Section A – ALL 15 questions are compulsory and MUST be attempted

Each question is worth 2 marks

1. A company makes a single product with the following data:

$ $
Selling price 25
Material 5
Labour 7
Variable overhead 3
Fixed overhead 4
(19)
Profit per unit 6

Budgeted output is 30,000 units.

In relation to this data, which of the following statements is correct?

The margin of safety is 40%

The contribution to sales ratio is 24%

The volume of sales needed to make a profit of $270,000 is 45,000 units
If budgeted sales increase to 40,000 units, budgeted profit will increase by $100,000

2. Which TWO of the following statements regarding zero based budgeting are correct?

It is best applied to support expenses rather than to direct costs

It can link strategic goals to specific functional areas
It carries forward inefficiencies from previous budget periods
It is consistent with a top-down budgeting approach

3. A manufacturing company decides which of three mutually exclusive products to make in its
factory on the basis of maximising the company's throughput accounting ratio.

Current data for the three products is shown in the following table:

Product X Product Y Product Z

Selling price per unit $60 $40 $20
$40 $10 $16
Direct material cost per unit

Machine hours per unit 10 20 2.5

Total factory costs (excluding direct materials) are $150,000. The company cannot
make enough of any of the products to satisfy external demand entirely as machine
hours are restricted.

Which of the following actions would improve the company's existing throughput
accounting ratio?

Increase the selling price of product Z by 10%

Increase the selling price of product Y by 10%
Reduce the material cost of product Z by 5%
Reduce the material cost of product Y by 5%

4. Which of the following could be a closed system?

Public relations department

Controlled design tests
Rolling budget preparation
Target costing

5. Perrin Co has two divisions, A and B.

Division A has limited skilled labour and is operating at full capacity making product Y. It has
been asked to supply a different product, X, to division B. Division B currently sources this
product externally for $700 per unit.

The same grade of materials and labour is used in both products. The cost cards for each
product are shown below:

Y X
Product
($)/unit ($)/unit
Selling price 600 -
Direct materials ($50 per kg) 200 150
Direct labour ($20 per hour) 80 120
Apportioned fixed overheads ($15 per hour) 60 90

Using an opportunity cost approach to transfer pricing, what is the minimum transfer
price?

a) $270
b) $750
c) $590
d) $840
6. Jorioz Co makes joint products X and Y. $120,000 joint processing costs are incurred.

At the split-off point, 10,000 units of X and 9,000 units of Y are produced, with selling
prices of $1.20 for X and $1.50 for Y.

The units of X could be processed further to make 8,000 units of product Z. The extra costs
incurred in this process would be fixed costs of $1,600 and variable costs of $0.50 per unit of
input.

The selling price of Z would be $2.25.

What would be the outcome if product X is further processed?

$600 loss
$400 gain
$3,900 gain
$1,600 loss

7. A company has produced the following information for a product it is about to launch:

20X4 20X5 20X6

Units 2,000 5,000 7,000
Variable production cost per unit $2.30 $1.80 $1.20
Fixed production costs $3,000 $3,500 $4,000
Variable selling cost per unit $0.50 $0.40 $0.40
Fixed selling costs $1,500 $1,600 $1,600
Administrative costs $700 $700 $700

What is the life-cycle cost per unit (to two decimal places)?

8. A company manufactures a specific clinical machine used in hospitals. The company holds
a 2% share of the market and the total market demand has been constant at 250,000
machines for the last few years. The budgeted selling price for each machine is $10,000 and
standard contribution is equivalent to 10% of the budgeted selling price.
An initial performance review of the company's actual results showed a sales volume of
5,600 machines had been achieved. The total market demand for the machines, though,
had risen to 300,000 units.

What is the market share variance for the clinical machines?

a) $200,000 Favourable
b) $400,000 Adverse
c) $600,000 Favourable
d) $1,000,000 Adverse
9. VC Co is a firm of opticians. It provides a range of services to the public, such as eye tests
and contact lens consultations, and has a separate dispensary selling glasses and contact
lenses. Patients book appointments with an optician in advance.

A standard appointment is 30 minutes long, during which an optician will assess the
patient's specific requirements and provide them with the eye care services they need. After
the appointment, patients are offered the chance to buy contact lenses or glasses from the
dispensary.

Which of the following describes a characteristic of the services provided by an optician

at VC Co during a standard appointment?

