ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

ANSWERS & COMMENTS

Total Score

13 to 17, February, 2012

Year 2011/2012 Semester 2

Name: _____________________________________________________
Class & Instructor

Please Tick One

G1: Prof Leong Kwong Sin

G2: Prof Leong Kwong Sin
G3: Prof Leong Kwong Sin
G4: Wong Suay Peng
G5: Wong Suay Peng

Instructions:

1.

Time allowed: 45 minutes

3.

There are 4 questions in this quiz.

4.

Please write your answers legibly only in the boxes provided.

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

Common mistakes in concepts

1.
Treated variable cost as if it is fixed. If sales is unknown, how can total variable
costs be known?
2.

Use the wrong sales mix. $2:$1 is not the same as 2 units:1unit.

3.

Worthwhile does not mean Breakeven.

4.

Equated Budgeted OH to Applied OH

5.

Applied OH = POR x Bgt Qty of Cost Allocation base

6.

Under-/Over-applied OH = Actual Budgeted OH

7.

Omitted Indirect Materials from the Raw Materials account

8.

Mistook the $10,000 bal in Raw Materials to be a credit closing balance. Can
inventory be negative?

9.

Service Dept allocation:

a)
Costs are allocated from Admin & Maint Dept (Service Depts) > Piano,
Violin (Operating Depts). Qn is not asking about allocating from Piano to
the no. of students.
b)

Budgeted rates mean Budgeted costs of Service Dept/Budgeted usage of

Operating Depts
Budgeted rates DO NOT mean Budgeted costs of Piano Dept.

c)

Did not follow through arguments e.g. using actual rates will result in
seasonal fluctuations. This could be mitigated by lengthening the period.
However, it would result in untimely information.

d)

Ambiguity: subject to inefficiencies of the other depts are you

referring to service depts or user depts?

e)

Did not recalculate % of allocation base for 2nd setp allocation

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

Question 1 (20 marks)

(1a) Scent Ltd. produces and sells a wide range of perfumes in specially designed
bottles. The bottle is an important feature of the product. Complete the table
below by putting a to indicate if the cost is a direct material cost, direct labour
cost, manufacturing overhead cost or period cost.
(16 marks)
(1 mark for each correct answer; minus 1 mark for each wrong answer)

i. Aroma compounds
essential to create
the fragrance
ii. Water (about 0.1% of
the content of each
bottle of perfume)
iii. Water for
consumption during
office meetings
iv. Perfume bottles

Dir
Mat
Cost

Mfg OH
Cost

Period
cost

Remarks
(If needed)

Too insignificant to
be worth tracing
as Dir Mat
Non-Mfg

Bottle is an
important feature of
the product

v. Wages for the

production workers
vi. Overtime premium
for production
workers. OT is due to
increase in general
workload.
vii. Idle time due to
machine breakdown
viii. Salaries of the
production
supervisors

ix. Salaries of the sales

supervisors
x. Office rent
xi. Factory utilities
xii. Depreciation: factory
xiii. Depreciation: Shop
xiv. Transportation-in
costs on materials

Dir Lab
Cost

Cannot be identified
with specific
production.
Homework 2-38,
Horngren pg 66
Same as above for
wear and tear
A wide range of
perfumes are
produced =>
production
supervision is
shared among
products.
Non-Mfg

Non-Mfg

Non-Mfg
Both accepted. FA:
Dir Mat but if amt

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

purchased

is insignificant and
not economically
traceable, then
Manu OH
Non-Mfg

xv. Transportation-out
costs to customers
xvi. R&D to explore new
products

Non-Mfg. See
Homework 2-37
(if capitalized, then
intangible asset; not
as inventory i.e.
cannot be product
cost)

(1b) What is the impact on the balance sheet and income statement if a
manufacturing cost is wrongly recorded as a period cost?
(4 marks)
Answer (1b)
Identify the flow through the various accounts
If ALL the product affected have not sold yet,
a) Manufacturing cost is understated
b) Inventory (Asset) is understated
c) Expense (Income statement) is overstated
d) Net Profit (Income statement) is understated
If ALL the product is sold,
a) Manufacturing cost is understated
b) Cost of goods sold (Income statement) is undercosted
c) Gross Profit (Income statement) is overstated
d) Expense (Income statement) is overstated
e) Net Profit (Income statement); Asset (Balance Sheet): no impact

Other Comments for Question 1:

(1) Consider the 2 steps in classifying transactions relating to production (refer
to diagram below):
a. First, does the transaction relate to production or manufacturing?
If not, it cannot be D. Mat, D. Lab, nor Mfg OH; (ans becomes period
costs usually ).
b. If yes, then can it be (physically AND economically) traced to products
as D. Mat or D. Lab if not, then it must be Mfg OH.

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

(2) You have to think through the cost flow for Question 1(b) which will then
highlight to you the conditional impact due to whether the affected
products have been sold or not (or partially sold?). T accounts may help you
see the flow clearer.
(3) Please do not make ambiguous (wrong?) statements e.g. The Balance Sheet
or The Profit & Loss Statement is over- or under- stated. It has no meaning.
Only specific accounts, e.g. Inventory, Profit, etc. can be over- or understated. You will have to develop a vocabulary of proper accounting terms and
phrases by the time you graduate
(4) Those who are still not sure about whats in the Balance Sheet and whats in
the P & L, will need to revise their FA (e.g. CoGS, expenses, etc are NOT in
the Balance Sheet).

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

Question 2 (20 marks) (A multiple product break-even problem !)

BR makes and sells 2 ice cream flavours. It projected total fixed costs for 2012 to be
$378,000. Forecasted sales and variable costs for the year are as follows:

Sales
Variable costs

Vanilla
$400,000
$100,000

Chocolate
$200,000
$80,000

Assume sales mix will remain constant.

Required
(a) Calculate the sales (in dollars) of each flavour to breakeven. Round your answers
to the nearest dollar.
(5 marks)
Answer (2a)
Sales
VC
Total CM
CM ratio
FC
BE Sales *

Vanilla
$400,000
$100,000

Chocolate
$200,000
$80,000

$360,000

$180,000

Total
$600,000
$180,000
$420,000
0.7000 (70%)
$378,000
$540,000

* BE Sales in $ = FC / CMR
Sales mix (in $) of V:C = $2:$1; NOT 2 units : 1 unit

(b) BR is considering paying a sales commission of 10% of sales to motivate its retail
staff. What is the additional total sales that must be made to make paying the
sales commission worthwhile?
(10 marks)
Answer (2b)
Current Profit = Sales$ - VC$ - FC$ = $600,000 - $180,000 - $378,000 = $42,000
Old CM% = 70% (see above)
New CM% = 60% (i.e. 70% - 10% of proposed commission)
Worthwhile means Benefits must at least cover Costs or must at least maintain
current profit.
Required sales to maintain Current level of Profit (i.e. not pure Break Even )
= (FC + Current Profit) / New CM% = ($378,000 + $42,000) / 60% = $700,000
Therefore additional sales required (to justify commission) = $700,000 - $600,000
= at least $100,000

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

(c) Compute the additional sales (in dollars) of Vanilla and Chocolate ice cream
required if BR wants to increase operating income by 100%.
(5 marks)
Answer (2c)
Operating income = Total CM FC = $420,000 - $378,000 = $42,000
DOL (Ops Leverage) = CM/Operating income = 420,000/42,000 = 10 times
% increase in operating income = DOL x % increase in sales
% increase in sales = 100%/10 times = 10%
Additional sales of Vanilla = 10% x $400,000 = $40,000
Additional sales of Chocolate = 10% x $200,000 = $20,000

Other Comments for Question 2:

(1) For Question 2a, since the qn asks for BE sales dollars, the fastest approach is
to use Total CM = CMR x BE Sales $ (Method 2) or BE% (Method 3). If you are
not sure of the sales mix, then use Method 3.
*** Quite a few students are still splitting the FC amongst the 2
products. This is a grave conceptual error
(2) For question 2b. Many have overlooked the fact that you must maintain
current level of profit so the BE formula (where profit is set to zero) is not
the right formula to use.
(3) Another mistake in Q2b is to calculate the additional VC = 10% x current sales
$600,000 = $60,000 and use $60,000 to calculate the required sales i.e. sales
is unknown you are treating the commission as fixed regardless of the sales
level.
(4) Alternative approach to answering Question 2c (without using Ops Leverage):
a. Current Profit = $42,000
b. Desired Profit (with a 100% increase) = $42,000 x 2 = $84,000
c. BE $ = (FC + Desired Profit) / CM%
d. = ($378,000 + $84,000) / 70% = $660,000
e. Therefore Increase in sales needed = $660,000 - $600,000
f. = $60,000 (or $40,000 of V and $20,000 of C, with the 2:1 sales$ ratio)
Question 3 (20 marks)
BWC uses normal costing in its job costing system. In 2011, the company earned a
gross profit margin of 60% on sales of $475,000. It started (worked on) 3 jobs during
the year and by the end of the year, Job A was still in progress, Jobs B and C were
completed but only Job B was delivered to the customer.

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

Production data for 2011 are as follows:

Manufacturing
Overhead
Factory supervisor
Production setup
Indirect materials

Job A
Job B
Job C
Total

Cost allocation base

Direct labour cost
No. of setups
Direct materials cost

No. of setups
Budget Actual
4
5
7
8
9
15
20
28

Budgeted Manu
Overhead $
$180,000
$40,000
$15,000
$235,000

Cost of Direct Materials

used
Budget
Actual
$6,000
$8,000
$17,000
$15,000
$7,000
$9,000
$30,000
$32,000

Actual Manu
Overhead $
$100,000
$159,500
$10,000
$269,500

ref
d
d
d

Cost of Direct Labour used

Budget
Actual
$18,000
$20,000
$45,000
$50,000
$27,000
$30,000
$90,000
$100,000

BWC uses activity-based costing to allocate overhead costs. Its policy is to write off
any under- or over- applied overhead to cost of goods sold.
Required
(a) Compute the manufacturing overhead application rates.

(6 marks)

Answer (3a)

Manufacturing
overhead
Factory supervisor
Production setup
Indirect materials

Bgt Cost$
$180,000
$40,000
$15,000

Allocation
Base /
Driver
$90,000
20
$30,000

Page 8 of 12

Driver/base
DL$
No. of setups
DM$

OH Activity
Rates
200%
$2,000
50%

ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

(b) Complete the T-accounts on the next page.

(14 marks)

Workings:
Actual Driver
DL$
Rate
Job A
Job B
Job C
Ref:

$20,000
$50,000
$30,000
WIP a/c

Dir Mat $
Job A
Job B
Job C
Tot

8,000
15,000
9,000
$32,000

# of
setup
5
8
15

OH Allocation (Applied) to Jobs

DM$
8,000
15,000
9,000
b

Dir Lab $
$20,000
$50,000
$30,000
$100,000

OH-Sup
200%
$40,000
$100,000
$60,000

OH Applied
$54,000
$123,500
$94,500
$272,000

OHSetup
$2,000
$10,000
$16,000
$30,000

OH-Ind
Mat
50%
$4,000
$7,500
$4,500

Total Costs
$82,000
$188,500
$133,500

Total Applied
OH (ref)
$54,000 (f)
$123,500 (k)
$94,500 (o)
e

Ref
WIP A (g)
WIP - B
WIP - C

Ref
A
P
H

For some of the required answers

Balancing Figure in Dir Mat a/c
$133,500 + opening bal ($5,000)
Job A not completed, FG=0
CoGS = 40% of $475,000 - $190,000
Over-Applied OH = $2,500 (see T a/c)
C
Is a Bal Fig ($190,000 + $2,500)
N
= c (double entry )
M
= n - $2,000 (B. Bal)
L
=m
J
BWIP the balancing figure
Q
=p
R
= q + B. Bal ($7,000)
Note the sequence of solving the numbers
Other comments:
This Question requires you to:
(1) know how costs flow through the various accounts, e.g. Raw Mat -> WIP ->
FG -> CoGS (and remember a little of FAs double entry);
(2) know that Actual OH are captured in the account but only Applied OH
appears in the WIP account(s); thus requiring treatment of Over- or Underapplied OH;
If you are unclear about t-accounts, refer to homework 4-24; attached file in my
comments on Solomons solution; solution to seminar additional practice question

