2005 (P2)
SECTION A
Answer ALL questions in this section. Each question carries 30 marks. Write all your answers in the AL(C)1 answer book provided.
- Welldone Ltd has two production departments, Department A and Department B, manufacturing Product X and Product Y respectively. Production departments A and B are served by two production service centres, S1 and S2. The following information relates to the budget for the year ending 31 December 2005.
(i)Information relating specifically to Product X and Product Y is given below:
Product X / Product YNumber of units to be produced and sold / 80 000 / 50 000
Raw materials / $680 000 / $600 000
Direct labour hours / 40 000 / 80 000
Labour rate per hour / $20 / $18
(ii)Factory overheads of the production departments and the production service centres are:
Production / Production / Productiondepartments / service centre / service centre
A & B / S1 / S2
$
Rent and rates / 480 000
Electicity / 100 000
Technical support / 70 000
Design and quality control / 156 000
Stores / 256 000
Depreciation / 618 000
Total overheads / $1 680 000 / $200 000 / $300 000
(iii)Factory overheads of the production departments are allocated to Department A and Department B based on direct labour hours. On the other hand, the factory overheads of the production service centres are apportioned as follows:
S1 / S2% / %
Production department A / 50 / 60
Production department B / 40 / 30
Production service centre S1 / - / 10
Production service centre S2 / 10 / -
100 / 100
Required:
(a) (i) Calculate the total factory overheads of Department A and Department B respectively. (Note: Use the repeated distribution method to apportion the factory overheads of production service centres S1 and S2. Correct all amounts to the nearest dollar.) (6 marks)
(ii) Calculate (to two decimal places) the unit production costs of Product X and Product Y respectively. (3 marks)
Welldone Ltd has been using an absorption rate of administrative and selling expenses at $10 per unit
produced and sold. Both Product X and Product Y are priced at mark-up of 50% of total costs.
Required:
(b)Catculate (to two decimal places) the budgeted unit selling prices of Product X and Product Y
respectively. (3 marks)
The cost accountant of Welldone Ltd advised that the budgeted selling prices would differ if factory overheads of the production departments are absorbed by specific cost drivers. Further information relating to the production departments is as follows:
Production department A / Production department BFloor area (in square feet) / 18 000 / 14 000
Equipment value / $300 000 / $600 000
Number of requests for technical support / 400 / 600
The cost drivers for different items of factory overheads are shown below:
Overheads / Cost driverRent and rates
Electricity support
Technical support
Design and quality control
Stores
Depreciation / Floor area
Floor area
Number of requests
Number of units produced
Cost of raw materials consumed
Equipment value
Required:
(c)(i) Using the above cost drivers for overhead absorption, re-calculate the unit production costs of
Product X and Product Y respectively. (7 marks)
(d) (ii) What are the budgeted unit selling prices of Product X and Product Y if Welldone Ltd is to maintain its mark-up at 50% of total costs? (3 marks)
Lucky Ltd, a potential customer, is negotiating with Welldone Ltd for the purchase of Product X and Product Y, proposing unit prices at $55 for Product X and $110 for Product Y. In deciding whether to accept the proposal, Welldone Ltd estimated that the budgeted sales of 80 000 units of Product X would be difficult to achieve without the order from Lucky Ltd. However, sales of Product Y would be likely to achieve the budgeted 50 000 units even without the order.
Required:
(d) Referring to the calculations in (c), advise whether Welldone Ltd should accept the proposal of Lucky Ltd. Explain your answer. (8 marks)
- Yellow Stone Manufacturing Ltd commenced business in 2004 producing cleaning liquid Product X. Each bottle of Product X contains 1 litre of raw materials.