Tangible
Homogeneous
Non-perishable
Simultaneous

10. Which of the following methods would be LEAST effective in ensuring the security of
confidential information?

Monitoring emails
Encryption of files
Dial back facility
Universal passwords

11. A company which makes two products, Alpha and Zeta, uses activity-based costing to
absorb its overheads.It has recently identified a new overhead cost pool for inspection costs
and has decided that the cost driver is the number of inspections.

The following information has been provided:

Total inspection costs $250,000

Alpha Zeta
Production volume (units) 2,500 8,000
Machine hours per unit 1 1.5
Units per batch 500 1,000
Inspections per batch 4 1

What is the inspection cost per unit for product Alpha (to two decimal places)?
12. Indicate, by clicking on the relevant boxes in the table below, whether each of the following
statements regarding the existence of multiple objectives in not-for-profit organisations is
correct or incorrect.

13. Flow cost accounting is a technique which can be used to account for environmental costs.
Inputs and outputs are measured through each individual process of production.

Which of the following is NOT a category used within flow cost accounting?

Material flows
System flows
Delivery and disposal flows
Waste flows

14. A company has used expected values to evaluate a one-off project. The expected value
calculation assumed two possible profit outcomes which were assigned probabilities of 0.4
and 0.6.

Which of the following statements about this approach are correct?

(1)The expected value profit is the profit which has the highest probability of being achieved
(2)The expected value gives no indication of the dispersion of the possible outcomes
(3)Expected values are relatively insensitive to assumptions about probability
(4)The expected value may not correspond to any of the actual possible outcomes

2 and 4 only
2, 3 and 4
1, 2 and 3
3 and 4 only

15. In an investment centre, a divisional manager has autonomy over negotiating all selling
prices, has local functions set up for payables, inventory and cash management, and uses a
full debt factoring service.
Indicate, by clicking on the relevant boxes in the table below, which of the following the
divisional manager should be held accountable for.
Section B – ALL 15 questions are compulsory and MUST be attempted.

Each question is worth 2 marks.

The following scenario relates to questions 16–20

Hare Events is a company which specialises in organising sporting events in major cities across
Teeland. It has approached the local council of Edglas, a large city in the north of Teeland, to
request permission to host a running festival which will include both a full marathon and a half
marathon race.

Based on the prices it charges for entry to similar events in other locations, Hare Events has
decided on an entry fee of $55 for the full marathon and $30 for the half marathon. It expects
that the maximum entries will be 20,000 for the full marathon and 14,000 for the half marathon.

Hare Events has done a full assessment of the likely costs involved. Each runner will receive a
race pack on completion of the race which will include a medal, t-shirt, water and chocolate.
Water stations will need to be available at every five kilometre (km) point along the race route,
stocked with sufficient supplies of water, sports drinks and gels. These costs are considered to
be variable as they depend on the number of race entries.

Hare Events will also incur the following fixed costs. It will need to pay a fixed fee to the Edglas
council for permits, road closures and support from the local police and medical services. A full
risk assessment needs to be undertaken for insurance purposes. A marketing campaign is
planned via advertising on running websites, in fitness magazines and at other events Hare
Events is organising in Teeland, and the company which Hare Events usually employs to do the
race photography has been approached.
The details of these costs are shown below:

Full marathon Half marathon

($) ($)
Race packs 15.80 10.80
Water stations 2.40 1.20

$
Council fees 300,000
Risk assessment and insurance 50,000
Marketing 30,000
Photography 5,000

16) If Hare Events decides to host only the full marathon race, what is the margin of
safety?

35.0%
47.7%
52.3%
65.0%
17) Assuming that the race entries are sold in a constant sales mix based on the
expected race entry numbers, what is the sales revenue Hare Events needs to achieve in
order to break even (to the nearest $'000)?

$385,000
$575,000
$592,000
$597,000

Hare Events wishes to achieve a minimum total profit of $500,000 from the running festival.

18) What are the number of entries Hare Events will have to sell for each race in order to
achieve this level of profit, assuming a constant sales mix based on the expected race
entry numbers applies?

Work to the nearest whole number.

Full marathon: 17,915 entries and half marathon: 12,540 entries

Full marathon: 14,562 entries and half marathon: 18,688 entries
Full marathon: 20,000 entries and half marathon: 8,278 entries
Full marathon: 9,500 entries and half marathon: 6,650 entries

Hare Events is also considering including a 10 km race during the running festival. It expects the
race will have an entry fee of $20 per competitor and variable costs of $8 per competitor. Fixed
costs associated with this race will be $48,000.

