MANAGEMENT ACCOUNTING

FORMATION 2 EXAMINATION - AUGUST 2018

NOTES:
Section A - Questions 1 and 2 are compulsory. You have to answer Part A or Part B only of Question 2. Should
you provide answers to both Part(s) A and B of Question 2, you must draw a clearly distinguishable line through
the answer not to be marked. Otherwise, only the first answer to hand for this question will be marked.
Section B - You are required to answer any three out of Questions 3 to 6. Should you provide answers to all of
Questions 3 to 6, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise,
only the first three answers to hand for these four questions will be marked.

TIME ALLOWED:
3 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question
attempted.

NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE ENVELOPE
PROVIDED.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

MANAGEMENT ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2018
Time allowed: 3 hours, plus 10 minutes to read the paper.
Section A: Answer Question 1 and either Part A or Part B of Question 2.
Section B: You are required to answer any three out of Questions 3 to 6.

SECTION A
1. HW DAC was formed five years ago in Sligo and produces a range of health products and supplements for the Irish
and UK markets. The management accountant is busy preparing budgets for the period from January to March 2019
and is currently compiling pertinent information relating to one of the company’s newest products: Eyz.

Eyz is a refreshing eye spray mist based on two key organic ingredients: mineral water and green tea extract. There
is a simple manufacturing process and the product is manufactured in a 250ml size for everyday use. Details relating
to this product are shown below.

1. Projected sales for the first quarter of 2019 are as follows:

January February March

Sales in units (250ml bottles) 4,300 4,380 5,020

The selling price of Eyz is €3.10 per bottle.

2. At 1 January 2019, the company expects to have an opening inventory of 980 bottles of Eyz.

3. The costs incurred to produce one 250ml bottle of Eyz are shown in the table below:
€
Materials
Mineral water (225ml) 0.18
Green tea extract (25ml) 0.30
Recycled plastic 250ml bottle 0.10
Labour (0.06hr @ €10 per hour) 0.60
Variable production overhead 0.40
1.58

The company has arranged to purchase top quality mineral water at a cost of €0.80 per litre and green tea
extract at a cost of €12.00 per litre. These prices have been fixed from 2018-2020.

4. At 1 January 2019, the company expects to have 2,000 litres of mineral water and 1,000 litres of green tea
extract in inventory. It also expects to have 1,000 250ml plastic bottles in inventory.

5. Projected closing inventory levels for the finished product and raw materials are as follows:

End January End February End March

Eyz (250ml bottles) 1,000 1,500 2,000
Mineral water (litres) 2,108 3,010 4,108
Green tea extract (litres) 1,000 1,000 2,000
Recycled plastic bottles 1,000 1,500 2,000

Page 1
REQUIREMENT:

(a) For the first three months of 2019:

(i) Prepare a sales budget (in units and €). (2 marks)

(ii) Prepare a production budget in units. (4 marks)

(iii) Prepare a materials budget (in units and €) for each material. (9 marks)

(iv) Prepare a labour cost budget. (2 marks)

(v) Prepare a variable production overhead cost budget. (2 marks)

(b) Prepare a budgeted income statement for the first quarter of 2019 based on your calculations in (i) to (v) above.

(4 marks)

(c) Briefly outline TWO reasons why a company should prepare budgets. (2 marks)

[Total: 25 Marks]

Page 2
 ANSWER PART (A) OR PART (B)
2.
(A) You are a newly qualified Certified Public Accountant in the firm of Kyle & Co and have been asked by a senior
manager to provide assistance to a new client. The client has asked for information about standard costing;
specifically the different types of standard costs and how standard costs are established. You have agreed to
prepare a briefing note that will address these matters.

REQUIREMENT:

Prepare a briefing note that:

(a) Describes the different types of standard costs and their suitability for use in a company. (6 marks)

(b) Briefly explains two approaches to establish standard costs, including the advantages and disadvantages of each
approach.
(6 marks)

(c) Outlines TWO limitations of standard costing. (2 marks)

Format and Presentation (1 mark)

[Total: 15 Marks]

OR
(B) Peter Fahy is the managing director of PF Components DAC, a recently established manufacturing company based
in Kerry. He recently approached your firm, Farrell & Brennan, Certified Public Accountants, seeking advice in
relation to inventory valuation and just-in-time (JIT) inventory management. Peter understands the importance of
efficient inventory management in a manufacturing environment.

