Management Accounting

2nd Year Examination

August 2012

Exam Paper, Solutions & Examiner’s Report

Management Accounting August 2012 2nd Year Paper

NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to
provide guidance to students and their teachers regarding possible answers to questions in our
examinations.

Although they are published by us, we do not necessarily endorse these solutions or agree with the views
expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It
should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us.
Alternative answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will
often be significantly longer than would be expected of a candidate in an examination. This will be
particularly the case where discursive answers are involved.

This publication is copyright 2012 and may not be reproduced without permission of Accounting
Technicians Ireland.

© Accounting Technicians Ireland,2012.

2
 Accounting Technicians Ireland
2nd Year Examination: August 2012
Paper : MANAGEMENT ACCOUNTING

24th August 2012 - 2.30 p.m. to 5.30 p.m.

INSTRUCTIONS TO CANDIDATES

In this examination paper the €/£ symbol may be understood and used by candidates in Northern
Ireland to indicate the UK pound sterling and the €/£ symbol may be understood by candidates in
the Republic of Ireland to indicate the Euro.

Answer FIVE questions.

Answer all three questions in Section A. Answer any two of the three questions in Section B.

If more than the required number of questions is answered, then only the requisite number, in the
order filed, will be corrected.

Candidates should allocate their time carefully.

All figures should be labelled, as appropriate, e.g. €/£’s, units etc.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

Management Accounting August 2012 2nd Year Paper

SECTION A
ANSWER ALL THREE QUESTIONS

QUESTION 1 (Compulsory)

The owner of Office Furniture Limited instructs you to prepare a monthly cash budget for the next three
months. You are presented with the following budget information for September, October and November
2012:
September October November
€/£ €/£ €/£
Sales 590,000 650,000 750,000
Production costs 300,000 350,000 420,000
Sales & Administration expenses 150,000 170,000 200,000
Capital expenditure 0 0 120,000

The company expects 10% of sales revenue to be cash sales and in the current climate that a 5%
allowance for receivables will be required.

60% of sales revenue is expected to be collected in full the month following the sale and the remainder
the following month.

Depreciation and insurance costs combined represent €/£60,000 of the estimated monthly
production costs per month.

The annual insurance premium of €/£384,000 is paid in September.

80% of the remainder of production costs are expected to be paid in the month in which they are
incurred and the balance in the following month.

Current assets at the 1st September include a bank balance of €/£55,000 and accounts receivable (net
of provisions) of €/£611,135 (€/£459,135 from August sales and €/£152,000 from July sales).

Current liabilities at the 1st September include a short term loan of €/£100,000, which is repayable
together with a premium of 2% in October, and €/£60,000 of accounts payable incurred in August for
production costs.

All selling and administrative expenses are paid in cash in the period they are incurred.

It is expected that €/£35,000 of dividends will be paid to Shareholders in September. Dividends of

€/£8,000 on investments held will be received in October.

Requirement:

(a) Prepare a monthly cash budget and supporting schedules for September, October and November
2012.
14 Marks

(b) Calculate the Receivables and Payables figure to be included in the projected Statement of
Financial Position at 30 November 2012.
2 Marks

(c) On the basis of the cash budget prepared, what recommendations should be made to the
company?
4 Marks
Total 20 Marks

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Management Accounting August 2012 2nd Year Paper

QUESTION 2 (Compulsory)

Davisfield Ltd. produces agricultural machinery parts and has classified the production process into two
sections - Assembly and Finishing, which are supported by the Service Departments - Administration,
Stores and Quality Control.

Allocated overhead costs No. of Employees

€/£
Production Departments
Assembly 35,000 20
Finishing 44,000 15
Service Departments
Administration 70,000 10
Stores 8,000 2
Quality Control 8,000 3

During the year, 50,000 machine hours were worked in the Assembly Dept. and 20,000 direct labour
hours (at a cost of €/£12 per hour) were worked in the Finishing Dept.

Stores received 1,500 requisitions from Assembly and 1,000 from Finishing.