19) If the selling price per competitor, the variable cost per competitor and total fixed
costs for this 10 km race all increase by 10%, which of the following statements will be
true?

Break-even volume will increase by 10% and break-even revenue will increase by 10%
Break-even volume will remain unchanged but break-even revenue will increase by 10%
Break-even volume will decrease by 10% but break-even revenue will remain unchanged
Break-even volume and break-even revenue will both remain the same

20) Which of the following statements relating to cost volume profit analysis are true?

(1) Production levels and sales levels are assumed to be the same so there is no inventory
movement
(2) The contribution to sales ratio (C/S ratio) can be used to indicate the relative profitability of
different products
(3) CVP analysis assumes that fixed costs will change if output either falls or increases
significantly
(4) Sales prices are recognised to vary at different levels of activity especially if higher volume
of sales is needed
 1, 2 and 3
2, 3 and 4
1 and 2 only
3 and 4 only

The following scenario relates to questions 21–25

Romeo Co is a business which makes and sells fresh pizza from a number of mobile food vans
based at several key locations in the city centre. It offers a variety of toppings and dough bases
for the pizzas and has a good reputation for providing a speedy service combined with hot, fresh
and tasty food to customers.

Each van employs a chef who is responsible for making the pizzas to Romeo Co's recipes and
two sales staff who serve the customers. All purchasing is done centrally to enable Romeo Co
to negotiate bulk discounts and build relationships with suppliers.

Romeo Co operates a standard costing and variances system and the standard cost card for
Romeo Co's basic tomato pizza is as follows:

Weight Price
Ingredient
(kg) ($ per kg)
Dough 0.20 7.60
Tomato sauce 0.08 2.50
Cheese 0.12 20.00
Herbs 0.02 8.40
0.42

In Month 3, Romeo Co produced and sold 90 basic tomato pizzas and actual results were as
follows:

Ingredient Kgs bought and used Actual cost per kg

Dough 18.9 6.50
Tomato sauce 6.6 2.45
Cheese 14.5 21.00
Herbs 2.0 8.10
42

21) What was the total favourable material price variance for Month 3 (to two decimal
places)?
22) What was the total materials mix variance for Month 3?

a) $81.02 Adv
b) $41.92 Adv
c) $42.88 Adv
d) $38.14 Adv

In Month 4, Romeo Co produced and sold 110 basic tomato pizzas. Actual results were as
follows:

Ingredient Kgs bought and used Actual cost per kg

Dough 21.3 6.60
Tomato sauce 7.5 2.45
Cheese 14.2 20.00
Herbs 2.0 8.50
45

23) What was the total materials yield variance for Month 4?

Note: Calculate all workings to two decimal places.

$12.21 favourable
$11.63 favourable
$21.95 adverse
$9.75 adverse

In Month 5, Romeo Co reported a favourable materials mix variance for the basic tomato pizza.

24) Which of the following statements would explain why this variance has occurred?

The proportion of the relatively expensive ingredients used in production was less than the
standard
The prices paid for the ingredients used in the mix were lower than the standard prices
Each pizza used less of all the ingredients in actual production than expected
More pizzas were produced than expected given the level of ingredients input

In Month 6, 100 basic tomato pizzas were made using a total of 42 kg of ingredients. A new chef
at Romeo Co used the expected amount of dough and herbs but used less cheese and more
tomato sauce per pizza than the standard. It was noticed that the sales of the basic tomato
pizza had declined in the second half of the month.

25) Based on the above information, which TWO of the following statements are correct?

The actual cost per pizza in Month 6 was lower than the standard cost per pizza
 The sales staff should lose their Month 6 bonus because of the reduced sales
The value of the ingredients usage variance and the mix variance are the same
The new chef will be responsible for the material price, mix and yield variances

The following scenario relates to questions 26–30

Sweet Treats Bakery makes three types of cake: brownies, muffins and cupcakes.