REQUIREMENT:

Draft a memorandum for Peter Fahy, managing director of PF Components DAC, that addresses the following issues:

(a) For each inventory valuation approach (FIFO, LIFO and Average Cost):

• Describes the main features of the approach, (6 marks)

• Explains the effect of the approach on profit and on closing inventory valuation during periods of rising prices.

(3 marks)

(b) Outlines how just in time (JIT) inventory management operates and lists TWO advantages and TWO disadvantages
of this approach.
(5 marks)

Format and Presentation (1 mark)

[Total: 15 Marks]

Page 3
 SECTION B - ANSWER ANY THREE QUESTIONS.
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of
answers. Only one answer is correct in each case. Each question carries equal marks. On the answer sheet
provided indicate for each question, which of the options you think is the correct answer. Marks will not
be awarded where you select more than one answer for any question.

1. Which of the following would be classified as a direct labour cost?

(a) A bricklayer’s wages in a construction company.

(b) The wages of the general manager in a hardware store.
(c) The salary of the maintenance manager in a company manufacturing cameras.
(d) The salary of the human resources manager in a car sales company.

The following information relates to Questions 2 and 3:

The process account shown below relates to the month of August and closing work in progress (WIP) is 50%
complete.

Process Account
Units € Units €
Opening WIP 542 24,000 Output 578
Period costs 60 4,910 Closing WIP 24
602 28,910 602

The company uses the weighted average (average cost) method of process costing.

2. The value of the closing WIP for the month of August is:

(a) €588
(b) €1,153
(c) €1,176
(d) €976

3. The value of output for the month of August is:

(a) €27,757
(b) €28,853
(c) €28,322
(d) €27,934

4. Which of the following differences between financial accounting and management accounting is INCORRECT?

(a) There is no legal requirement for management accounting information to be produced.

(b) Management accounting reports must be produced on a monthly basis.
(c) Financial accounting information primarily focuses on past information.
(d) Financial accounting reports present summarised financial information for the business based on company
law and financial reporting standards.

5. XY DAC charges a selling price of €200 for one of its products and the product cost per unit is €80.

In relation to this product, which of the following statements is CORRECT?

(a) The gross profit margin is 150% and the mark-up is 60%.
(b) The gross profit margin and mark-up are the same.
(c) The gross profit margin is 60% and the mark-up is 150%.
(d) There is not enough information given to calculate the gross profit margin and the mark-up.

Page 4
6. AB DAC recorded the following information relating to its production activity:

Month January June July

Machine hours 16,000 18,000 20,000
Production overhead cost €346,000 €380,000 €414,000

The fixed production overhead cost per month is:

(a) €74,000
(b) €34,000
(c) €68,000
(d) €36,000

7. CD DAC makes and sells three products; details relating of each product is shown below:

Product R Product S Product T

Per Unit € Per Unit € Per Unit €
Direct labour (@ €12 per hour) 6.00 18.00 12.00
Direct material (@ €6 per kg) 9.00 7.50 12.00
Maximum demand per period (units) 760 1,040 480

Total labour hours per period are limited to 2,600 and the supply of material is limited to 2,900 kgs per period.

The company’s limiting factor is:

(a) Direct material.

(b) Direct labour.
(c) Both direct material and direct labour.
(d) Neither direct material nor direct labour.

8. Ola DAC is pricing a one-off contract. The contract requires 2,000 kgs of material X44, which the company no
longer uses in its production process. Currently, Ola DAC has 1,000 kgs of this material in inventory, which originally
cost €3,000 and which could be sold for a scrap value of €1.50 per kg. If the company wants to buy a new supply
of material X44 the current replacement cost is €2.80 per kg.

The relevant cost of material X44 to include in the contract is:

(a) €2,800
(b) €4,500
(c) €5,800
(d) €4,300

[Total: 20 Marks]

Page 5
4. Sceneit DAC, based in Dublin, offers a range of sightseeing tours to tourists in the summer season. This year the
company has developed two new tours, Magical Newgrange and Wicklow Wonders. However, due to budget
constraints the company can only afford to offer one of the new tours to tourists. The management accountant has
collated the costing details of each of the tours, including a proposed selling price, and these are shown below. In
addition, the company’s sales staff has conducted some market research to try to estimate the popularity and
demand for each of the tours. This information is also provided below.

