acct2006

ACCT2006 Management and Cost Accounting Practice Exam

ACCT2006 Management and Cost Accounting Practice Exam

acct2006

Question 1 Cost Estimation

acct2006

ABC Ltd is considering how quarterly maintenance costs change for budget preparation. The company’s management accountant has collected the following data on machine-hours worked and maintenance costs for the previous 12 quarters.

Quarter Machine hours Maintenance Costs
1 100000 $205000
2 120000 240000
3 110000 220000
4 130000 260000
5 95000 190000
6 115000 235000
7 105000 215000
8 125000 255000
9 105000 210000
10 125000 245000
11 115000 200000
12 140000 280000

Required:

  1. Using the high-low method, develop a cost function in form of TC = F + V * Q for ABC Ltd.
  2. Identify and briefly explain two other cost drivers for ABC Ltd.

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Question 2 Cost Allocation

The following information relates to costs incurred by each of the four departments of Western Council Library. Two support departments are Support Maintenance and Administration. Two operating departments are Operating Books and Other Media.

Direct Costs Support Maintenance Administration Operating Books Other Media Total
Salaries $40000 $80000 $100000 $140000 $360000
Supplies 10000 10000 30000 50000 100000
Allocation base volumes Square meters (Support Maintenance) Employees (Administration) 1000
2
1000
2
2400
4
600
2
5000
10

Required:

  1. Using the direct method, allocate the support department costs to the operating departments.
  2. Using the step-down method, allocate the support department costs to the operating departments. Allocate first the support department that incurs the largest dollar amount of direct costs.
  3. Explain how the step-down method differs from the direct method and reciprocal method in allocating support departments’ costs to operating departments.

Question 3 Costing System

Summers Ltd produces identical electric fans for residential use. The manufacturing process requires all direct materials to be added at the beginning of production, and conversion costs to be incurred evenly throughout production. The production information for the month of April 2016 is given below.

Physical Units
Started in April 150000
Completed in April 141000
Ending work-in-process (WIP), 60% complete 22500
Beginning WIP, 20% complete 13500
Costs
Beginning WIP costs
– Direct materials
– Conversion costs
$27000
54000
Costs added during April
– Direct materials
– Conversion costs
150000
300000

Required:

  1. Calculate the equivalent cost per unit using the weighted average (WA) method
  2. Calculate the equivalent cost per unit using the first-in first-out (FIFO) method
  3. Explain how the WA method differs from the FIFO method in process costing, and why an entity might prefer one method over the other.

Question 4 Cost Volume Profit Analysis

Excel Dining Ltd has two restaurants that are open 24 hours a day. Fixed costs for two restaurants together total $450 000 per year. Service varies from a cup of coffee to full meals. The average sales per customer is $8.00. The average cost of food and other variable costs for each customer is $3.20. The income tax rate is 30%. Target net profit after tax is $105000.

Required:

  1. Calculate the revenue needed to earn the target net profit after tax above.
  2. How many customers are needed to break even? To earn net profit after tax above?
  3. Calculate net profit after tax if the number of customer is 150 000.

Question 5 Relevant Costs for Decision Making

Beta Ltd manufactures a single product. The cost information of 20 000 units of the product is below for the year ending 30 June 2017:

Direct materials $80000
Direct labour $600000
Variable overhead $300000
Fixed overhead $500000

Teta Ltd has offerred to sell 20 000 units of the product to Beta Ltd for $55.00 each.

Required:

  1. Should Beta Ltd make or buy 20 000 units? Assume the company incurs all of the fixed overhead cost regardless of their make or buy decision.
  2. Discuss three qualitative factors Beta Ltd should consider when deciding whether to make or to buy the 20 000 units from Teta Ltd.

Question 6 Budget Variance Analysis

Akata Ltd has the following standard information for its single product.

Quantity Standard Price Standard
Direct materials 0.8 kg per unit $2 per kg
Direct labour 0.2 hours per unit $17 per hour

In April 2017, 15 342 units were produced at a cost of $26 870 for direct materials and $47 000 for direct labour. A total of 13 252 kilograms of direct materials was used. Total direct labour hours amounted to 2730 hours. During the same period, 11 000 kilograms of direct material were purchased for $21 730. The company’s policy is to record materials price variances at the time materials are purchased.

Required

Calculate the price and efficiency variances for materials and labour.

