MANAGEMENT ACCOUNTING

Certificate stage examination 8 June 2009

From 10:00 to 13:00 plus ten minutes reading time from 09:50 to 10:00

Instructions to candidates There are six questions on this question paper Answer five questions in total Three compulsory questions from Section A Two of the three questions from Section B The questions in Section A carry, in total, 60 marks The questions in Section B each carry a total of 20 marks All workings should be shown. Where calculations are required using formulae, calculators may be used but steps in the workings must be shown. Calculations with no evidence of this (for example, using the scientific functions of calculators) will receive no credit. Programmable calculators are not permitted in the examinations room. Formula sheets, graph paper and cash analysis paper are available from the invigilator, where applicable. Where a question asks for a specific format or style, such as a letter, report or layout of accounts, marks will be awarded for presentation and written communication.

(Copyright)

Certificate level Management Accounting

June 2009

SECTION A (Compulsory)

Whitewater Council, situated in the highlands of Scotland, operate a snow sports centre. During the winter season, the centre offers the public the facility of a real snow ski slope. During the summer, and when there is insufficient snowfall, the alternative is a dry ski slope. The centre has a number of activities on offer. At certain pre-determined times of the week, both slopes are open to the public for skiing or snowboarding (referred to as open-skiing). The centre operates an hourly charge for use of these facilities. This charge includes the hire of skis, snowboards, boots and poles, if required. The centre also offers skiing and snowboarding lessons. These can be booked on an individual basis, for which an hourly charge is levied. Alternatively, individuals can choose to join a group lesson, for which the hourly charge is slightly lower. Both options include ski and snowboard hire in the fee. It is estimated that 60% of the lesson hours will be individual lessons and 40% group lessons. The charge per hour for an individual is 25 and drops to 17 if they decide to join a group lesson. Each group consists of 5 individuals being taught together by one instructor (it is to be assumed that each group lesson will have all 5 participants). On two occasions per week the centre runs a club for 6-15 year olds, called the Polar Bears. This is a club that teaches and develops skiing with younger children. The charge for this facility does not operate hourly. Instead, the fee is paid in full at the start of the course (each full course consisting of 24 one hour sessions). There is one course run each quarter. The courses are taught and run by one of the ski instructors. There is a maximum allocation of 20 children per course. However, for planning purposes it should be assumed that only 18 places will be filled. The fee for each course is 280 per child. The centre is in the process of planning the 2009/2010 winter quarter. In order to do this effectively, it requires an accurate forecast of the likely demand for all of the facilities on offer. Once this is established, the charges for the various activities have to be determined, taking into account the fixed and variable running costs of the centre. Some analysis has been done on the number of customers that have demanded use of the open skiing facilities in the last 4 years. The financial year for the centre runs from 1st December to 30th November. The analysis is presented in Table 1 below: Table 1 Quarter 2005/2006 Number of customer hours 740 722 432 551 2006/2007 Number of customer hours 761 730 511 620 2007/2008 Number of customer hours 789 735 523 640 2008/2009 Number of customer hours 822 730 517 670

Winter (Dec Feb) Spring (March May) Summer (June Aug) Autumn (Sept Nov)

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Certificate level Management Accounting

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The winter quarter has 12 weeks for planning purposes. The centre is open 6 days per week. There are five ski instructors that each work five days per week. They teach a maximum of seven hourly sessions per day to allow for their breaks. If they have no lessons booked, the instructors are still paid as they perform other duties in the centre. Due to recent experience, the centre managers have decided that it would be prudent to budget that only 75% of the available teaching hours (after deducting time allocation needed for Polar Bears) to actually be booked out for either individual or group lessons. The costs for the winter quarter are as follows: Staff costs: 5 instructors paid 620 per week. Maintenance of slopes and lifts: This cost depends partly on the use of the slope and is partly fixed regardless of usage. During the last 4 winter quarters the costs have been as follows: Table 2 2005/2006 740 10,590 2006/2007 761 10,664 2007/2008 789 10,762 2008/2009 822 10,877

Number of customer hours Total maintenance cost

Water system for the dry ski slope: This cost is 2,500 per quarter. Power and utilities: This is a fixed charge of 7,400 per quarter. Replacement/wear and tear of boards and skis: This has been estimated at 1.70 per customer hour. Advertising: The centre advertises in local press and on local radio at a cost of 750 per quarter. Business rates and insurance costs: This is 6,700 per quarter. Fee payable to council for central services: 25,000 per quarter. Refreshments are provided free to customers and the cost of this is estimated to be 1.50 per customer hour.