Cost information Magical Newgrange Wicklow Wonders

Driver and guide wages (per day) €185 €185

Insurance cost (per day) €12 €16.40
Entrance price to attractions per person (see Note 1) €10 €16
Refreshments per person (see Note 2) €12.50 €15.80
Kilometres travelled (See Note 3) 130 120
Bus hire costs (see Note 3) €50 €50
Selling price of tour (per person) €50 €56

Market research information Magical Newgrange Wicklow Wonders

Average (expected) number of persons per tour 48 55

Notes:
1. The selling price of each tour includes the entrance ticket to the various attractions. For Magical Newgrange
the entrance ticket relates the heritage centre. For Wicklow Wonders the entrance ticket relates to
Powerscourt House and Gardens. Sceneit DAC has negotiated a deal (with the Newgrange heritage centre
and Powerscourt House and Gardens) whereby if there are 40 or more customers on the tour, the entrance
price to the attraction is reduced by €1.00 per person for all tickets.

2. Sceneit DAC has arranged morning coffee and lunch for each person taking the tour. This cost is only payable
for customers taking the tour and is included in the selling price of the tour.

3. The tour buses are hired from Busy Buses DAC based in Dublin and can accommodate a maximum of 56
customers per tour. The bus hire cost is €50 per day plus €0.95 per kilometre travelled.

REQUIREMENT:

(a) For EACH tour:

(i) Calculate the breakeven point in sales revenue. (8 marks)

(ii) How many tours must be sold for the company to achieve a profit of €1,000 per day? (5 marks)

(iii) Calculate the margin of safety in percentages, assuming tour sales achieved are equal to the average
(expected) number of tour sales.
(3 marks)

(b) Recommend which tour Sceneit DAC should choose for the summer season, giving relevant reasons to support
your answer.
(2 marks)

(c) Outline TWO assumptions of Cost-Volume-Profit analysis. (2 marks)

[Total: 20 Marks]

Page 6
5. Enlighten DAC was established two years ago and produces a wide range of candles, for the hotel and leisure
industry. The company specialises in large scented candles that are popular in spas and beauty rooms throughout
the country. Since its inception the company has used variable (marginal) costing as the basis for its management
accounts. Due to its substantial growth over the past two years the company is required to have an external audit
conducted for the financial year to 31 December 2018. During preliminary discussions the audit partner suggested
that it would be much simpler and more appropriate for the company to use absorption costing rather than variable
(marginal) costing. However, the managing director of Enlighten DAC was concerned, stating that she was, ‘not
really sure how it will affect our bottom line.’

Management accounts for the Spa Tranquillity candle for the month of July, prepared using variable (marginal)
costing, are shown below:

€ €
Sales (see Note 1) 53,125
Cost of sales:
Opening inventory (See Note 2) 2,240
Production 33,600
35,840
Closing inventory (840)
Cost of goods sold 35,000
Contribution 18,125
Fixed costs
- Production overheads (see Note 3) 7,650
- Selling and administrative overheads 2,500
Profit 7,975

Notes:
1. Spa Tranquillity candles have a selling price of €4.25 each.
2. At 1 July, the company had 800 Spa Tranquillity candles in inventory.
3. The variable (marginal) cost per candle has remained at the same level since the company began operating.
4. Total fixed production overheads are budgeted to be €91,800 for this product for the year.
5. The audit partner has suggested that fixed production overheads may be absorbed into production using
budgeted production in units. Total budgeted production for the year is 108,000 units to be split equally over
the twelve month period.
6. Assume that actual fixed production overheads are equal to budget for July.

REQUIREMENT:

(a) Calculate the product cost of one Spa Tranquillity candle based on absorption costing. (3 marks)

(b) Prepare an income statement for the Spa Tranquillity candle for the month of July using absorption costing.

(12 marks)

(c) Reconcile the profit using variable (marginal) costing with the profit calculated using absorption costing at (b) above.

(3 marks)

(d) Briefly outline TWO reasons why a company may prefer to use absorption costing rather than variable (marginal)
costing.
(2 marks)

[Total: 20 Marks]

Page 7
6. SC Tables DAC was established in Dublin in 1999 and produces a range of side tables and coffee tables. The
manufacturing facility comprises four departments. It has two production departments, cutting and assembly and
two service departments, stores and machine maintenance. SC Tables DAC operates a traditional absorption
system to assign overhead to products.

Budgeted cost information for the month is shown below.

