management accounting - accounting technicians ireland · management accounting august 2015 2nd...

Management Accounting August 2015 2nd Year Paper

Management Accounting 2nd Year Examination

August 2015

Solutions & Marking Scheme & Examiner’s Comments

of 33 Management Acc A2015 (MA)


NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations.

Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved.

This publication is copyright 2015 and may not be reproduced without permission of Accounting Technicians Ireland.

© Accounting Technicians Ireland, 2015.



Accounting Technicians Ireland

2nd Year Examination: Autumn 2015

Paper: MANAGEMENT ACCOUNTING

Monday 17 August 2015

2.30 p.m. to 5.30 p.m.

INSTRUCTIONS TO CANDIDATES

In this examination paper the £ symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and the € symbol may be understood by candidates in the Republic of Ireland to indicate the Euro.

Answer ALL THREE questions in Section A and ANY TWO of the three questions from Section B.

If more than the required number of questions is answered, then only the requisite number, in the order filed, will be corrected.

Candidates should allocate their time carefully.

All figures should be labelled, as appropriate, e.g. €/£’s, units etc.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

Note:

Examinees are permitted to use terminology of either International Accounting Standards (I.A.S’s) or Financial Reporting Standards (F.R.S’s) where appropriate (e.g. Receivables/Debtors) when preparing management accounting statements.

SECTION A



Answer All Questions

QUESTION 1 (Compulsory)

Pricewell plc. has produced the following budgeted figures for one of its products the Seagem.

€/£

per unit

Selling Price 45

Direct Material 15

Direct Lab our 10

Variable Production Overhead 9

Fixed Production Overhead €/£40,000 per month

Budgeted Output 10,000 units per month

The following are the levels of activity for January and February 2015.

January February

Production units 12,000 13,000

Sales units 10,500 11,500

Opening inventory at the start of January was 500 units.

Note: Actual prices and costs were the same as budgeted for January and February.



Required:

(a) Calculate the standard contribution and standard profit per unit. 4 Marks

(b) Prepare a profit statement for each month (separately) on each of the following basis: (i) Absorption Costing (ii) Marginal Costing

12 Marks

(c) Prepare a reconciliation of the difference in profit reported in the profit statements prepared in part (b) above.

2 Marks

(d) Clearly explain the reason for the difference in reported profit under the two methods. 2 Marks

Total: 20 Marks




(a) Dearing plc. provides the following information in relation to its inventory of Raw material Q and Work-in-progress.

Raw Material Q

01 August Received 1,000 kg @ €/£8.00 per kg

10 August Issued to production 800 kg

16 August Received 1,200 kg @ €/£9.50 per kg

23 August Received 600 kg @ €/£10.00 per kg

28 August Issued to production 1,500 kg

Required:

Prepare a statement showing the amount charged to production and the cost of the inventory of raw materials held after each inventory transaction using each of the following methods of inventory costing:

(i) First In, First Out (FIFO) (ii) Last In, First Out (LIFO) (iii) Weighted Average (AVG)

12 Marks

(b) Dearing plc. is planning to launch a new product next year and budgets to use 55,000 units of a special material. The material will be used at an even rate throughout the year. The purchasing manager has decided he is going to place orders for 2,200 units at regular intervals during the year. The costs associated with the material are as follows:

1. Purchase Price €/£2.75 per unit. 2. Ordering costs €/£15 per order. 3. Holding costs €/£1.00 per unit per year.

Required:

(i) Calculate the ordering and holding costs based on the suggested order quantity of 2,200 units per order.

4 Marks (ii) Calculate and explain the Economic Order Quantity.

4 Marks

Total: 20 Marks




Sandown plc. has provided the following projected information:

Year 1 Year 2

Sales units Sales units

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1

5,000 6,500 7,000 8,000 8,500

Unit cost of production € / £

Material X 8 litres @ €/£3per litre 24

Material Y 5 litres @ €/£4 per litre 20

Direct labour 18

Variable Overhead 12

74

- The selling price is expected to be €/£100 per unit. - Sales costs are estimated to be 4% of projected sales revenue. - The inventory of finished goods at the start of quarter 1, year 1 is expected to be 1,000 units. - The inventory of finished goods held at the end of each quarter is projected to be 30% of the following

quarter’s sales volume. - Administration costs are estimated to be €/£3,000 per month in quarter 1 of year 1 rising by €/£500

per quarter from quarter 2 onwards.

