SAMPLE REVISION QUESTION BANK. Paper FMA MANAGEMENT ACCOUNTING

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1 For Examinations to 2014 ugust Edition 2015 REVISION QUESTION NK Paper F2 MNGEMENT OUNTING Foundations in ccountancy Paper FM MNGEMENT OUNTING T International became a part of ecker Professional Education in T International has 20 years of experience providing lectures and learning tools for Professional Qualifications. Together, ecker Professional Education and T International offer candidates high quality study materials to maximize their chances of success.

2 In 2011 ecker Professional Education, a global leader in professional education, acquired T International. T International has been developing study materials for for 20 years, and thousands of candidates studying for the Qualification have succeeded in their professional examinations through its Platinum and Gold LP training centers in entral and Eastern Europe and entral sia.* ecker Professional Education has also been awarded pproved ontent Provider Status for materials for the iploma in International Financial Reporting (ipifr). Nearly half a million professionals have advanced their careers through ecker Professional Education's courses. Throughout its more than 50-year history, ecker has earned a strong track record of student success through world-class teaching, curriculum and learning tools. Together with T International, we provide a single destination for individuals and companies in need of global accounting certifications and continuing professional education. *Platinum Moscow, Russia and Kiev, Ukraine. Gold lmaty, Kazakhstan ecker Professional Education's Study Materials ll of ecker s materials are authored by experienced lecturers and are used in the delivery of classroom courses. Study System: Gives complete coverage of the syllabus with a focus on learning outcomes. It is designed to be used both as a reference text and as part of integrated study. It also includes the Syllabus and Study Guide, exam advice and commentaries and a Study Question ank containing practice questions relating to each topic covered. Revision Question ank: Exam style and standard questions together with comprehensive answers to support and prepare students for their exams. The Revision Question ank also includes past examination questions (updated where relevant), model answers and alternative solutions and tutorial notes. Revision Essentials*: condensed, easy-to-use aid to revision containing essential technical content and exam guidance. *Revision Essentials are substantially derived from content reviewed by s examining team.

3 PPER F2/FM MNGEMENT OUNTING REVISION QUESTION NK For Examinations to ugust evry/ecker Educational evelopment orp. ll rights reserved. (i)

4 No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher. This training material has been prepared and published by ecker Professional evelopment International Limited: 16 Elmtree Road Teddington TW11 8ST United Kingdom opyright 2014 evry/ecker Educational evelopment orp. ll rights reserved. The trademarks used herein are owned by evry/ecker Educational evelopment orp. or their respective owners and may not be used without permission from the owner. No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system without express written permission. Request for permission or further information should be addressed to the Permissions epartment, evry/ecker Educational evelopment orp. cknowledgement Past examination questions are the copyright of the ssociation of hartered ertified ccountants and have been reproduced by kind permission. (ii) 2014 evry/ecker Educational evelopment orp. ll rights reserved.

5 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) ONTENTS Question Page nswer Marks ate worked Formulae Sheet Present Value Table nnuity Table OUNTING FOR MNGEMENT (vii) (viii) (ix) 1 MQs ccounting for Management SOURES OF T 2 Sources Economic environment MQs Sampling techniques OST LSSIFITION 5 Total costs voidable rchibald ( J05) MQs ost lassification PRESENTING INFORMTION 9 MQs Presenting information OUNTING FOR MTERILS 10 Wivelsfield EOQ ( 03) Goodheart hospital ( 04) Jane ( J05) Point ( 06) MQs Materials OUNTING FOR LOUR 16 7½ hour day () Gross wages () Labour turnover () Idle ( J01) MQs Labour OUNTING FOR OVERHES 21 Shark One service cost centre ( J00) Warninglid Reciprocal method ( 03) Phoebe ( 06) MQs Overheads evry/ecker Educational evelopment orp. ll rights reserved. (iii)

6 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK ONTENTS Question Page nswer Marks ate worked SORPTION N MRGINL OSTING 27 Surat ( 01) Oathall ( 02) Mollepata MQs bsorption and Marginal osting JO, TH N SERVIE OSTING 31 Specific order and job costing () Job Yippee () Solicitors () Job costing system ( 00) Service costing () Transport business () MQs Job, atch and Service osting PROESS OSTING 38 uddon ( J04) Weighted average method Partlett ( 05) Maybud ( 04) Joint and by-products ( J03) Joint and y () Saphir () orcoran ( J06) Luiz ( J07) MQs Process osting LTERNTIVE OSTING PRINIPLES 48 irtles ( 04) Hughes ( J05) Product life cycle ( J06) ctivity based costing system ( J07) MQs lternative costing principles UGETING NTURE, PURPOSE N EHVIOURL SPETS 53 Planning and control ( 04) Top down and bottom up ( 04) MQs Nature, purpose and behavioural aspects (iv) 2014 evry/ecker Educational evelopment orp. ll rights reserved.

