EXCEL FINAL MOCK -2.2 MGT ACCOUNTINGOCT 2017

ICAG PROFESSIONAL EXAMS
EXAMS / FINAL MOCK- OCTOBER 2017
COURSE / 2.2 MANAGEMENT ACCOUNTING
TIME / 3 HOURS
Instructions: Attempt all questions. Show all workings in the answer booklet provided.
Cheating in the exams is unethical, and will be least tolerated

Question 1: Hybrid Ltd

Hybrid Ltd manufactures three models of swing sets: standard, deluxe, and super. The standard set is made of steel, the deluxe set is made of aluminum, and the super set is made of plastic. Because of the different materials used, production requirements differ significantly across models Ideas uses ABC system to apportion variable overhead cost. Fixed costs are deemed as period costs. In 2015, the company produced and sold 5,000 standard sets, 500 deluxe sets, and 2,000 super sets. Revenue and cost information for the year is given as:

Standard
GHC / Deluxe
GHC / Super
GHC / Total
GHC
Sales / 475,000.00 / 380,000.00 / 560,000.00 / 1,415,000.00
Direct Costs:
Direct material / 200,000.00 / 150,000.00 / 240,000.00 / 590,000.00
Direct labour / 54,000.00 / 14,400.00 / 24,000.00 / 92,400.00
Variable overhead costs
Machine setup / 26,000.00
Orders processed / 64,000.00
Warehouse / 93,000.00
Shipping / 36,000.00
Fixed overhead costs:
Plant administration / 88,000.00
Others / 182,000.00

The financial controller provided a schedule of activities and related cost drivers as follows:

Cost Driver / Activity level
Activity Cost Driver / Standard / Deluxe / Super / Total
Number of production runs / 22 / 11 / 17 / 50
Number of sales orders received / 300 / 200 / 300 / 800
Number of units in inventory / 200 / 100 / 100 / 400
Number of units shipped / 5,000 / 500 / 2,000 / 7,500

Required:

  1. Using the marginal costing approach prepare in columnar form, the profit statement for each product and for the company 12 marks
  2. If the company wants to make a profit of GHC800,000 how many units of each product should be sold (Assume no tax applies) 8 marks

Question 2: Again Ltd

Again Ltd produces a single product (Swag) and operates a standard costing system and uses absorption costing for performance reporting. For each month, the management accountant computes detailed cost and revenue variances and presents an operating variance report. In the month of September 2017, the following data has been provided:

Standard cost and revenue per unit
Standard cost / GHC
Direct Material A / 2grams @GHC1 each / 2
Direct Material B / 1gram@ GHC3 each / 3
Direct Labour / 0.5hrs@GHC4per hour / 2
Variable Overheads / per hour / 1.5
Fixed Production overhead / 1hr@GHC1 per hour / 1
Profit loading / 2.5
Selling price / 13
Budgeted Annual Production and sales (sales and production are even throughout the year) / 60,000units
Actual results for the month Sept 2017 / GHC
8,000 units produced and sold / 100,000.00
Direct Material A cost / 14,400grams / 33,120.00
Direct Material B cost / 10,000grams / 28,000.00
Labour cost / 6,400hrs / 32,000.00
Variable overheads / 6,400hrs / 7,680.00
Fixed Overhead expenditure / 4,200hrs / 6,000.00
Selling and distribution cost / 15,000.00

Required:

  1. Compute detailed cost and revenue variances (including fixed overhead capacity and efficiency variances) for the Again Ltd for the month of September 2017 15 marks
  2. Prepare an operating variance report to reconcile budgeted and actual profit for the month of September 2017 5 marks

Question 3: Seasons

  1. Seasons Co is considering a new investment which would start immediately and last four years. The company has gathered the following information:

GHC12,000 has already been spent on initial research.

Asset cost – GHC160,000

Annual sales are expected to be 30,000 units in Years 1 and 2 and will then fall by 5,000 units per year in both Years 3 and 4. The selling price in first-year is expected to be GHC4.40 per unit and this is then expected to increase by 3% per annum. The variable costs are expected to be GHC0.70 per unit in current terms and the incremental fixed costs in the first year are expected to be GHC0.30 per unit in current terms. Both of these costs are expected to increase at 5% per annum.