The company’s budget manual requires each of the following preliminary budgets to be prepared in advance of preparing the company’s overall budget:

(i) Sales volume and sales revenue budget (ii) Production volume budget (iii) Purchases volume and purchases cost budget for each of raw materials X and Y (iv) Selling & administration overheads budget (v) Labour budget (vi) Variable overhead budget



Required:

a) Describe the content of and relationship between each of the preliminary budgets (i) to (iii) mentioned above, in the context of the overall company budget.

9 Marks

b) Prepare quarterly budgets for items (i) to (vi) mentioned above and the annual budgeted statement of profit. 11Marks

Total: 20 Marks



SECTION B

Answer any two of the following questions

QUESTION 4

You have been asked by your manager to assist with the induction of a new member of the finance team. After a number of days, the new person approached you with a number of queries about the differences between the following terms which they have heard being used, but which they don’t understand:

(i) The break-even point and the margin of safety. (ii) A cost pool and a cost driver. (iii) A sunk cost and a differential cost. (iv) An ideal standard and an attainable standard. (v) Job costing and contract costing.

Conscious of the importance placed upon clear guidance by your manager, and in order to provide documentation for future reference, you decide that the best approach is for you to provide a written explanation of each term.

Required:

Prepare brief notes which explain the difference between any four of the five above terms.

(Each part carries equal marks)

Total 20 Marks



QUESTION 5

Turnbull plc. is a manufacturing company which produces three products. The following information has been provided by the company.

Product Product Product

Oasis Dune Sand

Sales units 12,000 22,000 8,000

€ / £ € / £ € / £

Selling price per unit 12 16 24

Variable cost per unit 9 8 7

Allocated fixed production overheads 24,000 46,000 38,000

General overheads of €/£84,000 are apportioned between the products, on the basis of sales volume.

The company has been given the opportunity to produce an enhanced version of their existing Sand product, which will be called Sand D. The details relating to this proposed contract are as follows:

1. The proposed selling price is €/£ 17 per unit. 2. Budgeted sales volume is 1,200 units. 3. Variable costs will increase by €/£ 4 per unit, because of additional labour costs incurred as a result of

overtime. 4. Production of each unit of Sand D requires 1 kg of material Dust. This material is already used in the

production of Product Dune. Turnbull plc holds 6,500 kgs of material Dust in stock.

5. Additional data relating to material Dust which may be relevant is as follows: €/£ per kg

Purchase cost 5

Replacement cost 3

Net realisable value 2

6. The total fixed production overheads are expected to increase by 10% if Sand D is produced.



Required:

(a) Prepare a statement showing the net profit or net loss for each existing product line and for the company as a whole.

6 Marks

(b) Prepare a statement showing the profit / loss associated with the proposed contract to produce Sand D. 6 Marks

(c) Prepare a memorandum to the company’s management team: (i) outlining the advantages of using marginal costing for decision-making; (ii) advising whether, on financial grounds alone, the company should undertake the proposed

contract; (iii) outlining any non-financial factors which the company should consider in deciding whether or

not to undertake the proposed contract. 8 Marks

Total: 20 Marks



QUESTION 6

The following information relates to Template plc. a manufacturing business, which is considering the introduction of a piece-work incentive scheme in one of its departments, which has 4 employees.

Current Payroll

Basic working week 36 hours

Over-time premium 20% of normal pay grade

Normal grade A pay rate is € /£ 20 per hour

Normal grade B pay rate is € /£ 22 per hour

EMPLOYEE NORMAL HOURS WORKED

NORMAL PAY GRADE NORMAL UNITS PRODUCED

1 40 A 180

2 42 B 160

3 36 B 190

4 38 A 140

Piecework Incentive Scheme Proposal

Under the proposed incentive scheme, the standard time allowance would be 20 minutes per unit. The piecework rate would be based on grade B labour rates, with a standard piecework enhancement of 5%. All employees would receive the same piecework rate.

