MANAGEMENT ACCOUNTING

Transcription

1 CIPFA PROFESSIONAL QUALIFICATION CIPFA CERTIFICATE IN INTERNATIONAL PUBLIC FINANCIAL MANAGEMENT MANAGEMENT ACCOUNTING Instructions to candidates There are two sections in the examination. Section A contains 20 multiple-choice questions, each worth 2 marks. Answer all questions. Section B contains four questions, each worth 20 marks. Answer three of four questions. 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. 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. Chartered Institute of Public Finance and Accountancy

2 SECTION A 1 Which of the following is most likely to represent a basis for calculating relevant cost? Direct materials at original cost + Direct labour + Hire of equipment. Direct materials at replacement cost + Direct labour + Depreciation on equipment. Direct materials at replacement cost + Direct labour + Hire of equipment. Direct materials at original cost + Direct labour + Depreciation on equipment. 2 In period 1, an organisation produced units of a product at a total cost of In period 2 the organisation produced units at a total cost of In period 3 they plan to produce units. There are no stepped costs. The total budget (to the nearest ) should be: Which of these is not a management accounts function: Provide useful information to help managers make better decisions. Provide useful information for planning, control and performance measurement. Provide end of year accounts for publication. Provide costing information MA Specimen Exam 1.1 Page 2 of 25

3 4 AB company uses a standard costing system. In month 2, the materials cost variance was A and the materials price variance F. What was the materials usage variance? 3 000A 3 000F A F 5 Which of the following is not a key consideration in approaching sustainability? Ensuring stakeholder engagement is considered part of the strategic management process. Ensuring that internal stakeholder needs are satisfied before those of external stakeholders. Recognising that no one stakeholder group will ever be fully satisfied. Ensuring employees have the knowledge and skills to manage stakeholder expectations. 6 Which of these statements is not true of budget virements? Virement is the transfer of monies from one budget head to another. Virement is a tool that can be used as a means of control. Virement makes budgets too rigid and control too detailed. Virement can deter management from unnecessarily spending their entire budget in a given period MA Specimen Exam 1.1 Page 3 of 25

4 7 Company B currently produces 500 units of component X per period. A subcontractor has offered to supply component X at a price of 350 per unit. The following information is available regarding the costs of Company B producing component X: direct materials 100 per unit direct labour 75 per unit directly attributable fixed costs per period non-divisible fixed costs per period If Company B accepts the sub-contractor s offer and chooses to buy it from them rather than to make component X, which of the following statements is true? Company B will be worse off. Company B will be worse off. Company B will be better off. Company B will be better off. 8 Which of the following best describes case-driven services: A type of activity which is carried out regularly where individual examples of the activity are always the same. Services that take place on a regular basis and will be repeated in multiple financial periods. A type of activity which is carried out regularly where individual examples of the activity are different. Individual activities occurring just once MA Specimen Exam 1.1 Page 4 of 25

5 9 An organisation budgets for the period 01 January to 31 December. The premises budget at the organisation is made up of the following: Item Annual Budget Rent Payment pattern Paid quarterly in January, April, July and October. Rates Paid in total in April Electricity % paid equally over January, February, November and December. The remainder paid equally over the remaining 8 months of the year. What is the year-to-date total premises budget at 31 July to the nearest? Which of the following statements is not true of the specified order of closure method of addressing reciprocal services? It is the simplest of the three methods. It utilises simultaneous equations for the two service departments. The sequence in which departments are eliminated generally relates to the amounts involved. Once apportioned a department is eliminated from further apportionments. 11 Which of the following is a disadvantage of activity based costing? Increased interaction between management accountants and operational management. Staff time recording is essential. No need to include reciprocal service allocations. Cost drivers are independent of volume MA Specimen Exam 1.1 Page 5 of 25

