MA182 May 2016 Exam
Suggested Solutions
Question 1 – Job-Order Costing
(a)Predetermined overhead recovery rates:
Cutting: £360,000 / 48,000 = £7.50 per machine hour[2]
Finishing: £486,000 / £270,000 = £1.80 per £1.00 of direct labour cost[2]
(b)Cost of Job 133:
Labour costs: Cutting: £49,800 / 6,000 = £8.30 per direct labour hour[1]
Finishing: £270,000 / 30,000 = £9.00 per direct labour hour[1]
Total Costs:CuttingFinishing Total
Materials: / 500.00 / 310.00 / 810.00 / [2]Labour: 6 x £8.30 / 49.80 / 49.80 / [1]
20 x £9.00 / 180.00 / 180.00 / [1]
Overheads: 80 x £7.50 / 600.00 / 600.00 / [1]
180 x £1.80 / 324.00 / 324.00 / [1]
1,149.80 / 814.00 / 1,963.80
Plus 75% mark-up: £1963.80 x 75% / 1,472.85 / [1]
3,436.65 / [1]
(c)Overhead charges to Job 133 using direct labour hours to allocate overheads:
The present overhead application rate is £7.50 per machine hour in Cutting, and £1.80 per £1.00 of direct labour cost in Finishing [1]. If, however, total overheads were applied on the basis of total combined machine hours in both departments, the overhead application rate would be (£360,000 + £486,000)/(48,000 + 5,000) = £15.962 per machine hour in both Cutting and Finishing [1].
We can now calculate that the new overhead rate of £15.962 per machine hour is £8.462 per machine hour higher than the present overhead application rate in Cutting of £7.50 per machine hour [1]. And, as budgeted machine hours in Finishing are (£270,000/5,000) = 54 times lower than budgeted direct labour cost, to be equal to the old rate the new overhead rate in Finishing should have been (£1.80 x 54) = £97.20 per direct labour hour. This is £81.238 higher than the proposed new rate. [1]
For Job 133, for example, total overheads charged would be 84 x £15.962 = £1340.81, compared to the current charge of (£600 + £324) = £924. This is a difference of £416.81, or 45.1% [1]. So it seems evident that there are likely to be significant differences between the amount of overheads charged to some jobs if a single overhead application rate is used. [1]
[Any other accurate or partially accurate descriptions, using calculations or not, can be awarded the appropriate marks]
P.T.O. for (d).....
(d)Over/Under Recoveries:
Predetermined overhead rate: £218,400 / 12,000 = £18.20 per direct labour hour[1]
Actual manufacturing overhead cost / £215,000Overheadsapplied: 11,500 x £18.20 / £209,300 / [1]
Under-applied overheads / £5,700 / [1]
Gross Margin / £96,000.00
Less under-applied overheads / (5,700.00) / [1]
Adjusted Gross Margin / £90,300 / [1]
Question 2 – Process Costing
(a)Timex Clocks Production Report – Assembly Department – Month ended 31st May, 2016
Quantity Schedule and Equivalent Units
______
Units to be accounted for:
WIP on 1st May 80 [0.5]
Started into production in May500[0.5]
Total units (litres)580
______
Equivalent Units
Totals / Materials / Lab & O/HeadsUnits to be accounted for:
Transferred to next department / 460 / 460 / 460 / [1.5]
WIP on 31st May (60% mat, 30% lab & o/h’s) / 120 / 72 / 36 / [2.5]
Total units and equivalent units of production / 580 / 532 / 496
Costs per Equivalent Unit
Costs to be accounted for: / Total Cost / Materials / Lab & O/Heads / Unit CostWIP, 1stMay / £584,400 / £493,360 / £91,040 / [1.5]
Costs added during May / £4,612,000 / £3,220,000 / £1,392,000 / [1.5]
Total costs (a) / £5,196,400 / £3,713,360 / £1,483,040
Equivalent units of production (b) / - / 532 / 496
Costs per Equivalent unit (a/b) / £6980 [1] / £2990 [1] / = / £9,970
Cost Reconciliation
Equivalent Units (above)
Total Cost / Materials / Lab & O/HeadsCost accounted for as follows:
Transferred to next department:
460 units x £9,970 each / £4,586,200 [1] / 460 / 460WIP, 31stMay:
Materials, at £6,980per EU / £502,560 [1] / 72
Labour and O/Heads, at £2,990 per EU / £107,640 [1] / 36
Total WIP at 31stMay / £610,200
Total Cost / £5,196,400
(b)
Equivalent Units / Materials / Lab & O/H’sTo complete Opening WIP:
Materials: 80 x 10% / 8 [1]
Lab & Overheads: 80 x 60% / 48 [1]
Units started and completed:
460 - 80 / 380 [1] / 380 [1]
Ending WIP:
Material: 120 x 60% / 72 [0.5]
Lab & O/Heads: 120 x 30% / 36 [0.5]
460 / 464
Cost per EU – FIFO Method
Costs added during the period / £3,220,000 / £1,392,000
Equivalent Units / 460 / 464
Costs per EU / £7,000 [1] / £3,000 [1]
(c)When applying the weighted-average method, the brought-forward costs of beginning WIP inventory are added to the costs added into production during the month. The total cost is then used to calculate a weighted-average cost per equivalent unit, which is used to value goods transferred to the next department, as well as the closing inventory WIP. [1.5 Marks]