Required:

a) Outline the purpose of an incentive scheme. 4 Marks

b) Calculate the normal pay due to each employee on current payroll terms. 4 Marks



c) Calculate a standard piecework rate on the basis of the proposed incentive scheme. 4 Marks

d) Calculate the normal pay due to each employee under the terms of the proposed incentive scheme.

4 Marks

e) List four benefits of having an employee evaluation process in place. 4 Marks

Total: 20 Marks

END OF PAPER



2nd Year Examination: August 2015

Management Accounting

Suggested Solutions

and

Examiner’s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits.

Statistical Analysis – By Question

Question No. 1 2 3 4 5 6

Average Mark (%) 56 65 45 72 59 74

Nos. Attempting 285 288 282 179 128 263

Statistical Analysis - Overall

Pass Rate 60%

Average Mark 83%

Range of Marks Nos. of Students

0-39 22

40-49 26

50-59 78

60-69 91

70 and over 45

Total No. Sitting Exam 288

Total Absent 30

Total Approved Absent 4

Total No. Applied for Exam 322



General Comments:

This paper was divided into two sections A and B, each section consisting of three questions. All three questions in section A were compulsory and candidates had a choice of two out of three questions from section B. All of the questions carried 20 marks each. Five out of the six questions were mainly computational with some narrative elements whilst question 4 was all narrative.

All of the areas examined are key elements of the syllabus and given the depth of their coverage in the study text, past exam papers, sample papers and additional sample questions they should not have created any difficulty.

In order to perform well in this paper, question practice is essential. All of the areas examined are key elements of the syllabus and are well covered in the study text, past exam papers, sample papers and additional sample questions.

There was a vast improvement in the presentation and quality of answers, for this paper in comparison with previous papers.

However, care should be taken with presentation particularly questions 1, 3 and 5 where students were producing statements for each month/product rather than incorporating all within the one statement.



Examiner’s Comments on Question One

SOLUTION 1:

(a)

€/£ €/£ Total Marks

Allocated Selling Price 45 Direct Material 15 Direct Labour 10 Variable Production Overheads 9 34 Contribution 11 2 Fixed Production Overheads(W1) 4 Profit per unit 7 2

(b) (i) Absorption Costing

January February Total Marks

Allocated €/£ €/£ Revenue 472,500 517,500 1 Opening Inventory 19,000 76,000 1 Cost of production 456,000 494,000 1 Closing Inventory (76,000) (133,000) 1 Cost of Sales 399,000 437,000

Profit 73,500 80,500 Over Absorption 8,000 12,000 2 Adjusted Profit 81,500 92,500 1

This question was compulsory and tested the candidate’s knowledge of absorption and marginal costing systems. There was a very obvious improvement in the candidates understanding of those two costing systems when compared to previous papers. Answers were clearly presented and well labelled. Part (a) of the question required the calculation of standard contribution and profit per unit. This part was well answered but in some cases candidates could not distinguish between the two. Part (b) required a profit statement for two months using the two costing systems. Although a vast improvement was evidenced since previous papers, some candidates are still failing to identify opening and closing inventories and the under/over absorption of fixed production overhead. Additionally, some students lost valuable time by setting out four separate statements, one for each month under each basis of costing rather than incorporating the two months within the one presentation.



(ii) Marginal Costing

January February Total Marks

Allocated €/£ €/£ Revenue 472,500 517,500 1 Opening Inventory 17,000 68,000 1 Cost of Production 408,000 442,000 1 Closing Inventory (68,000) (119,000) 1 Variable Cost of Sales 357,000 391,000 Contribution 115,500 126,500 Fixed Cost 40,000 40,000 1 Profit 75,500 86,500

(c)

Reconciliation of Profit

Total Marks

Allocated January €/£ Absorption Costing 81,500 Marginal Costing 75,500 Difference 6,000 units Opening Inventory 500 Closing Inventory 2,000

1,500 x €/£4 €/£6,000 1 February €/£ Absorption Costing 92,500 Marginal Costing 86,500 Difference 6,000 units

Opening Inventory 2,000

Closing Inventory 3,500

x €/£4 1,500

6,000 1



(d)

The reason for the difference in profit is due to the difference in the valuation of inventory.

