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AC220 2020/21 A 800

FURTHER MANAGEMENT ACCOUNTING (AC220)

SECTION A: ANSWER ALL QUESTIONS

(Each question is worth 2.5 marks)

1. A colleague has been discussing Activity Based Costing (ABC) and states the following:

(i) ABC is most beneficial when overheads form a small proportion of the total production costs.

(ii) ABC calls the activity that causes an overhead a “cost driver” and uses it to absorb the relevant overhead into the product cost.

Which statements are true?

(a) Both the statements

(b) Only statement (i)

(c) Only statement (ii)

(d) Neither of the statements

2. A company uses Activity Based Costing to cost its three products and its budget includes the following:

	X	Y	Z
Budget	Units	Units	Units
Production	20,000	10,000	15,000
Batch size	500	1,000	1,500

Total set-up costs are estimated at £210,000 and each batch requires one set-up.

What is the budgeted set-up cost per unit of Y?

(a) £0.07

(b) £0.35

(c) £3.50

(d) £7.00

3. A product has the following as part of its standard cost card:

2 kg of material R at £5 per kg = £10 per unit

Last month, the company made 10,000 units and used 21,000 kg of R at a cost of £100,800.

What was the material usage variance?

(a) £4,800 A

(b) £4,800 F

(c) £5,000 A

(d) £5,000 F

4. Ingredient Q is expected to cost £8 per kg, but last year 20,000 kg cost £170,000. It was subsequently discovered that worldwide prices had risen by 5% because a poor harvest had caused a shortage.

What is the material price operating variance for ingredient Q?

(a) £2,000 A

(b) £8,000 F

(c) £10,000 F

(d) £10,000 A

5. A company has a product, Zepha; to produce 10 kg of Zepha requires the following:

Material
W	2 kg at £4 / kg
X	5 kg at £10 / kg
Y	4 kg at £6 / kg

Actual usage for 11,000 kg of Zepha was 2,350 kg of W, 4,900 kg of X and 4,300 kg of Y.

What is the material yield variance?

(a) £41,000 A

(b) £41,000 F

(c) £45,100 A

(d) £45,100 F

6. Division P supplies Division Q with components and a dual transfer price system has been agreed with head office.

What does this mean?

(a) P is credited with a lower price and Q is charged a higher price

(b) P is credited with a higher price and Q is charged a lower price

(c) P is paid a lump sum immediately and then a small amount per component transferred

(d) P is paid a small amount per component transferred and then a lump sum later

7. Division S supplies Division T with parts. Division S has no other customers and revenues and costs are as follows:

	S	T
Price of final product		£20
Variable cost per item made in division	£6	£12
Fixed Costs in division	£10,000	£40,000

Which of the following might be acceptable to both divisions as a transfer price for the parts?

(a) £5

(b) £7

(c) £9

(d) There is no price which would be acceptable to both divisions

8. A company has incurred a significant adverse labour rate variance.

What might have caused this?

(a) Additional workers were hired at the standard rate

(b) Better quality material was sourced

(c) Work was scheduled more efficiently than had been expected

(d) Some unskilled labour was replaced with skilled labour

9. Which of the following is NOT a usual perspective of the Balanced Scorecard?

(a) Financial

(b) Market

(c) Internal

(d) Innovation and Learning

10. A company budgets to sell 40,000 of its only product, which has a selling price of £50 and variable cost per unit of £20. Fixed costs are £600,000.

What is the margin of safety?

(a) 25%

(b) 33%

(c) 50%

(d) 100%

11. A company has three products but only has 20,000 hours of labour available in the coming period. Details of the products are as follows:

	T	U	V
	£	£	£
Selling price	20.00	25.00	15.00
Labour (£5 per hour)	10.00	12.50	5.00
Other variable costs	5.00	2.50	5.00
Maximum sales (units)	8,000	8,000	10,000

In addition, the company has committed to fulfilling an order for 2,000 units of Product T (this is included in the 8,000 maximum sales).

What production plan will maximize profits in the period?

