THE UNIVERSITY OF HULL
Faculty of Business, Law and Politics
Level 5 Examination
Duration of Exam: 2 Hours
Answer any TWO questions. Each question is worth 50 marks
You should answer all compulsory questions. If you do not attempt to answer a compulsory question you will receive a mark of 0 for that question.
If you have a choice of questions and you answer more than you are asked to, your answers will be marked in the order that the questions appear on the examination question paper. Any additional questions that you attempt will not be marked.
You should cross out any questions which you attempt but do not wish to be marked.
Do not open or turn over this exam paper, or start to write anything until told to by the Invigilator. Starting to write before permitted to do so may be seen as an attempt to use Unfair Means.
Smart Station Tech LLC develops Educational Solutions using Intel-based mini PC (MP), 2-in-1 tablets (TAB) and Stylo laptops (STL). Most of their clients are established educational institute and trusts and the company ensures full integration of clients’ business processes and goals with the IT system. The company is currently using traditional costing system, calculating absorption rate based on machine hours; however, the management accountant believes that the Activity based Costing (ABC) system would provide useful information about the cost control. The accountant has gathered following information related to costing:
|Expected number of units to be sold||200,000||700,000||400,000|
|Sales price per unit (£)||500||280||450|
|Number of units in a batch||20||35||10|
|Total number of job-orders||100||350||425|
|Direct materials per unit (£)||450||100||150|
|Direct Labour per unit||120 minutes
|Machine hours per unit||90 minutes
|Direct labour||£12 per hour|
|Machine hour||£16 per hour|
|Manufacturing overhead:||see below:|
|Customised access and security protocol (A&S)||£900,000||Driven by number of units|
|IT system configuration (Config)||£2,850,000||Driven by number of batches|
|System planning and setup (SET)||£2,500,000||Driven by direct labour hours|
|Installing application and related uplinks (APPS)||£3,500,000||Driven by machine hours|
|Client’s system analysis (SYANA)||£1,750,000||Driven by number of job orders|
|Customer services (PSER)||£3,000,000||Driven by number of job orders|
- Compute the profit/loss on each product using machine hours under traditional costing system. (12 marks)
- Calculate the profit/loss on each product using ABC system. In your calculation, you must show activity rates (28 marks)
- Explain the differences between the traditional costing system and ABC, referring to the differences in profit (loss) calculated above (10 marks)
(Total 50 marks)
Edward Limited produces aluminium cutting lubricants in Humberside region. Every year, the company sets a target to sell 98,000 litres of this oil at a price of £42 per litre. Standard variable costs relating to 1 litre of oil is provided in the table below:
|Cost category||Standard Rate||Standard quantity||Standard cost per litre|
£6 per litre
£4 per kg
|Machine-hour||£10 per hour||30 minutes||£5|
|Variable manufacturing overhead||£20 per hour||£10|
Manufacturing overheads are applied on the basis of machine hours. The budgeted fixed overhead of the company is £147,000 annually at a denominator activity level of 49,000 machine hours. The following table shows the actual cost data for the year:
|Sales- 100,000 litres||6,550,000|
|Direct material purchased:
Petrol mineral- 250,000 litres
Other additives- 60,000 kgs
Direct material used:
Petrol mineral – 190,000 litres
Other additives – 52,500 kgs
|Machine hours- 52,000 hours||494,000|
|Variable manufacturing overhead-||936,000|
|Fixed manufacturing overhead||150,000|
The company’s record shows no inventories of work-in-progress (WIP) and finished goods’ inventories as well as no opening inventories of direct materials.
- Compute the following variances:
- Sales price and volume variances. You must use contribution margin to calculate volume variance
- Direct material price and quantity variances
- Spending and efficiency variances of machine hours
- Variable overhead spending and efficiency variances
- Fixed overhead budget variance
- Critically analyse how standard costing and variance analysis may be used in assessing an organisation’s performance. In your discussion, you may refer to the variances computed in requirement (a). (15 marks)
(Total 50 marks)
Mackson Bakery Ltd sells bakery products to local markets. The company is currently selling a tray (20 individual pack of bread) of wholemeal breads for £35 and a tray of white bread for £30. During the year ended on 31st December 2018, the company had following level of inventory:
|Inventories at 1st January 2018||100 trays||–|
|Production during the year||20,000 trays||30,000 trays|
|Inventories at 31st December 2018||–||50 trays|
Although the cost of production does not significantly vary between white and wholemeal breads, the company charges premium price for the wholemeal bread as brand value. There were 100 trays of wholemeal breads in the stock as of 1st January 2018, the full cost of which was £27 including £4 fixed manufacturing overhead.
The company’s variable costs are given follows:
|Cost per tray (£)|
|Variable manufacturing overhead||8|
|Variable selling and administrative||2|
The following additional information is available from the accounts department of the company:
- Fixed manufacturing overhead cost was £200,000 in 2017 which included depreciation of machines £20,000 based on average use of machines in that year. The company’s policy is to apply straight line depreciation method assuming an average use of 50,000 machine-hours per year. In excess to this average use, the company adds up £0.50 per machine hour (over 50,000 machine-hours) as depreciation. In 2018, the company used 70,000 machine hours. There is no other changes observed in fixed manufacturing expenses in 2018.
- The fixed selling and administrative overhead was £80,000 in 2017. The company appointed a customer service manager on 1st March 2018 whose salary is £24,000 per year. No other changes has been found in 2018.
- Prepare a profit and loss statement for Mackson Bakery Ltd for the year ended on 31st December 2018 using the absorption costing approach (30 marks)
- Calculate the operating profit under marginal costing approach without preparing the full statement.
- Calculate the break-even point of 2018 in pound
- Prepare a brief note for the senior management team advising a suitable approach for preparing the profit and loss account. Your report should also discuss the potential impact of your advised approach on managers’ performance. (10 marks)
(Total 50 marks)
Fetchtoe Shoes Ltd makes designer shoes for women. In the ankle boots division of the company, it produces 60,000 pairs of high-quality boots every year for a price of £550 per pair. A recent export market survey finds an additional demand of 15,000 pairs of those ankle boots. The company uses an absorption costing system to allocate fixed manufacturing overhead and the division currently absorbs £2,400,000 of fixed manufacturing overhead cost per year. Due to the spare capacity, the fixed overhead costs are unlikely to increase though the company’s absorption costing system would allocate an additional charge of £600,000 a year. The existing account shows the following cost based on the 60,000 pairs:
|Variable manufacturing overhead||80|
|Absorbed fixed manufacturing overhead||40|
|Traceable fixed manufacturing overhead cost for the division||20|
An outside supplier has recently offered to make the pair of boots for £260 without the finishing task, which will be carried out by the company’s own specification using its own resources. If the buying offer is accepted, following costs will be affected:
- The traceable fixed manufacturing cost includes rent, depreciation of machines and salary of supervisor. Since the company is on a short-term rental contract, £300,000 out of the £560,000 annual rent could be saved by the buying offer. The current depreciation of the division’s three machines is £600,000. Only one of those three machines will continue the finishing task of the boots if the outside suppliers’ offer is accepted and this machine accounts for the one-third of the total depreciation charge. The other two machines will be made out of operation and there is no resale value expected from them. The rest of the traceable fixed manufacturing cost represents salary of supervisor which will be reduced by 20% due to the reduced workforce.
- The direct material, variable manufacturing overhead and labour costs will be reduced by 90%, 60% and 80% respectively if the boots are bought from outside supplier.
- Variable and fixed marketing and administrative expenses will be unchanged by the make or buy decision.
- Should Fetchtoe Shoes make or buy 75,000 pairs of ankle boots? Show your computation. In your analysis, you must identify the irrelevant costs.
- Would your recommendation be the same if the annual demand for boots drops to 50,000 pairs and the company can save only 50% of direct materials? Show your calculation. (12 marks)
- What would be the maximum purchase price of the pair of boots acceptable to Fetchtoe Shoes if it were to buy them from the outside supplier? (4 marks)
- Critically discuss the qualitative factors Fetchtoe Shoes should consider in making or buying pair of boots. (14 marks)
(Total 50 marks)