november 2003 management accounting performance ... variable cost per unit 21·00 62·00 84·00...

Paper 08 – Management Accounting Performance Management (IMPM)Post Exam GuideNovember 2003 Exam

The Chartered Institute of Management Accountants

General Comments

Performance on this paper continues to be poor. Too many candidates do not demonstrate a goodunderstanding of more than one or two areas of the syllabus. As a result many candidates canprepare answers to one or two questions that are of pass standard, but are then unable to preparepass standard answers to the remaining questions.

In this examination performance on question one (multiple choice) was poorer than at past diets. Thiscould be indicative of students not studying the entire syllabus as indicated above.



Question 1.1

N plc is forecasting its power costs for Period 12 using the following past data values:

Number of machine hours Cost£

Period 8 4,260 8,944Period 9 3,657 7,961Period 10 4,689 9,643

If price levels are expected to remain unchanged in Period 12, the expected power cost of 4,500 machinehours is closest to

A £7,309 B £7,334C £9,309D £9,334

The answer is D

Workings

HoursHigh 4,689 £9,643Low 3,657 £7,961Difference 1,032 £1,682

Variable cost = £ 1,0321,682

= £1·63 per hour

Fixed cost:Total cost at high activity level £9,643Variable cost at high activity level: 4,689 x £1·63 £7,643Difference £2,0004,500 machine hours should cost: £(4,500 x 1·63) + £2,000 = £9,335



Question 1.2

A company is calculating the relevant cost of the material to be used on a particular contract.

The contract requires 4,200 kgs of material H and this can be bought for $6·30 per kg.

The company bought 10,000 kgs of material H some time ago when it paid $4·50 per kg. Currently 3,700kgs of this remains in stock. The stock of material H could be sold for $3·20 per kg.

The company has no other use for material H other than on this contract, but it could modify it at a cost of$3·70 per kg and use it as a substitute for material J. Material J is regularly used by the company and canbe bought for $7·50 per kg.

The relevant cost of the material for the contract is

A $17,210B $19,800C $26,460D $30,900

The answer is A

Workings

3,700 kgs x ($7·50 - $3·70) $14,060500 kgs x $6·30 $3,150Total $17,210

Question 1.3

Which of the following statements are correct?

(i) A fixed budget is a budget that considers all of an organisation's costs and revenues for a single levelof activity.

(ii) A flexible budget is a budget that is produced during the budget period to recognise the effects of anychanges in prices and methods of operation that have occurred.

(iii) Organisations can use budgets to communicate objectives to their managers.

A (i) and (ii) only B (i) and (iii) onlyC (ii) and (iii) onlyD All of them

The answer is B



Question 1.4

H plc is forecasting its sales for next year using a combination of time series and regression analysismodels. An analysis of past sales units has produced the following equation for the quarterly sales trend:

y = 26x + 8,850

where the value of x represents the quarterly accounting period and the value of y represents the quarterlysales trend in units. Quarter 1 of next year will have a value for x of 25.

The quarterly seasonal variations have been measured using the multiplicative (proportional) model andare:

Quarter 1 -15%Quarter 2 -5%Quarter 3 +5%Quarter 4 +15%

Production is planned to occur at a constant rate throughout the year.

The company does not hold stocks at the end of any year.

The difference between the budgeted sales for quarter 1 and quarter 4 next year are

A 78 units.B 2,850 units.C 2,862 units.D 2,940 units.

The answer is D

Workings

Trend sales: Units Seasonally adjusted units:Q1 = (26 x 25) + 8,850 = 9,500 x 85% 8,075

then increasing by 26 per quarter so:Q2 9,526 x 95% 9,050Q3 9,552 x 105% 10,030Q4 9,578 x 115% 11,015Total 38,170

11,015 - 8,075 = 2,940



Question 1.5

Question 1.5 was based on the same information as Question 1.4

The number of units to be produced in each quarter of next year will be nearest to

A 9,454 units.B 9,493 units.C 9,532 units.D 9,543 units.