Quality Control carried out 2,000 chargeable hours for Assembly and 1,000 for Finishing.

One special piece of equipment, FARM100, was produced during the year. It took 100 machine hours
of Assembly time and 55 direct labour hours in the finishing dept. Direct costs were €/£650.

Requirement:

(a) Calculate an appropriate absorption rate for:

(i) Assembly Dept.
(ii) Finishing Dept.
10 Marks

(b) Calculate:
(i) The total factory cost of the special equipment, FARM100.
(ii) A sales price for FARM100 based on a 20% margin.
6 Marks

(c) Discuss the relevance of absorption costing where there are a high level of service costs.

4 Marks
Total 20 Marks

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Management Accounting August 2012 2nd Year Paper

QUESTION 3 (Compulsory)

VB Ltd. manufactures and sells a single item of farm machinery, which is distributed through a
network, at a sales price of €/£1,250 per item. The budgeted sales for the 2012 year are 36,000
units, which represents 60% of the firm’s capacity. The following production information has been
provided:
€/£
Direct Materials 17,820,000
Direct Labour 1,980,000
Production Overhead - Fixed 12,740,000
- Variable 1,226,000
Sales/Distribution Overhead - Fixed 2,110,000
- Variable 214,000

Requirement:

(a) Calculate the breakeven cost in units and sales revenue .

4 Marks

(b) Define and calculate the margin of safety, expressed in % terms.

4 Marks

(c) The Sales Director proposes to expand to 80% capacity by reducing the sales price by 10% and
spending an additional €/£3,000,000 on advertising. Calculate the impact of this proposal on
breakeven, margin of safety and profitability and advise management whether this proposal
should be adopted.
8 Marks

(d) Outline the limitations of using the analysis outlined in part (c) above in a decision making
context.

4 Marks
Total 20 Marks

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Management Accounting August 2012 2nd Year Paper

SECTION B
ANSWER TWO OUT OF THE FOLLOWING THREE QUESTIONS

QUESTION 4

Pres Ltd has provided the following standard costing information for the month of April 2012:

Budget/Standard Actual
Sales 2,500 x €/£100 2,600 X €/£108

Materials 5kg per unit 14,000kg

Materials price €/£9 per kg €/£128,800

Labour hours 2 hours per unit 5200 hours

Labour rate €/£12/ hour €/£11.75/hour

Requirement
(a) Prepare a statement of budget, actual and flexed gross profit for the month of April 2012.

5 Marks

(b) Prepare a statement identifying all relevant variances required to reconcile actual with budgeted
profit.
12 Marks
(c) Discuss possible reasons for material variances reported in April 2012 for Pres Ltd.

3 Marks
Total 20 Marks

QUESTION 5

The Sales Director has recently attended a course entitled ‘Finance for Non-Accounting Managers’. He
wants to understand more about a number of management accounting terms that he feels may be
relevant to him. He asks you to prepare a memorandum explaining and providing examples of the
following:

Attainable Standard;

Zero Based Budgeting;

Opportunity Costs;

Batch Costing ;

Equivalent Units.
Total 20 Marks

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Management Accounting August 2012 2nd Year Paper

QUESTION 6

Dunning Limited has recently introduced at Activity Based Costing System and has provided the following
details for the month of January:-

Cost Pool Overhead Cost

€/£
Parts 10,000
Maintenance 18,000
Stores 10,000
Administration 2,000

You have ascertained the following activity information:-

Number of employees 40
Total number of parts 500
Number of materials requisitions 20
Maintenance hours 600

During the month, 500 units of Product Y were produced. This production run required 100 parts and
150 maintenance hours; 5 material requisitions were made and 10 employees worked on the units.