Total Cutting Assembly Stores Machine

maintenance
€ € € € €
Direct labour 108,000 32,400 54,000 10,800 10,800
Indirect labour 24,500 1,960 17,150 2,940 2,450
Power 19,240
Building insurance 2,100
Factory security 1,680
Equipment depreciation 6,100
Factory rent 7,980
Supervision 14,700

Details relating to the budgeted activity for the month are as follows:

Total Cutting Assembly Stores Machine

maintenance
Labour hours 8,000 2,400 4,000 800 800
Floor area (square metres) 4,200 1,680 1,680 630 210
Kilowatt hours (% usage) 100 65 20 5 10
Net book value of equipment €366,000 €219,600 €54,900 €36,600 €54,900
Number of employees 15 4 7 2 2
Machine hours 10,500 7,350 3,150
Value of stores issues 56,280 42,210 14,070

REQUIREMENT:

(a) On the basis of the information provided above, prepare a schedule of the total budgeted overheads for each of
the four departments, clearly showing the basis of apportionment.
(8 marks)

(b) Calculate the total budgeted overheads for both production departments after the service departments have been
re-apportioned to them.
(3 marks)

(c) Compute the pre-determined overhead absorption rates for each of the production departments. (4 marks)

(d) At the end of the month the following information was obtained:

Cutting Assembly
Actual production overhead costs €39,015 €36,825
Actual machine hours recorded 7,090 1,580
Actual labour hours worked 3,150 3,940

Calculate the under or over-absorbed production overhead for the cutting and assembly departments. (5 marks)

[Total: 20 Marks]

END OF PAPER

Page 8
 SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

MANAGEMENT ACCOUNTING
FORMATION 2 EXAMINATION - AUGUST 2018

SOLUTION 1
Question 1 Healthwyze DAC - Solution
(a) Marks

(a) Sales budget

(i) January February March Total
! ! ! !
Sales (@ !3.10 per bottle) 13,330 13,578 15,562 42,470 2

(ii)
(b) Production Budget in units (250ml bottles)

January February March

Sales 4,300 4,380 5,020
Closing inventory 1,000 1,500 2,000
5,300 5,880 7,020 4
Less opening inventory 980 1,000 1,500
Production required in 250ml bottles 4,320 4,880 5,520

Production required in litres 1,080 1,220 1,380

(b) Materials Purchase Budget

(iii)
Each 250ml bottle contains 225ml or 90% mineral water and 25ml or 10% green tea extract

Mineral water January February March

Production in litres 1,080 1,220 1,380

Mineral water required per 250ml bottle i.e 90% 972 1,098 1,242
Closing inventory 2,108 3,010 4,108
3,080 4,108 5,350
Less opening inventory 2,000 2,108 3,010
Purchases required 1,080 2,000 2,340
Cost @ !0.80 per litre ! 0.80 ! 0.80 ! 0.80
Total Cost ! 864 ! 1,600 ! 1,872

Total mineral water purchases ! 4,336

Green tea extract January February March

Production in litres 1,080 1,220 1,380

Green tea extract per 250ml bottle i.e 10% 108 122 138
Closing inventory 1,000 1,000 2,000
1,108 1,122 2,138
Less opening inventory 1,000 1,000 1,000
Purchases required 108 122 1,138
Cost @ !12 per litre ! 12.00 ! 12.00 ! 12.00
Total Cost ! 1,296 ! 1,464 ! 13,656

Total green tea extract purchases ! 16,416

Recycled plastic bottles January February March

Production in 250ml bottles 4,320 4,880 5,520
Closing inventory 1,000 1,500 2,000
5,320 6,380 7,520
Less opening inventory 1,000 1,000 1,500
Purchases required 4,320 5,380 6,020
Cost @ !0.10 per bottle ! 0.10 ! 0.10 ! 0.10
Total Cost ! 432 ! 538 ! 602

Total recycled plastic bottle purchases ! 1,572

9

Page 9
 (c) Labour cost budget
(iv)
January February March
Production in 250ml bottles 4,320 4,880 5,520
Cost to produce each bottle !0.60 ! 0.60 ! 0.60 ! 0.60 2

Production labour cost ! 2,592 ! 2,928 ! 3,312

Total production labour cost ! 8,832

(d) Variable overhead budget

(v)
January February March
Production in 250ml bottles 4,320 4,880 5,520
Cost to produce each bottle !0.40 ! 0.40 ! 0.40 ! 0.40
2
Variable overhead cost ! 1,728 ! 1,952 ! 2,208