The answer is D

Workings

Quarterly production = 4

38,170 = 9,542·5

Question 1.6

S plc, a food processing company, uses the First In First Out method when costing its monthly output.

The following details relate to October 2003:

Opening work in process 10,000 kgs 90% complete as to raw ingredients and 40%converted

Raw ingredients added 34,880 kgsOutput 30,500 kgsNormal loss 15% of raw ingredients added in the periodClosing work in process 9,700 kgs 85% complete as to raw ingredients and 35%

converted

The number of equivalent kgs that would be used when calculating the cost per kg in relation to rawingredients and conversion costs for October 2003 would be nearest to

Raw ingredients ConversionA 38,200 27,300B 29,200 29,300C 29,700 29,900D 30,300 30,300

The answer is B



Workings

Process Account (kgs)Opening WIP 10,000 Output 30,500Raw ingredients 34,880 Normal loss 5,232Abnormal gain 552 Closing WIP 9,700Total 45,432 Total 45,432

Equivalent unit tableIngredients Conversion

Output:started and finished 20,500 20,500opening WIP completed 1,000 6,000

Closing WIP 8,245 3,395Abnormal gain (552) (552)Totals 29,193 29,343

Question 1.7

T plc manufactures a component D12, and two main products F45 and P67. The following details relateto each of these items:

D12 F45 P67$ per unit $ per unit $ per unit

Selling price – 146·00 159·00

Material cost 10·00 15·00 26·00Component D12 (bought-in price) 25·00 25·00Direct labour 5·00 10·00 15·00Variable overhead 6·00 12·00 18·00Total variable cost per unit 21·00 62·00 84·00

Fixed overhead costs $ per annum $ per annum $ per annumAvoidable* 9,000 18,000 40,000Non-avoidable 36,000 72,000 160,000Total 45,000 90,000 200,000

* The avoidable fixed costs are product specific fixed costs that would be avoided if the product orcomponent were to be discontinued.

Assuming that the annual demand for component D12 is 5,000 units and that T plc has sufficient capacityto make the component itself, the maximum price that should be paid to an external supplier for 5,000components per year is

A $105,000B $114,000C $141,000D $150,000

The answer is B



Workings

Internal manufacturing cost = $9,000 + ($21 x 5,000) = $114,000

Question 1.8


Assuming that component D12 is bought from an external supplier for $25·00 per unit, the number of unitsof product F45 that must be sold to cover its own costs without contributing to T plc's non-avoidable fixedcosts is closest to

A 188 units.B 214 units.C 228 units.D 261 units.

The answer is B

Workings$ per unit

Selling price 146·00Variable cost 62·00Contribution 84·00

Specific fixed cost $18,000

84

18,000 = 214 units

Question 1.9


Assuming that component D12 is bought from an external supplier for $25·00 per unit and assuming thatunits of products F45 and P67 are to be sold in the ratio of 4:3 respectively, the breakeven sales value (tothe nearest $000) is

A $506,000B $549,000C $616,000D $624,000

The answer is C



Workings

F45 P67 Total$ per unit $ per unit

Selling price 146·00 159·00Variable cost 62·00 84·00Contribution 84·00 75·00Ratio 4 3

$ $ $Total contributions per package of{(4 x F45) + (3 x P67)}

336 225 561

Total fixed costs: $D12 36,000F45 90,000P67 200,000

326,000

$561

326,000 = 581

so sell:581 x 4 of F45 @ $146 339,304581 x 3 of P67 @ $159 277,137

Total 616,441

Question 1.10


Assume that component D12 is bought from an external supplier for $25·00 per unit and assume thatproduction and sales of products F45 and P67 are as follows:

F45 P67Production (units) 3,000 2,500Sales (units) 2,500 2,000

The profit to be reported under marginal costing is closest to

A $34,000B $70,000C $113,500D $171,500

The answer is A



Workings

$ $Contribution:F45: 2,500 x $84 210,000P67: 2,000 x $75 150,000

360,000Fixed costs 326,000Profit 34,000



Question 2 (a)

Calculate the budgeted profit / loss for October.(2 marks)

Rationale

Question two is set in the context of a manufacturing company that uses standard costing to compare itsactual and budgeted performance. Requirements (a), (b) and (c) test candidates' ability to calculatevariances and use them to prepare a report for management.

