BUSI2157-E1
A LEVEL 2 MODULE, AUTUMN SEMESTER 2021-2022
MANAGEMENT ACCOUNTING
Section B (40 marks)
Answer ONE question
Question 1
Company G has a machining facility specializing in work for the aircraft components market. The prior job-costing system had two direct-cost categories (direct materials and direct manufacturing labour) and a single indirect-cost pool (manufacturing overhead, allocated using direct labour-hours). The indirect cost-allocation rate of the prior system for the year would have been £115 per direct manufacturing labour-hour. Recently, a team with members from product design, manufacturing and accounting used an activity-based approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. These five cost pools represent five activity areas at the facility, each with its own supervisor and budget responsibility. Pertinent data are as follows:
|
Activity area
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Cost driver used as allocation base
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Cost-allocation rate £
|
|
Materials handling
|
Parts
|
0.40
|
|
Lathe work
|
Turns
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0.20
|
|
Milling
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Machine-hours
|
20.00
|
|
Grinding
|
Parts
|
0.80
|
|
Testing
|
Units tested (all units have to be tested)
|
15.00
|
Information-gathering technology has advanced to the point where all the data necessary for budgeting in these five activity areas are automatically collected. Two representative jobs processed under the new system at the facility in the most recent period had the following characteristics:
|
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Job A
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Job B
|
|
Direct materials cost per job
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£9,700
|
£59,900
|
|
Direct manufacturing labour cost per job
|
£750
|
£11,250
|
|
Direct manufacturing labour-hours per job
|
25
|
375
|
|
Parts per job
|
500
|
2,000
|
|
Turns per job
|
20,000
|
60,000
|
|
Machine-hours per job
|
150
|
1,050
|
|
Units per job
|
10
|
200
|
Required:
(a) Calculate the per unit manufacturing costs of each job under the prior job- costing system. (6 marks)
(b) Calculate the per unit manufacturing costs of each job under the activity-based-costing system. (14 marks)
(c) Compare the per unit cost figures for Jobs A and B calculated in requirements (a) and (b). Explain why the prior and the activity-based costing systems differ in their job cost estimates for each job? Why might these differences be important to Company G? (14 marks)
(d) Assume the company uses ‘total cost plus’ pricing. Explain TWO disadvantages of ‘total cost plus’ pricing. (6 marks)
(Total 40 marks)
Question 2
Cars Ltd, a local garage, which has a body shop. The body shop manager has contacted a management accountant, saying that one of the company’s present customers has offered the company a one-year contract for additional work. The customer requires a discount of 10 per cent to be allowed on the total invoice value. The manager provides the accountant with the following information:
1. Additional capital expenditure will be:
|
|
£
|
|
Video conferencing facility
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10,000
|
|
Additional storage trolleys
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5,000
|
|
Computerised estimated system
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10,000
|
The customer insists on installation of the video conferencing facility which will not be usable for any other contract. The storage trolleys and estimating system may be used on other work after the end of this particular contract.
2. Additional staff will be required. Three full-time skilled technicians earning £8.00 per hour will each work 39 hours per week on the new contract. They are each allowed 6 weeks per year paid holidays and 2 weeks paid training. Labour efficiency is 95 per cent measured as the ratio of sold hours/hours occupied. Training time and holiday time are charged to direct costs of the department. For each technician the new contract will leave some unsold hours available for any other jobs coming into the body shop. One full-time car cleaner will be required earning £10,500 per annum.
3. The customer has said that the potential increase in sales due to chargeable hours from this contract could be 4,500 hours at a rate of £20.00 per hour before discount. In addition, the increase in sales of car parts is calculated on the basis of £40.00 per hour with an average gross profit of 15 per cent before discount. The increase in paint sales is calculated on the basis of £3.50 per hour with an average gross profit of 40 per cent before discount.
4. Additional annual overheads will be as follows:
|
|
£
|
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Variable costs
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5,500
|
|
Fixed costs
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6,500
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5. Depreciation is calculated on a straight-line basis as follows:
|
|
%
|
|
Storage trolleys
|
20
|
|
Computers
|
25
|
The manager has asked for an opinion on the acceptability of the customer’s proposal.