Requirement

(a) Using Activity Based Costing, calculate the total amount of overhead absorbed by each unit of Product
Y.
10 Marks

(b) Discuss THREE different types of controls and explain how activity based costing assists in the control
of costs?
10 Marks
Total 20 Marks

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Management Accounting August 2012 2nd Year Paper

2nd Year Examination: August 2012

Management Accounting

Suggested Solutions

Students please note: These are suggested solutions only; alternative answers may
also be deemed to be correct and will be marked on their own merits.
Marks
Allocated
Solution 1-Office Furniture Limited
(a) - Cash Budget

September October November

€/£ €/£ €/£ 1 mark
INFLOWS
See below
Receivables 517,090 554,345 613,650 1 mark
Dividend 8,000
Total Inflows 517,090 562,345 613,650 1 mark
OUTFLOWS
Payables 252,000 280,000 346,000 1 mark
Insurance 384,000 1 mark
Sales & Admin 150,000 170,000 200,000 1 mark
Dividend 35,000 1 mark
1 mark
Loan repayment 102,000 1 mark
Capital Expenditure 120,000
Total Outflows 821,000 552,000 666,000 1 mark
Net cash position (303,910) 10,345 (52,350)
1 mark
Opening Bank 55,000 (248,910) (238,565)
Closing Bank (248,910) (238,565) (290,915)

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 Management Accounting August 2012 2nd Year Paper

Marks
Workings Allocated

Receivables
August September October November
€/£ €/£ €/£
Revenue 537,000 (1) 590,000 650,000 750,000
Cash 10% 53,700 59,000 65,000 75,000
Receivables 483,300 531,000 585,000 675,000
60% 322,200 354,000 (2) 390,000 450,000
30% 161,100 177,000 (3) 195,000 225,000
Receivables 531,000 585,000 675,000
Allowance 5% 24,165 26,550 29,250 33,750 2 marks
Opening Balance
revenue – July 152,000
- August 306,090 153,045
September revenue 59,000 336,300(2) 168,150 (3)
October revenue 65,000 370,500
November revenue 75,000
Total receivables 517,090 554,345 613,650

(1) 459,135 = 85.5% of August Sales (-10% cash – 5% of balance (90%) = 4.5% of gross)
Gross Sales - €/£537,000
(2) 60% of revenue less 5% allowance ( x 95%) = €/£336,300
(3) 30% of revenue less 5% allowance ( x 95%) = €/£168150

Debtors Control Account (not required by solution – for explanation purposes)

1/9 Opening Balance 611,135 Received – July a/cs 152,000
September Sales 590,000 Received – August a/cs 306,090
Cash Received 59,000
Allowance 26,550
30/9 Closing Balance 657,495
1,201,135 1,201,135
1/10 Opening Balance 657,495 Received – August a/cs 153,045
October Sales 650,000 Received – Sept a/cs 336,300
Cash Received 65,000
Allowance 29,250
31/10 Closing Balance 723,900
1,307495 1,307495
1/11 Opening Balance 723,900 Received – Sept a/cs 168,150
November Sales 750,000 Received – October a/cs 370,500
Cash Received 75,000
Allowance 33,750
30/11 Closing Balance 826,500
1,473,900 1,473,900

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Management Accounting August 2012 2nd Year Paper

Payables Marks
September October November o/s Allocated
€/£ €/£ €/£
Production 300,000 350,000 420,000
Costs
Depreciation 60,000 60,000 60,000
& Insurance
Insurance 32,000 32,000 32,000
Depreciation 28,000 28,000 28,000
(non Cash)
Balance 240,000 290,000 360,000
Payable in 80% 192,000 232,000 288,000
month
Payable – 1 20% 60,000 48,000 58,000 72,000
month in
arrears
Payables 252,000 280,000 346,000

Insurance Premium – per annum €/£384,000 – per month - €/£32,000

Loan repayment
100,000 + 2% = 102,000

(b)

Receivables due at 30 November

25.5% x 650,000 165,750

85.5% x 750,000 641,250
€/£807,000 1 mark

Payables due at 30 November

(420,000-60,000) x 20% €/£72,000 1 mark

(c) Recommendations to the Company

Discuss projected cashflows with bank and seek temporary overdraft

Seek financing option for Insurance premium payment
Seek to extend short term loan arrangement
Negotiate additional credit with suppliers
Look at inventories and other assets to raise additional working capital 4 marks
Review credit control arrangements to minimise allowance (bad debt)