Total variable overhead cost ! 5,888

(b)
(e) Income statement
Sales ! 42,470
Cost of Sales
Opening Inventory note 1 ! 15,248
Production Cost note 2 ! 37,044 4
! 52,292
-Closing Inventory note 3 ! 30,646
Cost of sales ! 21,646
Gross Profit ! 20,824

Note 1
Opening Inventory Quantity Cost Value
Eyz 980 ! 1.58 ! 1,548
Mineral water 2,000 ! 0.80 ! 1,600
Green tea extract 1,000 ! 12.00 ! 12,000
Recycled plastic bottles 1,000 ! 0.10 ! 100
! 15,248

Note 2
Production Cost
Mineral water ! 4,336
Green tea extract ! 16,416
Recycled plastic bottles ! 1,572
Labour ! 8,832
Variable overheads ! 5,888
! 37,044

Note 3
Closing Inventory Quantity Cost Value
Eyz 2,000 ! 1.58 ! 3,160
Mineral water 4,108 ! 0.80 ! 3,286
Green tea extract 2,000 ! 12.00 ! 24,000
Recycled plastic bottles 2,000 ! 0.10 ! 200
! 30,646

(c)
(f) Briefly outline reasons why a company should prepare budgets
Any TWO of the following:
- Agreed targets: budgets establish targets for all aspects of an organisation's operations.
- Identification of problems: budget preparation facilitates examination of all aspects of a business
and may identify any factors that prevent an organisation from achieving its objectives.
- Identifies possible improvements: budgets identify any areas that may be improved increasing
effectiveness and efficiency.
- Improves co-ordination: preparation of budgets requires managers to combine their plans and
objectives with those of other managers and this ensures that each plan fits with the company's
overall objectives.
- Control: once prepared budgeted figures are compared with actual results and a variance is
extracted. The reasons for this variance are then investigated so as to make necessary 2
corrections and control the company's operations.
- Improves communication: in preparing budgets the organisation must ensure that it communicates
effectively with all those involved in the budget process. In addition, those preparing the budgets must
communicate well with others involved in the process to ensure that a realistic but challenging
budget is produced.
- Assists in evaluation of managers: budgets are often used to assess the performance of managers
in achieving the budgeted outcomes.
- Any other relevant point.
Total 25

Page 10
SOLUTION 2

(A)

BRIEFING NOTE

(a) Different types of standard costs and their suitability for a company to use
There are three main categories of standard costs, basic standard costs, ideal standard costs and currently
attainable standard costs.

Basic standard costs: these are standard costs that do not change over many years. The advantage of this type of
standard cost is that it provides a base for comparison with actual cost over a period of years. However, there may
be changes in prices, methods of production or other factors so that basic standard costs are not useful as they
do not represent current costs; they do not accurately represent what the organisation expects to achieve now.

Ideal standard costs: these standard costs represent perfect performance. They assume 100% efficiency, that there
are no losses or idle time. They represent the minimum costs that are possible under the most efficient operating
conditions. Ideal standard costs are not generally used in practice as they are likely to have a demotivational effect
on staff. However, the company may set ideal standard costs as goals to aim for rather than performance that must
be attained. By doing this it is possible that the company’s performance level will improve over time and it will
become more efficient and more competitive.

Currently attainable standard costs: these are standard costs that should be attainable under efficient operating
conditions. These standards incorporate the possibility of machine breakdowns, normal wastage and lost time.
Currently attainable standards should be tough but realistic. They should be tough so that staff will have to work
hard to achieve the standards but they also must be realistic because if not staff will not be motivated to work hard.
Currently attainable standard costs are the most suitable for companies to use. They provide information for planning
and control purposes.
(6 marks)

(b) Approaches used to establish standard costs including advantages and disadvantages
In general there are two approaches that may be used when establishing standard costs, historical records and
engineering studies.

Historical records: with this approach past records of the company’s operations, purchase and use of materials and
labour serve as a basis for establishing current standards. This approach is often used in practice.

The advantages of this approach are that it is relatively inexpensive; it uses actual company data to compute
standard costs and provides a reference for future improvement.

The disadvantages of using past historical records are that there is the possibility that past inefficiencies will be
incorporated in the standard costs; if the production process changes the historical data will be irrelevant and if the
company introduces new products then using this approach to develop cost standards will not be possible.

Engineering studies: this approach requires a detailed study of each production operation to be conducted so that
standard costs are based on observed recorded activity. Engineering studies may also require input from operating
personnel to provide estimates about future activities and consumption levels.