6 12 Which of the following statements is true? Bottom up budgeting can result in lower level managers and employees feeling uninvolved in the budget process. One of the main problems with top down budgeting is budget slack being built into the budget. An advantage of top down budgeting is that budgets will have been prepared by those who have the best knowledge of the area they are budgeting for. It is more time consuming to use a bottom up approach and can be more expensive because of the administration required in checking and amending the budget until a final version is agreed by all. 13 When describing value for money efficiency is best defined as: Acquiring resources of appropriate quality and quantity at the least cost. Ensuring that outputs are achieving the objectives set. Making the public sector more responsive to customers. Ensuring the maximum output is gained from the resources input. 14 The following costing information is available for an organisation that produces and sells a single product: Selling price Variable costs Predetermined overhead absorption rate Fixed costs 25 per unit 8 per unit 3 per unit 180 per period In period 3, the company produced 70 units and sold 55 units. opening stocks and actual fixed costs for the period were 180. There were no Calculate the under / over absorption incurred. 30 under absorption 30 over absorption 15 under absorption 15 over absorption MA Specimen Exam 1.1 Page 6 of 25

7 15 Which of the following statements describes what service level agreements specify? The provision of a certain amount of service, the standards to be expected and a predetermined cost. The provision of a certain amount of service, a predetermined cost and whether the service will break-even. The provision of a certain amount of service, the standards to be expected and whether the service will break-even. A predetermined cost, the standards to be expected and whether the service will break-even. 16 Which of the following statements best describe relevant costs? They include future costs/benefits, include costs/benefits that are common to all options and exclude opportunity costs. They include future costs/benefits, include opportunity costs and exclude costs/benefits that are common to all options. They include costs/benefits that are common to all options, include opportunity costs and exclude future costs/benefits. They include future costs/benefits, exclude costs/benefits that are common to all options and exclude opportunity costs. 17 A company plans to sell 500 units of a product in period 4. At the end of period 3 there were 85 units of product in stock and the company would like to increase this to 100 units by the end of period 4. Each unit of the product requires 3kg of materials. Calculate the production and materials usage budgets. Production budget 485 units, materials usage 1 455kg Production budget 485 units, materials usage 1 500kg Production budget 515 units, materials usage 1 500kg Production budget 515 units, materials usage 1 545kg MA Specimen Exam 1.1 Page 7 of 25

8 18 Which of the following statements best defines sensitivity analysis? Sensitivity analysis is a what-if technique which allows management to gauge the effect of changing one or more of the variables within the cost-volume-profit model. Sensitivity analysis is a what-if technique which allows management to gauge the effect of political changes on the general public. Sensitivity analysis is a what-if technique which allows management to gauge the effect of environmental changes on the budget process. Sensitivity analysis is a what-if technique which allows management to gauge the effect of management techniques on the motivation of staff. 19 An organisation budgets from 01 January to 31 December. The current staff budget is per annum. You have been given the following information to prepare next year s staff budget. A member of staff currently paid will leave the organisation on 31 May. There are no plans to replace the current staff member when they leave. All staff are expected to receive a 2% pay rise on 1 March. Calculate next year s staff budget to the nearest Which of the following best describes the planning, programming and budgeting system? A budgeting model which starts each period s budget from zero. A budgeting model where programmes of work are identified for achieving organisational objectives that may not follow the organisation s departmental structure. A budgeting model where the current year s budget is taken as a basis for building the budget for the next year. A budgeting model where budgets are set for activities instead of functional departments. Total marks (40) MA Specimen Exam 1.1 Page 8 of 25

9 SECTION B (Answer THREE from four questions) 1 You are the newly appointed management accountant for the local leisure facility. You are reviewing the management accounting information that is provided to the facility manager and feel that there are some improvements that should be made. The latest budgetary control report showed the following: Leisure Facility Budgetary Control Report 01 January 2013 to 31 July 2013 Annual budget Budget to Date Actuals to Date Expenditure: Employees Premises Electricity Water Maintenance Total Expenditure Income: Leisure Activities Special Events Cafe Total Income Surplus / (Deficit) (44 058) The following information is also available: The employees budget is for permanent staff who are paid on a monthly basis, and for extra casual staff who are employed during the school holidays. 80% of the casual staff costs will be incurred over June, July and August with the remainder in December. Premises costs include of buildings taxes which are paid on 01 April each year. The remainder of the budget is spent evenly through the year. The building maintenance team has been investigating the profile of electricity and water expenditure. The following pattern was recorded for electricity: 60% of the budget is spent evenly from May to September 20% of the budget is spent in November and December the remainder of the budget is spent evenly over the remaining months. The investigation showed that water costs are incurred evenly throughout the year. In most years, the maintenance budget is spread equally throughout the year. However, in 2013 there was a one off project to redecorate the changing rooms. This work took place in March and was budgeted to cost Income from both the leisure activities and the cafe is received evenly throughout the MA Specimen Exam 1.1 Page 9 of 25