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

Answer (3b)
Raw Materials
8,000 (b)

Bal
(a)
Purchases

44,000
Manu OH

Bal

(d)

Cost of Goods Sold

8,000
15,000
9,000
10,000

(c)
FG (Job B)

192,500

Adjusted
Bal

190,000*

Overapplied
OH
2,500

10,000

Manufacturing Overhead Control

(e)

Raw Materials
Indirect labour
Prodn setup
COGS
(overapplied
OH)

10,000 WIP Job A

100,000 WIP Job B
159,500 WIP Job C

54,000
123,500
94,500

Show clearly the adjustment of under- or

overapplied overhead
*Given gross margin = 60% of $475,000
Thus COGS = 40% x $475,000 = $190,000

2,500

WIP: Job A (Not finished yet )

BWIP
0
Raw Materials
8,000
DL
20,000
(f)
Applied OH
54,000
(g) Bal
82,000
WIP: Job B (Finished and Sold)
(j)BWIP
2,000
Raw Materials
15,000
DL
50,000
(k)
(l) FG
Applied OH
123,500

Bal
(h) Bal

FG: Job A
0
0

Bal
(m)
WIP Job B

FG: Job B
2,000
(n)
190,500 COGS

Bal
(q) WIP

FG: Job C
7,000
138,500

(r) Bal

145,500

190,500

WIP: Job C (Finished but not sold)

BWIP
5,000
Raw Materials
9,000
DL
30,000
(o)
(p)FG
138,500
Applied OH
94,500

Note: Follow the direction of the arrows sequence of solving numbers

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192,500

ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

Question 4 (20 marks)

DoReMe Music School provides piano and violin classes. It has two service
departments: Administration and Maintenance. The budgeted costs in the service
departments are as follows:
Administration
Maintenance

: $342,000
: $171,000

The usage of the service departments output for the year is as follows:
Provider of Service
Administration
Maintenance
User of Service
Administration
Maintenance
Piano
Violin

10%
40%
50%

5%
60%
35%

Required
(a) As the manager of the Piano Department, would you prefer budgeted or actual
cost allocation rates be used to allocate the service department costs to your
department? Why?
(10 marks)
Answer (4a)
This is a homework question 15-5
Budgeted rates because:
a. the user knows the costs in advance and can factor them into ongoing operating
choices, (better Planning info)
b. the cost allocated to a particular user department does not depend on the
amount of resources used by other user departments, and
c. Inefficiencies at the department providing the service do not affect the costs
allocated to the user department.
And any other good reasons

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ACCT112: MANAGEMENT ACCOUNTING

2011/12 S2 Test # 1

(b) Use the step-down method to allocate service department costs.

(10 marks)
Answer (4b)
Sequence of Allocation:
Admin spent more of its time (i.e. 10%) servicing Maintenance than the other way
around (5%). Thus Should allocate Admin Dept first.
Supporting Dept
Admin
Maint
Budgeted overhead
costs before allocation
from Service Depts
(1) Allocate Admin
% usage of Admin
service
Allocated Admin cost
(2) Allocate Maint
Amt of Maint cost to
be allocated
% usage of Maint
service
Allocated Maint cost
Total allocated cost

$342,000

($342,000)

Production Dept
Piano
Violin

$171,000

Total
$513,000

10%

40%

50%

100%

$34,200

$136,800

$171,000

$0

60%

35%

95%

$129,600
266,400

$75,600
246,600

$0
$513,000

$205,200

($205,200)

$0

Other comments:
(1) Some have chosen not to use a tabular format and thus unable to observe
some obvious errors. Anyway, a neat format will be a good habit to develop
- for your future career
(2) Arguing for allocation of Actual OH is rather difficult. Accuracy is NOT a
characteristic of allocation of actual OH. Two possible weak arguments for
it are:
a. No subjectivity (but it may be objectively wrong?);
b. When OH is insignificant compared to total product cost? (Then you
might as well dont allocate anything and treat OH as a period cost?)

End of Quiz

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