The costs, revenues and demand for each of the three cakes are as follows:

Brownies Muffins Cupcakes

Batch size (units) 40 30 20
Selling price ($ per unit) 1.50 1.40 2.00
Material cost ($ per unit) 0.25 0.15 0.25
Labour cost ($ per unit) 0.40 0.45 0.50
Overhead ($ per unit) 0.15 0.20 0.30
Minimum daily demand (units) 30 20 10
Maximum daily demand (units) 140 90 100

The minimum daily demand is required for a long-term contract with a local cafe and must be
met.

The cakes are made in batches using three sequential processes; weighing, mixing and baking.
The products must be produced in their batch sizes but are sold as individual units. Each batch
of cakes requires the following amount of time for each process:

Brownies Muffins Cupcakes

Weighing (minutes) 15 15 20
Mixing (minutes) 20 16 12
Baking (minutes) 120 110 120

The baking stage of the process is done in three ovens which can each be used for eight hours
a day, a total of 1,440 available minutes. Ovens have a capacity of one batch per bake,
regardless of product type.

Sweet Treats Bakery uses throughput accounting and considers all costs, other than material, to
be 'factory costs' which do not vary with production.
On Monday, in addition to the baking ovens, Sweet Treats Bakery has the following process
resources available:

Process Minutes available

Weighing 240
Mixing 180

26) Which of the three processes, if any, is a bottleneck activity?

a) Weighing
b) Mixing
c) Baking
d) There is no bottleneck

On Wednesday, the mixing process is identified as the bottleneck process. On this day, only
120 minutes in the mixing process are available.

27) Assuming that Sweet Treats Bakery wants to maximise profit, what is the optimal
production plan for Wednesday?

80 brownies, 30 muffins and 100 cupcakes

0 brownies, 90 muffins and 100 cupcakes
120 brownies, 0 muffins and 100 cupcakes
40 brownies, 60 muffins and 100 cupcakes

Sweet Treats Bakery has done a detailed review of its products, costs and processes.

28) Which TWO of the following statements will improve the throughput accounting
ratio?

The cafe customer wants to negotiate a loyalty discount

A bulk discount on flour and sugar is available from suppliers
There is additional demand for the cupcakes in the market
The rent of the premises has been reduced for the next year

On Friday, due to a local food festival at the weekend, Sweet Treats Bakery is considering
increasing its production of cupcakes. These cupcakes can be sold at the festival at the existing
selling price.

The company has unlimited capacity for weighing and mixing on Friday but its existing three
ovens are already fully utilised, therefore in order to supply cupcakes to the festival, Sweet
Treats Bakery will need to hire another identical oven at a cost of $45 for the day.

29) How much will profit increase by if the company hires the new oven and produces as
many cupcakes as possible?
a) $55.00
b) $140.00
c) $95.00
d) $31.00

In a previous week, the weighing process was the bottleneck and the resulting
throughput accounting ratio (TPAR) for the bakery was 1.45.

30) Indicate, by clicking on the relevant boxes in the table below, whether each of
the following statements about the TPAR for the previous week are true or false.
Section C - Both questions are compulsory and MUST be attempted

Question N0.31

Static Co is a multinational consumer goods company. Traditionally, the company has used a
fixed annual budgeting process in which it sets quarterly sales revenue targets for each of its
product lines. Historically, however, if a product line fails to reach its sales revenue target in any
of the first three quarters, the company’s Sales Director (SD) and Finance Director (FD) simply
go back and reduce the sales revenue targets for the quarter just ended, to make it look like the
target was reached. They then increase the target for the final quarter to include any shortfall in
sales from earlier quarters.

During the last financial year ended 31 August 20X6, this practice meant that managers had to
heavily discount many of their product lines in the final quarter in order to boost sales volumes
and meet the increased targets. Even with the discounts, however, they still did not quite reach
the targets. On the basis of the sales targets set at the beginning of that year, the company had
also invested $6m in a new production line in January 20X6. However, to date, this new
production line still has not been used. As a result of both these factors, Static Co saw a
dramatic fall in return on investment from 16% to 8% in the year.

Consequently, the Managing Director (MD), the FD and the SD have all been dismissed. Two
key members of the accounts department are also on sick leave due to stress and are not
expected to return for some weeks. A new MD, who is inexperienced in this industry, has been
appointed and is in the process of recruiting a new SD and a new FD. He has said:

“These mistakes could have been largely avoided if the company had been using rolling
budgets, instead of manipulating fixed budgets. From now on, we will be using rolling budgets,
updating our budgets on a quarterly basis, with immediate effect.”