10 year except for a peak during school holidays. Income in the months of July, August and December is double the normal monthly amount. Three special events are planned to take place during the year, one in each of February, September and November. It is expected that each event will generate the same levels of income. Requirement for question 1 Prepare a profiled budgetary control report for the 01 January 31 July period in an improved format. (14) A common form of budgeting used by public services organisations is incremental budgeting. Explain this form of budgeting and state two advantages and two disadvantages associated with it. (6) (20) MA Specimen Exam 1.1 Page 10 of 25

11 2 A government department is organising a conference on political, environmental and economic factors that influence budgeting. The speakers are highly respected and the government department is confident that many people will be eager to attend the conference. Although the conference will be valuable to all those working in budgeting in public services, the government department cannot afford to make a loss from running the conference and intend to charge a small fee of 110 per delegate. The conference will take place over two days and the fee per delegate is expected to cover all costs associated with the conference. The venue for the conference charges 350 per day for room hire for a room with capacity to hold up to 375 delegates. The venue will also charge 30 per day per delegate for refreshments and catering. There will be five speakers. The normal fee that speakers charge for such conferences is 450 per day. However, two of the speakers have volunteered to appear free of charge. Each speaker will only attend one day of the conference. Delegates at the conference will be provided with an information pack which will cost the government department 20 per pack. It is anticipated that the government department will also incur general costs of arranging the conference of Requirement for question 2 Calculate the number of delegates required for the conference to breakeven. (5) Draw a break-even chart to represent the information available regarding the conference, clearly showing the break-even point. (5) Calculate the charge per delegate that would result in a break-even position if the conference reached capacity of 375 delegates. (3) Break-even analysis uses marginal costing principles. (i) Explain the key principles of marginal costing and how it differs from alternative methods of costing. (5) (ii) Define the term contribution. (2) (20) MA Specimen Exam 1.1 Page 11 of 25

12 3 EE Limited is a company that manufactures a range of products. At the start of the year, the budgeted costs of one particular product, the Basic, were as follows: Budgeted costs per unit Direct materials Direct labour: Skilled Direct labour: Semi-skilled Overheads Budgeted production 4.5 kilograms at 11 per kilogram 3 hours at 15 per hour 2 hours at 10 per hour Fixed overheads are budgeted to be per annum. Fixed overheads are absorbed on a basis of total direct labour hours, (including both skilled and semi-skilled labour) units During the period the following costs were actually incurred Direct materials kilograms were used, costing in total Direct labour: Skilled hours were worked at a total cost of Direct labour: Semi-skilled hours were worked at a total cost of Overheads Fixed overheads incurred were Production units were produced The production manager has expressed concern that the total costs seem to be running at too high a level against the budgeted costs. You work in the finance department and the production manager has asked you to analyse the variances from the budgeted cost. Requirement for question 3 Calculate eight different variances for materials, labour and fixed overheads. Total cost variances are not required. (12) Briefly explain possible reasons for the labour variances identified. (4) Identify the conditions that need to be met for standard costing to be useful in public services. (4) (20) MA Specimen Exam 1.1 Page 12 of 25