7 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) ONTENTS Question Page nswer Marks ate worked STTISTIL TEHNIQUES 56 bsent worker ost inflation Product X Personal disposable income South dvertising expenditure ( 02) ase ( J05) omputer spreadsheet package ( 05) Josephine ( J06) MQs Statistical techniques UGET PREPRTION 66 & M Winners Wollongong ( 01) Langdale ( J04) MQs udget preparation FLEXILE UGETS, UGETRY ONTROL N REPORTING 71 endy Francis ( 04) Kilkline Hospital ( 05) MQs Flexible budgets, control and reporting STNR OSTING N VRINE NLYSIS 75 Material ( 92) Newcastle ( 01) Fixed overheads ( J03) Murgatroyd ( J05) osting differences ( J05) eadeye ( J06) Fairfax ( 06) asilda ( J07) Flexed ( 03) Perseus ( J94) MQs Standard costing systems MQs Variance analysis evry/ecker Educational evelopment orp. ll rights reserved. (v)

8 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK ONTENTS Question Page nswer Marks ate worked PITL UGETING N ISOUNTE SH FLOWS 87 arter Investment project Product launch Project investment arcombe Martinique Ljubicic Warkel & o MQs apital budgeting and Fs PERFORMNE MESUREMENT 97 Rockingham Hospital Osborne P ivision Value analysis ost reduction and cost control Perry ( J04) Heighway ( J05) alanced scorecard ( 05) Mabbutt ( 05) Lewisville ( J06) enchmarking ( J07) MQs Performance measurement PILOT PPER (2 hours) Section MQs 70 Section Three compul ory questions 30 (vi) 2014 evry/ecker Educational evelopment orp. ll rights reserved.

9 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) MQs 1 OUNTING FOR MNGEMENT 1.1 Monthly variance reports are an example of which one of the following types of management information? Tactical Strategic Planning Operational 1.2 Which of the following statements are correct? (i) (ii) (iii) Strategic information is mainly used by senior management in an organisation. Productivity measurements are examples of tactical information. Operational information is required frequently by its main users. (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 1.3 The following statements relate to financial accounting or to cost and management accounting: (i) (ii) (iii) The main users of financial accounting information are external to an organisation. ost accounting is part of financial accounting and establishes costs incurred by an organisation. Management accounting is used to aid planning, control and decision making. Which of the statements are correct? (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 1.4 Which of the following is an initial requirement of a management control system? Establishing the standard to be achieved Measuring the actual performance Setting organisational objectives Taking appropriate corrective action 1.5 The following statements refer to strategic planning: (i) (ii) (iii) It is concerned with quantifiable and qualitative matters. It is mainly undertaken by middle management in an organisation. It is concerned predominantly with the long term evry/ecker Educational evelopment orp. ll rights reserved. 1

10 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK Which of the statements are correct? (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) 1.6 Which one of the following is a common feature of cost accounting but not financial accounting? ontrol accounts ost classification ost unit Periodic stocktaking 1.7 onsider the following incomplete statements relating to management information: (1) clear to the user (2) detailed and completely accurate (3) provided whatever the cost (4) relevant for purpose. Which of the above are necessary features of useful management information? 1 and 2 only 1 and 4 only 2 and 4 only 1, 2 and 3 only 1.8 What is the purpose of management information? Planning only Planning and control only Planning, control and decision-making only Planning, control, decision-making and research and development 1.9 Which of the following only contains essential features of useful management information? ccurate, clear, presented in report format Timely, reliable, supported by calculations Regular, complete, communicated in writing lear, accurate, relevant for its purpose 1.10 Which of the following describes the control process? The action of monitoring something to keep it on course The choice between alternatives The development of strategies to achieve objectives The establishment of a plan for a future period evry/ecker Educational evelopment orp. ll rights reserved.

11 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) 1.11 onsider the following statements in relation to management information: (1) It should always be provided regardless of its cost (2) It is data that has been processed in such a way as to be meaningful to the person who receives it (3) It should not be provided until it is as detailed and accurate as possible Which of the above statements is/are true of good management information? 1 only 2 only 1 and 3 only 2 and 3 only 1.12 Which of the following are characteristics of management accounting information? (1) Non-financial as well as financial (2) Used by all stakeholders (3) oncerned with cost control only (4) Not legally required 1 and 4 only 2 and 3 only 1, 2 and 3 only 2, 3 and 4 only 1.13 Which of the following statements about cost and management accounting are true? (1) ost accounting cannot be used to provide inventory valuations for external financial reporting (2) There is a legal requirement to prepare management accounts (3) The format of management accounts may vary from one business to another (4) Management accounting provides information to help management make business decisions 1 and 2 only 1 and 4 only 2 and 3 only 3 and 4 only 1.14 Which of the following are characteristics of management accounting information? (1) Forward looking (2) Legally required (3) oncerned with cost control (4) Follows clearly defined standards 1 and 3 only 2 and 4 only 1, 3 and 4 only 1, 2 and 3 only 2014 evry/ecker Educational evelopment orp. ll rights reserved. 3

12 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK 1.15 onsider the following incomplete statements relating to features of management information: (1) ommunicated in writing (2) Presented in report format (3) Supported by calculations (4) Timely and clear to the user Which of the above are necessary features of useful management information? 4 only 2 and 3 only 1 and 4 only 1, 2 and 3 only 1.16 onsider the following statements relating to management information: Statement 1: Management information should have some value otherwise it would not be worth the cost of collecting and communicating it Statement 2: Management information only needs to be accurate enough for its purpose re the statements TRUE or FLSE? Statement 1 Statement 2 True True True False False True False False 1.17 Which of the following statements concerning management information is/are correct? (1) user of management information should have all the information he needs to do his job properly (2) management information report must be relevant for a variety of purposes (3) management information report should contain a lot of detail to ensure complete accuracy Question 2 SOURES 1 only 1 and 2 only 2 and 3 only 3 only (34 marks) (a) riefly distinguish between primary and secondary sources of data. (2 marks) (b) escribe internal and external sources of information, giving THREE examples of each. (8 marks) (10 marks) evry/ecker Educational evelopment orp. ll rights reserved.

