ACC203e
Examination - July Semester 2013
Managerial Accounting

Friday, 22 November 2013 10:00 am - 12:00 pm

Time allowed: 2 hours

At the end of the examination
Please ensure that you have written your examination number on each answer book used.
Failure to do so will mean that your work cannot be identified.

If you have used more than one answer book, please tie them together with the string provided.

THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS.

Question 1
Fred owns a food factory in Kallang that specialises in supplying premium mini chiffon cakes to food retailers in Singapore. The cakes are very popular with the locals and tourists who buy them as gifts before leaving Singapore.
You have just joined the company as its management accountant and were provided the following information from the production floor. Weighted average method is used to value its inventory. All ingredients required to make the cakes are used at the beginning of the production process. Fully baked cakes are distributed and sold immediately to the retailers.

Production data for the year 1 January to 31 December 2011
• Started baking a total of 10,000,000 cakes during the year.
• 360,000 cakes were not fully baked (also known as work-in-progress or ‘WIP’) as at 31 December 2010. Only 20% of the conversion costs have been incurred for these cakes-in-progress.
• As at 31 December 2011, 2,360,000 cakes were partially baked (‘WIP’) and these consumed 80% of the conversion costs.
• Ingredients used for beginning and ending WIP were $38,200 and $1,205,000 respectively.
• Conversion costs are estimated at $179,640 for beginning WIP and $2,589,000 for ending WIP.

(a) Based on the information provided, prepare a production report to calculate the following items as at 31 December 2011:
(i) Total number of cakes completely baked and sold
(ii) Total equivalent units
(iii) Costs per equivalent unit
(iv) Costs of cakes completed and sold and the costs of the ending WIP.
(23 marks)

(b) If the percentage of completion for ending WIP is lower than 80%, describe the impact on the costs of cakes completed and sold and the company’s overall profitability. No calculation is required.
(2 marks)


Question 2
(a) The selling price of a machine, computed based on unit cost plus 20% mark-up, is $240.
Fixed and mixed costs accounted for 40% and 35% of its unit cost respectively, while the remaining costs are variable in nature.

80% of its variable costs are product costs. Prime costs and conversion costs amounted to 50% and 60% of its variable costs respectively.
Analyse the information given and find the following unit cost of the machine. Show your workings that describe each of the following cost components.

(i) Manufacturing overhead
(ii) Direct labour cost
(iii) Direct material cost
(10 marks)
(b) Cargo Express Pte Ltd provides air freight services. The following costs were incurred over a period of 5 months for the year 2011.

Month Air Cargo Tonnage Operating Expenses
July 50,000 $3,000,000
August 48,500 $2,950,000
September 55,000 $3,600,000
October 52,000 $3,350,000
November 60,000
Analyse the information given, $3,594,000
(i) Using the high-low method, estimate the company’s fixed and variable costs.
(5 marks)
(ii) What are the operating expenses for December if the freight volume is expected at 85,000 tonnes?
(2 marks)
(iii) Describe three limitations of using the high-low method.
(6 marks)

(iv) Describe briefly the organisation that you are working at or one that you are familiar with.

Identify one of the operating expenses of the organisation whose cost behaviour is classified as a mixed cost.
Which method would you recommend to use to separate the mixed cost into its fixed and variable component?
(2 marks)

Question 3

Jordan Executive Development Services Inc. is an events and conference organiser. The firm has been approached by a potential client, a large global oil & gas conglomerate, to organise a mega conference for its employees and business associates. The event is expected to be one of the largest projects the firm will be undertaking.

Jordan, the Managing Director, wants to know the price he should quote to the client. The usual practice was to estimate the total costs required to complete the project. Fees are computed at 150% of the total estimated costs.

He recently read an article about the activity-based method as a more accurate measurement of cost. Armed with the following information, he asked you to evaluate this project based on both methods. The project is expected to incur $50,000 of direct labour costs.

A summarised financial statement for the firm for the last 12 months is shown below.