13 4 A building firm has been approached by the local police authority to submit a tender to build a new police headquarters office. The building firm has been having some financial difficulties and is very eager to win the tender and so has decided that relevant costing principles should be used to establish the cost in preparation for the tender submission. The building firm has approached you to assist in production of the tender submission and has provided the following tender information: The project will take 10 months to complete. The materials that will be required for the job are as follows: Material Units required Units in stock Book value of stock per unit Current cost per unit X Y Z If unused after 12 months, the store manager will clear out old stocks of materials and if possible sell them for scrap. The scrap values of materials X, Y and Z are 2.50, 3.55 and 6.50 per unit respectively. The stock of material X has been in the storeroom for some time now and it is not expected to be used for any other projects. Material Y is popular on many projects and is in constant use by the building firm. The stock of material Z was purchased for another project but was unused. One of the engineers has had an idea that material Z could be used instead of Compound A which is currently in use in other projects. 450 units of Z could save the company from purchasing 300kg of Compound A which currently costs 10 per kg. One of the building firm s employed project managers will oversee the project. He is paid a salary of per annum. The project manager will require specialist assistance from an architect experienced in such large projects. As the building firm does not employ an architect with this level of experience the firm will employ one specially for this project, who will be paid per month and who is expected to work on the project for the full 10 months. To complete the project on time 10 labourers will be needed. Labourers are paid per annum to work 48 weeks per year, 40 hours per week. Two of the labourers are already committed to work on a school building project which overlaps with the first two months of this police headquarters office project. The firm can hire two temporary labourers to complete the final two months of the house building project from a local employment agency or pay overtime to existing staff. Agency labourers would cost the same as employed labourers. Overtime would involve each of the remaining eight labourers working 3.5 hours of overtime per week for 10 weeks. Overtime is paid at double the normal hourly rate. The project requires two pieces of equipment, both for 6 months each. One is already owned by the building firm, the other will have to be hired at cost of 400 per month. The equipment owned by the building firm originally cost and is being depreciated on a straight line basis over 10 years MA Specimen Exam 1.1 Page 13 of 25

14 Requirement for question 4 (i) Calculate the relevant cost to the building firm of undertaking the police headquarters job. (ii) Explain your treatment of each of the costs and revenues in the tender information provided. (16) Explain the other factors that the building firm should consider before finalising the price to charge the police authority in their tender submission. (4) (20) MA Specimen Exam 1.1 Page 14 of 25

15 SECTION A: ANSWER SHEET Question number 1 X 2 X 3 X 4 X 5 X 6 X 7 X 8 X 9 X 10 X 11 X 12 X 13 X 14 X 15 X 16 X 17 X 18 X 19 X 20 X MA Specimen Exam 1.1 Page 15 of 25

16 SECTION B (Answer THREE from four questions) Answer to Question 1 Part Leisure facilities budgetary control report 1 st January 2013 to 31 st July 2013 Annual budget Budget to Date Actuals to Date Variance Marks Expenditure: Employees Premises F 1½ Electricity A 2½ Water F ½ Maintenance F ½ Total Expenditure F ½ Income: Leisure Activities F Below Special Events A 1 Cafe F Below Total Income F ½ Surplus / (Deficit) (48 984) (44 058) F ½ 2 marks for appropriate format including variance column Variances may be shown in any format providing there is consistency Workings Employees: Permanent employees Casual employees x 7/12 = year to date x 80% = June, July and August x 2/3 = year to date Total year to date employees = Premises: Building taxes paid in April included in year to date Remainder = x 7/12 = year to date Total year to date premises = MA Specimen Exam 1.1 Page 16 of 25

17 Electricity x 60% = May to Sept = per month per month x 3 months = year to date 20% November and December is not year to date Remainder x 20% = January to April and October x 4/5 = January to April = year to date Total electricity year to date = Water Incurred evenly x 7/12 = Maintenance decorating cost is year to date Remainder = x 7/12 = Total maintenance year to date = Leisure activities & Café Split of the 12 months: 9 months give 1 part income, 3 months give 2 parts income ½ mark Total of 15 parts income ½ mark January to June is 6 parts income + July is 2 parts income = 8 parts year to date mark Total leisure activities year to date x 8/15 = ½ ½ mark Total café year to date x 8/15 = ½ mark Maximum mark for part 14 marks Part In incremental budgeting, the current year s budget is taken as a basis for building the budget for the next year. The items and values in the current budget are then adjusted for changes expected in the next period, such as changes in the volume of activity, changes in the activities undertaken and changes to prices often caused by inflation. In practical terms for those areas of the budget where the level of activity and method of delivery are to remain the same, the budget will be set as the current budget plus x% for inflation. 1 mark per relevant point to a maximum of 2 marks Other relevant points should be given credit MA Specimen Exam 1.1 Page 17 of 25

