FINAL DRAFT
DIPLOMA IN ACCOUNTING
FEBRUARY 2005 EXAMINATION
INFORMATION FOR MANAGEMENT CONTROL
Paper No: IMC223
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
Pangkor Bhd produces one uniform product. The assembly department encounters wide fluctuation in activity levels from month to month. However, the following department overhead budget depicts expectations of currently attainable efficiency for an ’average’ or ‘normal’ level of activity of 20,000 units of production per month:
BudgetNormal month
(RM) / Actual cost incurred in the month of January 2005
(RM)
Indirect labour (variable) / 20,000 / 19,540
Supplies (variable) / 1,000 / 1,000
Power (variable) / 1,000 / 980
Repairs (variable) / 1,000 / 880
Other variable overhead cost / 2,000 / 1,800
Depreciation (fixed) / 10,000 / 10,000
Other fixed overhead cost / 5,000 / 5,000
40,000 / 39,200
Required :
(a) Prepare a flexible budget statement for 16,000; 20,000 and 24,000 units level of activity, showing the budget formula.
(10 marks)
(b) In January 2005, the department operated at a level of activity of 17, 600 units.
Prepare TWO (2) performance reports comparing:
(i) Budget at normal activity;
(ii) Budget at 17,600 units of activity.
(11 marks)
(c) Comment on your results in (b).
(4 marks)
(Total : 25 marks)
SECTION B
(Answer any ONE (1) out of TWO (2) questions)
Question 2
“Participation by managers in setting budget standards is a good practice but it is incorrect to think that participative approaches are always more effective than authorisation styles”.
Discuss the above statement in terms of the advantages and disadvantages of participation in budgetary planning and control.
(Total : 25 marks)
Question 3
Total quality management (TQM) is the process of applying that philosophy to the management of all resources and relationships within the firm as a means of developing and sustaining a culture of continuous improvement which focuses on meeting customers’ expectations.
Required :
(a) Describe the TWO (2) basic principles of TQM and suggest ways in which quality can be achieved.
(13 marks)
(b) Describe FOUR (4) categories of quality related costs.
(12 marks)
(Total : 25 marks)
SECTION C
(Answer any TWO (2) out of FOUR (4) Questions)
Question 4
Atec Bhd. produces two products MR2 and MR3. Each has two specific components which are sequentially numbered i.e. parts 1 and 2 for product MR2 and parts 3 and 4 for product MR3. There are two production departments (machining and fitting) which are supported by five service activities (material procurement, material handling, set-up, maintenance and quality control).
Additional information :
Product / MR2 /MR3
Volume produced / 300,000 units / 300,000 unitsComponents used / Parts 1 and 2 / Parts 3 and 4
Direct labour hours (DLH):
Machining Department / 500,000 DLH / 600,000 DLH
Fitting department / 150,000 DLH / 200,000 DLH
Overhead cost analysis / RM’ 000
Material handling / 1,500
Material procurement / 2,000
Set-ups / 1,500
Maintenance / 2,500
Quality control / 3,000
Machining / 2,500
Fitting / 2,000
15,000
Cost driver analysis :
Volume per components
Cost drivers: / Part 1 / Part 2 / Part 3 / Part 4Material movements / 180 / 160 / 1,000 / 1,200
Number of orders / 200 / 300 / 2,000 / 4,000
Number of set-ups / 12 / 12 / 300 / 300
Maintenance hours / 7,000 / 5,000 / 10,000 / 8,000
Number of inspections / 36 / 360 / 2,400 / 1,000
Machining direct labour hours / 150,000 / 350,000 / 200,000 / 400,000
Fitting direct labour hours / 50,000 / 100,000 / 60,000 / 140,000
Assumptions :
1. It is assumed that the RM10,500,000 service departments costs will be apportioned as follows :
RM’000Machine / 6,500
Fitting / 4,000
10,500
2. For the traditional method it is assumed that direct labour hours are an appropriate base of absorption for the machining department and fitting department.
Required :
Compute the overhead cost per unit for products MR2 and MR3 using :
(a) A traditional volume based costing system
(9 marks)
(b) An activity based costing system
(16 marks)
(Total : 25 marks)
Question 5
An incremental budgeting system tends to focus on cost centres whereas activity based budgeting aims at continuous improvement by linking strategic planning to overall performance measurement.
Required :
(a) Explain the weaknesses of an incremental budgeting system.
(12 ½ marks)
(b) Describe the main features and potential advantages of an activity based budgeting system.