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Management Accounting August 2012 2nd Year Paper

Marks
Allocated
Solution 2-Davisfield Ltd

(a) Absorption Costing Statement

Production Service

Assembly Finishing Administ- Stores Quality 1 mark

(€/£) (€/£) ration (€/£) Control
(€/£) (€/£)
Allocated Overheads 35000 44000 70000 8000 8000 1 mark

Service Apportionment

Administration 35000 26250 (70000) 3500 5250 2 marks

Quality Control 8835 4415 (13250) 1 mark
Stores 6900 4600 (11500) 1 mark
Total 85735 79265 - - -
50000 20000 direct
machine labour hours 2 marks
hours
Absorption Rate €/£1.71 per €/£3.96 per
machine direct labour 2 marks
hour hour

Notes:
Allocated overhead – per question
Administration apportionment based on employee numbers
Quality Control apportionment based on no of chargeable hours
Stores apportionment based on no .of requisitions

(b) FARM100 – Calculation of Cost

€/£
Direct Costs 650.00 1 mark
Direct Labour 55 x 12 660.00 1 mark
Overheads
Assembly Dept 100 x 1.71 171.00 1 mark
Finishing Dept 55 x 3.96 217.80 1 mark
Total 1698.80 1 mark

Margin – 20% 424.70

1 mark
Sales Price 2123.50

(c)
Absorption costing provides more accurate product cost information by recognising that the costs of
overheads constitute an input into the production process. Where the overhead relates to service costs, 2 marks
it is important that the total cost is considered for accounting and decision making purposes.
This will assist in improving decisions about resource utilisation and encourage the optimal use of
services.
However, traditional absorption costing methods are usually calculated on a single volume based
calculation, related to the most appropriate base (eg machine hours or direct labour hours) and this can
2 marks
lead to cost distortion as it can overlook the real underlying driver of cost. If there is a significant
amount of overheads related to service costs, it may be more appropriate to look at activity based
costing.

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Management Accounting August 2012 2nd Year Paper

Marks
Solution 3-VB Ltd Allocated
Question 3 VB Ltd

(a)
1 mark
Breakeven Point = Fixed Cost/Contribution

Fixed Costs - Production Overhead 12,740,000

- Sales /Distribution Overhead 2,110,000
14,850,000

Contribution Total Per unit

€/£ €/£
Sales (1250 x 36000) 45,000,000 1250
Direct Materials 17,820,000 495
Direct Labour 1,980,000 55
Variable Overhead (1,226k + 224k) 1,440,000 21,240,000 40
Contribution 23,760,000 660 1 mark

14,850,000/660 = 22,500 units 1 mark

Fixed Costs /CS Ratio

CS Ratio 660/1250 = 0.528

14,850,000/0.528 = €/£28,125,000 1 mark

(22,500 x 1250 = 28,125,000)

(b) Margin of Safety

The margin of safety (MOS) is the difference between the level of budgeted sales and the 1 mark
breakeven level of sales. Hence, MOS is a measure of risk and the lower it is the higher
the risk of not breaking even. It can be expressed in €/£, units or % terms
1 mark
Budgeted sales revenue/units – Breakeven sales revenue/units x 100
Budgeted sales revenue/units

36000 – 22500 x 100 = 37.5% 2 marks

36000

45,000,000 – 28,125,000 x 100 = 37.5%

45,000,000

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Management Accounting August 2012 2nd Year Paper

Marks
(c ) Revised Scenario Calculations Allocated

Revised Sales price 1250-125 = €/£1125

Revised Contribution Per unit

€/£
Sales (1125 x 36000) 1125
Direct Materials 495
Direct Labour 55
Variable Overhead 40
Revised Contribution 535 1 mark

Revised Fixed Costs

Fixed Costs - Production Overhead 12,740,000
- Sales /Distribution Overhead 2,110,000
- Additional Advertising 3,000,000
17,850,000
1 mark
Revised BEP 17,850,000/535 = 33,365 units

