BS2107 - Management Accounting Jan 2012 Solutions to MCQ s

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    Cass Undergraduate School

    BS2107 Management Accounting Part 2 Examination

    16 January 2012 14:30 16:45

    Instructions to students:

    Candidates must answer ALL TWENTY questions from Section A and ONE question from Section B. Section A of this paper consists of TWENTY multiple choice questions with each having FOUR possible solutions, only ONE of which is correct. (80 marks available, worth 70% of the final grade)

    Your answers must be recorded on the multiple choice answer sheet distributed by your invigilator. The instructions for completion are on that form and must be striclty adhered to.

    Candidates will score four marks for each correct answer and no marks for a question you do not answer. A deduction of one half mark will be made for an incorrect answer to discourage guessing.

    This examination paper consists of 10 printed pages including the title page. Materials: Number of answer books to be provided: 1

    Only the Casio calculators FX-83 or FX-85 (MS or ES or GT+) are permitted for use in this exam

    Multiple choice answer sheet. Dictionaries are not permitted. This examination paper MAY NOT be removed from the examination room.

    External Examiner: Professor Paul Collier Internal Examiner: Indrani Balachandran

    BSc (Hons) Degree in Banking and International Finance BSc (Hons) Degree in Business Studies BSc (Hons) Degree in Economics and Accountancy BSc (Hons) Degree in Management BSc (Hons) Degree in Accounting and Finance

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    Section A Answer all questions Use the following data for questions 1 & 2: H Ltd. operates a process costing system. The following activity was recorded for Process 1 during December:

    Number of Units

    Conversion % Completed

    Work in progress 1 December 8,000 35%

    Started into production during December 50,000

    Work in progress 31 December 12,000 55%

    All materials are added at the beginning of the process. Question 1 The equivalent units for conversion for December, using the weighted average method, were: A 52,600 units B 62,000 units C 50,000 units D 46,000 units Output 46,000 Closing WIP (55% of 12,000) 6,600 Equivalent units for conversion 52,600 units Question 2 The equivalent units for materials for December, using the first in first out method, were? A 46,000 units B 42,000 units C 58,000 units D 50,000 units Opening WIP 0 Output 38,000 Closing WIP (100% of 12,000) 12,000 Equivalent units for conversion 50,000 units Question 3 Which of the following is an aspect of a just in-time (JIT) system? (i) The use of small frequent deliveries against bulk contracts (ii) Flexible production planning in small batch sizes (iii) A reduction in machine set-up time (iv) Production driven by demand A (i) only B (i), (ii), (iii) and (iv) only C (i), (ii) and (iv) only D (i) and (iv) only

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    Question 4 Which of the following statements are correct? (i) When target costing is used, the selling price of a product or service determines its

    target cost. (ii) An activity based costing (ABC) system makes some use of volume related cost drivers. (iii) Life cycle costing does not track costs that are incurred once production has ceased, since

    there are no revenues against which to match the costs. (iv) A just-in-time system tends to cause increased storage costs as inventory is held to ensure

    that materials are available just as they are needed in production. A (i) and (ii) only B (i) and (iii) only C (ii) and (iv) only D (iii) and (iv) only Use the following to answer questions 5 & 6 Neame Ltd. uses the weighted average method in its process costing system. This month, the beginning inventory in the mixing department consisted of 700 units. The costs and percentage completion of these units in the beginning inventory were:

    Cost % Complete

    Material costs 12,700 85%

    Conversion costs 10,900 30%

    A total of 9,800 units were started and 8,800 units were transferred to the forming department during the month. The following costs were incurred in the first processing department during the month:

    Cost

    Material costs 175,600

    Conversion costs 420,900

    The ending inventory was 85% complete with respect to materials and 70% complete with respect to conversion costs. Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer closes to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places. Question 5 The total cost transferred from the mixing department to the forming department during the month is closest to: A 620,100 B 646,832 C 542,106 D 596,500 Question 6 The cost of ending work in progress in the mixing department according to the companys cost system is closest to: A 77,994 B 73,308 C 104,725 D 89,016