Formula Sheet (Formula Sheet for the exam may differ depending on the formulae required to answer the exam questions)

Cost Function

TC = F + V x Q
Where TC is total cost
F is total fixed cost
V is variable cost per unit of activity
Q is volume of activity of cost driver

High-Low Method

Variable cost = change in cost/change in cost driver 
To calculate Fixed cost: TC = F + old cost driver x Variable cost  
Total cost = F + VQ 

Profit Equation

Basic Profit Equation Profit = Total revenue – Total costs
Can be rewritten as:  Profit = (Total revenue – Total VC) – Total FC 
Contribution Margin CM = Total revenue – Total variable costs
Profit Equation per unit Profit = [(P – V) * Q] – F 

where
P  = selling price per unit
V = variable cost per unit
(P – V) = contribution margin per unit
Q = quantity of product sold
F = total fixed costs 

Breakeven Point (BEP = Total Revenue = Total Costs (Zero Profit))

BEP in Units
Units to Breakeven = Fixed Costs CM per unit
Contribution Margin Ratio (CMR) 
CMR = CM per unit Sales price per unit 
BEP in Total Revenue 
Revenue to Breakeven = Fixed costs CM ratio 

Targeted Pre-tax Profit

Sales Quantity =  F + Profit / P – V   
Sales Revenue = F + Profit / CM ratio

After-tax Profit

Pre-tax Profit = After-tax profit

Standard Costs

Standard Costs

Direct Materials Price Variance

DM Price Variance = [Standard Price – Actual Price] x Quantity Purchased 
(AP – SP) x AQ     

Direct Material Efficiency Variance

DM Efficiency Variance = [Standard Quantity for actual output – Actual Quantity for actual output] x Standard Price 
(AQ – SQ) x SP 

Direct Labour Price Variance

DL price variance = [Standard Labour price p.h. – Actual labour price p.h.] x Actual hrs used 
(AR – SR) x AH 

Direct Labour Efficiency Variance

DL efficiency variance = [Standard hours for actual output – Actual hours for actual output] x Standard Price
(AH – SH) x SR 

ADDITIONAL PRACTICE EXAM PROBLEMS

Question One: Process Costing

Brodie Company produces plastic toys. The company uses process costing to assign costs to its inventory. The company always used the weighted average method but the company’s new accountant is thinking about recommending a change to the firstin, first-out (FIFO) method. She plans to prepare production cost reports for March using both methods so that she can compare the results.

The company has only one production department (there are no transferred-in costs). Direct materials are added at the beginning of the process, and conversion costs are incurred evenly throughout the manufacturing process. Once each unit is completed, it is transferred to finished goods inventory. The accountant collected the following data for the month of March:

Beginning WIP inventory (40% complete)  10000 units
Costs:  
Direct Material $  8,000
Conversion costs     2,220 
Total cost of beginning WIP $10,220 

Units completed and transferred out during March 48,000 units
Units started during March 40,000 units
Ending WIP inventory (50% complete)   2,000 units 
 
Direct material cost used during March $44,000
Conversion costs incurred during March $36,000 

Required:

  1. Prepare a production cost report for Brodie using the Weighted Average method.
  2. Prepare a production cost report for Brodie using the FIFO method.
  3. Compare the total costs calculated under (a) and (b) for units completed and units in ending work in process. In this case, which of the two costing methods do you think is superior?

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Question Four: Variances

Betty Company’s variable manufacturing overhead is applied to products on the basis of direct labour-hours. The standard variable costs for one unit of product are as follows:

Direct material:     6 kg at $0.50 per kg………..………..….$  3
Direct labour: 1.8 hours at $10 per hour……………..……….18
Variable manufacturing overhead:1.8 hours at $5/hour……...9
Total standard variable cost per unit…………………………$30 

During June, 2,000 units were produced. The costs associated with June’s operations were as follows:

Direct materials purchased: 18,000 kgs at $0.60 per kg…..……..$10,800
Direct material used in production:              14,000 kgs
Direct labour: 4,000 hours at $9.75 per hour….................……        ……...$39,000
Variable manufacturing overhead costs incurred……..........     .........…….$20,800 

Required

a) Compute the:

  1. Direct material price and efficiency variances;
  2. Direct labour price and efficiency variances; and
  3. Variable overhead spending and efficiency variances.

b) Discuss your findings regarding all the variances calculated above, including why the variances may have occurred, and possible interrelationships between the variances.

acct2006

Question Five: Relevant Costing

Paradise Wheels is currently producing gear shifters used in its most popular line of mountain bikes. The company’s accounting department reports the following costs of producing 8,000 units of the shifter internally each year:

                                   Per unit     8,000 units 
Direct materials                   $6           $48,000
Direct labour                      4            32,000 
Variable overhead                  1            8,000 
Supervisor’s salary                3            24,000
Depreciation of equipment          2            16,000
Allocated general fixed overhead   5            40,000 
                                  $21           $168,000     

An outside supplier has offered to sell 8,000 shifters a year to Paradise Wheels at a price of $19 each. The managementaccountant recognises that the supervisor would be made redundant if the shifters were purchased rather than made. The depreciation relates to equipment that is used across the factory to also manufacture other components of each mountain bike.

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Required

  1. Should the company stop producing the shifters internally and buy them from the outside supplier? Explain your answer. Show all workings.
  2. Assume now that the space currently used to produce shifters could be used to produce a new cross-country bike that would generate an additional profit of $60,000 per year. Under these conditions, what should be Paradise’s decision regarding making or buying the shifters? Explain your answer. Show all workings.
  3. Discuss three (3) qualitative factors that might be considered in making the decision to make or buy the shifters.

acct2006

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ACCT2006 Management and Cost Accounting Practice Exam

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