For example in January the difference is €/£6,000.This is due to the fact that in absorption €/£6,000 worth of the fixed overhead is not written off but instead is carried forward to February. This does not happen in marginal costing as fixed overheads are not included in inventory valuation. 2 Marks

WORKINGS:

Working 1: Production overhead cost per unit

€/£40,000 ÷ 10,000 units = €/£4 per unit

Working 2 : Production cost per unit

€/£

Direct materials 15

Direct Labour 10

Variable Production Overheads 9

Marginal Costing CPU 34

Fixed Production Overhead 4

Absorption Costing CPU 38

Working 3 : Opening and closing inventories in units

January February units units Opening Inventory 500 2,000 Production 12,000 13,000 12,500 15,000 Sales 10,500 11,500 Closing inventory 2,000 3,500



Working 4: Under/over absorption of overheads

January February €/£ €/£ Overhead absorbed (12,000 unit x € 4)

48,000

(13,000 units x € 4) 52,000

Actual overhead 40,000 40,000 Over absorbed 8,000 12,000

Examiner’s Comments on Question Two

SOLUTION 2

(a) i. First In, First Out (FIFO) Method

4 marks

FIFO Method

Received Issued

Balance

Date Qty. kg

Value

per kg €/£

Total value

€/£

Qty. kg

Value per kg

€/£

Total value € / £

Qty. kg

Value per kg

€/£

Total value

€/£

01 Aug. 1,000 8.00 8,000 1,000 8.00 8,000

10 Aug. 800 8.00 6,400 200 8.00 1,600

16 Aug. 1,200 9.50 11,400 1,200 9.50 11,400 200 8.00 1,600 13,000

23 Aug. 600 10.00 6,000 600 10.00 6,000 1,200 9.50 11,400 200 8.00 1,600

28 Aug. 19,000 200 8.00 1,600 1,200 9.50 11,400 100 10.00 1,000 1,500 14,000 500 10.00 5,000

This question was compulsory and tested the candidate’s knowledge of inventory management. Part (a) of the question required candidates to calculate the amount charged to production and the value of closing inventory using FIFO, LIFO and AVG. This part of the question was very well answered with many candidates gaining almost full marks. Part (b) of the question required candidates to calculate ordering costs and holding costs, and to explain and calculate the EOQ. Most candidates did not know how to calculate or explain the EOQ. Equally most did not understand how to calculate holding costs (i.e. an average amount is held in stores over the year). This is consistent with my comments for previous papers.



(a) ii. Last In, First Out (LIFO) Method

4 marks

LIFO Method

Received Issued

Balance

Date Qty. kg

Value

per kg €/£

Total value

€/£

Qty. kg

Value per kg

€/£


Qty. kg

Value per kg

€/£

Total value

€/£

01 Aug. 1,000 8.00 8,000 1,000 8.00 8,000

10 Aug. 800 8.00 6,400 200 8.00 1,600

16 Aug. 1,200 9.50 11,400 1,200 9.50 11,400 200 8.00 1,600 13,000

23 Aug. 600 10.00 6,000 600 10.00 6,000 1,200 9.50 11,400 200 8.00 1,600

28 Aug. 19,000 600 10.00 6,000 900 9.50 8,550 1,500 14,550 300 9.50 2,850 200 8.00 1,600 4,450



(a) iii. Weighed Average (AVG) Method

4 marks

(b)

Order Cost 55,000 = 25 orders

2,200

25 x €/£15 = €/£375

2 marks

Holding Cost

2,200

2 = 1,100 x €/£1 = €/£1,100

2 marks

Average Method

Received Issued

Balance

Date Qty. kg

Value

per kg €/£

Total value

€/£

Qty. kg

Value per kg

€/£


Qty. kg

Value per kg

€/£

Total value

€/£

01 Aug. 1,000 8.00 8,000 1,000 8.00 8,000

10 Aug. 800 8.00 6,400 200 8.00 1,600

16 Aug. 1,200 9.50 11,400 1,200 9.50 11,400 200 8.00 1,600 1,400 9.286 13,000

23 Aug. 600 10.00 6,000 600 10.00 6,000 1,200 9.50 11,400 200 8.00 1,600 2,000 9.50 19,000

28 Aug. 1,500 9.50 14,250 500 9.50 4,750



EOQ =

2 x 15 x 55,000 1.00

= 1,284 units

2 marks

This is the order quantity that minimises ordering and holding costs.