The production budget for the year ended 31 December 2004 on the basis of 100 000 bottles is shown below:
$Raw materials ($10 per litre) / 1 000 000
Direct labour ($2 per labour hour) / 800 000
Factory overheads - fixed / 200 000
Other budget information:
Selling and distribution expensesFixed
Variable
Administrative expenses – fixed
Selling price
Sales volume / $150 000
$1 per bottle
$400 000
$30 per bottle
90 000 bottles
Required:
(a) (i) Prepare the budgeted income statement for Product X based on absorption costing to show the budgeted net profit for the year ended 31 December 2004. (5 marks)
(ii) How will the budgeted net profit differ if marginal costing is used instead? (2 marks)
The actual results of Product X for the year ended 31 December 2004 are shown below:
$ / $Sales (120 000 bottles produced and sold) / 3 540 000
Raw materials ($9.95 per litre) / 1 228 825
Direct labour ($2.10 per labour hour) / 1 010 100
Factory overheads / 205 000
Selling and distribution expenses
Fixed / 152 000
Variable / 120 000
Administrative expenses / 420 275 / 3 136 200
Net profit / 403 800
Jimmy Chow, the director, said to Robert Wong, the cost accountant, ‘I am delighted to find that the
actual net profit is better than that in the original budget. Furthermore, the variable selling and
distribution expenses per bottle match exactly with budgeted amount!’ However, Robert Wong did not
agree with Jimmy Chow, ‘We should not evaluate the performance based on the original budget.’
Required:
(b)Explain Robert Wong’s view on the 2004 performance of Product X. Support your answer with a list of discrepancies between the actual and budgeted amounts.
(c)Prepare a variance analysis on the 2004 performance of Product X for each of the following items:
(i)Sales
(ii)Raw materials cost
(iii)Direct labour cost (6 marks)
During the year 2004, $240 000 was incurred for the development of a new Product Y. the variable production costs for each bottle of Product Y are:
Raw materials / $11Direct labour / $24
The experience in 2004 shows that the company has spare capacity to deal with additional production. If the company maintains the production level of Product X at 120 000 bottles in 2005, it will be able to produce and sell 50 000 bottles of Product Y, and the following additional expenses are required for 2005:
Selling and distribution expensesFixed
Variable
Administrative / $70 000
$2 per bottle Product Y
$80 000
An engineer would be redeployed from another unit to supervise the production of Product Y, if any, in 2005. he would be paid at the current salary of $150 000 per annum and would return to his original post when Product Y ceases production. Product Y can be sold at $44 per bottle. However, Product Y will be sold for one year only because another new product will be launch in 2006. The whole amount of the development cost will be written off in 2005.
Required;
(d)As Product Y will be sold for one year in 2005 only, analyse the costs above and advise with supporting calculations whether the company should product Product Y in 2005
Section B
Answer any TWO questions from this section. Each question carries 20 marks. Write all your answers in the AL(E) answer book provided.
- The draft financial statements of Peaceful Ltd for the year ended 31 December 2004 showed a net profit of $900 000. The following information was also available;
(i)A batch of goods was valued at its original cost $500 000. As the goods will expire in 9 months, their saleable value is $480 000 only. The saleable value will fall to $380 000 if the expiry date is within 3 months. The average stock turnover of these goods was 3 times a year. The replacement cost of this batch of goods is $550 000.
(ii)The board of directors approved on 30 June 2004 a bonus of $600 000 to be paid to the managing director on 30 June 2005 in appreciation of his service with the company. As the amount was yet to be paid, no accounting entries had been made.
(iii)New production machines costing $900 000 and with an estimated useful life of 5 years were purchased on 1 January 2004 to replace all the old ones. For the sake of consistency, the company continued to use the straight line method of depreciation. The operations director suggested that the sum of the years’ digits method should be adopted instead. Forecasts show that sales volume will gradually decrease over the coming years.
(iv)In November 2004, Peaceful Ltd entered into a sales contract for the bulk supply of 8000 units of goods at $550 per unit (which cost $400 per unit). It was specified in the contract that 500 additional units had to be given free of charge to the customer for delivery made after 31 December 2004. If no delivery was made even until 31 March 2005, a cash compensation of $300 000 had to be paid for the cancellation of the contract. At 31 December 2004, no goods were delivered yet, although it was certain that the delivery would be made in February 2005. No accounting entries had yet been made for the above.
