Appendix: Sample examination paper

Appendix: Sample examination paper

There are two sections to this paper (A and B). You must answer four
questions, at least one question must be from each section.
Duration of examination: three hours.

Section A (You must answer at least one question from this section)

Question 1
Distorto Company Ltd produces a range of elastic fasteners used in the
stationery industry. The company’s plant in Newcastle is automated, but the
special nature of the product requires some labour. In the past, overheads
have been allocated on the basis of direct labour hours, but Distorto now
believes that this is an inappropriate method given its method of production.
Total overheads for the month of July 2005 are expected to be £490,000,
with 5,000 direct labour hours expected. Overheads have been investigated,
and found to depend on a range of factors.
a. Purchasing costs are approximately proportional to the cost of materials
purchased. For July 2005, total material purchases are estimated to cost
£3 million, and purchasing costs are to total £180,000.
b. Product design costs depend on the number of hours each product takes
to design. The design is expected to work 2,000 hours in July 2005, and
total design costs are expected to be £60,000.
c. Setting up the automated machines before the start of each production
run is a significant cost. During July 2005, Distorto expects to set up 800
production runs, at a total cost of £140,000.
d. Machine depreciation is currently included in overheads at a rate of
£110,000 per month. In 2005, machine usage is estimated to be 22,000
hours.
Distorto has just accepted two orders for July 2005. Information relating to
the orders is set out below:

15,000 units of fastener SL205 10,000 units of fastener SL299

Direct labour hours 35 40

Raw material cost £28,000 £36,000

Hours in design department 10 25

Production runs (i.e. set-ups) 2 8

Machine hours 20 20

Required
a. Calculate the overhead rate per direct labour hour that Distorto Company
Ltd would use under its existing costing system. (2 marks)
b. Calculate the total overhead cost that would be assigned under the
existing costing system to each of the orders given above. (3 marks)

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c. Determine the total overhead cost that would be assigned to each of the
two orders given above if overheads are allocated in accordance with
their causes. (8 marks)
d. Explain why the total overhead costs calculated in parts (b.) and (c.) are
different, and discuss the implications of this for the product costing
systems. (12 marks)

Question 2
Tribe Products has two divisions. Division A produces a component part that
can be sold either to outside customers, at a unit selling price of £75, or to
Division B. Division A’s variable production cost per unit of the component
is £45, and its variable selling and administrative expense per unit of the
component is £2. Daily fixed production costs are £300,000 and
manufacturing capacity is 20,000 units per day.
Division B currently buys the component from another supplier, paying £72
per unit (the supplier allows Division B a quantity discount on its order of
2,000 units per day). It is now considering whether to purchase the
components from Division A instead. It has been determined that the
variable selling and administrative expenses of Division A would fall by half
for any sales to Division B. The senior management of Tribe Products aims to
treat each division as an autonomous unit with independent profit
responsibility.

Required
a. What is the highest transfer price that can be justified between the two
divisions for the component part? What is the lowest transfer price?
Justify your answers. (8 marks)
b. Suppose that Division A decides to raise its price to outside customers for
the component to £80 per unit. If Division B is willing to pay this price,
will the price increase result in greater or smaller total corporate profits?
Explain. (7 marks)
c. Under what circumstances should Division B be forced to purchase from
Division A? Discuss the implications of your response in relation to the
evaluation of the divisional managers’ performance. (10 marks)

Question 3
Joe Haines owns and manages a small engineering factory, which
manufactures a single product, the ‘Maxwell’. Joe prepares a monthly budget
on a rolling basis, and compares this at the end of each month with the
actual results. The budget and actual results for April 2005 are set out below:
Budget Actual
Sales 100,000 98,400
Materials 28,800 29,274
Labour 32,000 29,602
Variable overheads 16,000 17,138
Fixed overheads 12,000 13,776
88,800 89,790
Profit £11,200 £8,610

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 Appendix: Sample examination paper

The following information is available:

1. Joe’s monthly budget is based on production and sales of 800 units of the
‘Maxwell’ each month. No stocks of raw materials, work in progress or
finished goods are kept at the beginning and end of any month.
2. The production budget for April 2005 for each unit of the ‘Maxwell’
assumes two kilograms of raw material at £18 per kilogram and four
hours of direct labour at £10 per hour. Variable overheads, which are
assumed to vary in line with direct labour, are estimated at £5 per hour.
3. The actual selling price of the ‘Maxwell’ in April 2005 was £120 per unit.
4. Actual material costs in April 2005 were £17 per kilogram and actual
direct labour costs were £9.50 per hour.