(12 ½ marks)
(Total : 25 marks)
Question 6
BMT Sdn Bhd company is a large manufacturer of domestic appliance equipment.
Internal accounting is based on a standard CostiQg and budgetary control system introduced some
Internal accounting is based on a standard costing and budgetary control system introduced many years ago. Since then, greatly increased competition, buyers’ demand for product differentiation and greatly changed manufacturing technology (some of which is installed and operating in the company) have dramatically affected the company's business and manufacturing environment.
The results of a four-week operating period in one of the production departments making component parts, are given below :
Budget / ActualOutput (standard hours) / 4,800 / 4,460
Direct labour :
Production time (hours) / 4,000 / 3,900
Attendance time (hours) / 5,000 / 4,900
Direct materials used (kgs) / 20,160 / 20,962
The direct labour production standard incorporates a 20% efficiency factor. There is a standard downtime allowance of 20%.
Costs budgeted and actually incurred in the four-week period are:
Budget Actual
RM RM
Direct material 30,240 33,539
Direct labour 16,800 17,500
Indirect costs
Indirect wages of direct workers 2,500 3,000
Variable overhead 2,000 2,400
Fixed overhead 25,200 28,000
Variable overhead recovery is based on production time and fixed overhead recovery on standard hours output.
Required :
Calculate all the relevant variances from the above data.
(Total : 25 marks)
Question 7
Data from October 20X9 standard cost card of product NFZ, the only product of Exe Bhd is as follows :
RMDirect materials / 4kg / @RM2.50 per kg / 10.00
Direct labour / 3 hours / @RM6.00 per hour / 18.00
Variable overhead / 3 hours / @RM4.00 per hour / 12.00
Fixed Overhead / 20.00
60.00
Standard profit / 15.00
Standard selling price / 75.00
RM / RM / RM
Adverse / Favourable
Budgeted profit / 17,250
Sales volume profit variance / 750 / (Adverse)
16,500
Selling price variance / 5,500 / (Favourable)
22,000
Cost variances :
Direct materials – Price / 535
- Usage / 375
Direct Labour – Rate / 410
- Efficiency / 1,200
Variable Overhead – Expenditure / 820
- Efficiency / 800
Fixed Overhead – Expenditure / 1,000
- Volume / 1,000
3,320 / 2,820 / 500 / (Adverse)
21,500
Required :
Calculate :
(a) Actual sales units
(5 marks)
(b) Actual production units
(4 marks)
(c) Actual selling price per unit
(3 marks)
(d) Actual material price per kg
(4 marks)
(e) Actual labour hours
(3 marks)
(f) Actual variable overhead cost
(3 marks)
(g) Actual fixed overhead cost
(3 marks)
(Total : 25 marks)
DIA/SADA FEB 2005 EXAM INFO FOR MANAGEMENT CONTROL
SUGGESTED ANSWER & MARKING SCHEME IMC223
Answer for Question 1
(a) Flexible budget statement: Assembly Department
Budget Formula / Level of activities (units)(RM per unit) / 16,000 / 20,000 / 24,000
Variable Overheads
Indirect labour / 1.0 / 16,000 / 20,000 / 24,000
Supplies / 0.05 / 800 / 1,000 / 1,200
Power / 0.05 / 800 / 1,000 / 1,200
Repairs / 0.05
1½ M / 800
1½ M / 1,000
1½ M / 1,200
1½ M
Other variable overhead / 0.10 / 1,600 / 2,000 / 2,400
Total variable overhead / 1.25 / 20,000 / 25,000 / 30,000
Fixed overheads / Total
Depreciation / 10,000
¼ M / 10,000
¼ M / 10,000
¼ M / 10,000
¼ M
Other fixed overhead / 5,000 / 5,000 / 5,000 / 5,000
Total fixed overhead / 15,000 / 15,000 / 15,000 / 15,000
Total overhead / 35,000 / 40,000 / 45,000
½ M / ½ M / ½ M
Budget formula: 1.25x + 15,000
Where x = Number of units produced 1½ M
(10 marks)
(b) Performance reports – Assembly Department
January 2005
Budgets / Performance report(i) at normal activity / (ii) at actual activity / Actual incurred / (i) actual against budget at normal activity / (ii) actual against budget at actual activity
Units / 20,000
(RM) / 17,600
(RM) / (17,600)
(RM) / (20,000 units)
(RM) / (17,600 units)
(RM)
Indirect lab / 20,000 / 17,600
½ M / 19,540 / 460 (F)
½ M / 1,940 (A)
½ M
Supplies / 1,000 / 880
½ M / 1,000 / - / 120 (A)
½ M
Power / 1,000 / 880
½ M / 980 / 120 (F)
½ M / 100 (A)
½ M
Repairs / 1,000 / 880
½ M / 880 / 120 (F)
½ M / -
Other variable cost / 2,000 / 1,760
½ M / 1,800 / 200 (F)
½ M / 40 (A)
½ M
Total variable cost / 25,000
1 M / 22,000
½ M / 24,200
1 M / 800 (F)
½ M / 2,200 (A)
½ M
Fixed overhead
Depreciation / 10,000 / 10,000 / 10,000 / - / -
Others / 5,000 / 5,000 / 5,000 / - / -
Total fixed cost / 15,000 / 15,000 / 15,000 / - / -
Total overhead / 40,000 / 37,000 / 39,200 / 800 (F) / 2,200 (A)
(11 marks)
(c) From the above comparisons it can be seen that performance report (b i) which is the comparison between actual against a budget at normal activity level is not meaningful for cost control purposes since the comparison is between two different level of activities. Nevertheless such a comparison would be useful in judging the effectiveness in planning. The performance report of (b ii) which is the comparison between actual and budget also at actual activity level gives rise to an adverse variance indicating areas to be investigated to control cost.