2 marks

Examiner’s Comments on Question Three

SOLUTION 3

(a) Content of named budgets and relationship between them.

(i) The sales volume and sales revenue budget expresses in volume and value the total anticipated sales for the budget period. The sales budget may be constructed on the basis of information from specific products, market areas or by periods. The sales budget uses the sales volume projections and the expected selling price to obtain the total sales revenue by budget period.

3 marks (ii) The production volume and production cost budget expresses forecast production in units for each

budget period and considers inventory-holding requirements and sales budgets. The production budget is calculated by taking the budgeted sales volume and adjusting this for planned opening and closing finished goods inventory levels. The sales and the production budgets are inter-dependent and to ensure business success, these should be aligned.

3 marks

(iii) Once the sales and production budgets have been decided, the costs of various inputs to production should be calculated. The purchases budget calculates the raw materials required to be purchased in order to service the requirements of the production budget, after making allowance for opening and closing materials inventory. After the purchases budget has been quantified in terms of cost, the impact on payables may also be established.

3 marks

This question was compulsory and tested the candidate’s knowledge of budgetary planning and control. Part (a) of the question required candidates to explain the interrelationship between certain budgets. The standard of answers was mixed. Many candidates scored full marks whilst others seemed to have experience difficulty with this part. Part (b) of this question required candidates to prepare quarterly budgets. The standard of answers showed a vast improvement from the May 2015 paper. However, as mentioned in previous reports, some students wasted time by setting out four separate budgets, one for each quarter rather than incorporating all four quarters within the one budget.



(b) Preparation of budgets

(i) Sales volume and sales revenue budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Marks

Allocated

Budgeted sales units 5,000 6,500 7,000 8,000 1

Budgeted selling price €/£ per unit 100 100 100 100

Budgeted sales revenue €/£ 500,000 650,000 700,000 800,000 1

(ii) Production budget

Year 1 Year 2 Total Marks

Allocated

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1

units units units units units

Opening inventory 1,000 1,950 2,100 2,400

Budgeted production (Bal. figure)

5,950 6,650 7,300 8,150 2

Less closing inventory (1,950) (2,100) (2,400) (2,550)

Budgeted sales 5,000 6,500 7,000 8,000 8,500



(iii) Purchases budget


Allocated

Budgeted production units 5,950 6,650 7,300 8,150

Material X volume (@ 8 litres per unit)

47,600 ltr. 53,200 ltr. 58,400 ltr. 65,200 ltr.

Material X cost (@ €/£3 per litre) €/£142,800 € / £159,600 € / £175,200 €/£195,600 1

Material Y volume (@ 5 litres per unit)

29,750 ltr. 33,250 ltr. 36,500 ltr. 40,750 ltr.

Material Y cost (@ €/£4 per litre) €/£119,000 €/£133,000 €/£146,000 €/£163,000 1

(iv) Selling & administration overhead budgets

Quarter 1

€ / £

Quarter 2

€ / £

Quarter 3

€ / £

Quarter 4

€ / £

Total Marks

Allocated

Budgeted sales revenue 500,000 650,000 700,000 800,000

Sales costs (4% sales revenue) 20,000 26,000 28,000 32,000

Administration costs 9,000 9,500 10,000 10,500 1

(v) Labour budget


Allocated


Direct labour cost per unit € / £ 18 18 18 18

Budgeted total ddirect labour cost € / £

107,100 119,700 131,400 146,700 1



(vi) Variable Overhead Budget


Allocated


Variable overhead per unit € / £ 12 12 12 12

Variable overhead cost € / £ 71,400 79,800 87,600 97,800 1

Budgeted Statement of Profit Total Marks

Allocated

€/£ €/£

Sales

2,650,000

Cost of sales

Opening Inventory 74,000

Production 2,075,700

Less Closing Inventory (188,700) 1,961,000

Gross Profit

689,000

Less

Sales costs 106,000

Administration costs 39,000 145,000

Net Profit

544,000 2



Examiner’s Comments on Question Four

SOLUTION 4:

The break-even point and the margin of safety

The breakeven point is the number of sales units (or revenue) at which a product does not make a profit or a loss. It can be found by dividing fixed costs by contribution per unit.