Revenue $7,200,000
Less:
Direct labour $1,500,000
Overhead costs $3,450,000 $(4,950,000)
Operating profit $2,250,000
The overhead costs consist of the following components:

Usage level
Activity Cost driver Costs Used last year Project
Marketing support Days advertised $3,066,000 1,095 68
Logistics and administration support Man hours $150,000 10,000 240
Information technology systems Workstations $18,000 30 3
Printing and supplies No. of participants $144,000 7,200 300
Other general expenses Man days $72,000
$3,450,000 36,000 100

(a) Using direct labour cost to apply overheads, calculate the applied overhead rate, the total project cost and the fees to be quoted to the client.
(7 marks)
(b) Develop an activity-based costing system and calculate the total project cost and the fees to be quoted to the client.
(14 marks)
(c) Compare your findings and advise Jordan the fees he should quote to the client. Explain your recommendation.
(4 marks)

Question 4
Jacksons & Jacksons makes and sells top quality premium monitor screens. It is 30 June 2013 and they forecast the production of monitor screens as follows:

Month (2013) Production (in units)

July 380
August 450
September 620
October 580
The monitor screens are made from raw materials which cost $45 per unit.
On 30 June 2013, there were enough raw materials to build 76 units of monitor screens. At the end of every month, they intend to have enough raw materials to satisfy 20% of the production requirement of the following month.

It takes 5 hours to produce one monitor screen with one worker working on it. The workers are paid on average $25 per hour.

Production overhead costs are estimated below. The fixed costs are estimated monthly costs, whereas the variable costs are tied to labour hours as a cost driver.

Fixed cost per month Variable cost per labour hour
$ $
Supervisor salary 8,000
Manufacturing supplies 2.00
Utilities 1.00
Depreciation 3,000

Prepare the following:

(a) Prepare a direct raw materials purchase budget for monitor screens for July, August and September and for the quarter ended 30 September 2013.
(7 marks)

(b) Prepare a direct labour budget for July, August and September and for the quarter ended 30 September 2013.
(5 marks)
(c) Prepare an overhead budget for July, August and September and for the quarter ended 30 September 2013.
(5 marks)

(d) Based on the above, what is the per-unit product cost?
(8 marks)


Question 5
KidsKorner Pte Ltd designs and manufactures children’s furniture under two brands, mid-range ‘EnviNorm’ and premium ‘ErgoLux’.
The ErgoLux was introduced at the beginning of the year 2011 as part of the company’s strategy to broaden its product lines, increase revenue stream, and improve its overall bottom line. Each unit was sold at $108 a piece, which was 2.7 times the unit selling price of EnviNorm. ErgoLux was very well-received by its customers and sales grew rapidly.
When the accountant presented the financial statements as at 31 December 2011 to the Managing Director, he was shocked to learn that the overall net profit of the company has declined despite achieving higher revenue.
He wants you to investigate and has asked his accountant to provide you with the following information.

EnviNorm ErgoLux
Units produced 56,000 8,000

Direct material costs per unit $ 18 $30 Direct labour hours per unit 1 3
Direct labour cost per hour $8 $12
Manufacturing overheads Activity driver No of activity consumed
Welding $199,800 Machine hour 21,000 16,000
Quality control $201,600 Quality test 56 136
Delivery $198,600 Shipment 40 60
$600,000

(a) Apply an applied overhead rate to manufacturing overheads by using direct labour hours as a cost driver. What is the unit product cost for each brand under this traditional costing method?
(6 marks)

(b) Develop an activity based costing system (ABC) and compute the unit product cost for each brand using the activity-based costing system.
(14 marks)
(c) Compare your answers in (a) and (b) above, advise the Managing Director on whether he should adjust the selling price of ErgoLux. Explain why. What should be the new selling price if it is marked-up at 120% of unit product cost?
(5 marks)
Show your workings. Give your answers up to 2 decimal points.


Question 6
This question has 2 parts. You are required to answer both parts.

Part A
Julia owns a boutique retail shop selling luxury watches at Orchard Road. Below is an extract of the financial information provided by her accountant for the year ended 31 December 2011:
S$
Purchase of watches 500,000
Shop rental (Note 1) 120,000
Salary of retail staff 120,000
Sales commission (Note 2) 40,000
Credit card commissions (Note 3) 50,000
Advertising including shop display expenses 20,000
Insurance for fire and theft 15,000
General and administration expenses 12,000
Depreciation of fixed assets 50,000
Renovation cost and purchase of new furniture and fittings 280,000
Alarm and security system (Note 4) 30,000

Her accountant also provided the following information:
Note:
1. The shop lease was secured at a very attractive monthly rate of $15 per square feet for a period of 2 years with effect from 1 January 2009, with an option to renew for another 3 years at $20 per square feet per month. On 1 January 2011, Julia extended the lease.
2. Sales commission was paid to the 3 retail staff when they achieved their pre-agreed sales targets based on a graduated scale of $500,000 per level.

