Principles of Accounts (Mock Examination) 2008

Principles of Accounts (Mock Examination) 2008

HONG KONG ASSOCIATION FOR BUSINESS EDUCATION

HONG KONG INSTITUTE OF VOCATIONAL EDUCATION (TUEN MUN)

HONG KONG ADVANCED LEVEL EXAMINATION 2008

MOCK EXAMINATION

PRINCIPLES OF ACCOUNTS

A-LEVEL PAPER 2

9:30am – 12:30am (3 hours)

This paper must be answered in English

Instructions:

1. Answer FOUR questions in this paper: TWO compulsory questions

in Section A (60%), and any TWO of the three questions in Section B

(40%)

2. Write your answers for Section A & B in the answer book provided.

3. Show all your workings.

SECTION A

Answer ALL questions in this section. Each question carries 30 marks. Write all your answers in the answer book provided.

Question 1

Connie Manufacturing Ltd. is a well-established toy producer. All products take one process to complete. The company adopts the first-in-first-out method for its process costing system. Materials are added at the start of the production process and the conversion costs are applied evenly throughout the production process.

The following information relates to the production process taken place in February, 2008.

Opening work in progress: 1,500 units
Degree of completion / Cost
Direct materials / 100% / $21,200
Conversion costs / 40% / $10,000
$31,200
Closing work in progress: 800 units
Direct materials / 100% completed
Conversion costs / 40% completed
Direct materials 5,000 units added to the process / $46,250
Conversion costs added to the process / $25,850
Finished goods / 5,150 units

It was estimated that normal loss constituted 5% of the input. According to a newly-introduced environmental protection regulation, such kind of waste materials must be discarded under proper handling procedures. As a result, an additional charge of $5 per unit was incurred. Any excessive loss should be treated as abnormal loss.

The consumer response was excellent and all finished goods were sold within 1 week. The market price was $25 each.

You are required to:

(a)  Prepare the process account for the month of February 2008 with separate columns for the number of units and dollar amounts. (12 marks)

(b)  Prepare a statement to calculate the profit or loss on toy production for the month of February 2008. (3 marks)

Connie, the finance director of the company, has a plan to diversify its products by engaging in furniture and fitting accessories production. The pricing policy is proposed to be 20% and 80% mark up above the production costs for furniture and fitting accessories respectively.

In reviewing the structure of production overheads, she concludes that it is convenient to follow the traditional way of allocation based on labour hours. Alternatively, she is considering the implementation of an activity-based costing (ABC) system in order to have proper control over the overheads.

The production and cost figures per batch of 1,000 units of the two products are estimated as follows:

Furniture / Fitting
Accessories
Direct materials / $170,000 / $137,000
Direct labour (hourly rate $50) / $62,000 / $47,500
New design / 60 times / 30 times
Material purchase order / 15 / 10
Set up / 27 / 13
Machine hours / 650 hours / 350 hours
Details for overhead charges: / $
Design changes / 63,000
Material handling / 28,150
Production set-up / 40,000
Machine activities / 55,000
186,150

To launch the new products, a mass promotional and advertising scheme will be undertaken. It is estimated that selling and distribution expenses amount to $78 and $30 per unit for the two products respectively.

You are required to:

(c)  Show the estimated unit selling prices for furniture and fitting accessories using the traditional costing system. (5 marks)

(d)  Show the estimated unit selling prices for the two products using the activity-based costing system. (6 marks)

(e)  Compare and explain the difference between the prices using the traditional and ABC systems for the two products. (Round off your calculations to 2 decimal places)

(4 marks)

Question 2

Glory IT Ltd., a fancy gift token manufacturer, has recently been organising the departmental monthly performance meeting for January 2008. There are three departments including Purchasing, Production and Sales which are required to explain their variances. Due to the recent computer failure, some of the basic data have been destroyed. You are instructed by your Accounting Manager to use the limited available information to re-generate the data for this performance review meeting. The following data are available from the three departments:

$
Actual cost of direct material purchased and used / 239,400
Actual direct wages paid / 348,500
Actual wage rate per hour / 41
Variable overheads incurred and paid / 88,400
Budgeted variable overhead / 70,400
Fixed overheads incurred and paid / 276,900
Budgeted fixed overheads / 210,400
The variances from standard costs were: / $
Direct Material Price Variance / (37,240) / Adverse
Direct Material Usage Variance / (38,000) / Adverse
Direct Labour Rate Variance / 25,500 / Favourable
Direct Labour Efficiency Variance / (22,000) / Adverse

Production Department:

It took two standard skilled labour hours to produce one unit of the product. Raw material inputs of 5.4 kg were allowed as standard for one unit of output. All figures related to a single product which was manufactured at the plant. There was no stock at the beginning and closing of the accounting periods. Variable and fixed overhead absorption rates were based on two standard labour hours per unit. The monthly production capacity was only at 50% level.

Purchasing Department:

The single direct material used in the period cost was $1.4 per kg above the standard price.

Sales Department

There were 4,000 units budgeted and actually sold at standard price.

Due to the corrupted computer data, departmental managers from various functions have been brought to the meeting. In order to demonstrate the link between the accounting values and their measures, the following information must be obtained for further investigation.