The margin of safety is the difference between the breakeven sales and the actual sales as a percentage of actual sales.

5 marks

Cost pools and cost drivers

A cost pool is the total of all costs associated with a particular business activity. Activity costs are itemized for company leaders to use in making financial decisions. Under ABC the areas where the overheads were caused is the cost pools.

A cost driver is the measure of activity which causes overhead costs. In ABC products consume activities and activities consume resources. A cost driver is any factor which causes a change in the cost of an activity.

5 marks

A sunk cost and differential cost A sunk cost is a past cost. It is a cost that has already been incurred and is not relevant for decision making. A differential cost is a future cost that will increase as a result of the decision at hand. . It is a relevant cost for decision making.

5 marks

An ideal standard and an attainable standard An ideal standard is a standard that is set on the assumption that working conditions are perfect. They do not allow for obstacles that will be encountered during production such as wastage etc. An attainable standard is a standard that is set which allows for problems encountered during production.

5 marks

Job costing and contract costing Job costing is used for calculating the cost of a small job like making a specific type of product. For instance, if you receive an order to make 20 tables, you will use job costing. This type of job is usually completed in a short period of time.

This question was optional and tested the candidate’s knowledge of and differences between certain management accounting terms.

This question was exceptionally well answered with candidates demonstrating a very strong knowledge of the management accounting terms asked.



Contract costing is used for calculating the cost of large projects such as building a bridge and usually takes more than one year to complete.

5 marks

Examiner’s Comments on Question Five

SOLUTION 5:

Workings

Working 1:

Apportionment of general overheads

Oasis Dune Sand

Sales volume 12,000 22,000 8,000

Apportioned

general overheads

84,000 / 42,000 x 12,000

= €/£24,000

84,000 / 42,000 x 22,000

= €/£44,000

84,000 / 42,000 x 8,000

= €/£16,000

(a) Profit / Loss Statement Oasis

€ / £

Dune

€ / £

Sand

€ / £

Total

€ / £

Sales revenue 144,000 352,000 192,000 688,000

This question was optional and tested the candidate’s knowledge of decision making.

Part (a) required candidates to prepare a statement of profit/loss for three product lines. Candidates seemed to have difficulty with the allocation of overheads based on sales volume. Other than this difficulty, this part of the question was answered very well.

Part (b) required candidates to decide whether a new product line should be introduced.

In order to perform well in this part of the question, candidates required knowledge of the relevant cost rules relating to decision making, particularly in relation to material, labour and overhead costs.

Once again, this question proved very unpopular with candidates. Many did not attempt it. This area of the syllabus is covered in depth in the study text and it also features in my sample papers. It will become a regular question in future exam papers in light of the new syllabus requirements.



Variable cost 108,000 176,000 56,000 340,000

Contribution 36,000 176,000 136,000 348,000

Fixed Costs

Allocated fixed production overheads 24,000 46,000 38,000 108,000

Apportioned General Overheads 24,000 44,000 16,000 84,000

Net Profit / (Loss) (12,000) 86,000 82,000 156,000

6 marks

(b) Proposed contract Sand D product

€ / £ € / £

Incremental revenue

Sales revenue 1,200 units x €/£17 per unit 20,400

Incremental Costs

Variable cost €/£7 per unit original variable cost

+ €/£4 per unit additional labour cost x 1,200 units

13,200

Additional materials cost 1,200 @ €/£3 replacement cost 3,600

Fixed overheads Increase €/£108,000 x 10% 10,800

Total (27,600)

Net loss (7,200)

6 marks

(c) MEMORANDUM

To: Management Team

From: Student

Date: x/ x/ xx

Re: (i) Marginal costing for decision making



(ii) Proposed Contract – financial decision & non-financial factors

Marginal costing for decision making

Marginal costing focuses on separating variable costs and fixed costs and assists in focusing on relevant costs to provide more relevant information. Marginal costing recognises that, as fixed costs are committed and cannot be avoided, they are largely irrelevant to many decision-making situations.