(4 marks)
(Total : 25 marks)
Answer for Question 2
Advantages :
ý Better awareness of standards / Budget
ý Motivation since participation encourages the sharing of information
ý More realistic budgets / standards
ý Better understanding of problem since participation encourages explanation / discussion of the problem matters
ý Reflects a more democratic approach encouraging acceptance to the budget.
(Any 4 points x 3 marks
up to a maximum of 12½ marks)
Disadvantages of participation :
ý Opportunity to build slack exist
ý Time, cost and effort involved in arranging for participation.
ý Can give rise to conflict and produce undesirable effects than if not participation is considered in the first place
ý Management spending time recording events
(Any 4 points x 3 marks)
(up to a maximum of 12½ marks)
(Total : 25 marks)
Answer for Question 3
(a) Basic principles of TQM
ý The cost of preventing mistakes is less than the cost of correcting them once they occur, therefore get things right the first time.
ý The belief that it is always possible to improve, therefore get it more right next time.
Achieving Quality
Training For Quality
- Involves changing people’s attitudes towards quality control and encouraging staff to obtain practical, vocational skills training.
Empowerment
- To change the culture of the organisation so that everyone can become involved in the process of improvement and work together to make the changes.
Two Main Aspects
- Freedom of workers to decide how to do the necessary work.
- Making those workers personally responsible for achieving production targets and for quality control.
Quality Circles
- Consists of a group of employees which meets regularly to discuss problems of quality and quality control in their area of work and to suggest ways of improving quality.
- It has a leader who directs discussion and help train other members. It has also a way to encourage innovation.
- Training in quality control and techniques in problem-solving and communication is necessary.
Factors To Consider
- It is a voluntary grouping
- Training is required
- Right leader must be chosen
(13 marks)
(b) Quality related costs
Is the cost of ensuring and assuring quality and loss when quality is not achieved
Categorised into
Prevention Costs
The cost of any action taken investigate, prevent or reduce defects and failures
Appraisal Costs
The cost of assessing quality achieved
Internal failure costs
Costs arising within the organisation of failure to achieve the quality specified.
External failure costs
Costs arising outside the organisation (after transferring of ownership to customer) of failure to achieve specified quality
(Each explanation x 3 marks: 12 marks)
(Total : 25 marks)
Answer for Question 4
(a) Workings
Departments / Machining / FittingRM’000 / RM’000
Overheads allocated
/ 2,500 / ½ M / 2,000 / ½ MOverhead apportionment from service departments / 6,500 / ½ M / 4,000 / ½ M
9,000 / ½ M / 6,000 / ½ M
Total DLH / 1100,000 / ½ M / 350,000 / ½ M
OAR per DLH / 8.18 / ½ M / 17.14 / ½ M
Using traditional method of absorption :
O/H absorption
- machining
/ 500,000 x RM8.18 / ½ M / 600,000 x RM8.18 / ½ M- fitting / 150,000 x RM17.14 / ½ M / 200,000 x RM17.14 / ½ M
6661,000 / ½ M / 8,336,000 / ½ M
No. of units / 300,000 / 300,000
Overhead cost per unit / RM22.20 / ½ M / RM27.79 / ½ M
(9 marks)
(b) Workings – using ABC method
Material handling
1 M
Material procurement
1 M