Under the FIFO method, the costs of completing the brought-forward WIP inventory are added to the brought-forward costs of this inventory, to establish the actual costs of the finished WIP units. Costs added during the month are then used to value the rest of the finished units for the month, as well as the closing inventory WIP. [1.5 Marks]
The FIFO method is therefore the most accurate, as actual costs of goods transferred out, and of closing WIP inventory, are calculated. FIFO is especially more accurate than the weighted-average method when costs change considerably from month to month, and brought-forward opening inventories of WIP are high, as brought-forward costs then make up a greater percentage of total costs, and might be significantly higher or lower than the current period costs on a per-unit basis. [2 Marks]
Question 3
Part A:
Revenue at the split-off point:
A: 15,000 x £16 = £240,000[1]
B: 20,000 x £8 = £160,000[1]
C: 4,000 x £25 = £100,000[1]
Net revenue if processed further:
A: (15,000 x £20) - £63,000 = £237,000[1]
B: (20,000 x £13) - £80,000 = £180,000[1]
C: (4,000 x £32) - £36,000 = £92,000[1]
To maximise profits:
- Sell A and C at the split-off point[2]
- Process B further, then sell.[1]
Part B:
(a)Sales: 15,000 x £14£210,000[1]
Less:
Direct labour (15,000 x £3.8)(£57,000)[1]
Var. Man. O/heads (15,000 x £1.00)(£15,000)[1]
Increase in annual net profit£138,000[1] (Only award mark for correct figure)
If student excludes selling and delivery expenses:[1]
(b)The lowest selling price will be £1.50 per unit, as all other variable expenses were incurred in the previous year, and are sunk costs. [2]
(c)Any two of the following, or any other two acceptable reasons:
- By accepting the order the company will be working at 100% of capacity. Any machine breakdowns or staff absences could therefore lead to delays and customers not receiving goods on time, or to additional overtime costs.
- The company’s regular customers may become aware of the lower price charged on the special order, and also demand a price reduction.
- Having the special order collected by the customer may disrupt the company’s own loading and delivery process; there may also be health and safety and insurance issues.
- The stress of working at 100% capacity may lead to poorer quality goods, or to worker stress and dissatisfaction.
Any two at 1.5 each = 3 marks)
P.T.O. for Part C......
Part C:
(i)Relevant costs for decision-making purposes are future cash flows, which differ between the various alternatives being considered. [2]
(ii)A sunk cost is a cost that has already been incurred in the past, and which cannot be avoided no matter what a manager does. [2]
(iii)An opportunity cost is the potential benefit that is foregone (or given up) when one alternative is chosen over another. [2]
Question 4 –CVP
(a)
Sales: 6,000 x £1.50 / 9,000.00 / [1]Less variable costs:
Ingredients: 6,000 x £0.50 / 3,000.00 / [1]
Direct labour: 6,000 x £0.10 / 600.00 / [1]
Contribution Margin / 5,400.00 / [1]
Less Fixed expenses:
Shop rental / 1,000.00 / [0.5]
Other Fixed expenses / 3,200.00 / [0.5]
1,200.00
(b)CM ratio = £5,400 / £9,000 = 60%[1.0]
(c)B/E Sales units = £4,200 / (£5,400 / 6,000) = 4,667 units[1.5]
B/E Sales revenue: 4,667 x £1.50 = £7,000.50 = £7,001[1.0]
(d)MOS units = 6,000 – 4,667 = 1,333 units[1.5]
MOS % = (1,333 / 6,000) x 100 = 22.2%[1.5]
(e)DOL = £5,400 / £1,200 = 4.5[1.5]
(f)4.5 x 20% = 90.00%[1.5]
(g)Revised Budgeted Variable Costing Income Statement of CC:
Sales: (6,000 x £1.40) x (£1.50 x 1.2) / 15,120 / [2.0]Less variable costs:
Ingredients: 8,400 x (£0.50 x 1.2) / 5,040 / [1.5]
Contribution Margin / 10,080
Less Fixed expenses:
Shop rental / 1,000 / [0.5]
Other Fixed expenses / 3,200 / [0.5]
Baking costs / 700 / [0.5]
5,180
(h)If Cathy’s sister had continued to bake the muffins, the total baking cost of 8,400 muffins would have been £840 in Month 6, compared to the £700 she will now pay. This will improve profit by £140 in Month 6. [2]
However, over the next 12 months if sales volumes grow to between 9,001 and 10,999 units, the monthly baking cost will have varied between £900.10 and £1,099,90 if Cathy’s sister had still been doing the baking [1]. But, per the new arrangement, Cathy will have to pay a flat fee of £1,200 for all volumes between 9,001 and 10,999 units [1]. This will result in a lower level of profit than if Cathy’s sister had continued to bake the muffins [1].