Marginal costing avoids arbitrary allocations, apportionments and the use of pre-determined overhead absorption rates, which can be misleading in decision-making scenarios.

Profit calculations are not dependent upon changes in inventory levels. Holding inventory is normal in most businesses (other than service businesses), where production is at a different rate to sales. Differing costing approaches will result in different inventory valuations. This can result in differing profit figures when the inventory level changes during a reporting period. Marginal costing charges fixed costs to the period in which they are incurred and does not incorporate fixed costs in inventory costs, which results in profits reported relative to sales.

A marginal cost represents the most relevant cost for short-term tactical decisions, such as pricing. In a scenario where a manager is seeking to make the best use of resources, as fixed costs are treated as committed and unchanging, so the marginal cost, sales revenue and contribution are the key issues. In these circumstances, the selection of the alternative which maximises contribution is the correct decision rule. Where sales volumes are declining but production volume is sustained, marginal costing provides an early profit warning, as opposed to other methods such as absorption costing.

Marks Allocated

3 marks

Proposed Contract – financial decision

On financial grounds alone, it does makes sense to proceed with the proposed contract, as the calculations show that doing so will result in a loss.

Marks Allocated

2 marks

Proposed Contract – non-financial factors

Other considerations which the company should consider before accepting this contract include:

• Impact on other existing Delta sales and customers; • Impact on other product revenues and costs; • Consideration of overhead cost drivers to identify cost allocations, particularly general overheads;



• Consideration of variable and fixed costs split; • Other uses and returns for product omega; • Future potential contracts from the same source.

Marks Allocated

3 marks



Examiner’s Comments on Question Six

SOLUTION 6:

(a) Incentive schemes are a means of remuneration which relate payment to output. The aims of such schemes are to benefit employees by providing an opportunity to increase earnings, while encouraging performance and providing for increased productivity, which may result in reduced cost per unit. Incentive Schemes can be based upon individual performance or aimed at incentivising groups of employees. Incentive schemes should be based on efficient working methods following comprehensive work studies and may be financial or non-financial in nature.

Marks Allocated

4 marks

(b) Normal pay on current payroll terms

Employee Calculation

€ / £

Total Marks Allocated

Employee 1 36 hours @ €/£20 720.00

4 hours @ (€/£20+20%) 96.00

816.00 1

Employee 2 36 hours @ €/£22 792.00

6 hours @ (€/£22+20%) 158.40

950.40 1

This question was optional and tested the candidate’s knowledge of employee incentive schemes. This question was very popular and was exceptionally well answered with many students gaining full marks. Part (a) required an understanding of the purpose of an incentive scheme. This part was well answered with students demonstrating an in depth knowledge of those types of schemes.

Part (b) was again very well answered and required the calculation of normal pay due to employees without an incentive scheme.

Part (c) required the calculation of a standard piecework rate and this was required to be used in part (d) to calculate the pay due to employees under a proposed incentive scheme.



Employee 3 36 hours @ €/£22 792.00

792.00 1

Employee 4 36 hours @ €/£20 720.00

2 hours @ (€/£20+20%) 48.00

768.00 1

(c) Standard piecework rate

Standard weekly pay (Grade B) 792.00

Standard weekly production

36 hours = 2,160 minutes / 20

108 units

2

Basic piecework rate €/£7.33 per unit

Incentive element 5% 0.37

Standard Incentive piecework rate €/£7.70 2

(d) Normal pay under the proposed incentive scheme

€ / £

Total Marks

Allocated

Employee 1 180 units x €/£7.70 1,386 1

Employee 2 160 units x €/£7.70 1,232 1

Employee 3 190 units x €/£7.70 1,463 1

Employee 4 140 units x €/£7.70 1,078 1



(e) Benefits of having an employee evaluation in place (i) Improve morale. (ii) Reduce labour turnover. (iii) Increase productivity. (iv) Reduce friction and frustration. (v) Enhance communication between managers and employees. (vi) Instill a higher level of accountability for performance.

Marks Allocated

4 marks


management accounting - accounting technicians ireland · management accounting august 2015 2nd...

Documents