Suggested Approach

Identify the number of units of each product that were budgeted to be sold.Multiply the number of units sold by their respective standard profit per unit.

Marking Guide Marks

Calculate the budgeted profit or loss 2

Examiner’s Comments Too many candidates did not realise the simplicity of this requirement and often were unable to do thisbasic calculation.



Question 2 (b)

Calculate the actual profit / loss for October. (4 marks)

Rationale

See 2(a).

Suggested Approach

Determine the number of units of unsold production (the closing stock) of each product and value theseusing the standard production cost per unit.Total the actual costs of production, and deduct the closing stock valuation to determine the cost of sales.Compare the sales value with the cost of sales to calculate the profit / loss.

Marking Guide Marks

Stock valuationSales revenue and cost of sales

22

Examiner’s Comments Too many candidates did not adjust for closing stock, showing a lack of understanding of a basic principlethat candidates at a foundation level would be expected to know. Common Errors• Not adjusting for closing stock.



Question 2 (c)

The Management Accountant has started to reconcile the budgeted and actual profits and has alreadycalculated the following variances:

Direct material price variance $250,400 AdverseDirect material usage variance $48,750 AdverseDirect labour rate variance $30,320 Adverse

Prepare a statement that reconciles the budgeted and actual profit / loss for October, showing thevariances in as much detail as possible from the information provided.

(19 marks)

Rationale

See 2(a).

Suggested Approach

Prepare calculations for sales variances.Prepare calculations for labour efficiency variances taking care to determine the idle time varianceseparately.Prepare calculations for the fixed overhead variances including the capacity and efficiency variances.Present the results of these calculations in a reconciliation statement in good format.

Marking Guide Marks

Calculate sales variances 6Calculate labour efficiency variancesCalculate fixed overhead variances Prepare reconciliation statement

4 6 3

Examiner’s Comments Many candidates are unable to calculate sufficient variances with sufficient accuracy to demonstratethat they are competent with this topic. It should be no surprise that a paper which is entitled“Performance Management” will contain a question on standard costing and variance analysis. I amalways amazed that candidates do not seem to have practised this topic to ensure that they can answera question on it. Common Errors• Ignoring the variances given on the paper and re-calculating them from the data provided, often

getting them wrong, but in any event wasting valuable examination time.• Calculating cost variances based on sales volumes rather than on production volumes.



Question 2 (d)

Explain and briefly discuss the level of efficiency assumed in M plc's standard costing system, andsuggest an alternative level that may be more useful for operational control.

(5 marks)

Rationale

Requirement (d) asks candidates to discuss the alternative standard costs that may be set.

Suggested Approach

Identify that M plc is using ideal standards.Explain the implications of using ideal standards.Suggest the use of an attainable standard as an alternative.

Marking Guide Marks

State that M plc is using ideal standardsExplain the implications of using ideal standardsSuggest the use of an attainable standard

122

Examiner’s Comments Many candidates did not recognise that M plc was using ideal standards, despite this being stated in thefirst line of the question. Candidates must learn to read the entire question so that they can earn theeasier marks that are available. Common Errors• Not reading the question carefully and so not recognising that ideal standards were being used.



Question 3 (a)

Calculate the mix of services that should be provided by W plc so as to maximise its profit for December2003.

(9 marks)

Rationale

Question three is set in the context of a cleaning company that is currently experiencing resourceconstraints. In requirement (a), candidates are asked to solve a single resource constraint problem.

Suggested Approach

Prepare calculations to determine the resource requirements for the budgeted level of activity.Identify that machine hours are the limiting factor, but that sufficient other resources exist.Calculate the contribution per service unit.Calculate the contribution that each service earns per machine hourRank the services according to their contribution per machine hour.Allocate the available machine hours according to the ranking in order to determine the optimum servicemix.