3. Credit card commissions are paid based on the commission rates (as a percentage of sales) charged by the banks.

4. The alarm and security system was installed on 31 December. The payment terms were $10,000 upon delivery of system and $15,000 upon installation. The balance
$5,000, also known as retention sum, is only payable 6 months after the installation.


Examine the behaviours of the cost described below. Identify and calculate the total for each cost category below. Show your workings. A cost component may fall into more than one category.

(i) Fixed cost
(ii) Pure variable cost
(iii) Step cost
(iv) Product cost
(15 marks)

Part B
Tim's Tans operates a chain of tanning salons that provides a controlled alternative to outdoor tanning. The number of customers and the cost of electricity incurred from January to June are as follows.

Month No. of customers Electricity cost
January 3,000 $ 4,020
February 2,100 $ 2,800
March 6,000 $ 6,890
April 5,600 $ 6,850 May 9,000 $ 10,390
June 8,300 $ 9,600


(a) Tim wants to estimate the cost of electricity for the current month of July. It is estimated that there will be at 7,600 customers. Identify, using the high-low method, what will be the estimated cost for the month of July? Give your answers to 2 decimal points.
(6 marks)
(b) Tim is convinced that this method is easy to use to separate fixed costs and variable costs. Analyse and explain to him 2 limitations of this method.
(4 marks)

Question 7
Caspian Seafood Pte Ltd is a wholesaler that imports and distributes seafood to all major supermarket chains in Singapore. At the start of 2011, an annual budget was prepared based on the data provided to the CEO by the heads of department below.

1. Budgeted annual sales volume is expected at 3,000 tonnes.
2. The average selling price for each tonne is $3,000.
3. The purchase price is forecast at 70% of selling price.
4. Other purchasing expenses such as $300 of freight charges and $3 of insurance are expected to be incurred for every tonne of seafood flown into Singapore.
5. Variable overheads comprising utilities and temporary workers’ wages are estimated at 1% and 2% of revenue respectively.
6. Fixed overheads comprising office and warehouse rent, depreciation of freezers and delivery trucks, staff salaries and marketing expenses, are estimated to increase by 5% based on last year’s actual expenditure of $255,238.
7. The company has been granted a full exemption from the 17% corporate income tax under a government trade incentive scheme.

(a) Prepare a budgeted income statement for Caspian Seafood Pte Ltd for the year.
(10 marks)

(b) At the end of the year, the total actual revenue achieved was $10,800,000 with a gross profit margin of 17% of sales. Total variable overheads and total fixed overheads incurred amounted to $363,000 and $220,000 respectively. Use the actual performance and compare it against the budget prepared. Analyse 2 variances and comment on possible underlying causes for these variances.
(12 marks)

(c) The budget was prepared from a bottom-up participation approach. Explain to the CEO the potential problems with such approach.
(3 marks)

Question 8
Biomed Pte Ltd (‘Biomed’) specialises in the manufacture and supply of disposable syringes. It uses the weighted average method in its inventory valuation.

The production involves a two-stage process. Stage 1 Moulding Process involves melting raw plastic resins and mixing them with colour pigments. The heated mixture is then injected into a multiple-cavity mould to form syringes. Once cooled, the syringes are ejected from the moulds and transferred to Stage 2 Assembly and Packaging Process. Here, they are assembled, sterilised, packed and shipped to customers.

For the month of September, the production department recorded the following information.

(i) The beginning work-in-progress (‘WIP’) inventory was 500,000 units with 40% completed in respect of conversion.
(ii) Biomed started manufacturing 1,200,000 units during the month.
(iii) The ending WIP inventory was 300,000 units with 60% completed in respect of conversion.
(iv) All direct materials are fully used up at the beginning of Stage 1 process.
(v) The costs incurred are shown below.

Costs incurred for WIP as at 1 September
Material $ 33,000
Conversion $ 78,000
$ 111,000
Costs incurred in September
Material $ 103,000
Conversion $ 238,000
$ 341,000

(a) Prepare a production cost report using the process costing system for the month of September. Include the following items:
(i) Units completed and delivered to customers
(4 marks)

(ii) Total equivalent units
(5 marks)

(iii) Costs per equivalent unit
(8 marks)

(iv) Costs transferred out and costs of ending WIP
(5 marks)

(b) The price of raw plastic resins has been on the rise. The Managing Director is aware of this trend but thinks that Biomed is not affected. Prepare a brief to give your view to the Managing Director.
(3 marks)