13 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) Question 3 EONOMI ENVIRONMENT (a) State FOUR factors which impact the general economic environment. (2 marks) (b) escribe how changes in economic factors affect costs and revenues. (4 marks) MQs 4 SMPLING TEHNIQUES 4.1 Which sampling method selects items from identifiable sub-populations? luster Multi-stage Simple random Stratified (6 marks) 4.2 Which of the following selection methods provide a sample which is representative of a population? (1) luster (2) Multi-stage (3) Quota sampling (4) Simple random 1 and 3 only 1 and 4 only 2 and 3 only 2 and 4 only 4.3 Which of the following is an example of a cluster sample? Selecting every 20 th entry in a membership listing Taking the name of every company listed in a business telephone directory Selecting every entry in a telephone directory with the same postal or zip code Generating a list of numbers by random numbers and matching them to entries in a trade directory 4.4 publishing company is conducting research into the nation s reading habits. It randomly selects a number of locations from around the country and then interviews everyone who lives in these locations. What is this approach to sampling known as? luster sampling Quota sampling Stratified sampling Systematic sampling 2014 evry/ecker Educational evelopment orp. ll rights reserved. 5

14 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK 4.5 The following statements relate to stratified random sampling: (1) Every item in the population has an equal chance of being selected. (2) The sample proportionately represents items in different sub-populations. (3) The sample is more representative of the target populations than the accessible population. Which of the statements, if any, is true? 1 only 2 only 3 only None of them Question 5 TOTL OSTS (10 marks) The total costs incurred at various output levels, for a process operation in a factory, have been measured as follows: Required: Output Total cost (units) $ 11, ,476 12, ,730 12, ,263 13, ,021 13, ,727 14, ,201 Using the high-low method, analyse the costs of the process operation into fixed and variable components. Question 6 VOILE istinguish between, and provide an illustration of: (3 marks) (a) avoidable and unavoidable costs; (4 marks) (b) cost centres and cost units. (4 marks) (8 marks) evry/ecker Educational evelopment orp. ll rights reserved.

15 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) Question 7 RHIL rchibald manufactures and sells one product. Its budgeted income statement for the first month of trading is as follows: $ $ Sales (1,200 units at $180 a unit) 216,000 Less: ost of sales: Production (1,800 units at $100 a unit) 180,000 Less losing inventory (600 units at $100 a unit) (60,000) (120,000) Gross profit 96,000 Less Fixed selling and distribution costs (41,000) Net profit 55,000 The budget was prepared using absorption costing principles. If budgeted production in the first month had been 2,000 units then the total production cost would have been $188,000. Required: (a) (b) (c) Using the high-low method, calculate: (i) the variable production cost for a unit; and (ii) the total monthly fixed production cost. (4 marks) If the budget for the first month of trading had been prepared using marginal costing principles, calculate: (i) the total contribution; and (ii) the net profit. (4 marks) Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption or marginal costing principles. (2 marks) (10 marks) 2014 evry/ecker Educational evelopment orp. ll rights reserved. 7

16 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK MQs 8 OST LSSIFITIONS 8.1 The following diagram represents the behaviour of one element of cost: $ Total cost 0 Volume of activity Which ONE of the following statements is consistent with the above diagram? nnual factory power cost where the electricity supplier sets a tariff based on a fixed charge plus a constant unit cost for consumption but subject to a maximum annual charge. Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is paid at a premium rate. Total direct material cost for a period if the supplier charges a lower unit cost on all units once a certain quantity has been purchased in that period. Total direct material cost for a period where the supplier charges a constant amount per unit for all units supplied up to a maximum charge for the period. 8.2 n organisation manufactures a single product. The total cost of making 4,000 units is $20,000 and the total cost of making 20,000 units is $40,000. Within this range of activity the total fixed costs remain unchanged. What is the variable cost per unit of the product? $0 80 $1 20 $1 25 $ evry/ecker Educational evelopment orp. ll rights reserved.

17 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) 8.3 When total purchases of raw material exceed 30,000 units in any one period then all units purchased, including the initial 30,000, are invoiced at a lower cost per unit. Which of the following graphs is consistent with the behaviour of the total materials cost in a period? $ 0 $ 0 30,000 30,000 Units Units $ 0 $ 0 30,000 30, The total cost of production for two levels of activity is as follows: Level 1 Level 2 Production (units) 3,000 5,000 Total cost ($) 6,750 9,250 Units Units The variable production cost per unit and the total fixed production cost both remain constant in the range of activity shown. What is the variable production cost per unit? $0 80 $1 25 $1 85 $ evry/ecker Educational evelopment orp. ll rights reserved. 9

18 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK 8.5 manufacturing company has four types of cost (identified as T1, T2, T3 and T4). The total cost for each type at two different production levels is: Total cost for Total cost for ost type 125 units 180 units $ $ T1 1,000 1,260 T2 1,750 2,520 T3 2,475 2,826 T4 3,225 4,644 Which two cost types would be classified as being semi-variable? T1 and T3 T1 and T4 T2 and T3 T2 and T4 8.6 Up to a given level of activity in each period the purchase price per unit of a raw material is constant. fter that point a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased. Which of the following graphs depicts the total cost of the raw materials for a period? $ 0 $ 0 Units Units $ 0 $ Units 0 Units evry/ecker Educational evelopment orp. ll rights reserved.