18 Advantages It is straight forward to explain in comparison to other models. It is easy to understand. Quick to implement. It is appropriate for the public sector as many of the services delivered by public service organisations are statutory and must be delivered, the budget is likely to remain static for these areas and so the incremental approach will ensure that the budget is carried forward to the next year. Disadvantages Errors may be carried forward. Can stifle innovation in the organisation in terms of the way in which service delivery can be improved or made more efficient as there is an assumption made that the method and level of delivery is appropriate when the budget is rolled forward. It may result in budgetary slack. Budgetary slack refers to areas of the budget where the value of the budget is more than is really required. 1 mark per relevant advantage/disadvantage to a maximum of 2 marks for advantages/disadvantages Other valid points should be awarded credit (Total 20 marks) MA Specimen Exam 1.1 Page 18 of 25

19 Costs/Revenue Management Accounting Answer to Question 2 Part Fixed costs: Venue 350 x 2 days 700 ½ 450 x 3 charging speakers ½ General costs ½ Total fixed costs ½ Variable costs: Refreshments & 30 x 2 days 60 ½ Information pack 20 ½ Total variable costs per delegate 80 ½ Break-even point: Fixed costs = Contribution per unit = 235 delegates 1½ Part Conference Break-even Chart BEP Total Revenue Fixed Cost Total cost Number of delegates Fixed cost line 1 mark Total cost line 1 mark Total revenue line 1 mark Break-even point labelled 1 mark Axes correctly labelled and a title included 1 mark MA Specimen Exam 1.1 Page 19 of 25

20 Part Selling price = Total fixed costs + (Break-even point x Variable costs per unit) 1 Break-even point = (375 x 80) = Part (i) Marginal Costing: Marginal costing is a principle whereby only marginal costs of cost units are ascertained the fixed costs will be known but usually only as a total amount. Marginal costing does not include the full cost of products and services within the cost of individual units. A marginal cost is the additional cost incurred to provide one extra unit. Under marginal costing, only variable costs are charged to cost units. Under marginal costing fixed costs are not treated as part of the cost of producing output because they aren t generated from producing the units. Fixed costs are treated as a cost of the period to which they relate. 1 mark per relevant point to a maximum of 5 marks (ii) Contribution: Other valid points should be awarded credit Contribution is the difference between the sale price and variable costs of a product or service. This difference shows the contribution being made to fixed costs and, once fixed costs are covered, to profit. In marginal costing decisions management will look for a product to make a positive contribution. If competing options are available management should choose the one which makes the highest contribution. 1 mark per relevant point to a maximum of 2 marks Other valid points should be awarded credit (Total 20 marks) MA Specimen Exam 1.1 Page 20 of 25

21 Answer to Question 3 Part Eight of the following variances should be calculated: Materials price variance (Standard price Actual Price) x Actual Quantity Actual price per kg = = 9 per kg (11-9) x = F Materials usage variance (Standard quantity for units produced Actual quantity for units produced) x Standard price Standard quantity for units produced = 4.5 x = 6 750kg ( ) x 11 = A Labour rate variance: Skilled labour (Standard rate per hour Actual rate per hour) x Actual hours used Actual labour rate = = 17 per hour ( 15-17) x = A Labour rate variance: Semi-skilled labour (Standard rate per hour Actual rate per hour) x Actual hours used Actual labour rate = = 9 per hour (10-9) x = F Labour efficiency variance: Skilled labour (Standard hours for units produced Actual hours for units produced) x Standard rate units should take 3 x = hours ( ) x 15 = F Labour efficiency variance: Semi-skilled labour (Standard hours for units produced Actual hours for units produced) x Standard rate units should take 2 x = hours ( ) x 10 = A Labour mix variance Actual hours in standard mix minus actual hours in actual mix multiplied by the standard wage rate per hour AHSM AHAM (AHSM AHAM) SP Variance Skilled F Semi-skilled A 800 F Actual hours in the standard mix: Skilled = 3/5 x = Semi-skilled = 2/5 x = MA Specimen Exam 1.1 Page 21 of 25