	T	U	V
(a)	2,000	2,400	10,000
(b)	0	4,000	10,000
(c)	8,000	0	4,000
(d)	1,000	6,400	0

12. A company makes two products but in the coming month has constraints on three of the resources which all the products use. In addition there are limits on the total that can be sold of each product and a minimum that must be made of each to satisfy certain contracts.

If the company wants to determine the production plan to maximize profits, which of the following is true?

(a) Because there are multiple products, we should use single limiting factor (key factor) analysis

(b) The feasible region will have its boundary made up of all the constraints

(c) The origin will not be in the feasible region

(d) Because of the number of constraints, we cannot use the graphical method of linear programming

13. A short term project requires investment in a machine of £150,000, and it will have a scrap value of £50,000 in four years’ time (the end of the project). The annual operating cashflows, which are received at the end of each year, are forecast to be £40,000, £50,000, £40,000 and £40,000.

What is the Accounting Rate of Return (ARR), based on average investment?

(a) 11.7%

(b) 17.5%

(c) 28.3%

(d) 42.5%

14. A short term project requires 5,000 kg of Material P and 4,000 kg of Material Q; Material P is no longer used for any other product, but Material Q is used regularly by the company. Details are as follows:

	Amount in inventory	Original cost	Current price	Resale value
Material P	3,000 kg	£5 per kg	£4 per kg	£2 per kg
Material Q	3,000 kg	£6 per kg	£8 per kg	£3 per kg

What is the total relevant cost of material for the project?

(a) £38,000

(b) £46,000

(c) £49,000

(d) £52,000

15. A four year project requires the purchase of a machine costing £20,000. It will attract capital allowances at 18% reducing balance, with a full allowance given in the year of purchase and a balancing allowance or charge in the year of disposal.

The machine will be bought at the start of an accounting period (when the project starts) and sold on the last day of the fourth year for £4,000. Tax is payable at 20% pa.

What will be the cashflow associated with the capital allowances at time 2, to the nearest £10?

(a) £480

(b) £590

(c) £2,420

(d) £2,950

16. A company has £6 million to invest and has the following potential projects. Each project is infinitely divisible but cannot be undertaken more than once.

Project	Investment needed at t0 (£000s)	Net Present Value (£000s)
P	3,600	540
Q	3,600	1,260
R	7,200	2,400

Which projects should be undertaken, either wholly or in part, to maximize shareholders’ wealth?

(a) P and Q

(b) P and R

(c) Q and R

(d) P, Q and R

(40 marks)

Section B: ANSWER ANY TWO QUESTIONS

1. Prancer Forestry Products limited has a number of specialized garden centres which sell small trees to homeowners and landscapers.

In December it sells four main varieties of Christmas trees: three which have been cut (fir, spruce and pine) and a tree which has been grown in a pot.

The company is thinking about the ordering needed for next Christmas so is reviewing last year’s results. These were as follows:

	Fir	Spruce	Pine	Potted
Budget
Number of sales	1,000	2,000	2,000	3,000
Average price	£40	£30	£35	£50
Average unit variable cost	£25	£24	£27	£38
Actual
Number of sales	1,200	2,600	2,200	4,000
Average selling price	£38	£32	£36	£49
Average unit variable cost	£23	£24	£25	£36

In March, the tree-sellers association released data which showed that Christmas tree sales were 30% higher in 2020 than in 2019. It was thought this was caused by the pandemic as the restrictions on gatherings meant there were more locations at which celebrations took place and they all wanted a tree.

Required

(a) Calculate the sales price variance and the sales volume variances for each of the four lines individually.

(8 marks)

(b) Calculate the sales mix variance and the sales quantity variance and explain how they relate to your answer to (a).

(10 marks)

(c) In the light of the information form the association, split the sales quantity variance into a planning and an operating part.

(6 marks)

(d) Discuss and comment on the results you have calculated in parts (a) to (c).

(6 marks)

(Total: 30 marks)

2. Dasher makes three brands of an expensive perfume. The products are sold to exclusive retail outlets in boxes of 5 bottles and this is called a unit. Details are as follows: