Reference no: EM131226918

QUESTION 1

1. New Bank University is organized into three departments - registry, personnel and general administration - and two teaching faculties - undergraduate and postgraduate. The service departments provide services to the two teaching faculties and also to each other, and the respective proportions provided to each user are set out in the table below:

User of service

Provider of
service	Service	departments		Teaching	faculty
	Registry	Personnel	Central	Under-	Post­
			admin.	graduates	graduates
Registry	0%	0%	0%	70%	30%
Personnel	5%	0%	20%	50%	25%
Central					'I
admin.	0%	5%	0%	60%	35%

Costs incurred in the three service departments are set out below:

Service departments	Variable cost	Fixed cost	Total to be allocated
Registry	£24,000	£76,000	£100,000
Personnel	£15,000	£45,000	£60,000
Central
admin.	£47,500	£142,500	£190,000
	£86,500	£263,500	£350,000

Required

a. Determine the appropriate allocation of service department costs to the teaching departments, taking into account the reciprocal nature of service provision between departments.

b. `Instead of using reciprocal allocation of costs, end user departments should be able to bargain over the level and price of provision of services from service departments.' Discuss this statement.

QUESTION 2

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 19X4 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 19X4, 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 19X4, 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 19X4, 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 off 110,000 per month. In 19X4, machine usage is estimated to be 22,000 hours.

Distorto has just accepted two orders for July 19X4. 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 labor hour that Distorto Company Ltd would use under its existing costing system.

b. Calculate the total overhead cost that would be assigned under the existing costing system to each of the orders given above.

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.

d. Explain why the total overhead costs calculated in parts (b.) and (c.) are different, and discuss the implications of this for the design product costing systems.

QUESTION 3

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.

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.

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.

QUESTION 4

Leg Cycles manufactures quality bicycle components, and is about to begin marketing a component package, the `UXX Group Set', to specialist bicycle shops. The UXX Group Set consists of eight of the most commonly-purchased components from Leg Cycles' UXX range. Production of 5,000 Group Sets is planned for the forthcoming year. For this production level, predicted costs are:

£

Direct material per set                                                                                              80

Direct labour per set: one hour at £15.00 per hour                                                  15

 Variable selling cost per set                                                                                    5

                                                           £100

Variable overhead rate                                                                 £8.00 per direct labour hour

Fixed overhead rate                                                                     £20.00 per direct labour hour.

In addition, the sales department will allocate £25,000 of fixed administrative expenses to supporting the marketing of UXX Group Set.

Required
a. Compute the unit cost of a UXX Group Set, using each of the following definitions of cost:
1. variable manufacturing cost
2. absorption manufacturing cost
3. total cost.

b. Assuming that cost is defined as total cost, determine the mark-up percentage required for Leg Cycles to achieve a target profit of £66,500 (before taxes) on the UXX Group Set for the year.

c. The sales director has estimated the mark-up required to be calculated in part (b.), and claims that such a mark-up is unrealistic given the competitive nature of the market for bicycle components. She believes that a mark-up of half that calculated in part (b.) is more appropriate. Assuming that the number of direct labor hours worked could be reduced through efficiency measures, by how much would direct labor hours per unit have to fall in order to achieve a revised target profit of £27,875 and a mark-up of half that calculated in part (b.)? Explain any assumptions you make.

d. The use of full cost allocation methods makes controlling overhead costs more difficult because it hides the reason for incurring overheads.' Discuss this statement.

QUESTION 5

a. 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?

b. Discuss the caveats of a decision-making approach to the study of management accounting.

Question 6

a. Discuss how the budgetary planning and control system of a manufacturer of a single product is likely to differ from the system of a similar-sized manufacturer of a range of products. (25 marks)

b. `The 1980s brought about a fundamental rethinking of the role of management accounting.' Critically discuss this statement.

Question 7

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 19X4 are set out below:

	£	Budget £	£	Actual £
Sales		100,000		98,400
Materials	28,800		29,274
Labor	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

The following information is available:

1. Joe's monthly budget is based on production and sales of 800 units of the `Maxwell' 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 19X4 for each unit of the `Maxwell' assumes two kilograms of raw material at £18.00 per kilogram and four hours of direct labour at £10.00 per hour. Variable overheads, which are assumed to vary in line with direct labour, are estimated at £5.00 per hour.

3.The actual selling price of the `Maxwell' in April 1994 was £120 per unit.

4.Actual material costs in April 19X4 were £ 17.00 per kilogram and actual direct labour costs were £9.50 per hour.

Required

a. Prepare a variance statement for Joe Haines for April 19X4, showing such variances as you consider appropriate.

b. Variance analysis simply shows where the budget went wrong. It has no value in controlling costs.' Discuss this statement.

QUESTION 8

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 19X4, 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 19X5. 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 19X4,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 a	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 may be assumed to be fixed.

For the year to 31 March 19X5, 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.

The department has a maximum capacity of 60 beds but in the year to 31 March 19X4 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 19X5, 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 re-deployed 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 19X5.

Required

a. Prepare calculations to help guide the hospital management in settine, the level of charges for the private patients' department for the year to 31 March 19X5. 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 19X5 is the same as that in the year to 31 March 19X4.

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.