Requirement for question 1

(a) Using the additive model of time series analysis, prepare a forecast of the number
of customer hours that will be demanded of the open skiing facilities for skiing and snowboarding for the 4 quarters of 2009/2010. (You should base your calculations on the data in Table 1). 12 (b) From the information given, determine the hourly price that should be charged for the open skiing and snowboard facility during the winter quarter, based on the forecast numbers in part (a) for the centre to break even. 7 (c) The centre would like to buy a new piece of equipment that will improve the operation of the lifts considerably. This would cost 12,000. Calculate and comment on the price that the centre would now need to charge for their open skiing facility to cover this cost, if the charges for their other facilities were to be left unchanged. 1

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Certificate level Management Accounting

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(20)

The Brassimo Beverage Company manufacture and sell a range of healthy option beverages. One best seller is the premium raspberry fruit smoothie, which is made in batches and sold in litre cartons. Each batch produces 16 litres of finished smoothie drink. The standard production cost of one batch of 16 litres is shown in Table 1 below: Table 1 Cost Raspberries Distilled water Fresh milk Direct labour Production overhead variable Production overhead fixed Total Details 6 kg (including wastage) at 2.70 per kg. 12 litres at 10 pence per litre 4 litres at 75 pence per litre 1.5 hours at 11.50 per hour 16.20 1.20 3.00 17.25 4.00 12.75 54.40

In addition to the production overheads shown above, the company also incurs non production overheads. These are: Variable overheads: 10% of the selling price per litre. Fixed overheads: 230,000 per annum. The selling price of each litre carton of smoothie is 4.50. In order to calculate the fixed production overhead per batch shown above, a normal operating capacity of 42,000 batches per annum has been assumed. The following is a summary of the batches produced and sold in the year that has just ended. 01/04/2008 30/09/2008 22,000 20,000 01/10/2008 31/03/2009 18,000 19,500

Production Sales

There were no batches in finished inventory on 1 April 2008 and the fixed overhead is incurred at an even rate throughout the year.

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Certificate level Management Accounting

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Requirement for question 2 (a) Prepare statements for management that show sales, costs and profits for each of the two six monthly periods to 31/03/2009, using: marginal costing; (ii) (b) absorption costing.

(i)

(c)

10 Prepare a statement that reconciles the profit for each period using marginal costing, to that when absorption costing is used. Explain any significant differences. 5 Identify and explain three alternative methods that can be used in order to reapportion overheads from service cost centres to front line (or production) cost centres, if there is reciprocal work done between service cost centres. 5 (20)

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Certificate level Management Accounting

June 2009

Lidsville City Council has recently undertaken a regeneration programme to replace and upgrade the windows of three, 15 storey flat complexes in the center of Lidsville. Each storey of each block accommodates six flats, each with eight window units to be replaced. Materials The windows are bought in as a completed unit, but there is an additional materials cost for seals, trims and adhesives. The materials cost per unit are as follows: Completed unit 85 Seals, adhesives and trims (one pack) 9 94 Labour Two council workers are required to fit each window unit. The standard time taken (per worker) is one hour fifteen minutes. The council workers are paid at a rate of 8.20 per hour. Fixed overheads In addition to the above direct costs, there are also overhead costs incurred to cover the costs of scaffolding, transport and administration. The budgeted cost for the programme was 76,680. Fixed overheads are absorbed on the basis of direct labour hours. Actual Performance During the budget period allocated for the regeneration work to be completed, a total of 1,980 units were actually completed. In order to achieve this level of output: 2,520 units were used, costing 206,640. 2,760 packs of seals adhesives & trims were used, costing a total of 22,908. 5,100 hours of labour were used at a total cost of 47,430. Actual fixed overhead incurred was 82,900.

(a)

Requirement for question 3 Prepare, for the above budget period, a statement that reconciles the standard cost of windows fitted with the actual cost of fitting for the regeneration programme, showing all appropriate variances. 15 List the advantages and disadvantages of using a standard costing system such as the one in the case above. 5

(b)

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Certificate level Management Accounting

June 2009 (20)

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SECTION B (Answer two from three questions)

Brightlight Limited manufactures domestic lighting equipment and operates a group of factories throughout the UK. The managers are in the process of reviewing the performance of the South West factory. A recent extract from the internal profit statement for the factory shows a worrying situation: Revenue Costs Loss 1,680,000 1,820,000 140,000