19 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) 8.7 n organisation has the following total costs at two activity levels: ctivity level (units) 17,000 22,000 Total costs ($) 140, ,000 Variable cost per unit is constant in this range of activity and there is a step up of $5,000 in the total fixed costs when activity exceeds 18,000 units. What is the total cost at an activity level of 20,000 units? $155,000 $158,000 $160,000 $163, supplier of telephone services charges a fixed line rental per period. The first 10 hours of telephone calls by the customer are free, after that all calls are charged at a constant rate per minute up to a maximum, thereafter all calls in the period are again free. Which of the following graphs depicts the total cost to the customer of the telephone services in a period? $ 0 $ 0 Hours Hours $ 0 $ Hours 0 Hours 2014 evry/ecker Educational evelopment orp. ll rights reserved. 11

20 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK 8.9 The following production and total cost information relates to a single product organisation for the last three months: Month Production Total cost units $ 1 1,200 66, , ,400 68,200 The variable cost per unit is constant up to a production level of 2,000 units per month but a step up of $6,000 in the monthly total fixed cost occurs when production reaches 1,100 units per month. What is the total cost for a month when 1,000 units are produced? $54,200 $55,000 $59,000 $60, For which of the following is a profit centre manager normally responsible? osts only Revenues only osts and revenues osts, revenues and investment 8.11 Reginald is the manager of production department M in a factory which has ten other production departments. He receives monthly information that compares planned and actual expenditure for department M. fter department M, all production goes into other factory departments to be completed prior to being despatched to customers. ecisions involving capital expenditure in department M are not taken by Reginald. Which of the following describes Reginald s role in department M? cost centre manager n investment centre manager profit centre manager revenue centre manager 8.12 The following observations have been made of total overhead cost: Output level (units) 5,000 10,000 Total overhead cost ($) 14,000 27,000 The variable element of total overhead cost is known to increase by $1 per unit at output levels above 7,000 units. What is the variable element of total overhead cost at an output level of 5,000 units? $2.00 per unit $2.60 per unit $3.20 per unit $3.60 per unit evry/ecker Educational evelopment orp. ll rights reserved.

21 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) 8.13 company has the following data for a semi-variable cost: Output 20,000 units 60,000 units Total cost $85,000 $253,000 The fixed element of total cost increases by $8,000 at output levels in excess of 30,000 units. What is the variable cost per unit? $4 00 $4 20 $4 22 $ product has the following costs per unit: $ irect material 4 00 irect labour 3 00 irect expenses 1 50 Variable overhead 5 00 Fixed overhead 6 00 What is the prime cost per unit of the product? $4 00 $7 00 $8 50 $ company has a single product with a selling price of $12 per unit, which is calculated as variable cost per unit, plus 20%. t an output level of 5,000 units it makes a loss of $8,000. What is the company s total fixed cost? $2,000 $4,000 $18,000 $20, company s total overhead varies with output level. It has recorded the following observations of output and total overhead cost: Output level Total overhead cost 100,000 units $800, ,000 units $2,500,000 It is known that there is an increase in fixed costs of $200,000 when output exceeds 300,000 units. Using the high low method, what is the variable overhead cost per unit? $5 00 per unit $5 67 per unit $6 25 per unit $6 60 per unit 2014 evry/ecker Educational evelopment orp. ll rights reserved. 13

22 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK 8.17 Which of the following would NOT be controllable by the manager of a profit centre? irect labour cost irect material cost epreciation Variable overhead (34 marks) Question 9 PRESENTING INFORMTION 9.1 Which of the following would best present how an organisation spent its income for one year? Line graph ar chart Pie chart Scatter diagram 9.2 Which of the following would best present the number of manufacturing companies in different areas of the country over time? ompound bar chart Line graph Pie chart Scatter graph 9.3 Which of the following would best present monthly sales revenue over a year? ar chart Line graph Pie chart Scatter diagram 9.4 Which of the following would most usefully present information about a company s sales of air-conditions according to daily temperature? ar chart Line graph Pie chart Scatter diagram 9.5 The following statements relate to pie charts: (1) They are a graphical representation of relative frequency of quantitative data (2) omparisons can be made more accurately with pie charts than with bar charts (3) The area of each segment is proportional to the percentage it represents Which statements are true? 1 and 2 only 1 and 3 only 2 and 3 only 1, 2 and evry/ecker Educational evelopment orp. ll rights reserved.

