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TRIMESTER 2 2020 FINAL EXAMINATION

STUDENT ID	1469735
STUDENT NAME	JASKARAN SINGH

SUBJECT NAME: Management Accounting

SUBJECT CODE: MAC003

TIME ALLOWED: 2 hours

PERMITTED MATERIALS:

This is an Open Book exam

INSTRUCTIONS FOR STUDENTS:

You do not require a separate answer booklet. Please type your responses in the spaces provided.
Type your full name and ID at the top of this page.
This examination consists of six compulsory questions.

Question 1 (10 marks)

InsulateMe Ltd produces a high-quality insulation material that passes through two production processes.

Data for June for the first process follow:

Work in process inventory, June 1 60,000 units

(Direct material 75% completed and conversion 40% completed)

Work in process inventory, June 30 to be calculated in part (a) below:

(Direct material 50% completed and conversion 25% completed)

Direct material costs in work in process inventory, June 1 $56,000

Conversion costs in work in process inventory, June 1 $14,900

Units started into production 280,000 units

Units completed and transferred out 300,000 units

Direct materials costs added during June $385,000

Conversion costs added during June $214,500

Required: Using the weighted-average method

(a) Calculate the physical units in ending work in process inventory.

(b) Calculate the total equivalent units for direct material and conversion.

(d) Calculate the cost of units completed and transferred out, and the cost of ending work in progress inventory.

[Answer and show workings here]

A) (a) Physical flow of units: Physical units Work in process, 1 June 60 000 Units started into production 280 000 Total units to account for 340 000 Units completed and transferred out during June 300 000 Work in process, 30 June 40 000 Total units accounted for 340 000 B) Equivalent units: Physical units Percentage of completion with respect to conversion Equivalent units Direct material Conversion Work in process, 1 June 60 000 40% Units started during June 280 000 Total units to account for 340 000 Units completed and transferred out during June 300 000 50% 300 000 150 000 Work in process, 30 June 40 000 25% 40 000 10000 Total units accounted for 340 000 Total equivalent units 340 000 310000

C) Costs per equivalent unit: Direct material Conversion Total Work in process, 1 June $56000 $ 14900 $70,900 Costs incurred during June 385 000 214500 626500 Total costs to account for $441 500 $229400 $626500 Equivalent units 320 000 310000 Costs per equivalent unit. $1.38 $0.74 D)COST OF ENDING WORK PROCESS $635,438 TOTAL COSTS ACCOUNTED FOR $670,400

Question 2 (10 Marks)

	Direct materials	Direct Labour
Actual price per unit of input (kg and hours)	$32	$15
Standard price per unit of input	$30	$14
Standard input allowed per unit of output	5kg	6 hours
Actual units of input	36,000 kg	50,000 hours
Actual units of output (product)	7,500	7,500

Required:

Assume that the quantity of direct materials purchased, and the quantity used are identical. Given the above information, what are the price and rate variances of direct materials and direct labour respectively?

[Answer show workings here]

Direct material price variance = (Standard Price – Actual Price) x Actual Quantity used= (30-32)x36000= 72000
Direct material rate variance = (STANDARD QUANTITY X STANDARD PRICE) – (ACTUAL QUANTITY X ACTUAL PRICE) = (37500X30)-(36000X32) = 27000

DIRECT LABOUR PRICE VARIANCE = ( Standard Rate – Actual Rate) X Actual hours used= (14-15)X50000 = 50000
DIRECT LABOUR RATE VARIANCE = (STANDARD QUANTITY X STANDARD PRICE) – (ACTUAL QUANTITY X ACTUAL PRICE) = (45000X14)- (50000X15) = 120000

Question 3 (15 marks)

Bondi Panorama is a boutique motel located near Bondi Beach. For one-night accommodation per person, the motel charges $50. The owner of the motel estimates that the variable cost per person is $20, which includes food and room services. The fixed cost is estimated to be $42,000 per year.

