Information for Management Control s1

YEAR 2

DIPLOMA IN ACCOUNTING

MAY 2005 EXAMINATION

INFORMATION FOR MANAGEMENT CONTROL

Paper No: 4ACC0817

TIME ALLOWED : 3 HOURS

INSTRUCTIONS TO CANDIDATE :

There are THREE (3) sections in this paper.

1. SECTION A – answer the compulsory question.

2. SECTION B – answer ONE (1) out of TWO (2) questions.

3. SECTION C – answer TWO (2) out of FOUR (4) questions.

SECTION A

(Compulsory Question)

Question 1

Fook Bhd. is currently using a budgetary control system for planning and control purposes. For the period just ended, the following statement has been presented to the management:

Original / Actual / Variance
budget / result
RM / RM / RM
Sales / 200,000 / 160,000 / (40,000) / (A)
Direct materials / 24,000 / 14,000 / 10,000 / (F)
Direct labour / 50,000 / 40,000 / 10,000 / (F)
Variable production overhead / 30,000 / 27,000 / 3,000 / (F)
Fixed production overhead / 20,000 / 23,000 / (3,000) / (A)
Variable selling overhead / 10,000 / 9,000 / 1,000 / (F)
Fixed selling overhead / 16,000 / 15,000 / 1,000 / (F)
150,000 / 128,000 / 22,000 / (F)
Profit / 50,000 / 32,000 / (18,000) / (A)
Production and sales units / 2,000 / 1,500
Direct materials units / 4,000 / 4,600
Direct labour hours / 10,000 / 8,800

The sales manager commented that the results for the period were actually good but he was surprised to see a large adverse profit variance. He then, felt that the statement was providing misleading information.

Required:

(a) Redraft the above statement based on flexible budgeting concept.

(11 marks)

(b) Calculate the following variances:

(i) Material price

(ii) Material usage

(iii) Labour rate

(iv) Labour efficiency

(v) Variable production overhead expenditure

(vi) Variable production overhead efficiency

(vii) Fixed production overhead expenditure

(10 marks)

(4 marks)

(Total : 25 marks)

SECTION B

(Answer ONE (1) out of TWO (2) questions)

Question 2

Benchmarking is a technique used for performance improvement.

Required :

(a) Explain the objectives of benchmarking.

(5 marks)

(b) Explain how benchmarking works by citing some examples.

(12 marks)

(8 marks)

(Total : 25 marks)

Question 3

Gongxi Bhd., a cleaning liquid manufacturer, is a member of the Facai group of companies. The company is currently using a periodic review stock control system. Stock control levels (maximum, minimum and reorder levels) are established to control stocks and purchases. The economic order quantity model is used for cost control. Gongxi Bhd. purchases chemicals from a number of suppliers.

The management of Gongxi Bhd. is keen to change to a Just-in-Time (JIT) system.

Required:

(a) Explain the differences between JIT system and the current system.

(11 marks)

(b) Discuss the implications to Gongxi Bhd.’s quality control procedures if the JIT system is introduced.

(14 marks)

(Total : 25 marks)

SECTION C

(Answer any TWO (2) out of FOUR (4) Questions)

Question 4

Wanshi Bhd. is preparing its annual budgets for Year 6. The quarterly sales units of its single product have been estimated as follows:

Units
Quarter 1 / 30,000
Quarter 2 / 40,000
Quarter 3 / 20,000
Quarter 4 / 40,000

The sales of each quarter of Year 7 are expected to be 30,000 units.

The selling price of the product, which is currently RM120, will be increased to RM130 with effect from 1 July Year 6.

The following is the standard data for producing 1 unit of product:

Material A / 3 / kgs at RM / 6 / per kg
Material B / 2 / kgs at RM / 5 / per kg
Material C / 1 / kgs at RM / 20 / per kg
Direct labour / 5 / hrs at RM / 4 / per hour
Variable overhead / RM / 8 / per unit

The prices of Material A and B are expected to increase by 10% with effect from 1 April Year 6. The price of Material C is expected to remain unchanged. There will be an increase in wage rate of 4% from 1 October Year 6.

Fixed production overhead is estimated at RM252,000 for the year and is absorbed based on production units.