Increased Sales 36000/60 x 80 = 48000

Revised Margin of Safety

1 mark
48000 – 33,365 x 100 = 30.49%
48000

Revised Profitability €/£

Sales (1125 x 48000) 54,000,000
Direct Materials (495 x 48000 ) 23,760,000
Direct Labour (55 x 48000) 2,640,000
Variable Overhead (40 x 48000) 1,920,000 28,320,000
Revised Contribution 25,680,000 1 mark
Original contribution 23,760,000
Increase in contribution 1,920,000 1 mark

Comparison of Overall results

Original Results Revised Scenario
€/£ €/£
Contribution 23,760,000 25,680,000
Fixed Overhead
- Production 12,740,000 12,740,000
- Sales/Distribution 2,110,000 5,110,000
Profit 8,910,000 7,830,000 1 mark

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Management Accounting August 2012 2nd Year Paper

Comment: Marks
Allocated
The Sales Director’s proposal will bring additional contribution of €/£1.92m, but as this
does not exceed the incremental overhead costs of €/£3m, overall profitability is reduced.
There are also some additional risks associated with the proposal as the breakeven point
2 marks
increases by almost 11,000 units and the margin of safety is reduced.

Other factors should be considered including the opportunity costs for the additional
capacity, overall business objectives, market share, competitors and existing customers.

(d)

Cost Volume Profit (CVP) analysis assumes that various factors (eg: costs and revenues) are
broadly linear throughout the entire range. This is unlikely to be the case as in reality quantity 1 mark
discounts and production efficiencies may be achieved.
Similarly, fixed costs are assumed to stay static and hence, CVP analysis is most useful for short
term planning and decision making rather than long term. 1 mark
CVP can only be applied to a single product (as in this example) or in some cases to a single
1 mark
static mix of a group of products.
Inventory holdings are not considered by CVP analysis and some aspects can be time- 1 mark
consuming to prepare.

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Management Accounting August 2012 2nd Year Paper

Marks
Solution 4-Pres Ltd Allocated

(a) Statement of Budgeted, Actual and Flexed Budget

Budget Actual Flexed Per Unit
(€/£) (€/£) (€/£) (€/£)
Revenue 250,000 280,800 260,000 100 1 mark
Materials 112,500 128,800 117,000 45
Labour 60,000 61,100 62,400 24 1 mark
Cost of Revenue 172,500 189,900 179,400 69
Gross Profit 77,500 90,900 80,600 31 3 marks

(b) Statement of Profit Reconciliation

1 mark
Budgeted Profit €/£77,500

(i) Sales Price Variance

(Actual Sales Quantity x Actual Price) – (Actual Sales Quantity x Standard Price)
(2,600 x 108.00) - (2,600 x 100.00)
280,800 - 260,000 = £/€20,800 fav 1 mark
(ii) Sales Volume Variance
(Actual Sales Quantity x Standard profit per unit) – (Standard Sales Quantity x Standard profit per unit)
(2,600 x 31) - (2,500 x 31)
80,600 - 77,500 = £/€3,100 fav 2 marks

(iii) Material price variance

(Actual quantity of inputs x Actual price) – (Actual quantity of inputs x Standard Price)
(14,000 x 9.20) - (14,000 x 9.00)
128,800 - 126,000 = £/€2,800 adv 2 marks
(iv) Materials usage variance
(Actual quantity of inputs x Standard price) – (Flexed quantity x Standard price)
(14,000 x 9.00) - (5 x 2,600 x 9.00)
126,000 - 117,000 = £/€9,000 adv 2 marks

(v) Labour rate variance

(Actual Hours of input x Actual Rate) – (Actual Hours of input x Standard rate)
(5,200 x 11.75) - (5,200 x 12.00)
61,100 - 62,400 = £/€1,300 Fav 2 marks

(vi) Labour efficiency variance

(Actual Hours of input x Standard rate) – (Standard hours required for actual output x Standard rate)
(5200 x 12.00) - (2 x 2600 x 12.00)
62,400 - 62,400 = £/€ - 1 mark