The advantages of this approach are that it is future oriented; it aims to ensure that past inefficiencies are not
incorporated in standard costs. In addition, this approach facilitates allowance for expected changes such as
alterations to the production process or product redesign.

The disadvantages of this approach are that it is time consuming and expensive to employ. Engineering studies
require a comprehensive team approach combining input from production, human resources, sales and finance
staff. While such an approach may improve the reliability of cost estimates and increase commitment and motivation,
there is the possibility of data bias to set easier to achieve standard costs.
(6 marks)

Page 11
(c) Outlines TWO limitations of standard costing.

• Standard costing was developed when the business environment and operating conditions were more stable.
The modern business environment is much more dynamic suggesting that standard costing may be less
applicable.

• In the past it was considered satisfactory for performance to reach predetermined standard levels. This is not
the case in today’s challenging business environment, constant performance improvement is required to
remain competitive.

• Past production processes were much more labour intensive and consequently labour standards and
variances were in greater focus. However, significant changes to production processes have increased
automation so that in many cases labour standards and variances are now less relevant.

• Any other relevant limitation.

(2 marks)
(Format and presentation 1 mark)

[Total: 15 marks]

(B)

MEMORANDUM
To: Mr Peter Fahy, managing director, PF Components DAC.
From: Trainee CPA
Subject: Inventory valuation and just in time inventory management
Date: August 2018

Further to your request for assistance, the information regarding the different approaches to inventory valuation and just
in time inventory management is presented below. The first section outlines the main features of each inventory valuation
approach. The second section explains the effect of each inventory approach on profit and closing inventory during periods
of rising prices. The final section describes just in time inventory management, providing advantages and disadvantages
of this system.

(a) The main features of each inventory valuation approach

First In First Out (FIFO):

• Assumes that materials purchased first are used first.
• FIFO seems most logical as it makes the same assumptions as the physical flow of materials through an
organisation.
• In periods of inflation early purchases of material will have lower prices and will be issued first
• FIFO is accepted by accounting standards as a suitable method of valuing inventory
• Any other relevant point

Last In First Out (LIFO):

• Assumes that materials purchased last are used first
• With LIFO the latest purchases of material, which will (generally) have higher prices, will be issued first
• LIFO is NOT accepted by accounting standards as a suitable method of valuing inventory
• Any other relevant point

Average Cost (also called Weighted Average):

• Calculates an average cost for all materials purchased
• With Average Cost, material issues will be recorded at an average price based on purchases to date
• Average Cost is accepted by accounting standards as a suitable method of valuing inventory
• Any other relevant point
(6 marks)

The effect of each inventory valuation approach on profit and on closing inventory during periods of rising prices.

First In First Out (FIFO):

Cost of sales will be lower and profit will be higher than the other methods
Closing inventory will be valued at the latest (and highest) prices

Page 12
 Last In First Out (LIFO):
Cost of sales will be higher and profit will be lower than the other methods
Closing inventory will be valued at the earliest (and lower) prices

Average Cost (also called Weighted Average):

Cost of sales and profit will (generally) be in between the figures for FIFO and LIFO
Closing inventory will be valued at average prices
(3 marks)

(b) The operation of a just-in time (JIT) inventory management system including TWO advantages and TWO
disadvantages

A JIT system refers to purchasing or production systems where goods arrive at a particular destination exactly
when they are needed. In a full JIT system almost no inventory is held. JIT inventory management seeks to eliminate
any waste arising from the production process as a result of using inventory. However, aside from carrying lower
levels of inventory, JIT also involves working in ways that reduce or eliminate non-value added activities and
practices.

Advantages of JIT
• Seeks to eliminate waste at all stages of the manufacturing process
• Builds a stronger relationship with suppliers
• Emphasises a high quality product and can help to reduce scrap, re-working and set up costs
• Facilitates a smooth flow of material and work throughout the production process
• Any other relevant point

Disadvantages of JIT
• There may be little flexibility or room for manoeuvre in the event of unforeseen delays
• Company may become too dependent on supplier(s) to deliver high quality goods on time
• Due to commitment to particular supplier(s), company may be unable to obtain the best prices for products
• Any other relevant point
(5 marks)
Format and presentation (1 mark)

[Total: 15 Marks]

Page 13
SOLUTION 3

1. Answer (a) Bricklayer’s wages in a construction company.

2. Answer (a) €588

Total costs incurred €28,910 (x)

