planning process.

An organisation will produce a sales budget and from that production and inventory budgets, culminating in
a series of expenditure budgets (direct materials, direct labour, factory overheads, selling and administration
expenses etc.). These budgets are known as functional budgets. Once all of the various budgets have been
prepared, reviewed, revised and agreed a budgeted profit and loss account and balance sheet are prepared
and this is called the Master budget.

Page 12
 A cash budget shows the cash inflows and outflows for an organisation for a specific period of time. It is
usually prepared on a monthly basis but may be prepared quarterly or weekly or as required. The cash budget
highlights any cash shortfalls or surpluses expected to occur within a given period allowing the organisation
to plan the measures necessary to deal with these situations.
(4 marks)

• Planning: budgeting facilitates planning for future operations as managers become aware of the long
(b) The benefits that may arise from budgeting include:

range objectives of the company. It also encourages managers to anticipate potential problems that
may occur and plan their resolution.
• Co-ordination: there is better co-ordination of the various functions of the business as managers
examine the operations of their departments relative to other departments.
• Communication: the budgeting process requires that all levels of the organisation are informed of long
range plans, providing and receiving feedback throughout the budgeting process.
• Motivation: a budget, if it is realistic and prepared with the participation of managers, provides a standard
of performance that managers will strive to achieve. However, if a budget is set by higher level
managers and imposed on lower level managers it may be resisted and cause dissatisfaction and
demotivation.
• Control: a budget assists managers in controlling the activities for which they are responsible by allowing
them to compare actual performance with expected or budgeted performance. Any significant
differences may then be investigated and inefficiencies highlighted for remedial action.
• Performance evaluation: a manager’s performance may be evaluated by reference to how well budgeted
results are achieved. Budgets thus allow managers to gauge how well they are meeting targets that
they have been involved in setting.
(7 marks)

(c) As a consequence of the budget setting process some problems may arise such as:

All managers must be involved in the budget-setting process to ensure that they are committed to achieving
Lack of commitment to achieve budgets

their targets.

It is important to ensure that budget targets are not too difficult as if they are seen to be unattainable they may
Unsuitable budget targets

cause staff to become demotivated. However, budget targets must be challenging as if they are too easily
attainable this may also cause demotivation and result in poor use of resources.

It is important that there is good communication and co-ordination during the budgeting process. This will
Lack of goal congruence

ensure that managers develop budgets to achieve organisational goals rather than focusing on their own
individual departmental goals.
(3 marks)

If you have any questions relating to information contained in this memorandum I will be pleased to provide further
clarification.

Yours sincerely,
A Management Accountant
(format and Presentation 1 mark)

[Total: 15 Marks]

Page 13
SOLUTION 3

Answer (c) €9.95

Prime Cost = Direct material cost + direct labour cost + direct expenses cost
1.

Prime Cost = €8.00+€1.20+€0.75 = €9.95

2. Answer (a) On 30 April inventory valuation using lIfO is €22,100

Using LIFO Balance

Receipts Issues Quantity Value
€
08/04 Purchase 4,000 x €5 4000 20,000
15/04 Issue 3,900 x €5 100 500
19/04 Purchase 1,200 x €6 1,300 7,700
21/04 Issue 1,100 x €6 200 1,100
24/04 Purchase 2,800 x €7.50 3,000 22,100

3. Answer (c) On 21 April value of issue using fIfO is €6,500

Using FIFO Balance

Receipts Issues Quantity Value
€
08/04 Purchase 4,000 x €5 4000 20,000
15/04 Issue 3,900 x €5 100 500
19/04 Purchase 1,200 x €6 1,300 7,700
21/04 Issue 100 x €5
1,000 x €6 200 1,200
24/04 Purchase 2,800 x €7.50 3,000 22,200

4. Answer (a) On 30 April inventory valuation using (weighted) average is €22,185

Using (Weighted) Average Receipts/(Issues) Purchase Price Value Weighted

Average Price
€ €
08/04 Purchase 4,000 5 20,000 5
15/04 Issue (3,900) (19,500) 5
100 500 5
19/04 Purchase 1,200 6 7,200
1.300 7,700 5.923
21/04 Issue (1,100) (6,515)
200 1,185 5.925
24/04 Purchase 2,800 7.50 21,000
3,000 22,185 7.395

Answer (c)
Profits are higher under absorption costing when production is greater than sales as some fixed production
5.

overhead relating to this period is included in inventory and will be charged against revenue in a subsequent
period.