23 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) 9.6 group of 60 trainee accountants were asked about their favourite sport. They chose as follows: Rugby 15 ricket 12 Swimming 12 asketball 11 thletics 10 The data is to be presented in a pie chart. What will be the angle of the segment which represents rugby? Question 10 WIVELSFIEL (12 marks) Wivelsfield currently uses the economic order quantity (EOQ) to establish the optimal reorder quantity for purchasing the main raw material used in its production process. The company has been approached by an alternative supplier who would be willing to offer the following discounts: Order level iscount units 1% units 3% units 5% 700 units or more 7% Information regarding current inventory costs is as follows: Holding cost per unit per year = 10% of purchase price Order costs = $2 per order nnual demand = 15,000 units Purchase price = $15 urrent EOQ = 200 units Required: (a) alculate the new optimal order quantity. (6 marks) (b) Explain your approach with regard to each discount band. (4 marks) (10 marks) 2014 evry/ecker Educational evelopment orp. ll rights reserved. 15

24 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK chain of supermarkets compares the performance of its fleet of delivery lorries with that of a successful company that delivers goods by road. Which type of benchmarking is it using? Internal ompetitive Functional Strategic division earns a residual income of $200,000. The imputed interest charge is $150,000 and its cost of capital is 20% per year. What is the division s return on capital employed? 5 3% 6 7% 26 7% 46 7% Which term is applied to management s ability to monitor and supervise expenditure in order to ensure that organisational objectives are achieved? ost control ost reduction ost allocation ost absorption (40 marks) evry/ecker Educational evelopment orp. ll rights reserved.

25 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) MQs 1 OUNTING FOR MNGEMENT Item nswer Justification 1.1 ertainly not operational ( day-to-day ). Not strategic because this is longer term. Planning is another name for strategic Followed by, then, then The concept of a cost unit is specific to costing for management purposes. oth management and financial accounting will involve the other features. 1.7 Management information is not necessarily detailed. For example, information for strategic purposes will not have the same level of detail as information for day-today management. In managing by exception it is the lack of detail (of the nonexceptional items) that makes it most useful. Even financial information should not be provided if its cost. 1.8 Management information is provided for these purposes. 1.9 report format is not essential (so not ). etailed calculations in support of information may be superfluous and therefore not essential (so not ). Regular information is not necessarily useful and though information which is reported irregularly, by exception will be useful (so not ) is part of the decision-making process and and concern the planning process (1) is not true because cost should not exceed benefit. (3) is not true detail and accuracy may result in information being no longer relevant Only internal stakeholders will have access to management accounting information which will concern revenues also (1) is absolutely not true since up-to-date absorption costs of inventory will be those used for external reporting in the annual financial statements. (2) is not true and in some jurisdictions there may be no legal requirement even for financial accounts to be prepared (e.g. for entities meeting certain criteria) (2) and (4) are characteristics of financial reporting See item 1.9. This item clearly shows how essentially the same question can be asked but in a different way See 1.7. This item shows how a true/false matrix can be presented to test essentially the same knowledge Each management report should be specific to the needs of the user(s) and should not be too detailed, complete or accurate at the expense of being timely (and therefore relevant) evry/ecker Educational evelopment orp. ll rights reserved. 1001

26 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK nswer 2 SOURES (a) (b) Primary and secondary Primary data can be collected directly through questionnaires, depth interview, focus group interviews, case studies, experimentation and observation. Secondary data can be obtained through: Internal sources (i.e. within the organisation); External sources (i.e. outside the organisation). Internal and external sources If available, internal secondary data may be obtained with less time, effort and money than external secondary data. lso it may also be more relevant to a given situation if the information is specific to the organisation. Examples ccounting resources are a main source of documented information (e.g. about costs, assets, etc). Price lists provide information about selling prices and possibly discount structures also. This information is made available outside the organisation. Internal experts include those who are responsible for each department (e.g. factory supervisor, HR manager, head of IT). They can provide information that is not necessarily documented. If data available within the organisation is unsuitable or inadequate, external secondary data sources may be sought. These are outside the company in a larger environment. ollection of external data is more difficult because the data have much greater variety and the sources are much more numerous. Examples Government sources provide an extremely rich pool of data, much of which is freely available through the internet. There are many government agencies which generate data. For example, a central statistics office publishing national statistics about growth rates in major economic activities. government agency which is particularly relevant to accountants seeing information about other companies (e.g. for benchmarking purposes) is that which is responsible for the registration of companies (e.g. ompanies House in UK). In most jurisdictions legislation requires that legal entities file returns about directors and annual financial statements. These may be publicly available. Non-government industry publications include those of trade associations, chambers of commerce, associations of press media, industry development boards, export promotion councils, etc. Stock exchanges publish details of listings and statistics on domestic and international companies admitted to their market evry/ecker Educational evelopment orp. ll rights reserved.