Total completed units 578
Add equivalent units of closing WIP: 24 x 50% 12
Total equivalent units of output 590 (y)
Cost per equivalent unit €49 (x/y)
Value of closing WIP for August: 12 x €49 = €588

3. Answer (c) €28,322

Cost per equivalent unit (calculated at 2. Above) €49

Value of output for August 578 x €49 = €28,322

4. Answer (b) Management accounting reports may be produced on a daily, weekly, monthly basis as required.

5. Answer (c) The gross profit margin is 60% and the mark-up is 150%.

Selling price €200

Product cost € 80
Gross profit €120

Gross profit margin = Gross profit x 100 = €120 x 100 = 60%

Sales €200

Mark-up % = Gross profit x 100 = €120 x 100 = 150%

Product cost €80

6. Answer (a) €74,000

Machine hours Overhead cost

High month of activity July 20,000 €414,000
Low month of activity January 16,000 €346,000
Difference 4,000 € 68,000

Variable production overhead cost = €68,000/4,000 = €17 per machine hour

Fixed production overhead cost = €414,000 – (20,000 x €17) = €74,000

7. Answer (a) Direct material.

Product R Product S Product T
Per Unit Per Unit Per Unit
Direct labour (unit cost/labour rate per hour) (x) 0.5 hrs 1.5 hrs 1 hr
Maximum demand per period (units) (y) 760 1,040 480
Total labour hours required per product (x*y) 380 hrs 1,560 hrs 480 hrs
Total labour hours required 2,420 hrs
Total labour hours available 2,600 hrs
‘=> Not limiting factor

Direct material (unit cost/material cost per kg) (x) 1.5 kgs 1.25 kgs 2 kgs
Maximum demand per period (units) (y) 760 1,040 480
Total material required per product (x*y) 1,140 kgs 1,300 kgs 960 kgs
Total material required 3,400 kgs
Total material available 2,900 kgs
‘=> Material IS a limiting factor

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8. Answer (d) €4,300.

2,000 kgs of material X44 required - relevant cost:

1,000 kgs in inventory - scrap value =1,000kgs x €1.50/kg = €1,500
1,000 kgs to be purchased – replacement cost =1,000kgs x €2.80/kg = €2,800
Total amount to be included in contract for material X44 €4,300

[Total: 20 marks]

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SOLUTION 4
Question 4: Sceneit DAC - Solution Marks
(a)
(i) Break even point in sales revenue Magical Wicklow
Newgrange Wonders
Fixed costs ! !
Driver and guide wages cost 185.0 185.00
Insurance cost per day 12.0 16.40
Bus hire costs - fixed rate 50.0 50.00
Bus hire costs - based on kilometres 123.5 114.00
Total fixed costs 370.50 365.40

Sales revenue per person 50.00 56.00

Less: variable costs
Refreshments per person 12.50 15.80
Entrance to attraction per person (discounted rate) 9.00 15.00
Total variable costs 21.50 30.80

Contribution per person 28.50 25.20

Contribution margin ratio(CMR) = Contribution/Sales = 0.57 0.45

Break even point in sales revenue = Total fixed costs = !650.00 !812.00 8
CMR

(ii) If a profit of !1,000 per day is required how many day trips must be sold?

Target profit in units = Total fixed costs + Target profit

Contribution per unit

For Magical Newgrange = !370.50 + !1,000 = 49

!28.5 trips (rounded)

For Wicklow Wonders = !365.40 + !1,000 = 55

!25.20 trips (rounded) 5

Magical Wicklow
PROOF: Not required by question Newgrange Wonders
! !
Total revenue [49 x !50]/(55 x !56) 2,450.00 3,080.00
Less: total variable costs [49 x !21.50]/(55 x !30.80) 1,053.50 1,694.00
Total contribution 1,396.50 1,386.00
Less: total fixed costs (see (a) (i) above) 370.50 365.40
Profit (approximately !1,000) 1,026.00 1,020.60

(iii) Margin of safety in percentages

Assuming actual sales = expected sales

= Expected Sales - Break Even sales x 100

Expected Sales Magical Wicklow
Newgrange Wonders
Average expected sales
= expected no. of customers x selling price per tour = !2,400 !3,080

Magical Newgrange = !2,400 - !650 x 100 = 72.9%

!2,400

Wicklow Wonders = !3,080 - !812 x 100 = 73.6% 3

!3,080

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 !