The asset is expected to have a residual value (RV) of GHC40,000.

The project will require working capital investment equal to GHC3,000 in year 1, GHC8,000 in year 2 and GHC7,000 in year 3. No further working capital is required in year 4. The investment in working capital must be in place at the start of each year. Corporate tax is 30% per annum and is paid one year in arrears. 25% reducing balance capital allowances are available on the asset cost.

The cost of capital is 12%

Required:

i. Based on NPV criteria, is the project worth investing in? 10 marks

ii. By what minimum percentage should initial outlay change in order to affect the decision in (i) above? 2 marks

  1. The MD of Seasons is scheduled to attend a seminar to discuss contemporary management accounting practices. He is expected to speak on application of throughput accounting ratios (TPAR) and value for money. He requests that you write a briefing notes on the concept of TPA ratio and components of value for money

Required: Meet the MD’s request8marks

Question 4: Nowherekul Ltd

A division in Nowherekul Ltd makes a profit before depreciation of GHC20,000. Currently the division employed an asset base of GHC100,000. The asset comprises 80% depreciable assets and 20% working capital. The division charges depreciation at 20% reducing balance method. The division is considering investing in a specialised plant that will cost GHC10,000 and will increase profit by GHC2,500 .

Cost of capital for Nowherekul is 20%

Required:
a. Calculate and comment on the Residual income and Return on investment of the division before the new project is undertaken 6marks

b. Calculate and comment on the Residual income and Return on investment of the division after the new project is undertaken 6marks

c. Outline two benefits and two challenges associated with implementing divisional transfer pricing 8 marks

Q5: El-classico Ltd

El-classico Ltd manufactures and sells a small range of kitchen equipment. Specifically the product range contains a dishwasher (DW), a washing machine (WM) and a tumble dryer (TD). The TD is of a rather old design and has for some time generated negative contribution. It is widely expected that in one year’s time the market for this design of TD will cease, as people switch to a washing machine that can also dry clothes after the washing cycle has completed.

El-classico Ltd is trying to decide whether or not to cease the production of TD now or in 12 months’ time when the new combined washing machine/drier will be ready. To help with this decision the following information has been provided:

1.The normal selling prices, annual sales volumes and total variable costs for the three products are as follows:

DW / WM / TD
Selling price / GHC200 / GHC350 / GHC80
Material cost per unit / GHC70 / GHC100 / GHC50
Labour cost per unit / GHC50 / GHC80 / GHC40
Contribution per unit / GHC80 / GHC170 / -GHC10
Annual sales / 5,000 units / 6,000 units / 1,200 units

2.It is thought that some of the customers that buy a TD also buy a DW and a WM. It is estimated that 5% of the sales of WM and DW will be lost if the TD ceases to be produced.

3.All the direct labour force currently working on the TD will be made redundant immediately if TD is ceased now. This would cost GHC6,000 in redundancy payments. If El-classico waited for 12 months the existing labour force would be retained and retrained at a cost of GHC3,500 to enable them to produce the new washing/drying product. Recruitment and training costs of labour in 12 months’ time would be GHC1,200 in the event that redundancy takes place now.

4.El-classico operates a just in time (JIT) policy and so all material cost would be saved on the TD for 12 months if TD production ceased now. Equally, the material costs relating to the lost sales on the WM and the DW would also be saved.

5.The space in the factory currently used for the TD will be sublet for 12 months on a short-term lease contract if production of TD stops now. The income from that contract will be GHC12,000.

6.The supervisor (currently classed as an overhead) supervises the production of all three products spending approximately 20% of his time on the TD production. He would continue to be fully employed if the TD ceases to be produced now.

Required:

(a)Calculate whether or not it is worthwhile ceasing to produce the TD now rather than waiting 12 months (ignore time value of money).16 marks

(b)Explain two pricing strategies that could be used to improve the financial position of the business in the next 12 months assuming that the TD continues to be made in that period (4 marks)

*END OF PAPER*

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