You are required to compute:

(a) (i) the actual number of direct labour hours worked

(ii)the standard rate of pay per direct labour hour

(iii)the standard hours of production

(iv)the actual quantity of direct material consumed

(v) the actual price paid for the direct material (per kg)

(vi) the standard direct material usage in kg for the actual number of units produced

(vii)the pre-determined fixed overhead absorption rate per labour hour (11 marks)

(b) (i) From the above data, prepare a comprehensive statement of costs, comparing the unit actual costs to standard costs, to show the variances. Determine the standard selling price of product (i.e. mark-up 12% on standard cost) which is also the actual selling price. (5 marks)

(ii) Give three reasons for which material and labour variances requiring investigation. (5 marks)

(iii) If the company has changed to use the marginal costing method, what will be the effect on the actual profit (no calculation required)? (2 marks)

(c)(i) Sales Manager has confirmed the potential sales of another product Z overseas, with estimated monthly sales of 5,000 units at a price of $200. The related unit costs are estimated as follows:

- Direct materials $50

- Direct Labour $90 (3 standard unskilled labour hours)

- Variable selling and distribution cost of $8 per unit

- Special monthly hiring charges of equipment $150,000

Advise the number of product Z needs to be sold per month in order to justify the hiring of equipment. State clearly your assumptions, if any. (4 marks)

(ii) Suppose the director will consider to set up a representative office overseas. This will involve the increase in additional overseas monthly overheads amounting to $250,000. Since some packing services can be performed there, a savings of 50% in variable selling and distribution costs will be achieved.

How many products Z will need to be sold in order to justify this proposal?

(3 marks)

SECTION B

Answer any TWO questions from this section. Each question carries 20 marks.

Write all your answers in the answer book provided.

Question 3
(a) / Tuen Yuen Limited engages in garments, accessories trading and fashion design. It operates a design house in Hong Kong and the garments are produced by manufacturers in China.
Two years ago, the company acquired a batch of 4,000 pieces of style A blue jeans. Owing to the change of fashion, the stock is outdated and the selling prices reduced dramatically during the year. An African buyer approached the company to purchase the whole batch but the jeans were to be modified to style B to fit the African market. The company accepted the offer before the year end. According to the sales contract, the jeans in style B were going to be shipped to the buyer in mid January.
The company has prepared the following table for the closing stock valuation of the batch of blue jeans for the year ended 31 December 2007.
Item / Number of the Item / Current
Selling
Price
(style A)
($) / Acquisition Cost
($) / Offer Price
(style B)
(Per piece)
($) / Estimated Cost
(style B)
(Per piece)
($)
Male / 1,400 / 230 / 280,000 / 220 / 30
Female / 1,600 / 190 / 336,000 / 250 / 30
Children / 1,000 / 180 / 160,000 / 190 / 40
You are required to:
(i) State the accounting principle of valuation of closing stock and its application in
the batch of stock. ( 2 marks)
(ii) Compute the closing stock of the batch as at 31 December 2007. (4 marks)
(b) / The company acquired a fashion design machine under a finance lease for a period of 5 years starting from 1 January 2007. At the end of the lease period, the title of the machine will be transferred to the company. The annual rental is $898,420. The first payment was made on 1 January 2007. The initial fair value of the machine was $3,400,000 and the amount was substantially equal to the present value of the minimum lease payments. The depreciation rate is 20 % on straight line method. Finance charges are at a constant rate of 15% per annum on the balance of obligation outstanding.
You are required to:
(i) Explain what a finance lease is. (2 marks)
(ii)Journalize all entries in relation to the finance lease for the year 2007.
(narrative is not required) (5 marks)
(c) / In addition to garment and accessories trading, the company also provides various design services to manufacturers and various garment provision services to large events. The followings are its different sources of revenue:
(i) / The company accepts specific jobs of special design of fashionable garment and accessories requested by garment manufacturers who require specific design to suit the tastes of their target markets. At the same time, these manufacturers are required to pay in full for the design. As soon as the design is completed, legal title will be passed to the manufacturers.
(ii) / The company provides services on garment design and provision of garments for large events according to the customer’s tastes and preference, and the purposes of the events. The price range is set on the basis of quality and complexity of the design, garment styles and services required.
(iii) / The company also consigns some fashion accessories to the large department stores. The department stores will be responsible for advertising the fashion accessories.
You are required to discuss the revenue recognition criteria policy on each of the above. (7 marks)

Question 4

Spring Limited, a group of catering business operated in Hong Kong, is in the process of assembling a cash budget for the first quarter of 2008. The following information has been extracted from the company’s accounting records:

i.  All sales are on credit. The total revenue for January and February amounted to $400,000 and $500,000 respectively.

ii.  60 percent of customer accounts are collected in the month of sale; 35 percent are collected in the following month. Uncollectible amounting to 5 percent of sales is anticipated.

iii.  The management believes that only 20 percent of the accounts receivable on 31 December 2007 will be recovered and the recovery will be in January 2008.

iv.  The motor vehicle used by the directors was sold in mid January for $5,000. The buyer agreed to pay within 30 days.

v.  The purchases for January and February amounted to $200,000 and $300,000 respectively, 70 percent of which are paid in the month of purchase; the remaining are paid in the following month after purchase.

vi.  The monthly operating costs in January were $100,000 and increased by 10% in February. The costs included monthly depreciation expense of $2,000 and bad debt expenses (5% of sales).

You are required to:

(a) Prepare a schedule of the group’s total cash collections for January and February.

(5 marks)

(b) Prepare a schedule of the group’s total cash disbursements for January and February. (6 marks)

The balance sheet at 31 December 2007 disclosed the following figures: cash $80,000; accounts receivable $65,000 and accounts payable $45,000. The company maintains a minimum cash balance of $80,000 at every month end.

Financing is available which is repaid at a 6 percent interest rate, with borrowings taking place at the beginning of the month and repayments occurring at the end of the month.