Question 5 – ABC
Costs per unit of cost drivers:
Set-ups:£229,075 / 670=£ 341.90[1]
Machinery: £130,900 / 23,375=£5.60[1]
Materials handling: £98,175 / 120=£818.13[1]
Inspection: £196,350 / 1,000=£196.35[1]
Overhead costs per product using ABC:
Product X:
(75 x £341.90) + (1,125 x £5.60) + (12 x £818.13) + (150 x £196.35)
= £25,642.50 + £6,300.00 + £9,817.56 + £29,452.50
= £71,212.56[4 x 1 each = 4]
Product Y:
(115 x £341.90) + (1,250 x £5.60) + (21 x £818.13) + (180 x £196.35)
= £39,318.50 + £7,000.00 + £17,180.73 + £35,343.00
= £98,842.23[4 x 1 each = 4]
Product Z:
(480 x £341.90) + (21,000 x £5.60) + (87 x £818.13) + (670 x £196.35)
= £164,112.00 + £117,600.00 + £71,177.31 + £131,554.50
= £484,443.81[4 x 1 each = 4]
Overhead cost per unit:
Product X: £71,212.56 / 750= £94.95[1]
Product Y: £98,842.23 / 1,250= £79.07[1]
Product Z: £484,443.81 / 7,000= £69.21[1]
(19 Marks)
(b)
Under the traditional method of absorption costing, Product X cost £65 to make, of which £42 was the cost of applied manufacturing overheads [1]. Under ABC the manufacturing cost of Product X is (£65 - £42 + £94.95) = £117.95. The increase in cost of £52.95 is due entirely to the increased amount of manufacturing overheads applied to the product under ABC [1].
The ABC cost analysis reveals that set-ups and inspections add the most manufacturing overhead costs to Product X, and Trident should therefore look at ways in which the numbers of these activities used by Product X could be reduced [1], or at ways in which the cost of carrying out these activities could be reduced [1]. Outsourcing the manufacture of Product X to a third party may, for example,be a cheaper option. [1]
If this is not possible, and as Trident believes that ABC is a more accurate costing system, the company should attempt to increase the selling price of Product X. [1]
(6 marks)
(Any other reasonable suggestions can be accepted).
Question 6 – Standard Costing
Material Variances (Price and Usage/Quantity)
(1)Actual Costs(2) (3) “Flexed” Budget
Actual Quantity x Actual Price / Actual Quantity x Standard Price / Standard Quantity (for actual production) x Standard Price10,080 x £18.00 / 10,080 x £20.00 / [480 x 20kgs] x £20.00
£181,440 / £201,600 / £192,000
£20,160F [2] £9,600A [3]
Material Price Variance Material Usage (Quantity) Variance
Labour Variances:
AQ x AP / AQ x SP / SQ (for actual production x SP528 hrs x £12.00 / 528 hrs x £15.00 / [480 x 1.0 hrs] x £15.00
£6,336 / £7,920 / £7,200
£1,584 F [2]£720 A [3]
Labour Rate Variance Labour Efficiency Variance
Variable manufacturing overhead variances:
AQ x AP / AQ x SP / SQ (for actual production) x SP528hrs x £34.00 / 528 hrs x £35.00 / [480 x 1.0 hrs] x £35.00
£17,952 / £18,480 / £16,800
£528F [2] £1,680 A [3]
Var. man.O/h Expenditure Variance Var. man. O/h Efficiency Variance
Sales Variances:
Sales Price Variance: (£875 - £900) x 480 = £12,000 A{2]
Sales Volume Variance: (480 – 500) x (£900 - £450) = £9,000 A[2]
(19 Marks)
(b) The adverse variances referred to are the Material Usage Variance and the Labour Efficiency Variance [1]. If the adverse material usage variance was due to the use of poor quality material, one would expect the material to have been cheaper than standard [1]. This is in fact the case, as the material price variance is favourable [1].
Regarding the labour efficiency variance, if the HR manager had hired inexperienced workers, one would expect their pay rate to be below the standard rate [1]. This is also the case, as the labour rate variance for the month is favourable. [1]
It is possible, therefore, that the production manager’s comments are correct. [1]
(6 Marks)