Required:
Write a memo to the manager:
(a) Assessing the financial aspects of the proposal under the relevant costing principles and based on that to give suggestion. (30 marks)
(b) Commenting on other considerations relevant to the decision-making process. (10 marks)
(Total 40 marks)
Section C (40 marks)
Answer ONE question
Question 1
Nottingham Products, Inc., has a Calculator Division that manufactures and sells a standard calculator:
Capacity in units 100,000
Selling price to outside customers £30
Variable costs per unit £16
Fixed costs per unit (based on capacity) £9
The company has a Notebook Division that could use this calculator in one of its notebooks. The Notebook Division is currently purchasing 10,000 calculators per year from an overseas supplier at a cost of £29 per calculator.
Required:
(a) Assume that the Calculator Division has enough idle capacity to handle all
of the Notebook Division’s needs. What is the acceptable range, if any, for the transfer price between the two divisions? (8 marks)
(b) Assume that the Calculator Division is selling all of the calculators that it
can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions? (8 marks)
(c) Assume again that the Calculator Division is selling all of the calculators that it can produce to outside customers. Also assume that £3 in variable expenses can be avoided. What is the acceptable range, if any, for the transfer price between the two divisions? (8 marks)
(d) Refer to the original data in the question setting. Assume that the
Notebook Division needs 20,000 special calculators per year. The Calculator Division’s variable costs to manufacture and ship the special calculator would be £20 per unit. To produce these special calculators, the Calculator Division would have to reduce its production and sales of regular calculators from 100,000 units per year to 70,000 units per year. As far as the Calculator Division is concerned, what is the lowest acceptable transfer price? (8 marks)
The following table sets out information in respect of Calculator Division and Notebook Division.
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Division X
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Division Y
|
|
Amount to be invested in new project
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£4m
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£4m
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|
Sales from the new project
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£2m
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£2m
|
|
Net profit from the new project
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£1.2m
|
£0.8m
|
|
ROI of existing investment
|
33%
|
4%
|
The cost of borrowing new finance is 10% per annum.
(e) Explain what view the managers of each division might take, depending on
the method of performance evaluation applied. (8 marks)
（Total 40 marks）
Question 2
RST manufactures three products using different quantities of the same resources. Details of these products are as follows:
|
Product
|
R
|
S
|
T
|
|
|
£/unit
|
£/unit
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£/unit
|
|
Market selling price
|
90
|
126
|
150
|
|
Direct labour (£7/hour)
|
14
|
28
|
35
|
|
Material A (£3/kg)
|
15
|
12
|
21
|
|
Material B (£6/kg)
|
24
|
36
|
30
|
|
Variable overhead (£4/hour)
|
8
|
16
|
20
|
|
Fixed overhead
|
12
|
7
|
12
|
|
|
73
|
99
|
118
|
|
Profit
|
17
|
27
|
32
|
The management of RST has predicted the demand for these products for July as follows:
Product R 500 units
Product S 800 units
Product T 1,600 units
These demand estimates do NOT include an order from a major customer to supply 400 units per month of each of the three products, at a discount of £10 per unit from the market selling price.
During July, the management of RST anticipate that there will be a shortage of material B, and that only 17,500 kgs will be available.
It is not possible for RST to hold inventory of any raw materials, work in progress or finished products.
Required:
(a) Prepare calculations to show the optimum product mix to maximise RST’s
profit for July, assuming that the order with the major customer is supplied in full. (10 marks)
RST has now realised that the contract with the major customer does not have to be met in full for any of the three products. The customer will accept whatever RST is prepared to supply at the contracted prices but they will change a financial penalty if RST does not supply them in full in July.
(b) Calculate the lowest value of the financial penalty that the major customer would need to insert in the contract to ensure that RST meets its order in full in July. (10 marks)
Now that you have presented your answer to (a) and (b) above to the management team of RST, the production manager has advised that, due to holidays, the number of direct labour hours available will be reduced to a total of 9,800 hours in July.
A decision has been made that RST will fulfil its order with the major customer in full in July and it has been agreed that a linear programming model will be used to determine optimum usage of the resources that will be available after setting aside those required for the major customer’s order.
(c) Identify the objective function and the constraints to be used in the linear programming model to determine the optimum usage of the remaining resources to maximise the company’s profits for July. (6 marks)
(d) The optimal solution has been determined as:
R 500 units
S 0 units
T 880 units
Explain which of the constraints you stated in (c) are binding on the solution.
(You are not required to draw a graph.) (4 marks)
(e) Critically evaluate the benefits and limitations of using linear programming for planning purposes. (10 marks)
(Total 40 marks)