Answer (b)
fixed costs can be relevant costs in situations where some fixed costs can be saved or incurred as a result
6.

of a decision.

Answer (b) €1.01

Time saved = 40 – 25 = 15 mins
7.

Bonus in minutes = 15 mins x 45% = 6.75 mins

Bonus value = 6.75/60 x €9 = €1.01

Page 14
 Answer (a) €2.60
December overhead cost before inflation = €198,660/1.05 = €189,200
8.

January 36,000 €173,600

Units produced Total overhead costs

December 42,000 €189,200

Change 6,000 €15,600

Variable cost per unit = €15,600/6,000 units = €2.60 per unit

[Total: 20 Marks]

SOLUTION 4

(a) Production capacity to meet demand

Sales Labour Machine

Blouse 30,000 7,500 9,000

demand hours required hours required

Skirt 18,000 4,500 3,600

Dress 15,000 7,500 3,750
19,500 16,350
Total hours available 20,000 15,000
excess/(shortfall) of hours 500 -1,350

The company does not have enough machine hours in the current year to meet sales demand
(4 marks)

(b) Compute the optimal production plan and total profit for the year

Calculate the contribution per unit of limiting factor

limiting factor = machine hours
Blouse Skirt Dress
€ € €
Selling price per unit 54 80 105
less: variable costs per unit
Direct material @ €6 per metre 9 7.5 15
Direct labour @ €12 per hour 3 3 6
Variable overhead: 150% Direct labour cost 4.5 4.5 9
Total variable costs per unit 16.5 15 30

Contribution per unit (x) 37.5 65 75

Machine hours per unit (y) 0.3 0.2 0.25

Contribution per machine hour (x/y) 125 325 300

ranking 3 1 2

Optimal production plan

Garment Contribution Production Machine hours Total Machine Contribution

per unit in units per unit hours required €
€
Skirt 65 18,000 0.20 3,600 1,170,000
Dress 75 15,000 0.25 3,750 1,125,000
Blouse 37.5 25,500* 0.30 7,650 956,250
15,000
Total contribution 3,251,250
less fixed production overheads 1,142,400
Selling and administrative expenses 512,000
Profit 1,596,850

* This represents the number of blouses that may be produced using the remaining machine hours i.e.
15,000 - 3,600 - 3,750 = 7,650 hours/0.3 hours per blouse = 25,500 blouses
(13 marks)
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(c) Explain the following terms:

Where an organisation has a number of possible courses of action/options, opportunity cost represents the
Opportunity cost

cost of the benefit that is lost/sacrificed when the choice of one course of action requires that the next best
course of action is given up.

A limiting factor arises in the context of decision making in a business. It is a resource that is in short supply
Limiting factor

such that it restricts the ability of the organisation to provide and sell more of its products or services. for
example, labour hours, machine hours, key raw material etc.
(3 marks)

[Total: 20 Marks]

SOLUTION 5

(a) Cost statement

Units 10,000 9,500 9,500

Original budget Flexed budget Actual results
€ € €
Direct materials
- reclaimed oak 385,000 365,750 375,345
- Oak dowels 40,000 38,000 41,496
Direct labour 150,000 142,500 139,650
Variable production overhead 34,500 32,775 29,925
fixed production overhead 51,000 51,000 50,100
Total production cost 660,500 630,025 636,516

(5 marks)