Required
a. Prepare a variance statement for Joe Haines for April 2005, showing such
variances as you consider appropriate. (14 marks)
b. ‘Variance analysis simply shows where the budget went wrong. It has no
value in controlling costs.’ Discuss this statement. (11 marks)

Question 4
Doll’s Hospital is a famous hospital in London, which mainly treats patients
all of whose costs are paid for by the government. In addition, it operates a
separate department specifically for patients who pay personally for their
treatment. In the year to 31 March 2005, patients paid a fixed fee of £170 per
day for the use of the hospital facilities, and this fee is currently expected to
remain unchanged for the year to 31 March 2006. In addition, patients pay a
separate fee to their doctors which has no effect on the hospital’s finances. In
the year to 31 March 2005, the private patients’ department received
revenue of £2,890,000. Costs charged to the private patients’ department for
the year were:
Meals 440,000
Laundry 252,000
Laboratory services 520,000
Maintenance 63,000
Nurses’ pay 104,000
Porters’ pay 24,000
General administrative expenses 474,000
Rent 800,000
Other expenses 85,000
Total £2,762,000
The costs relating to meals, laundry, laboratory services, maintenance and
other expenses are charged to the private patients’ department on the basis
of the number of patient days (a patient day is equivalent to the occupation
of a bed in the private patients’ department by a patient for one day), and
may be assumed to vary directly with the number of patient days in the
department. Other costs may be assumed to vary directly with the number of
patient days in the department. Other costs are assumed to be fixed.
For the year to 31 March 2006, it is expected that costs will increase by 10
per cent. However, the nurses’ pay will increase from £13,000 per nurse to
£14,000, while the rent charged to the private patients’ department (which
occupies a separate building) will increase to £1,000,000.

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The department has a maximum capacity of 60 beds but in the year to 31

March 2005 a number of beds were unoccupied because of insufficient
demand. Claims are being made that the private patients’ department is
likely to become loss making in the year to 31 March 2006, and should
therefore be closed down so that the resources would be available elsewhere
in the hospital. If the department is closed, the hospital will be able to
surrender the building that it occupies to its landlord at no cost, but the
department’s staff will have to be redeployed elsewhere in the hospital.
The hospital management believes, however, that the private patients’
department should be preserved, and is looking for advice on the appropriate
level of charges for the year to 31 March 2006.

Required
a. Prepare calculations to help guide the hospital management in setting the
level of charges for the private patients’ department for the year to 31
March 2006. You should include a calculation of the break-even point
based on the existing fee level of £170 per day, and a calculation of the
fee required to break even assuming that demand in the year to 31 March
2006 is the same as that in the year to 31 March 2005. (12 marks)
b. In the light of your calculations, outline the main points that you would
include in a report to the hospital management in advising them on the
future of the private patients’ department, including any additional
factors that should be considered before the final decision is made.
(13 marks)

Section B (You must answer at least one question from this section)
5. It has been argued that full absorption product costing does not provide
relevant information for decision-making. Explain this view and discuss
the reasons for the continued use of absorption costing by companies and
the development of activity-based costing. (25 marks)
6. Discuss, with appropriate examples, how the performance of managers
can be assessed using non-financial measures of performance. In what
circumstances is the use of non-financial measures likely to encourage
better performance by managers than using financial measures?
(25 marks)
7. ‘Strategic management accounting has no distinctive contribution to
make to the field of management accounting.’ Critically discuss this
statement. (25 marks)
8. ‘Traditional budgeting is too expensive for complex organisations. Beyond
budgeting techniques represent a significant advance over traditional
budgeting.’ Critically discuss this statement. (25 marks)

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