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Sample B – Exam Paper

Department of Accounting

2200

Introduction to Management Accounting

2 hours 10 minutes

Question 1

Incredible Furniture produces and sells three models of recliner chairs, Classic model, Velvet model and Leather model. Production is a machine intensive process. Harry Town, the owner, is planning production for the coming year and collects the following data:

	Estimated demand (units)	Selling price per unit	Direct material cost per unit	Variable machining cost per unit
Classic	2,175	3,200.00	765.00	591.00
Velvet	5,566	2,050.00	495.00	492.50
Leather	26,000	756.00	99.00	197.00

Salespeople are paid a 6% commission on each Classic or Velvet sold and a 9%

commission on each Leather model sold. All other marketing and administrative costs are fixed and, along with the fixed manufacturing costs, total $9,856,000.

Annual capacity is 41,000 machine-hours, which is limited by the availability of

machines. Variable machining costs are $197 per hour.

Required:

a) Advise Harry Town about the most profitable production levels of each model of recliner chairs. Show calculations to support your answer. (13 marks)

b) Suppose Harry Town can lease additional machining capacity on an as-needed basis. What is the maximum amount that Harry Town would be willing to pay for each

hour of additional machining capacity in the coming year? (3 marks)

c) Harry Town is planning to launch a new model of recliner chair by end of next year. Describe the pricing strategies he could use to price the new model of recliner chair. (3 marks)

(13 + 3 + 3 = 19 marks)

Question 2

Petronas Ltd., a chemical products company is currently trialling its product costing system. Currently, all directly traceable costs are assigned to individual jobs. Indirect costs are allocated on the basis of direct labour hours. Petronas has budgeted 4,000 direct labour hours for April at a cost of $20 per hour.

The management accountant, in consultation with production supervisors, identified activities that are common to the production of each job, yet are consumed in different amounts. For April, these activities are as follows:

Activity	Expected Cost	Activity Driver	Activity Capacity
Setting up machines	$60,000	Number of set-ups	300 set-ups
Maintaining machines	$90,000	Machine hours	18,000 machine hours
Ordering raw materials	$45,000	Number of orders	4,500 orders
Receiving raw materials	$25,000	Number of parts	50,000 parts

The following jobs were completed during April:

	Spirit	Telecom
Direct materials	$75,000	$85,000
Direct labour hours	2000	2000
Number of units	100	100
Number of set-ups	50	250
Machine hours	6,000	12,000
Number of orders	2,500	2,000
Number of parts	15,000	35,000

Required:

(a) Calculate the unit cost of jobs Spirit and Telecom under the current costing system.

Show all workings. (4 marks)

(b) Determine the unit costs of jobs Spirit and Telecom using activity-based costing.

Show all workings. (11 marks)

(c) Under its current system, Petronas has priced both jobs at $2700. Spirit’s buyers appear dissatisfied with this price and have begun placing orders with Petronas’ competitors. Telecom’s buyers, however, have doubled their order with Petronas for next year. In light of your calculations in requirements (a) and (b), discuss why this situation has come about and make suggestions on which costing system should be

used in the future. (3 marks)

(d) Examine the activity drivers used by Petronas and assess their suitability in terms of

1) predicting future costs and 2) controlling and managing costs. (4 marks)

(4 + 11 + 3 + 4 = 22 marks)

Question 3

Silver Fleece Limited is a Victoria-based manufacturer of merino wool. The following data relate to the Finishing Department for the month of May:

FIFO Weighted average

Total equivalent units of direct material

Total equivalent units of conversion

Units completed and transferred out during May

The cost data for May were as follows:

20,000

22,000

25,000

Opening process

work

30,000

26,000

25,000

Cost incurred during May

Direct material

Conversion

$282,000

133,200

$492,000

818,400

There were 10,000 units in process in the Finishing Department on 1 May (100 percent complete as to direct material and 40 percent complete as to conversion).

Required:

a) Explain the key assumption underlying the first-in-first-out method with regard to the physical flow of units and calculation of costs per equivalent unit. How does this differ under the weighted average method? (2 marks)

b) Using the weighted average method of process costing, calculate the cost of goods completed and transferred out during May and the cost of WIP at 31 May. Show all workings. (12 marks)

c) Repeat requirement a) using the FIFO method. (13 marks)

(2 + 12 + 13 = 27 marks)

Question 4

Looney Industries is a chemical company which produces and sells three cleaning products - Aqua-Clean, Micro-Clean and Green-Clean – to business customers, mostly to the cleaning departments of factories and large office buildings. Each product passes through four production departments, where both labour and machine times are applied. The machine and labour skills required in each department are so specialized that neither machines nor labour can be switched from one department to another.

Looney Industries’ sales department believes that next month’s demand will be 1000 units of Aqua-Clean, 800 units of Micro-Clean and 2000 units of Green-Clean. Their selling prices are $412, $292 and $388 respectively. Cost data for next month is estimated, as follows:

Unit costs	Aqua- Clean	Micro-Clean	Green-Clean
Direct material	$14	$26	$34
Direct labour	132	76	102
Variable overhead	54	40	50
Fixed overhead	30	20	64
Variable selling expenses	6	4	8