Required: Calculate

The contribution margin per unit of service (the per unit of service is one night accommodation for one guest) and the contribution margin ratio.
The annual breakeven point in dollars.
Assuming the motel targets a net profit of $60,000 a year before tax, calculate the number of units of service required to reach this target.

[Answer and show workings here]

A CONTRIBUTION MARGIN = $50-$20 = $30 MARGIN RATIO = 30/50 = 0.6 B) 42000/30 = 1400 C) NUMBER OF UNITS REQUIRED = (42000+60000)/30 = 3400

Question 4 (15 marks)

Bat Ltd. is considering a special order for 10 handcrafted Batarang to be given as gifts to Superman from a customer. The normal selling price of a Batarang is $389.95 and its unit product cost is $264.00 as shown below:

Direct Material	$143
Direct Labour	$86
Manufacturing Overhead	$35
Unit Product Cost	$264

Most of the manufacturing overhead is fixed and unaffected by variations in how much Batarang is produced in any given period. However, $7 of the overhead is variable with respect to the number of Batarang produced. The customer who is interested in the special order would like special filigree applied to the Batarang. This filigree would require additional materials costing $6 per Batarang and would also require acquisition of a special tool costing $465 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order.

Required:

What effect would accepting this order have on the company’s net operating income if a special price of $349.95 is offered per Batarang for this order? Should the special order be accepted at this price?

[Answer here]

INCREMENTAL REVENUE = $349.95X10 = $3499.5 DIRECT MATERIAL = 143X10= $1430 DIRECT LABOUR = $86X10= $860 VARIABLE MANUFACTURING OVERHEAD = $7X10 =$70 SPECIAL FILIGREE = $6X10= $60 TOTAL VARIABLE COST = $1430+$860+$70+$60 = $2420 PURCHASE OF SPECIAL TOOL = $465 TOTAL INCREMENTAL COSTS = ($2420+$465) = $2885 INCREMENTAL NET OPERATING INCOME = $3499.5 – $2885 = $614.5
SPECIAL ORDER SHOULD BE ACCEPTED BECAUSE IT IS PRODUCING INCREMENTAL INCOME AT THIS PRICE .

Question 5 (30 Marks)

Superman Ltd. manufactures two products called LaserEye and Hurricane. The Hurricane is a more complex product, requiring 0.80 hours of direct labour time per unit to manufacture and extensive machining support. The LaserEye requires only 0.40 hours of direct labour time per unit and only a small amount of machining support. Manufacturing overhead costs are currently assigned to products on the basis of direct labour hours. Direct material and direct labour costs per unit are as follows:

	LaserEye	Hurricane
Direct Material	$30	$50
Direct Labour	$6 (0.4 hours at $15 per hour)	$12 (0.8 hours at $15 per hour)

Management estimates that the company will incur $912,000 in manufacturing overhead costs during the current year and 60,000 units of the LaserEye and 20,000 units of the Hurricane will be produced and sold.

Required:

(a) Compute the predetermined manufacturing overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labour hours and the unit product cost of each product (15 Marks).

[Answer and show workings here]

a) total direct hours worked during period:

direct labour hour per unit units produced total lasereye
0.4
60000
24000 hurricane
0.8
20000
16000 total

80000
40000

predetermined overhead on basis of direct labour hours

estimated overhead costs 912000

divided by total direct labour hours 40000

predermined overhead rate 22.8

Question 5 cont’d

This part is connected to question 5 on the page before. (15 Marks)

Management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools:

	Expected Annual Activity
Activity drivers	LaserEye	Hurricane
Number of part types	600	900
Number of purchase orders	2000	800
Number of test runs	500	1750
Machine hours	1600	8400

Activity cost pool	Activity drivers	Estimated overhead costs
Maintaining parts inventory	Number of part types	$225,000
Processing purchase orders	Number of purchase orders	$182,000
Quality control	Number of test runs	$45,000
Machine related	Machine hours	$460,000

Required: Using activity-based costing compute the unit product cost of each product.