27 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) Research companies (e.g. IPSOS Mori) specialise in research in the areas of advertising (e.g. brand recognition and communications), loyalty (for both customer and employee relationship management), marketing (e.g. consumer, retail, healthcare), media and technology, social and political research and reputation research. Some of their research findings are published in the internet. Tutorial note: There are many other examples for which credit would be awarded. For example, an annual industry survey may provide information about the total number of workers employed, units produced, material used and value added by manufacturers. nother example is that a ministry (e.g. of commerce and industries) provides information wholesale and retail prices. Indices may be related to a sector (e.g. food, fuel, agricultural produce). nswer 3 EONOMI ENVIRONMENT (a) (b) Factors The economic environment consists of factors that affect consumer purchasing power and spending patterns. Economic factors include: business cycles; inflation; unemployment; interest rates; and income. hanges hanges in major economic variables have a significant impact on the marketplace. For example, income affects consumer spending which affects sales for organisations. It is generally accepted that, as income rises, the proportion of income that is spent on food will decrease, while the proportion spent on housing remains constant. People spend, save, invest and try to create personal wealth with differing amounts of money. Trends in the economic environment show changes in consumer-expenditure patterns from which predictions can be made. For organisations too, when there is an economic downturn expenditure will be cut to maintain profits. udgets for recruitment, marketing and training are often regarded as discretionary and may be the first to go in a financial crisis. This impacts on the sales of their providers of these and related services. The need to cut costs may drive down prices as suppliers compete to keep their customers. usinesses will look for cheaper alternatives which could involve outsourcing, restructuring, relocation or taking inhouse some activity that was previously outsourced. MQs 4 SMPLING TEHNIQUES Item nswer Justification 4.1 n identifiable sub-population is a stratum. 4.2 Only random sampling gives each item in the population an equal chance of being selected (so that the sample is representative). Multi-stage is a series of random samples. 4.3 This creates a cluster, by area. is interval (or systematic) sampling. is not sampling as an entire population of companies is taken. is random sample selection evry/ecker Educational evelopment orp. ll rights reserved. 1003

28 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK 4.4 luster sampling involved random sampling from small areas. 4.5 When different characteristics are associated with identifiable sub-populations a more representative sample is obtained by selecting items from each stratum. nswer 5 TOTL OSTS High-low method 113, , , , , 725 = $4.29 (variable cost per unit) 2, 500 Fixed costs = 113,201 (14, ) = $53,141 nswer 6 VOILE (a) (b) voidable vs unavoidable voidable costs are costs whose incurrence depends upon the course of action chosen from alternatives which are under consideration. These costs will be relevant for decision making purposes. Unavoidable costs are costs which will be incurred regardless of the course of action chosen, and will therefore not be relevant costs for the purpose of decision making. In the long term all costs could become avoidable. For example, a manufacturing company may be considering whether to continue to manufacture, or instead to buy-in, one of the many components that it currently produces in its factory. Many of the costs incurred in the factory will be unavoidable whichever of the alternatives is chosen because the factory will continue to be used for the production of many other components. Examples of such costs would be rent and rates of the factory and the factory manager s salary. However, other costs may be avoidable (or at least partly avoidable) according to the alternative chosen. Examples of completely avoidable costs in such a situation are the bought-in cost of the component and the material costs incurred in its manufacture. voidable costs are relevant to the decision between alternatives, whereas unavoidable costs are not. Some costs may fall into each category, for example labour costs. In the short term you must pay a basic wage to your employees, this cost is unavoidable, but you would only have to pay overtime if the workforce worked over their basic hours, therefore the overtime premium is an avoidable cost. ost centres and cost units cost centre is a part of the business (a department, location, or item of equipment) in relation to which costs may be identified for the purposes of cost control and product costing. For example, separate production and service departments in a factory may each be a cost centre. lternatively, a department may consist of more than one cost centre where costs may be separately ascertained for each cost centre. It is highly likely that an individual will be given responsibility for managing the costs of the cost centre evry/ecker Educational evelopment orp. ll rights reserved.

29 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) cost unit is a quantitative unit of product or service in relation to which costs are ascertained. In manufacturing, cost units will be units of output produced within production cost centres. If the manufacturing unit is operating on an individual job order basis, the cost unit will be the individual jobs. If the manufacturing unit is a continuous production process with output of homogeneous product, the cost unit will be a standardised quantity of output expressed in terms of units, weight or volume (e.g. cost per kg of manufactured output). Similarly, in a service environment (business or cost centre) costs may be related either to individual jobs or per unit of service (e.g. cost per hour of service). nswer 7 RHIL (a) (b) (c) High-low method (i) Variable production cost per unit Units Total cost $ Higher level 2, ,000 Lower level 1, ,000 ifference 200 8,000 Variable production cost per unit = 8, = $40 (ii) Total monthly fixed production cost $ Total production cost for 2,000 units 188,000 Less total variable production cost (2,000 40) (80,000) Total monthly fixed production cost 108,000 Marginal costing (i) Total contribution ontribution per unit (180 40) = $140 Total contribution from sales = 1, = $168,000 (ii) Net profit $ Total contribution [as in (b)(i)] 168,000 Less Total fixed costs (108, ,000) (149,000) Net profit 19,000 ircumstances When the number of units produced and the number of units sold in a month are identical, the net profit or loss determined by using absorption and marginal costing principles will also be the same. In other words the net profit or loss will be the same when the opening and closing inventory for a month is unchanged evry/ecker Educational evelopment orp. ll rights reserved. 1005