The stocks on 31 December Year 5 are as follows:

Products 7,000 units

Material A 2,000 kg

Material B 4,000 kg

Material C 1,000 kg

It is the company’s policy to keep closing stocks at the end of each quarter as follows:

Products / 10% / of next quarter's sales
Material A / 10% / of next quarter's production requirements
Material B / 20% / of next quarter's production requirements
Material C / 15% / of next quarter's production requirements

Required:

Prepare the following budgets for the company for Year 6, showing values for each quarter and the year in total.

(a) Sales budget (in units and values)

(3 marks)

(b) Production budget (in units)

(4 marks)

(d) Production cost budget (in values for each element of costs)

(14 marks)

(Total : 25 marks)

Question 5

Ruyi Bhd. is a food manufacturer. In the processing of one of its products, Product R, three ingredients are blended together. The following is the standard cost data for 1 kg of Product R

Ingredients / Quantity / Price
kg / RM
X / 0.4 / 2.60 / per kg
Y / 0.4 / 1.90 / per kg
Z / 0.3 / 2.90 / per kg

For the month of April Year 5, the following actual results were recorded for Product R:

Production units: 50,000

Ingredients / Quantity used / Cost incurred
kg / RM
X / 22,000 / 54,000
Y / 17,000 / 41,000
Z / 12,000 / 39,000

In mid April, the management found that there was a shortage of supply for ingredient X. This resulted in a rise of price to RM2.80 per kg.

The company does not hold any stocks of ingredients.

Required:

(a) Calculate the planning price variance and operating price variance for ingredient X.

(3 marks)

(b) Calculate the individual material mix variance and the total yield variance for April. (Using the weighted average cost per unit).

(13 marks)

(5 marks)

(d) Discuss the usefulness of material mix and yield variances to management.

(4 marks)

(Total : 25 marks)

Question 6

Hamtaro Sdn. Bhd. specialises in designing web sites and developing e-commerce systems for clients. The company has expanded rapidly since it was established four years ago. It now has a multi-site operation with bases in Malaysia and overseas.

Required:

Explain how the cost reduction and value analysis techniques may be used by Hamtaro Sdn. Bhd. as part of its planning activities.

(Total : 25 marks)

Question 7

M. Girls Bhd. is currently producing 63,300 units of output, which represent 70% of its capacity. The management wishes to increase the capacity to 90% next year.

The following flexible budgets were prepared for the current year:

Level of activity
60% / 70% / 80%
RM / RM / RM
Direct materials / 891,000 / 1,039,500 / 1,188,000
Direct labour / 712,800 / 831,600 / 950,400
Production overhead / 295,200 / 320,400 / 345,600
Selling overhead / 171,800 / 182,600 / 193,400
Administration overhead / 95,000 / 95,000 / 95,000
Total cost / 2,165,800 / 2,469,100 / 2,772,400

Profit is 20% of selling price.

The Cost Accountant has forecast the following increase in costs for next year:

Direct materials / 5.5%
Direct labour / 4.0%
Variable production overhead / 6.2%
Variable selling overhead / 5.5%
Fixed production overhead / 7.2%
Fixed selling overhead / 6.6%
Administration overhead / 8.5%

Required:

(a) Using a Marginal Costing approach, prepare a flexible budget statement for next year, based on a capacity of 90%.

(18 marks)

(b) Explain the objectives of a budget committee, and state who are the members of such a committee.

(7 marks)

(Total : 25 marks)

DIA/SADA MAY 2005 EXAM INFO FOR MANAGEMENT CONTROL

SUGGESTED ANSWER & MARKING SCHEME IMC223

Answer for Question 1

(a) Flexible budget statement

Flexible / Actual / Variance
Per unit / budget / result
RM / RM / RM / RM
Sales / *100
/ *150,000
/ *160,000 / *10,000
/ *(F)
Direct materials / *12
/ *18,000
/ *14,000
/ *4,000
/ *(F)
Direct labour / *25
/ *37,500
/ *40,000
/ *(2,500)
/ *(A)
Variable production overhead / *15
/ *22,500
/ *27,000
/ *(4,500)
/ *(A)
Fixed production overhead / *20,000
/ *23,000
/ *(3,000)
/ *(A)
Variable selling overhead / *5
/ *7,500
/ *9,000
/ *(1,500)
/ *(A)
Fixed selling overhead / *16,000
/ *15,000
/ *1,000
/ * (F)
/ *121,500 / *128,000 / *(6,500)
/ *(A)
Profit / *28,500
/ *32,000
/ *3,500
/ *(F)
Production and sales units / *1,500
/ 1,500
Direct materials units / *2
/ 3,000 / 4,600
Direct labour hours / *5
/ 7,500 / 8,800