Marking Guide Marks

Identify the limiting factorCalculate the contribution per machine hour and rank services accordinglyState the optimum service mix

423

Examiner’s Comments Many candidates did not recognise that this was a single limiting factor resource problem. Somecandidates used linear programming to solve this part of the question. Whilst this solution method isacceptable, it is far too complex and time consuming for what was a much simpler problem. Common Errors• Ranking according to values other than the contribution per machine hour• Wasting time by using linear programming as the solution method.



Question 3 (b)

The Sales Director has reviewed the selling prices being used by W plc and has provided the followingfurther information:

• if the price for laundry were to be reduced to $5·60 per service, this would increase the demandto 14,000 services;

• if the price for dry cleaning were to be increased to $13·20 per service, this would reduce thedemand to 9,975 services.

Assuming that such selling price changes would apply to all sales and that the resource limitationscontinue to apply, and that a graphical linear programming solution is to be used to maximise profit,

(i) state the constraints and objective function; (6 marks)(ii) use a graphical linear programming solution to advise W plc whether it should revise its selling prices.

(10 marks)

(Total = 16 marks)

Rationale

In requirement (b), candidates need to solve a multiple constraint problem using graphical linearprogramming.

Suggested Approach

Identify the constraints and objective function from the data provided.Prepare a graph to identify the optimum solution.Compare the profitability of the optimum solution with the profitability of the solution identified in part (a) ofthe question and make appropriate recommendations.

Marking Guide Marks

State constraints and objective functionPlot the constraints on a graph and identify the optimum solutionCompare the profitability of the two solutions and make appropriate recommendations

664

Examiner’s Comments Many candidates were able to answer this part of the question, even those candidates who did not appearto understand the requirements of part (a). Too many candidates attempted to answer this part of the question without drawing a graph, even thoughthe question stated “use a graphical linear programming solution ….”. Those candidates that did prepare agraph often did so using inappropriate scales, or did not use graph paper, thus making it difficult for themto identify the optimal solution. Common Errors• Poor quality graphs.



Question 4 (a)

Prepare a revised budgetary control statement using the additional information that you have obtainedfrom the Manager of the general machining department.

(10 marks)

Rationale

Question four is set in the context of an engineering company that uses budgets and budgetary control tocontrol its costs and measure performance. In requirement (a), candidates are asked to prepare abudgetary control statement.

Suggested Approach

Analyse the budgeted cost of direct labour into fixed and variable componentsAnalyse the budgeted production overhead into fixed and variable components.Prepare a statement that shows the original and flexed budget costs, the actual costs, and the variancefor each item of cost compared with the flexed budget.

Marking Guide Marks

Analyse the direct labour costAnalyse the production overhead costPrepare a budgetary control statement in good form

244

Examiner’s Comments This question was generally well answered, but many candidates failed to appreciate the importance ofthe step fixed cost in the production overheads. Common Errors• Not dealing properly with the step fixed cost in the production overheads.



Question 4 (b)

(i) Explain the differences between an incremental budgeting system and a zero based budgetingsystem. (4 marks)

(ii) Explain why R plc and similar organisations would find it difficult to introduce a system of zero basedbudgeting. (4 marks)

(Total = 8 marks)

Rationale

Requirement (b) asks candidates to explain incremental and zero based budgeting.

Suggested Approach

Briefly explain incremental and zero based budgeting, focusing on the differences between them.Identify the nature of R plc’s business and explain how this may make it difficult to introduce a zero basedbudgeting system.

Marking Guide Marks

Explain incremental and zero based budgetingExplain the difficulties of introducing zero based budgeting into R plc

44

Examiner’s Comments Many candidates were able to explain the differences between incremental and zero based budgeting, butthey did not use the information provided in the question to relate their answer to R plc. Common Errors• Not relating the answer to R plc.



Question 4 (c)

Explain the benefits of involving the managers of R plc in the budget setting process, rather than settingthe budget centrally as is R plc's current policy.

(7 marks)

Rationale

Requirement (c) asks candidates to discuss the behavioural issues of budgeting.