Required:
(a) For each of the four cases above, suggest with reasons the appropriate accounting treatment as at the year end 31 December 2004. (16 marks)
(b) Based on your suggestions in (a) above, calculate the revised net profit or loss. (4 marks)
4. (A) (a) Differentiable between job costing method and process costing method. (4 marks)
(b) Explain which of the above will be more appropriate for a firm engaged in aircraft manufacturing. (4 marks)
(B)Alan Manufacturing Ltd produces a product called ‘Alpha’ , which is required to go through two processes, Process 1 and Process 2. Materials are applied at the start of each process. Production losses will be identified at the end of Process 1 and Process 2 respectively and will not be absorbed into work in progress. A normal production loss within 7% of the completed units is expected only in Process 1.
The following information relates to Process 1 and Process 2 for the month of March 2005:
Process 1 / Process 2Opening work in progress / Nil / Opening work in progress / 1000 unit (80% completed; cost comprised of costs from Process 1 $92 000, materials costs $45 000 and conversion costs $22 400)
Closing work in progress / 1500 units
(60% completed) / Closing work in progress / 2800 units
(50% completed)
Started in March / 10 000 units / Transferred form Process 1 / 8000 units
Transferred to Process 2 / 8000 units / Transferred to finish goods / 6000 units
Materials costs / $240 000 / Additional materials / $360 000
Conversion costs / $658 000 / Conversion costs / $426 000
Opening stock of finished goods of ‘Alpha’ at the beginning of March was 800 units with the cost of $142 000 5000 units were sold at $300 per unit during the month of March 2005.
Required:
(a) Draw up the Process 1 and Process 2 accounts for the month of March 2005, with separate columns for number of units and dollar amounts. (9 marks)
(b)Prepare a statement to calculate the profit on ‘Alpha’ for the month of March 2005. (3 marks)
5. Tin Tin Ltd manufactured and sold two products: Product D and Product S. Information on the two products is as follows:
Product D / Product SUnit selling price / $1000 / $150
Unit variable cost (including commission to salesmen at 6% of sales) / $600 / $50
Sales volume in 2004 / 1000 units / 4000 units
The annual fixed costs (including commission to salesmen at 6% of sales)
Required:
(a) (i) Calculate the current breakeven point (in sale dollars) for the business as a whole. (Note: Assume that the sales volume of Product D and Product S is maintained at the ratio of 1:4)
(4 marks)
(ii)Define ‘margin of safely’. Calculate the margin of safety (in dollar amount) for the business as a whole in 2004. (3 marks)
The market for Product D is saturated whereas the market for Product S is expanding. The sales manager estimated that the demand for Product D would be reduced by 50% in 2005. He suggested the following two alternatives:
Alternative 1: Abandon Product D and focus on Product S only.
Alternative 2: Reduce the production and sales of Product D by 50% to 500 units and sell them at the existing price; Increase the production and sales of Product S
For both alternatives, the following strategies will be adopted for Product S to boost its sales:
(i)Reduce the selling price by 10%;
(ii)Increase the commission to salesmen to 10% of sales; and
(iii)Incur additional promotion expenses of $166 000 in 2005.
The annual fixed costs would remain unchanged in all situations.
Required;
(b) Assuming Alternative 1 is adopted, calculate the breakeven point (in sales volume) of Product S in 2005. (3 marks)
(c) Assuming Alternative 2 is adopted, calculate the quantity of Product S to be sold in 2005 if Tin Tin Ltd is to maintain the company’s net profit as that in 2004. (4 marks)
(d) Suppose the maximum capacity of Tin Tin Ltd is 100 000 machine hours while Product D and Product S will require machine hours of 60 hours and 8 hours for each unit of product respectively. Advise which alternative should be adopted, supporting with calculations on the respective total contributions under the two alternatives. (6 marks)