(* = ¼ marks x 44 = 11 marks)

(b) / (i) / MPV / AC - (AQ x SPQ) / SPQ
= / *14,000 / -* (4,600 / x * 6) / = / SPO / SQO
= / *-13,600 / *(F) / = / 12 / / *2
= / *6
(ii) / MUV / (AQ - SQ) x SPQ
= / [*4,600 / - (2 x / *1,500)] / x *6
= / *9,600 / *(A)
(iii) / LRV / AC - (AH x SRH) / SRH
= / *40,000 / - (*8,800 / x *5) / = / SRO / SHO
= / *-4,000 / *(F) / = / 25 / / *5
= / *5
(iv) / LEV / (AH - SH) x SRH
= / [*8,800 / - (5 x / *1,500)] / x *5
= / *6,500 / *(A)
Variable production overhead:
(v) / Rate / AC - (AH x SRH) / SRH
= / *27,000 / - (*8,800 / x *3) / = / SRO / SHO
= / *600 / * (A) / = / 15 / / *5
= / *3
(vi) / Efficiency / (AH - SH) x SRH
= / [*8,800 / - (5 x / *1,500)] / x *3
= / *3,900 / * (A)
Fixed production overhead:
(vii) / Expenditure / Actual overhead - budgeted overhead
= / *23,000 / - *20,000
= / *3,000 / *(A)

(* = ¼ marks x 40 = 10 marks)

(i) Preparing flexible budgets at the planning stage may serve a number of purposes.

Managers can assess what will be the effect of activity falling short of target. As a result they may want to make plans for alternative uses of capacity.

(1 mark)

(ii) If activity might exceed expectations, managers can assess the costs of extra resources including overtime, sub-contracting work or extra machine hire.

(1 mark)

(iii) Flexible budgets are helpful in decision-making. Managers can set up ‘what if scenarios and assess the effect of various changes in the assumptions made.

(1 mark)

(iv) Flexible budgets provide an appropriate yardstick for assessing how costs have been controlled. They enable comparisons to be made of results at the actual level of activity with the results that would have been expected at that level of activity.

(1 mark)

(Total : 25 marks)

Answer for Question 2

(a) Objectives:

This term is used to describe the systems analysis of processes or systems and products in order to compare them with a rival, peer entity or market leader in order to bring about improvement and greater efficiency in business operations. The objectives of any benchmarking activity are to strive for efficient use of resource, greater effectiveness in activities and products and to achieve a greater degree of quality assurance.

(5 marks)

(b) How it works:

The modus operandi consists of challenging any established premise, system or product and to assess, by comparison with other business how improvements can be made.

(2 marks)

There are three perspectives on benchmarking:

(i) Internal

(ii) External

(iii) Best practice

(1 mark)

Internal bench marking:

This is where comparison is done among divisions or subsidiaries within the same group of companies.

(1 mark)

For example, Unilever carries out cost monitoring across subsidiaries.

They also challenge established practices of manufacture to refine processes of manufacture. Margarine is now made in 9 tub sizes instead of 19.

(1 mark)

The Audit Commission compiles ‘cost profiles’ for every local authority in England and Wales. These are used to appraise local authority expenditure for VFM purposes.

(1 mark)

External benchmarking:

Many companies develop the practice of using external benchmarking. They may be partners in different industries but in the same group of companies.

(2 marks)

Best practice benchmarking:

This implies seeking out the best rival in your industry and seeking to emulate the practices and processes in order to improve. Eg, Lucas Industries.

(1 mark)

In 1984 Lucas resolved to avoid the fate of Dunlop (now broken up and absorbed into BTR). They developed Competitiveness Achievement Plans in which business managers had to identify the best rival and devise ways of closing the gap.