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ACCT603 Management Accounting

Final Exam

Semester Two, 2021

SUGGESTED SOLUTIONS

Question 1: Activity-based costing

25 Marks

a.

Cost of the job under activity-based costing system:

Activity rates:

Activity cost pools	Total cost (a)	Total activity (b)	Activity rate (a ÷ b)
Labour related	$30000	10000	3
Machine related	$40000	8000	5
Quality control	$10000	1000	10

The overhead cost charge to the job:

Activity cost pools	Activity rate (a)	Activity specific for the job (b)	ABC Overhead cost (a x b)
Labour related	3	20	60
Machine related	5	120	600
Quality control	10	7	70
Total overhead cost			$730

So, the total cost of the job:

Direct material cost	$1,200
Direct labour cost (20 hours x $50 per hour)	1000
ABC Overhead cost	730
Total cost	$2930

b.

Cost of the job under traditional costing system:

Under traditional costing, the predetermined overhead rate would have been:
POHR = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base

            = ($30000 + 40000 + 10000 + 32000) ÷ 10000 direct labor hours

            = $11.2 per direct labor-hour

So, the total cost of the job:

Direct material cost	$1,200
Direct labour cost (20 hours x $50 per hour)	1000
Traditional Overhead cost (20 direct labour hours x $11.2 per hour)	224
Total cost	$2424

· From the above, we can see that the cost of the job is $506 ($2930 – 2424) higher in the activity-based costing system than the traditional costing system.

· It seems that the traditional costing system under-costed the job by allocating less overhead cost to the job.

· The main reason for the difference is that the traditional system allocates overhead costs based on a single allocation base (i.e., here, direct-labour hours). In contrast, the activity-based costing system allocates the overhead costs based on multiple relevant cost pools and activity rates.   

Question 2: Absorption costing and variable costing and budgeting

25 Marks

a.

Valid discussion along the following lines:

· The Net Operating Income (NOI) will not necessarily be the same under absorption and variable costing systems.

· Under the variable costing system, only those manufacturing costs that vary with output are treated as Product Costs, such as direct materials, direct labour, and the variable manufacturing overhead costs.

· In contrast, the absorption costing system includes ALL manufacturing costs, regardless of whether they are fixed or variable. As a result, product cost would include direct materials, direct labour, variable manufacturing overhead, and fixed manufacturing overhead under the absorption costing system.

· So, the Product Cost will be different under both systems.

· If units produced equal units sold in a year, then there will be no change in inventory. As a result, both costing systems will give the same NOI.

· However, if units produced are higher than units sold, then the inventory will increase. As a result, NOI will be higher in absorption costing than variable costing.

· In contrast, if units produced are less than units sold, then the inventory will decrease. As a result, NOI will be less in absorption costing than variable costing.  

b. i.

Cash budget for November:

Opening cash balance		$18,000
Add: cash receipts (see below workings)		$38,000
Cash available		$56,000
Less: Cash disbursements   For merchandise (Oct     accounts payable)   Other cash expenses	$29,000   $9,000	$38,000
Cash excess/(deficit)		$18,000
Financing required (min balance $15,000)		$0
Ending cash balance		$18,000

Workings for cash receipts:

	November ($)
Sales	40,000
Cash collections:
Accounts receivable (from Oct. Balance Sheet)	10,000
November sales: 70% x 40,000	28,000
Total cash collections	$38,000

b. ii.

Valid discussion along the following lines:

· The cash budget for November shows that the company has $18,000 cash excess, which is equal to the minimum cash balance requirement ($18,000).

· As a result, the company does not need to borrow any money for November.

Question 3: Flexible budget and performance analysis and standard costing

25 Marks

a.

	Actual results	Flexible budget	Spending variances
Meals (q)	2,700	2,700
Groceries ($3.50q)	$6,540	$9,450	$2,910 F
Kitchen operations ($4,500 + $1.75q)	9,065	9,225	160 F
Administrative expenses ($3,200 + $0.85q)	4,715	5,495	780 F
Fundraising expenses ($2,200)	1,620	2,200	580 F
Total expenses	$21,940	$26,370	$4,430 F

b.

Valid discussion along the following lines:

· Yes, the performance report of a for-profit organization will be different from a non-profit organization.

· The main difference will be in terms of how revenue is reported.

· The primary source of revenue for for-profit organizations is sales. As a result, total revenues in for-profit organizations are variable in nature.

· In contrast, non-profit organizations can have multiple major sources of revenues, such as sales, donations, grants, etc. While sales revenues are variable in nature, donations and grants could be fixed, variable, or mixed in nature.    

· Except for the revenue part, all other parts of the performance report of both for-profit and non-profit organizations are likely to be the same.

Question 4: Differential analysis and decision making

25 Marks

a. i.

	Red	Green	Blue
Selling price per unit	$85	$195	$70
Variable cost per unit	$45	$155	$30
Contribution margin per unit	$40	$40	$40
Time on the constraint (minutes)	1.30	2.70	1.10
Contribution margin per unit of the constraint resource	$30.77	$14.81	$36.36
Ranking	2	3	1

a. ii.

Valid discussion along the following lines:

· Here, the least profitable product is Green, which will generate $14.81 contribution margin per unit of constraint resource.

· As a result, the company should be willing to pay up to $14.81 per minute to obtain more of the constrained resource since this is the value to the company of using this constrained resource to make more of the product Green.

· By assumption, enough of the other two products will already have been produced to fully satisfy demand.

b.

	Make ($)	Buy ($)
Outside purchase price (7,500 x $15)		112,500
Direct materials	22,000
Direct labour	32,000
Variable overhead	17,000
Fixed overhead*	13,000
Total cost	84,000	112,500

*1/3 of $39,000

Therefore, the annual disadvantage of buying the parts from the outside supplier is $28,500 ($112,500-84,000).