22 Labour yield variance Standard hours for actual output minus the actual hours in the standard mix multiplied by the standard wage rate per hour SHSM AHSM (SHSM AHSM) SP Variance Skilled F Semi-skilled F F Standard hours in the standard mix: Skilled: units should take 3 x = hours Semi-skilled: units should take 2 x = hours Fixed overhead expenditure variance Budgeted fixed overheads Actual fixed overheads = 3,000 A Fixed overhead efficiency variance (Standard hours for units produced Actual hours for units produced) x Standard rate units should take x (3 + 2) = x 5 = 7,500 hours Or units should take = hours Actually worked = hours ( ) x 7 = F Fixed overhead capacity variance (Budgeted capacity Actual capacity) x Standard rate Budgeted capacity = x (3 +2) = x 5 = ( ) x 7 = F Fixed overhead volume variance (Actual units produced Budgeted units) x Standard rate per unit Standard rate per unit = (3 + 2) x 7 = 5 x 7 = 35 ( ) x 35 = F Or Fixed overhead efficiency variance + Fixed overhead capacity variance F F = F Part Skilled 1½ marks per variance, up to a maximum of (12) Adverse skilled labour rate variance, possibly due to more highly skilled labour than budgeted resulting in a higher rate of pay. This is supported by the favourable skilled labour efficiency variance suggesting that these workers produced the units of Basic more quickly than budgeted MA Specimen Exam 1.1 Page 22 of 25

23 Semi-skilled Favourable semi-skilled labour rate variance, possibly due to a lower level of skills and thus a lower rate of pay. This is supported by the adverse semi-skilled labour efficiency variance suggesting that these less skilled workers took longer than budgeted to complete the units of Basic. 1 mark per relevant point, up to a maximum of (4) Part For standard costing to be useful in public services there are four conditions which must be met: 1. There must be an identifiable unit of service that can be delivered to all service users. 2. The resources required for one unit of the service must be identified, standard and reasonable. 3. The actual level of output must be measurable and costs able to be ascertained. 4. The service must be delivered in high enough volumes to meet cost benefit criteria. 1 mark per relevant point, up to a maximum of (4) (Total 20 marks) MA Specimen Exam 1.1 Page 23 of 25

24 Answer to Question 4 Part Item Material X (i) Relevant cost (ii) Explanation Book value of stocks not relevant. These are sunk costs. 1 Relevant cost is lost income from not receiving scrap value plus current cost to purchase additional amount needed units at units at 5 1 Material Y As material is in constant use stock must be replaced All units purchased, 600 units at 4 1 Material Z Relevant cost is the cost of the best alternative 1 Scrap value = Z saving = Project manager Architect Labourers employed Labourers extra No relevant cost as employees incur no additional cash flow. 1 Additional cash flow for the project = Employed labourer incur no additional cost regarding their salaries 1 Relevant cost is the best of the alternatives Agency 2 x x 2/12 = Overtime rate: / (48 x 40) x 2 = 20 per hour 8 x 3.5 hours x 10 weeks x 20 = Equipment owned 0 Equipment - hired Total Relevant cost Depreciation is not a cash flow and so is not relevant 1 Hire is an additional cash flow and is relevant. 400 x 6 months = MA Specimen Exam 1.1 Page 24 of 25

25 Part Other factors to be considered include: Can the cash flow of the building firm cope given the financial problems they have been experiencing? Is there any other future business that could be gained from completing this project? Successfully completing such a large project will be good for the firm s reputation. Asking staff to work overtime can have motivational implications. Offering a low price on this contract may result in this customer or others expecting low prices in the future which is not sustainable. 1 mark per relevant point to a maximum of 4 marks Other valid points should be awarded credit (Total 20 marks) MA Specimen Exam 1.1 Page 25 of 25