The original fixed budget for the year ended 31 August 20X7, for which the first quarter (Q1)
has just ended, is shown below:

Budget
Q1 Q2 Q3 Q4 Total
YE 31st August 20X7
$'000 $'000 $'000 $'000 $'000
Revenue 13,425 13,694 13,967 14,247 55,333
Cost of sales (8,055) (8,216) (8,380) (8,548) (33,199)
Gross profit 5,370 5,478 5,587 5,699 22,134
Distribution costs (671) (685) (698) (712) (2,766)
Administration costs (2,000) (2,000) (2,000) (2,000) (8,000)
Operating profit 2,699 2,793 2,889 2,987 11,368
The budget was based on the following assumptions:

(1) Sales volumes would grow by a fixed compound percentage each quarter
(2) Gross profit margin would remain stable each quarter
(3) Distribution costs would remain a fixed percentage of revenue each quarter
(4) Administration costs would be fixed each quarter

The actual results for the first quarter (Q1) have just been produced and are as follows:

Actual results Q1
$'000
Revenue 14,096
Cost of sales (8,740)
Gross profit 5,356
Distribution costs (705)
Administration costs (2,020)
Operating profit 2,631

The new MD believes that the difference between the actual and the budgeted sales figures for
Q1 is a result of incorrect forecasting of prices, however he is confident that the four
assumptions the fixed budget was based on were correct and that the rolling budget should still
be prepared using these assumptions.

Required:

a) Prepare Static Co's rolling budget for the next four quarters.
(8 marks)

b) Discuss the problems which have occurred at Static Co due to the previous budgeting
process and the improvements which might now be seen through the use of realistic rolling
budgets.

(6 marks)

c) Discuss the problems which may be encountered when Static Co tries to implement the new
budgeting system.
(6 marks)

(20 marks)
Question N0.32

Lens Co manufactures lenses for use by a wide range of commercial customers. The company
has two divisions: the Photographic Division (P) and the Optometry Division (O). Each of the
divisions is run by a divisional manager who has overall responsibility for all aspects of running
their division and the divisions are currently treated as investment centres. Each manager,
however, has an authorisation limit of $15,000 per item for capital expenditure and any items
costing more than this must first be approved by Head Office.

During the year, Head Office made a decision to sell a large amount of the equipment in
Division P and replace it with more technologically advanced equipment. It also decided to close
one of Division O’s factories in a country deemed to be politically unstable, with the intention of
opening a new factory elsewhere in the following year.

Both divisions trade with overseas customers, choosing to provide these customers with 60
days’ credit to encourage sales. Due to differences in exchange rates between the time of
invoicing the customers and receiving the payment 60 days later, exchange gains and losses
often occur.

The cost of capital for Lens Co is 12% per annum.

The following data relates to the year ended 30 November 20X6:

Division P Division O
$'000 $'000
Revenue 14,000 18,800
Gain on sale of equipment 400 -
14,400 18,800
Direct labour (2,400) (3,500)
Direct materials (4,800) (6,500)
Divisional overheads* (3,800) (5,200)
Trading profit 3,400 3,600
Exchange gain/(loss) (200) 460
Exceptional costs for factory closure - (1,800)
Allocated Head Office costs (680) (1,040)
Net divisional profit 2,520 1,220
*Depreciation on uncontrollable assets included in divisional
320 460
overheads
 Division P Division O
$'000 $'000
Non-current assets controlled by the division 15,400 20,700
Non-current assets controlled by Head Office 3,600 5,200
Inventories 1,800 3,900
Trade receivables 6,200 8,900
Overdraft 500 -
Trade payables 5,100 7,200

To date, managers have always been paid a bonus based on the return on investment (ROI)
achieved by their division. However, the company is considering whether residual income would
be a better method.

Requierd:

a) Calculate the return on investment (ROI) for each division for the year ended 30 November
20X6, ensuring that the basis of the calculation makes it a suitable measure for assessing
the DIVISIONAL MANAGERS' performance.
(6 marks)

b) Explain why you have included or excluded certain items in calculating the ROIs in part (a),
stating any assumptions you have made.
(8 marks)

c) Briefly discuss whether it is appropriate to treat each of the divisions of Lens Co as

investment centres.
(2 marks)
d) Discuss the problems involved in using ROI to measure the managers' performance.
(4 marks)

(20 marks)