ACCT2006 Management and Cost Accounting Practice Exam
Question 1 Cost Estimation
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|
- Using the high-low method, develop a cost function in form of TC = F + V * Q for ABC Ltd.
- Identify and briefly explain two other cost drivers for ABC Ltd.
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|
|Allocation base volumes Square meters (Support Maintenance) Employees (Administration)||1000
- Using the direct method, allocate the support department costs to the operating departments.
- 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.
- 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.
|Started in April||150000|
|Completed in April||141000|
|Ending work-in-process (WIP), 60% complete||22500|
|Beginning WIP, 20% complete||13500|
|Beginning WIP costs
– Direct materials
– Conversion costs
|Costs added during April
– Direct materials
– Conversion costs
- Calculate the equivalent cost per unit using the weighted average (WA) method
- Calculate the equivalent cost per unit using the first-in first-out (FIFO) method
- 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.
- Calculate the revenue needed to earn the target net profit after tax above.
- How many customers are needed to break even? To earn net profit after tax above?
- 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:
Teta Ltd has offerred to sell 20 000 units of the product to Beta Ltd for $55.00 each.
- 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.
- 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.
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)
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
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
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
Pre-tax Profit = After-tax profit
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
- Prepare a production cost report for Brodie using the Weighted Average method.
- Prepare a production cost report for Brodie using the FIFO method.
- 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?
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
a) Compute the:
- Direct material price and efficiency variances;
- Direct labour price and efficiency variances; and
- 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.
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.
- Should the company stop producing the shifters internally and buy them from the outside supplier? Explain your answer. Show all workings.
- 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.
- Discuss three (3) qualitative factors that might be considered in making the decision to make or buy the shifters.
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