Total Favourable Variances £/€25,200

1 mark
Total Adverse Variances (£/€11,800)

Actual Reported Profit €/£90,900

(c)
Both material variances are adverse, impacting negatively on overall performance. 1 mark
The adverse materials price variance of €/£2,800 may be attributable to changes in market conditions,
purchase of higher quality goods, loss of discount or change of supplier. 1 mark
The adverse materials usage variance of €/£9,000 could be as a result of poor materials handling, or poor
1 mark
stock control; lower skilled workers or production issues resulting in more wastage.
In both instances, an incorrect standard for price or quantity could also result in adverse variances.

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Management Accounting August 2012 2nd Year Paper

Marks
Solution 5 Allocated
MEMORANDUM

To: Sales Director 1 mark

From: Technician Student
Re: Accounting Terminology
Date: X/X/XX

Management accounting can provide information for managers to support decision making, planning and
control within an organisation. You have been introduced to a number of management accounting 1 mark
theories and related terminology. This paper aims to provide further information and explanation of a
number of key terms:

Attainable Standard
An attainable standard is a term used in standard costing which is based on the theory that the standard 2 marks
amount of work will be carried out efficiently under normal operating conditions. Some allowance is
made for delay and inefficiency. If appropriately set, the attainable standard can provide a realistic but
challenging target, which can act as a motivational tool for employees.

An example of an attainable standard:

Due to normal losses and expected downtime, the attainable standard cost of a widget is
€/£
Direct Materials 2.5 kg @ €/£5 12.50 2 marks
Direct Labour 5 hours @ €/£10 50.00
Production overhead 5 hours @ €/£4 20.00
82.50
A widget, produced in perfect working conditions has the following costs (ideal standard)
€/£
Direct Materials 2 kg @ €/£5 10.00
Direct Labour 4 hours @ €/£10 40.00
Production overhead 4 hours @ €/£4 16.00
66.00

Zero based budgeting

Traditional budgeting approaches are not always clearly linked to strategy and are focused on financial
aspects only. In this scenario, the annual budget uses an incremental approach whereby increases and
decreases are applied to previous out-turn positions. In contrast, Zero based budgeting supports a more 2 marks
innovative approach, requiring managers to justify all costs as if the proposals were being considered for
the first time. This approach is focused on opportunity costing and can eliminate efficiencies, however it
can be quite complex and time-consuming to administer.

A definition of zero based budgeting provided by CIMA is ‘a method of budgeting whereby all activities are
re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the
function does not exist and is at zero cost. Increments of cost are compared with increments of benefit,
culminating in the planning of maximum benefit for a given budget cost’.

An example of zero based budgeting:

It is proposed to increase the maintenance budget by 20% to take account of the age of some equipment and
other inflationary factors. Due to zero based budgeting analysis, it is identified that a particular machine, 2 marks
which costs €/£8000 to maintain is only used once per quarter. An alternative outsourcing option has been
identified and the budget adjusted accordingly.

Opportunity Costs
Opportunity costs are a key factor in decision-making. They can be defined as the value of the next best
alternatives, or the cost of the alternatives foregone. Opportunity costing focuses on the alternatives and 2 marks
presents a different perspective on the economically relevant cost or avoidable costs.

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Management Accounting August 2012 2nd Year Paper

Marks
Solution 5 (Cont’d) Allocated

An example of opportunity cost:

A firm rents a unit at a cost of €/£ 500 per week. They are considering using this space for a new project or 2 marks
subletting it for €/£600 per week..
The opportunity cost in this scenario is the €/£600/week rather than the actual cost incurred.