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    Closing WIP = 700 + 9,800 8,800 = 1,700 units Statement of equivalent units Material Con. Cost Total Output 8,800 8,800 Closing WIP 1,445 1,190 Total equivalent units 10,245 9,990 Costs incurred Costs b/f 12,700 10,900 Costs in current period 175,600 420,900 Total cost 188,300 431,800 Cost per equivalent unit 18.380 43.223 61.603 Q6 Cost of output 8,800 x 61.603 = 542,106 Q7 Value of Closing WIP Material Con. Cost Total Closing WIP Eq. units 1,445 1,190 Cost per equivalent unit 18.380 43.223 Value of closing WIP 26,559.10 51435.37 77,994.47 Question 7 To improve performance, a manager would like to see a decreasing trend in all of the following performance measures except: A Customer complaints as a percentage of units sold B Scrap as a percentage of total cost C Setup time D Manufacturing cycle efficiency Question 8 PQR Ltd. uses direct labour hours in its predetermined rate. The total estimated manufacturing overhead was 221,100. At the end of the year, the actual direct labour hours for the year were 14,400 hours and the actual manufacturing overhead was 216,100. If the manufacturing overhead for the year was over-applied by 21,500, the predetermined overhead rate for the year must have been closest to: A 15.01 B 17.73 C 15.35 D 16.50 Actual overheads 216,100 Overheads over-absorbed 21,500 Overheads absorbed 237,600 Actual hours 14,400 Predetermined overhead rate 237,600/14,400 = 16.50

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    Question 9 AB Ltd. Currently sets its selling price at 10, which achieves a 25% mark-up on variable cost. Actual production and sales volume is 100,000 units and annual fixed costs are 80,000. By how much would the selling price need to be increased in order to double the profit. Assume costs, production and sales volumes remain unchanged? A 12% B 17% C 20% D 25% Original Revised Per unit 100,000 units 100,000 units Selling price 125% 10.00 1,000,000 1,120,000 Variable cost 100% 8.00 800,000 800,000 Contribution 25% 2.00 200,000 320,000 Less: Fixed cost 80,000 80,000 Profit 120,000 240,000 To double the profit to 240,000 the total revenue has to be 1,120,000 which is a 12% increase on the original selling price. Question 10 Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of maximum occupancy, are shown below: Bed occupancy 82% 94% Medical supplies cost 410,000 429,200 During the period, the actual bed occupancy was 87% and the total cost of the medical supplies was 430,000. The medical supplies expenditure variance was: A 5,000 adverse B 12,000 adverse C 5,000 favourable D 12,000 favourable Difference Bed occupancy 82% 94% 12% Medical supplies cost 410,000 429,200 19,200 Variable cost per 1% occupancy = 19,200/12% = 1,600 Total variable cost at 82% occupancy = 131,200 Total cost at 82% occupancy = 410,000 Total fixed cost = 278,800 Flexed budget for 87% occupancy Variable cost (1,600 x 87%) = 139,200 Fixed cost = 278,800 Total flexed budget = 418,000 Actual expenditure = 430,000 Expenditure Variance = 12,000 adverse

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    Question 11 A company manufactures and sells a single product. The following data has been extracted from the current years budget: Sales and production (units) 5,000 Variable production cost per unit 50 Fixed cost per unit 70 Contribution margin (C/S) ratio 75% The selling price per unit for next year is budgeted to increase by 8%, whereas both the variable production cost per unit and the total fixed costs are expected to increase by 12%. The objective for next year is that total budgeted profit should remain the same as that budgeted for the current year. The minimum number of units which should be produced and sold next year in order to achieve the company objective is: A 4,688 B 4,950 C 5,209 D 5,280 Current year C/S ratio (75%) = (SP VC)/SP 75% = (SP 50)/SP Therefore SP = 200 Total contribution = 5,000 x 200 x 75% = 750,000 Less: fixed cost = 350,000 (70 x 5,000) Profit = 400,000 Next year Revised fixed cost = 350,000 x 1.12 = 392,000 Revised contribution to earn same profit = 792,000 (400,000 + 392,000) Revised SP = 200 x 1.08 = 216 Revised VC = 50 x 1.12 = 56 Revised contribution per unit = 216 - 56 = 160 Minimum number of units required = 792,000/160 = 4,950 units

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    Use the following to answer questions 12 & 13 Connor and Ledger Partnership provide accountancy and tax advice services and has three categories of clients: Limited companies, Sole traders and Individuals in employment. The partnership charges its clients a fee by adding 20% mark-up to total costs. Currently the costs are attributed to each client based on hours spent on preparing accounts and providing advice. Connor and Ledger are considering changing to an activity based costing system and has identified three cost pools. Information relating to the three costs pools is as follows:

    Activity Cost Pool

    Estimated Activity

    Estimated Overhead Cost

    Account preparation and advice 18,000 staff hours 580,000

    Issuing fee payment reminders 400 reminders 45,000

    Client meetings 250 client meetings 100,000

    Information (on a client basis) relating to the three categories of clients is as follows:

    Limited Company Sole Trader Individual

    Staff hours spent preparing accounts and providing advice

    1,000

    250

    340

    No. of reminders sent 2 8 10

    No. of client meetings held 4 1 2

    Question 12 Under the current traditional system the fee charged to a Limited Company is: A 40,857 B 42,556 C 48,333 D 50,348 Total overheads = 725,000 Total staff hours = 18,000 Overhead abs. rate = 725,000/18,000 = 40.278 Cost Limited Company = 1,000 x 40.28 = 40,278 Fee = 40,278 + 8,055.6 = 48,333.6 Question 13 Under the new activity based system the fee charged to a Limited company is: A 40,857 B 42,556 C 48,333 D 50,348

    Activity Cost Pool Estimated Activity Estimated OH Cost Activity rate

    Account preparation and advice 18,000 staff hours 580,000 32.222/ hour

    Issuing fee payment reminders 400 reminders 45,000 112.50/ reminder

    Client meetings 250 client meetings 100,000 400/client

    Amount chargeable to a limited company: Account preparation and advice = 32.222 x 1,000 = 32,222 Issuing fee payment reminders = 112.50 x 2 = 225 Client meetings = 400 x 4 = 1,600 Total cost = 34,047 Fee = 34,047 x 120% = 40856.40

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    Use the following to answer questions 14 & 15 PMS plc has a highly automated manufacturing process, During December the company gathered the following data relating to its manufacturing process: Process time 6 hours Inspection time 3 hours Wait time prior to starting production 6 hours Move time 1 hour Question 14 The companys delivery cycle time is: A 13 hours B 16 hours C 15 hours D 12 hours Delivery cycle time = wait time + process time + inspection time + move time + queue time = 6 + 6 + 3 + 1 = 16 hours Question 15 The companys manufacturing cycle efficiency is: A 60% B 40% C 75% D 25% Manufacturing cycle efficiency = Value added time/ Throughput time = 6/ (6 + 3 +1) = 60% Question 16 Mabel plc. recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below: Selling price Unit Sales 50.00 2,100 51.00 1,990 The products variable cost is 18.00 per unit. The products profit maximising price is closest to: A 29.99 B 19.30 C 29.13 D 28.48

    d = ln (1 + % change in demand) ln (1 + % change in price) = ln (1 + (-110/2100)) ln (1 + (1/50)) = ln (1 - .0524) = ln 0.9476 = -2.718 ln (1 + .02) ln 1.02

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    Profit maximising price = d x V cost (1 + d) = -2.718 x 18.00 (1 2.718) = 28.48 Question 17 Division X of Madonna Ltd produced the following results in the last financial year:

    000

    Net profit 400

    Average net assets 2,000

    For evaluation purposes all divisional assets are valued at original cost. The division is considering a project which will increase annual net profit by 30,000, but will require average inventory levels to increase by 100,000 and fixed assets by 100,000. Madonna Ltd imposes a 16% capital charge on its divisions. Given these circumstances, will the evaluation criteria on return on investment (ROI) and residual income (RI) motivate division X managers to accept the project? ROI RI A No Yes B Yes Yes C No No D Yes No Company Project ROI = 400k/ 2,000k 30,000/ 200,000 = 20% 15% Reject RI = 400k 16% x 2,000k 30,000 16% x 200,000 = 400 - 320 =30,000 - 32,000 = 80K = -2,000 Reject Question 18 The following information relates to Solar plcs Saturn division for 2011: Sales 750,000 Net operating income 45,000 Stockholders equity 75,000 Average operating assets 100,000 Residual income 15,000 The minimum required rate of return used in calculating the residual income for 2011 was: A 30% B 12% C 15% D 6% RI = Net operating income Minimum required return 15,000 = 45,000 x% 100,000 X% 100,000 = 45,000 - 15,000 = 30,000 Minimum required % = 30%

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    Use the following to answer questions 19 & 20 Division T of Timepiece Ltd. makes a timer which it sells for 40 to external customers. Data relating to the timer is as follows: Monthly capacity 60,000 timers Variable cost per unit 28 Fixed cost per unit 9 Presently, Division S of Timepiece Ltd. buys similar timers from an overseas supplier at 38 each. Timepiece Ltd. would like these timers bought from Division T. If Division T sells to Division S, 1 in variable costs can be avoided. Question 19 Assume that Division T is presently operating at capacity. According to the formula in the text, what is the lowest acceptable transfer price from the view point of Division T? A 37 B 39 C 36 D 38 Operating at full capacity Lowest acceptable transfer price = External market price less avoidable costs = 40 - 1 = 39 Question 20 Assume that Division T has sufficient idle capacity to handle all of Division B,s needs without any increase in fixed costs and without reducing external sales. What is the lowest acceptable transfer price from the view point of Division T? A 40 B 39 C 28 D 27 Spare capacity exists Lowest acceptable transfer price = Variable cost less avoidable cost = 28 - 1 = 27