Suggested Approach

State and briefly explain the main benefits of involving managers in the budget setting process.

Marking Guide Marks

Goal congruenceMotivationAccuracy / detail

232

Other items marked on merit

Examiner’s Comments This part of the question was generally well answered.



Question 5 (a)

Use a simple numerical example to illustrate the differences in the total cost of each meal that may arise ifSY Limited were to use an ABC system (using THREE activities) instead of its present absorption costingsystem.

(15 marks)

Rationale

Question five is set in the context of a restaurant and requires candidates to discuss alternative costingsystems. In requirement (a), candidates are asked to illustrate the differences between activity basedcosting and traditional absorption costing.

Suggested Approach

Identify three activities that would be appropriate to the operations of a restaurant.Identify the cost drivers that would be appropriate for each of these activities.Prepare simple calculations to illustrate the differences in meal costs that would result using an activitybased costing approach rather than the present absorption costing system.

Marking Guide Marks

Analyse overhead costs by activityIdentify a cost driver for each activityPrepare suitable calculations

555

Examiner’s Comments Many candidates found this to be a difficult question, in particular the requirement to prepare an exampleto illustrate the differences between traditional absorption costing and activity based costing. Common Errors• Preparing an example that did not include three clearly different activities.• Preparing an example where the various meals did not use different proportions of the activities

chosen, thus not clearly illustrating the cost differences that would arise.



Question 5 (b)

SY Limited is also considering the use of marginal costing rather than its present system.

(i) Explain the cost behaviour issues that SY Limited would need to consider if it wished to introduce amarginal costing system. (6 marks)

(ii) Briefly discuss the benefits that might be derived from introducing a marginal costing system at therestaurant. (4 marks)

(Total = 10 marks)

Rationale

In requirement (b), candidates are invited to explain and discuss marginal costing.

Suggested Approach

Explain marginal costing and how it relies on the identification of fixed and variable costs.Explain the relevance of marginal costing and contribution analysis to decision making.

Marking Guide Marks

Explain marginal costingExplain the need to identify fixed and variable costsExplain the relevance of marginal costing to decision making

424

Examiner’s Comments This part of the question was well answered.



Question 6 (a)

Explain the concept of the Balanced Scorecard and how it may be used by E plc to improve performancemeasurement.

(10 marks)

Rationale

Question six is set in the context of a computer repair and service organisation. In requirement (a),candidates are asked to explain how the balanced scorecard may be used to improve performance.

Suggested Approach

Explain the balanced scorecard and the four performance perspectives.Identify the performance measure currently being used by E plc and explain how using the balancedscorecard would improve its performance measurement.

Marking Guide Marks

Explain the balanced scorecard and its four performance perspectivesExplain how E plc could improve its performance measurement

82

Examiner’s Comments The general explanation of the balanced scorecard was reasonably well answered. Unfortunately manycandidates did not apply their answer to E plc. Common Errors• Not applying a general understanding to the specific scenario provided in the question.



Question 6 (b)

Another issue which concerns the management of E plc is the quality of the service provided for clients.The Operations Manager has suggested that the company should introduce Total Quality Management(TQM) but the management team is unsure how to do this and of the likely costs and benefits of itsintroduction.

(i) Briefly explain Total Quality Management in the context of E plc. (3 marks)(ii) Discuss the likely costs and benefits that would arise if E plc introduced a TQM policy. (12 marks)

(Total = 15 marks)

Rationale

In requirement (b), candidates need to explain total quality management.

Suggested Approach

Explain total quality management.Explain how E plc could use total quality management.Identify and explain the likely costs and benefits of introducing a total quality management policy.

Marking Guide Marks

Explain total quality management and how it could be used by E plcIdentify and explain the likely costs of a TQM policyIdentify and explain the likely benefits of a TQM policy

366

Examiner’s Comments Too many candidates did not apply their answer to the context of E plc. Common Errors• Not applying knowledge to the specific scenario provided in the question.

november 2003 management accounting performance ... variable cost per unit 21·00 62·00 84·00...

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