Batch Costing
A batch is a similar group of articles manufactured together and batch costing is a method similar to job
costing is normally used for costing purposes. Essentially, each batch is treated as a ‘job’ and is treated as 2 marks
the cost object in the exercise. Accordingly, costs are collected for each batch and divided by the number
of items in the batch to give a unit cost

An example of batch costing:

A bakery produces a batch of 500 specialist bread and collates cost as follows:
€/£ 2 marks
Materials: 60.00
Labour 25.00
Variable costs 20.00
Production overheads 45.00
Total batch cost 150.00
Batch no. 500
Cost per item 0.30

Equivalent units
At the end of any given period of accounting, there are likely to be partly completed units in a
manufacturing process. Clearly, some costs incurred during the period are attributable to these units, as 2 marks
well as those which are fully complete. In order to spread cost equitably - the number of equivalent units
is calculated. This is the equivalent number of fully complete units which the partly complete units
represent.

An example of equivalent units:

Production of fully complete units during period 1000 units
Work in progress 200 units – 50% complete 2 marks
Total equivalent production units 1000 + (200*50%)=1100 units
Cost would be spread over the total equivalent production of 1100 units

Maximum
20 marks

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Management Accounting August 2012 2nd Year Paper

Marks
Solution 6 - Dunning Ltd Allocated

(a) Product Y – Overhead Absorption

Cost Pool Workings €/£

Parts 100 x 20 2,000 1 mark

Maintenance 150 hours x 30 4,500 1 mark
Stores 5 x 500 2,500 1 mark
Administration 10 x 50 500 1 mark

Total Overhead Absorbed 9,500 1 mark

Per unit 19

Workings:
Schedule of Activity Based Overhead Absorption 1 mark

Parts Maintenance Stores Administration

Overhead Cost 10,000 18,000 10,000 2,000

Cost driver Total no.of Maintenance No. of No.of employees

parts hours requisitions

Activity level 500 600 20 40

ABC overhead recovery €/£20 per €/£30 per €/£500 per €/£50 per 4 marks
rate part Maintenance requisition employee
hour

(b)
Control is one of the key features of management accounting and follows on from planning. Control
can be exercised at an strategic and an operational level.
Strategically, the business plan of an organisation will be reviewed in light of developments to assess if 1 mark
objectives of the plan can be achieved. Operationally, the performance of the organisation is reviewed
in the context of detailed plans(including budgets) so that corrective action can be taken if necessary.
Effective controls is not practical without initial planning and planning without control is somewhat
pointless.

Three different types of control include:

Action or behavioural controls – these involve observing the actions of individuals (eg: work studies: 2 marks
quality and quantity controls) to inform corrective action

Personnel and cultural controls – support employees to be effective by establishing values, social
norms and beliefs that can influence performance 2 marks

Results and output controls – involve the collection, analysis and reporting of information about the
outcomes of work effort. An organisation should have a system of management reporting that 2 marks
produces control information in a specified format at regular intervals.

Activity Based Costing involves charging of overhead and service costs to cost pools and identifying the
main factor which drives costs in the respective pools and then calculating a cost driver rate to charge 1 mark
units with their share of pool costs.

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Management Accounting August 2012 2nd Year Paper
Marks
Allocated

Activity Based Costing improves the accuracy of costs, specifically overhead costs. By having accurate
1 mark
classification of costs and analysis of cost behaviour, managers can monitor performance more
effectively and take remedial action if required. Activity Based Costing therefore contributes
significantly to results and output controls, discussed above.

Activity Based Costing can provide a better understanding of overheads and supports performance 1 mark
management activities, which can motivate individuals or teams and therefore can influence
personnel and cultural controls

Activity based costing has a focus on activities which drive costs and this in turn may assist managers 1 mark
in identifying activities which do not add value or processes which could be re-engineered to produce
more effective results. Hence activity based costing can have behavioural implications resulting in
action or behavioural controls.
Maximum
20 marks

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Management Accounting August 2012 2nd Year Paper

2nd Year Examination: August 2012

Management Accounting

Examiner’s Report

Statistical Analysis – By Question

Question No. 1 2 3 4 5 6
Average Mark 54% 43% 31% 66% 48% 47%
(%)
Nos. 196 188 189 180 65 146
Attempting

Statistical Analysis - Overall

Pass Rate 46%
Average Mark 46%
Range of Marks Nos. of Students
0-39 70
40-49 39
50-59 47
60-69 35
70 and over 10
Total No. Sitting Exam 201
Total Absent 28
Total Approved Absent 8
Total No. Applied for Exam 237

General Comment

The overall performance at this session of the 2nd Year Management Accounting
examination was below the standard of the summer session although higher than the
corresponding session last year. The average mark recorded at this session was 46 and
the Pass Rate was 46%.