[Answer and show workings here]

B ) unit product cost using ABC LASEREYE =

Question 6 (20 marks)

State the key differences between activity based costing and conventional cost methods using volume driven cost drivers.

[Answer here]

Activity based costing is a more accurate method of accounting as it uses a more specific breakdown of costs related to the project indirectly. It is a system that assigns overhead costs to more specific activities in the project. Each activity has its own activity cost pool to which the indirect or the overhead costs are assigned and then each cost pool has its own cost drivers which can be volume based or non-volume based. Finally, predetermined overhead costs are also worked in relation to each activity cost pool.
Comparatively, conventional cost accounting methods uses the direct material and labour costs are traced to the products. Using a predetermined overhead rate, these manufacturing overhead costs are allocated to the products for the whole plant, these are based on an estimated volume of production. In this method, non-manufacturing costs are not allocated to the products cost. Hence, it is a more inaccurate form of costing. Other reasons as to why this more inaccurate method of costing are- a.) if the manufacturing overhead costs increase, these are have not been accounted for and are not distribute to the product costs accordingly. B.) Indirectly related costs to production volume might increase which are not considered in the costing. C. non-manufacturing costs related to the production method may become substantial. D.) Finally, the diversity in the production cycle may increase.
The benefits of using activity-based costing is that it considers overhead costs incurred for the project as a significant part of the total costing. A big part of the overhead cost is not directly related to the volume of production of the product, where it can have a diverse range of products as well. Costs of non-manufacturing expenses relatively increases as to the costs of the manufacturing. Higher costs can be associated to the making of inappropriate decision by depending on inaccurate costs. Hence with this method, more appropriate decisions can be made backed by more accurate data of costing allocations. Finally, this method is very cost-effective due to a high range of software that can be used in the managing of this method which is highly sophisticated.
But on the other hand, there are some limitations as to using this method, there is still a bit of uncertainty in regards to potential benefits of using this method and it does require a wide range of resources to garner accurate information. There are some resistance seen in terms of moving from managers to employee and there is a limitation as to knowledge possessed in regards to this method.

Specify the key criteria used to determine if a product line should be added.

[Answer here]

In order to decide as to whether a product line should be added into the business there are a couple of things that need to be considered in making the decision. Costs and benefits affected by the change should be considered in making the decision. It should be considered as to which costs and benefits will be eliminated if the line is added and also consider which additional costs and benefits will be incurred by adding this line.
Before adding a line, it should be also considered as to whether it will be more beneficial and cost effective to produce the product. There are couple of elements that are cosidered in the quantitative decision making, a.) quantify the objective of the decision making or having a choice criterion, e.g. maximising or minimising total costs. B.) The constraints involved in the decision making for the adding, availability and accessibility of raw materials, labour availability or requirement, machinery that might be necessary for the production. C.) Target market, is the market target of a good-size and growing or is this product to be consumed by a very limited market and might have small sales which can affect the decision. Should the product be produced by the company or is it more beneficial to outsource the product. D.) Forecast the cost and benefits of all possible alternatives. E.) Calculate the expected returns from the line and alternatives. F.) Consider all opportunity costs that are related to the decision making for the addition. These are the benefits that are given up by the company by selecting one decision and letting go of the other alternatives.
There are couple things that are to be considered in this decision making other than those above, consider the relevant costs related to the decision – what if the department closes, the product does not sell, fixed costs incurred, equiment that will be necessary for production of the specific line etc. Consider the short-term and long-term costs and profits. Apply the Cost-volume-profit analysis, this studies the total costs, revenues and profits that are related to the sales volume and will in turn predict the changes in the costs and sales volume for the profit sought. This is also known as the break-even analysis of the product or the line that is to be added.
It is essential to consider these things before adding a line, to review the market properly, conduct surveys or test to analyse how the market responds and to get an idea as to how the product might received. Review related costs or cost that might be incurred specidic to this line, new machinery required, new skill set required, labour, sourcing raw materials, clearances that might be required, etc. in order to make an informed decision in relation to the matter.

END OF EXAM PAPER