(b) Recommend which option Sceneit DAC should choose giving reasons for your answer

Sceneit DAC should choose the Magical Newgrange tour because:

- It has a lower break even point
- It has a higher contribution to sales ratio
- It has has a high margin of safety based on expected sales at 72.9% 2
Any other relevant point

(c) Assumptions of CVP

Any TWO of the following:
- Volume is the only factor influencing cost
- Costs may be accurately classified into fixed costs and variable costs
- Selling price per unit remains constant
- Variable cost per unit remains constant 2
- If more than one product is sold, the sales mix is assumed to be constant
-Inventory is valued at variable cost of production or if not all units are sold in the period when
they are produced
- The CVP analysis applies to the relevant range and short term horizon

Total 20

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SOLUTION 5

Question 5 Enlighten DAC - Solution Marks

(a) Calculation of product cost using absorption costing

!
Variable product cost * 2.80
Fixed production overhead ** 0.85
Total product cost per unit (candle) 3.65 3

Vairable product cost

Opening inventory value = opening inventory in units x variable production cost per unit
=> variable production cost per unit = opening inventory value/opening inventory in units
=> variable production cost per unit * = !2,240/800 = !2.80

Fixed production overheads per year !91,800

Normal production capacity per year 108,000
Fixed production overhead absorption rate per unit ** !0.85

Workings
July
W1 Calculation of changes in inventory units
Opening inventory 800
Production (!33,600/!2.80 (see above)) 12,000
Total inventory available 12,800
Sales (!53,125/!4.25) 12,500
Closing inventory 300

W2 Calculation of Under/Over absorbed overhead

July
!
Actual fixed production overhead 7,650
Absorbed fixed production overhead (12,000 units x .85) 10,200
Over absorbed overhead -2,550

(b) Income statement for Enlighten DAC for the month of July
Using Absorption costing - Product Cost = 3.65
July
!
Sales 53,125
Cost of Sales:
Opening Inventory (800 x 3.65) 2,920
+ Production (12,000 x 3.65) 43,800
- Closing Inventory (see W1) (300 x 3.65) -1,095 45,625

Over absorbed overhead (see W2) -2,550

Gross profit 10,050
Selling and administrative overheads 2,500
Profit 7,550

12
(c) Reconciliation of Absorption and Variable costing profit figures

!
Profit per variable costing 7,975

Adjustment for fixed production overhead absorbed in inventory

(800 - 300) * !0.85 -425

Profit per absorption costing 7,550 3

(d ) Briefly outline TWO reasons why a company may prefer absorption costing to variable (marginal) costing
Any TWO of the following reasons:
- Financial accounting requires that absorption costing is used to cost products.
- Absorption costing avoids having to separate costs into their fixed and variable elements.
- Absorption costing does not underestimate the importance of fixed production overheads. 2
- By calculating and analysing under/over absorbed overheads in absorption costing, inefficient utilisation of resources may be revealed.
- Absorption or full costing is a better basis for calculating selling prices.
- Any other relevant point
20

Page 18
SOLUTION 6

Question 6: Sidewayz DAC - Solution

a) Schedule of budgeted overheads Machine

Overhead expense Basis Total Cutting Assembly Stores maintenance
! ! ! ! !
Exclude direct labour Not a production overhead

Indirect labour Given 24,500 1,960 17,150 2,940 2,450

Power Kilowatt hours 19,240 12,506 3,848 962 1,924
Building insurance Floor area 2,100 840 840 315 105
Factory security Floor area 1,680 672 672 252 84
Equipment depreciation Net book value of equipment 6,100 3,660 915 610 915
Factory rent Floor area 7,980 3,192 3,192 1,197 399
Supervision Number of employees 14,700 3,920 6,860 1,960 1,960
76,300 26,750 33,477 8,236 7,837
8
b) Reapportionment of service departments
- Stores Value of stores issues 6,177 2,059 -8,236
32,927 35,536 0 7,837
- Maintenance Machine hours 5,486 2,351 -7,837
38,413 37,887 0 0
3
c) Calculation of predetermined overhead rates

Machine hours 7,350

Labour hours 4,000

Overhead absorption rate !5.23 !9.47 4

d) Under/over absorption of production overhead

Cutting Assembly
! !
Actual production overhead cost 39,015 36,825
Absorbed production overhead cost
- Cutting : 7,090 x !5.23 37,081
- Assembly 3,940 x !9.47 37,312
Under/(Over) absorbed production overhead 1,934 -487 5

Total 20

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