The examination assessed all aspects of the syllabus and most candidates made an
attempt at the required 5 questions. In terms of performance for individual questions –
the questions on cashflow projection calculations (Question 1) and variance analysis

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Management Accounting August 2012 2nd Year Paper

(Question 4) attracted the highest marks, while performance in the break-even analysis
question was particularly poor.
The format comprised of a compulsory section with three scenario based, largely
computational type questions assessing the application of key concepts of the syllabus
in practical situations; and a second section where the candidate was required to
answer 2 out of 3 questions, which included a mainly narrative question together with
other computational/theory questions.

While there were some very good scripts submitted, in general terms it was evident that
more thorough revision of key syllabus areas would have benefitted candidates.
Presentation and layout of solutions also varied from very good to poor.

Question 1

This question examined the area of budgetary planning and control through the
preparation of a cash budget and some relevant discussion. Marks were lost for a
variety of errors in relation to receivables, payables, the treatment of depreciation,
insurance and other overheads. The capital expenditure payment and loan repayment
was largely correct, but the treatment of dividend income varied. The most concerning
issue was the fact that quite a number of scripts made reference to profits/losses rather
than cashflows. Part (c ) required recommendations to be suggested to the company
and a number of candidates advised that they should close immediately rather than
making suggestions to improve cashflows. Layout could have been improved in some
instances.

Question 2

This question examined traditional overhead apportionment and absorption costing

though many candidates approached it as an activity based costing question or did not
carry out the service department apportionment and hence the average mark is
relatively low. The job costing requirement of part (b) often saw the omission of direct
labour costs, although most were able to correctly perform the margin pricing exercise.
The short narrative section was answered satisfactorily.

Question 3

This question examined the marginal costing technique of breakeven analysis and
required a number of calculations to be presented, as well as practical application in a
decision making scenario. As in recent previous sessions, this syllabus area was not
well answered. Many candidates produced an incorrect contribution or profit
calculation as the solution to part (a) or calculated a breakeven point using a
contribution-calculated as the sales value less variable overhead cost, ignoring
materials and labour, or attempted to calculate the breakeven using fixed costs divided
by the sales figure. In part (b) the margin of safety definition provided was in many

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Management Accounting August 2012 2nd Year Paper

cases the breakeven definition. As a result of the obvious lack of knowledge

demonstrated in the basic calculations, inevitably the solutions to part (c) were equally
poor, although the majority did identify that the new option would be less profitable
and were awarded marks accordingly. Part (d) was a simple requirement which was
specifically covered in the manual, but it was evident that appropriate revision had not
been completed in some cases.

Question 4

It was encouraging that the variance analysis question was the best answered on the
paper. Very few presented flexed budget figures as required in part (a) and errors in
part (b) related to the impact of the flexed quantity in relation to Materials Usage and
Labour Efficiency. Answers to part (c) was generally good although not all candidates
attempted this part

Question 5

This was a straightforward narrative type question, with a similar format to previous
sessions, requiring a briefing note on a number management accounting terms. This
was the least popular question of the paper and while there were a small number of
good answers, the majority of answers submitted were poor. Some definition were
simply incorrect, invented or extremely brief. In order to score well, candidates needed
to provide a clear definition, supported by a relevant example and the fact that this was
not the case in most cases evidenced a lack of preparation.

Question 6

This question examined management accounting systems with the requirement of an

activity based costing calculation and narrative section linking this to control theory,
which is covered in the nature of management accounting. Most made a good attempt
at the first requirement, although the standard of workings varied. The low overall
mark results from the fact that many did not attempt the narrative section and some
who did produced very poor answers to part (b).

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