30 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK MQs 8 OST LSSIFITIONS Item nswer Justification $(40,000 20,000) (20,000 4,000) units = $1 25 per unit (9,250 6,750) (5,000 3,000) = $ Total cost per unit ($) Total cost per unit ($) (125 units) (180 units) T T T T Raw materials has a variable cost so for zero purchases cost is $Nil. When the point at which the lower price applies is reached there is effectively a rebate represented by a discontinuity. The variable cost is then less so the line beyond the discontinuity has a less steep gradient. 8.7 Variable cost per unit = [(170,000 5,000) 140,000)] (22,000 17,000) = $5 Total fixed cost above 18,000 units = 170,000 (22,000 5) = $60,000 Total cost of 20,000 units = (20,000 5) + 60,000 = $160, The fixed cost is indicated on the vertical axis. That it is initially free is shown by a horizontal line. It then increases at a constant rate before until it reaches the maximum. 8.9 Units Total cost ($) 1,400 68,200 1,200 66, ,600 Variable cost per unit = (1, ) = $8 Total fixed cost (above 1,000 units) = [68,200 (1,400 8)] = $57,000 Total cost for 1,000 units = [(57,000 6,000) + (1,000 8)] = $59, y definition of profit Total overhead costs include the same fixed cost and at the higher output level include $3,000 (3,000 $1) for the increase in variable cost. The variable cost up to 7,000 units is therefore ($27,000 $14,000 $3,000) (10,000 units 5,000 units) = $2 per unit ($253,000 $85,000 $8,000) (60,000 20,000) = $ Prime cost is the total direct cost evry/ecker Educational evelopment orp. ll rights reserved.

31 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) 8.15 (5,000 $ ) + 8,000 = $18, ($2,500,000 $800,000 $200,000) (400, ,000) 8.17 epreciation expense is a function of investment in non-current assets which would not be controllable by a profit centre manager. nswer 9 PRESENTING INFORMTION Item nswer Justification 9.1 pie chart would best show the proportion of each expense for one year. bar chart is more suitable for making comparisons (so would need to be for more than one year. line graph would not be suitable as this connects pairs of successive data (which may reveal trends). scatter diagram would be wholly unsuitable. 9.2 multiple bar chart would also be suitable. line graph could only show the totals over time but not their make-up by area. pie chart is suitable for one period of time only. scatter graph could only plot totals over time. 9.3 Sales revenue is the variable that is being considered over time. line graph is more suitable than a scatter diagram because for each month there is only one value for sales. 9.4 s there will be multiple values of sales for the same temperature the scatter graph will be more suitable than a line graph. 9.5 More accurate comparisons can be made with bar charts. onsider, for example, a circle divided into 5 equal segments this would be equivalent to a bar chart with 5 bars of the same height. If the values were quite close but not equal this would be clear on a bar chart but may be impossible to discern from a pie chart = ¼. Therefore the angle will be ¼ nswer 10 WIVELSFIEL (a) New optimal order quantity ,000 EOQ new = 15 97% 10% = 203 units Order quantity Purchase costs Order costs Holding costs Total cost Q p o /Q Q h /2 15, % 15,000 2 (15 97% 10%) = 218,250 = 148 = ,546 15, % 15,000 2 (15 95% 10%) = 213,750 = 60 = ,166 15, % 15,000 2 (15 93% 10%) = 209,250 = 43 = , evry/ecker Educational evelopment orp. ll rights reserved. 1007

32 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK The best option is to order 700 units at a time, as this results in the lowest total cost. (b) pproach to discount band nswer 11 EOQ (a) (b) (c) The discount band of units has been ignored as this is below the current EOQ. The EOQ was recalculated as it is now subject to a discount. For all the other discount bands the revised inventory costs were calculated taking into account the new purchase price. EOQ EOQ = 2 0 h = ,000 $1.2 Revised annual total materials costs = 2,000 units $ Purchase costs (12,000 $15) 180,000 12,000 Order costs 200 1,200 2,000 2,000 Holding costs , ,400 Original materials costs 183,000 Saving 600 Ways in which discounts might affect EOQ and subsequent material costs iscounts are likely to increase the EOQ as the holding cost will be reduced. Since the purchase price is lower the total purchase cost will be reduced. s the order cost uses the EOQ to divide the total demand, this cost will be reduced as the EOQ has increased. The holding cost will change as it uses both the increased EOQ and a reduced purchase price. nswer 12 GOOHERT HOSPITL (a) EOQ (i) urrent year [( ,000) 8] 0 5 = 750 units (ii) Next year [( ,000) 8] 0 5 = 900 units evry/ecker Educational evelopment orp. ll rights reserved.

33 REVISION QUESTION NK MNGEMENT OUNTING (F2/FM) (b) (c) Increase in total annual cost nnual nnual nnual holding cost ordering cost total cost $ $ $ urrent year (750 2) 8 3,000 3,000 (90, ) 25 3,000 3,000 6,000 Next year (900 2) 8 3,600 3,600 (90, ) 36 3,600 3,600 7,200 Total additional cost of holding and ordering inventory for next year $1,200 (compared with the current year). Major costs associated (i) Holding inventory (2 only require) Interest on net working capital. osts of storage space Insurance costs Obsolescence, pilferage and deterioration. (ii) Ordering inventory osts of contacting supplier to place an order. osts associated with checking goods received and transport costs. nswer 13 JNE (a) (b) (c) EOQ [( ,760) ( )] = 234 units Inventory level Usage per day = 8, = 24 Re-order level = 24 3 days = 72 units Terms stock out occurs when a company runs out of inventory. There are costs associated with this lost contribution from lost sales, for example. In order to avoid a stock out the company could set a buffer inventory. This is a safety level of inventory to cover emergency situations such as demand and/or lead times exceeding their average levels. The holding of a buffer inventory involves an additional cost evry/ecker Educational evelopment orp. ll rights reserved. 1009