Senior managers are concerned that the performance of the South West factory is having a detrimental effect on the company as a whole. The Chief Executive has already paid 350,000 for a management consultancy company to evaluate the alternative uses of the South West factory and the management is considering their recommendations. In addition, it has asked for an internal review to be carried out to assess the long term viability of the factory. Brightlight have recently received a proposal from another local company, Danton Electricals, to lease the factory from them for one year and make use of most of the resources located there. They are prepared to pay 1,400,000 for this. The management of Brightlight is keen on this idea as it will give them some time for the review to be carried out and provide a well needed cash injection into the business. You have the following information relating to the offer: 1. The machinery at the factory could be sold for 3,920,000. At the end of the lease period it is estimated that the value would have fallen to 3,080,000. The net book value at the present time is 3,500,000 and Brightlight depreciate their machinery at a rate of 20% reducing balance. Danton Electricals would make use of the material that is currently located at the plant. The original cost of this material was 560,000. There are no other factories within the Brightlight group that could make use of this material. It would cost Brightlight 70,000 to dispose of these materials, if they are not used. Some of the staff employed at the factory would have to be relocated to other factories in the group. It is estimated that half of the staff would be redeployed. This would cost the company 350,000 for new work being undertaken at other factories. If this work had been undertaken by locally sourced labour, the cost would have been 308,000. The profit statement above includes a contribution of 30% towards the groups fixed costs of 2,800,000. Most of these fixed costs will still be incurred during the lease and subsequent closure of the factory: however, 105,000 of these fixed costs would not be incurred as these relate to a sales and distribution function serving the local area, which would be discontinued.

2.

3.

4.

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Certificate level Management Accounting 5.

June 2009

Group sales would be reduced by 1,120,000 over and above the South West factory sales if production was stopped at this factory. This is due to complementary product ranges that would have to be discontinued. The contribution to sales ratio for sales within the group (excluding the South West factory) is 15%. Danton Electricals would be responsible for all other costs and would enjoy all profits for the year of the lease.

6.

(a)

Requirement for question 4 Prepare a report, including relevant costings, for the management of Brightlight advising them on whether they should lease the South West factory to Danton Electricals for the coming year. (You must justify any figures used/omitted in/from your calculations). 14 Define and provide a relevant example of the following: Sunk cost; Opportunity cost; Net relevant benefit; Incremental cost/benefit. 6 (20)

(b)

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Certificate level Management Accounting

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You are the Principal Management Accountant in a medium sized public sector organisation. You have been asked to prepare for a presentation to brief a cohort of new CIPFA trainees about capital budgets in the public sector. You have decided to prepare a handout to give to the trainees to take away with them after the event explaining the main principles involved.

Requirement for question 5

Prepare the handout to be distributed at the event. It should cover the following key areas: (a) (b) (c) (d) (e) Features of capital expenditure. 4 Objectives of capital budgeting. 4 The process to be followed when preparing a capital budget. 4 Sources of finance available for capital budgets. 4 Key areas to be considered for the effective monitoring of the capital budget. 3 1 mark for format (20)

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Rippling Iron manufacture and sell home gym equipment. Two products that they make are exercise benches and dumbell weight lifting sets. They are in the process of setting the budget for the coming year and you are to assist in this process. You have the following information: It is expected that the number of sales are likely to be as follows: Number Of units 684 552 Selling price 280 130

Dumbell sets Benches

At the end of the previous year there were 80 dumbell sets and 60 exercise benches in stock. For the coming budget period, the company has decided to change its inventory policy to hold enough to satisfy an average of two months of annual sales. Both products require the same materials. These are iron, steel and plastic. The requirements are as follows: Dumbell sets Iron Steel Plastic 40kg 5kg 0 Benches 0 7kg 2.5 metre squared

Some wastage occurs during the manufacturing process. This is 2.5% of iron and steel and 2% of plastic. The current costs are as follows: Iron Steel Plastic 3.60 per kg 3.20 per kg 1.70 per metre squared.

The machines that the products are made on are leased from a local company. The machine hour requirements for each product are as follows: Dumbell sets 2.5 hours Labour requirement: Dumbell sets 1.5 hours Benches 0.75 hours Benches 3.6 hours

Labour is charged at a flat rate of 14.00 per hour.

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Variable overheads are charged at 5.25 per machine hour for benches and 6.20 per machine hour for dumbells. In addition, a fixed overhead absorption rate based on machine hours of 16.00 per machine hour is applied to cover remaining factory overheads. Inventory is valued at full absorption cost.

Requirement for question 6

(a) Produce a standard cost card for both products and calculate the percentage profit margin. 3 (b) In your role as accountant produce the following budgets:

Sales budget; Production budget; Materials purchase; Labour cost budget; Production overheads budget; Budgeted total profit statement. 10

(c) Having produced the budgets in part b, you are now given some additional
information regarding a possible shortage of machine hours resulting from some essential maintenance that has to be performed on the machines. It is estimated that the maximum hours that will be available will be 3,500. Show what effect this will have on the number of each product that can now be produced, given that the objective is to maximise contribution, and the resulting fall in the total contribution for Rippling Iron. 7 (20)

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