(b) Variance calculations

Direct materials

Price variance (SP - AP) x AQ = [€22 - (€375,345/17,100] x 17,100 = 855 f

Reclaimed oak

usage variance (SQ - AQ) x SP = [(1.75 x 9,500) - 17,100] x €22 = -10,450 A

Price variance (SP - AP) x AQ = [€0.25 - (€41,496/159,600)] x 159,600 = -1,596 A

Oak dowels

usage variance (SQ - AQ) x SP = [(16 x 9,500) - 159,600] x €0.25 = -1,900 A

rate variance (Sr - Ar) x AH = [€20 - (€139,650/6,650)] x 6,650 = -6,650 A

Direct labour

efficiency variance (SH - AH) x Sr = [(0.75 x 9,500) - 6,650] x €20 = 9,500 f

expenditure variance (Sr - Ar) x AH = [€4.60 - (€29,925/6,650)] x 6,650 = 665 f

Variable production overhead

efficiency variance (SH - AH) x Sr = [(0.75*9,500) - 6,650] x €4.60 = 2,185 f

expenditure variance (BfO - AfO) = [(10,000 x 5.10) - 50,100] = 900 f

Fixed production overhead

Volume variance (AP - BP) x Sr = (9,500 - 10,000) x €5.10 = -2,550A

(12 marks)

Page 16
 Any 2 reasons (one for each variance):
(c) Two reasons to explain the direct labour variances

- When establishing the standard labour rate the company may have excluded the effect of a pay
Rate variance [€6,650 A]

increase

- It may have been difficult to get staff and the company may have had to pay a higher rate to attract
workers

- Any other relevant point

- The company paid a higher wage rate so perhaps they attracted better experienced staff who were more
Efficiency variance [€9,500 F]

efficient

- The company may have changed the production process/factory layout that enabled staff to work more
efficiently

- Any other relevant point

(3 marks)

[Total: 20 Marks]

SOLUTION 6

(a) Total cost of each of the orders using ABC

W1 Calculation of cost per driver

(x) (y) (x/y)
Activity Cost driver Cost Total Cost
drivers per driver
€ €
requisition costs Orders placed 30,960 36,000 0.86 Per order
Design costs no of machine set ups 133,110 76,500 1.74 Per set up
Production Scheduling costs no of machine set ups 78,030 76,500 1.02 Per set up
Quality control costs no of inspections 52,779 57,840 0.91 Per inspection
Sundry finishing costs finishing department 5,550 7,500 0.74 Per labour
labour hours hour
300,429

W2 Calculation of total overhead cost for each order

Order 1203 Order 4569
€ €
requisition costs 0.86 0.86
Design costs 5.22 10.44
Production Scheduling costs 3.06 6.12
Quality control costs 1.83 3.65
Sundry finishing costs 0.15 0.15
Total overhead cost 11.12 21.22

Calculation of total product cost

Order 1203 Order 4569
€ €
Direct materials 4.10 6.25
Direct labour 2.50 2.95
Overheads (W3) 11.12 21.22
Total product cost 17.72 30.42
(13 marks)

Page 17
(b) Selling price to charge for the two orders
Order 1203 Order 4569 Proportion
€ €
Total product cost from (a) above 17.72 30.42 0.55
of SP

Margin 45% of selling price 14.50 24.89 0.45

Selling price (SP) 32.22 55.32 1.00

(3 marks)

(c) Two advantages and two disadvantages of ABC compared to traditional overhead costing

Advantages
Any TWO of the following:

- ABC uses more bases/drivers than traditional costing in tracing overhead costs to products

- ABC provides more detailed information about cost behaviour than traditional costing systems and
facilitates better understanding of costs

- ABC is better at directing managerial attention to the causes of costs

- By tracing costs more carefully, ABC produces more realistic product costs than traditional overhead
costing systems

Disadvantages
Any TWO of the following:

- ABC requires greater understanding of costs and cost drivers which may be time consuming to obtain

- It may not be possible to allocate all overhead costs to specific activities

- There may be common costs i.e. costs that relate to many cost pools so that it is difficult to allocate them
to specific functions

- It may be very difficult and expensive to develop an activity based costing system due to the time
involved in establishing cost pools and drivers
(4 marks)

[Total: 20 Marks]

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