34 MNGEMENT OUNTING (F2/FM) REVISION QUESTION NK (d) ircumstances Jane should consider having a buffer inventory if either the usage of component R starts to fluctuate from period to period (at present it is constant) and/or the lead time starts to fluctuate from its present constant level of 3 days. nswer 14 POINT (a) (b) (c) Material Y (i) Using EOQ exam formula EOQ = [( ,000) ( )] = 1,200 units (ii) Total annual cost $ Purchasing cost (48,000 $80) 3,840,000 Ordering cost (48,000 1,200) $120 4,800 Holding costs [(1,200 2) $ ] 4,800 Total cost 3,849,600 Total annual cost saving Purchasing cost (48,000 $ ) 3,801,600 Ordering cost (48,000 2,000) $120 2,880 Holding costs [(2,000 2) $ ] 7,920 Total cost 3,812,400 nnual total saving (3,849,600 3,812,400) 37,200 Holding costs Insurance costs of inventory and warehouse Rent of warehouse Wages and salaries of warehouse employees (store men) Interest on capital tied up in inventory held MQs 15 MTERILS Item nswer Justification 15.1 EOQ = 15.2 (2 20 (4 12,500) = 1, Maximum usage Longest lead time = = 7, EOQ = ½ [( ,000) ( )] = 949 1½ ½ ½ 1 1 ½ 3 ½ for each example evry/ecker Educational evelopment orp. ll rights reserved.

35 Fundamentals Level Knowledge Module Management ccounting Specimen Exam applicable from June 2014 Time allowed: 2 hours This paper is divided into two sections: Section LL 35 questions are compulsory and MUST be attempted Section LL THREE questions are compulsory and MUST be attempted Formulae Sheet, Present Value and nnuity Tables are on pages 16, 17 and 18. o NOT open this paper until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper F2 The ssociation of hartered ertified ccountants

36 Section LL 35 questions are compulsory and MUST be attempted Please use the space provided on the inside cover of the andidate nswer ooklet to indicate your chosen answer to each multiple choice question. Each question is worth 2 marks. 1 manufacturing company benchmarks the performance of its accounts receivable department with that of a leading credit card company. What type of benchmarking is the company using? Internal benchmarking ompetitive benchmarking Functional benchmarking Strategic benchmarking 2 Which of the following EST describes target costing? Setting a cost by subtracting a desired profit margin from a competitive market price Setting a price by adding a desired profit margin to a production cost Setting a cost for the use in the calculation of variances Setting a selling price for the company to aim for in the long run 3 Information relating to two processes (F and G) was as follows: Process Normal loss as Input Output % of input (litres) (litres) F 8 65,000 58,900 G 5 37,500 35,700 For each process, was there an abnormal loss or an abnormal gain? Process F Process G bnormal gain bnormal gain bnormal gain bnormal loss bnormal loss bnormal gain bnormal loss bnormal loss 4 The following budgeted information relates to a manufacturing company for next period: Units $ Production 14,000 Fixed production costs 63,000 Sales 12,000 Fixed selling costs 12,000 The normal level of activity is 14,000 units per period. Using absorption costing the profit for next period has been calculated as $36,000. What would be the profit for next period using marginal costing? $25,000 $27,000 $45,000 $47,000 2

37 (ii) Profit before interest and tax/sales revenue: $48m $480m = 10% (iii) Sales revenue/capital employed = $480m 192m = 2 5 (iv) verage number of telephones unrepaired at the end of each day/number of telephones returned for repair: (804 10,000)*365 days = 29 3 days (b) (i) Percentage of customers lost per annum = number of customers lost total number of customers x 100% = 117,600 1,960,000 = 6% (ii) Percentage of sales attributable to new products = Sales attributable to new products/total sales x 100% = $8m $480m = 1 67% (c) (i) ustomer satisfaction perspective: (ii) (iii) (iv) The customer perspective considers how the organisation appears to existing and new customers. It aims to improve quality of service to customers and looks at cost, quality, delivery, inspection, handling, etc. Growth perspective: The learning and growth perspective requires the organisation to ask itself whether it can continue to improve and create value. If an organisation is to continue having loyal, satisfied customers and make good use of its resources, it must keep learning and developing. Financial success perspective: The financial perspective considers how the organisations create value for the shareholders. It identifies core financial themes which will drive business strategy and looks at traditional measures such as revenue growth and profitability. Process efficiency perspective: The process perspective requires the organisation to ask itself the question what must we excel at to achieve our financial and customer objectives? It must identify the business processes which are critical to the implementation of the organisation s strategy and aims to improve processes, decision making and resource utilisation. (Note: Only one was required) 24

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39 This Revision Question ank has been reviewed by 's examining team and includes: The most recent examinations with suggested answers Past examination questions, updated where relevant Model answers and suggested solutions Tutorial notes evry/ecker Educational evelopment orp. ll rights reserved.