ca_exm_ma1_2009-06
CGA-CANADA
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION
June 2009
Marks Time: 3 Hours
Note:
Except for multiple-choice questions, all calculations must be shown to obtain full marks.
1
24 Question
Select the best answer for each of the following unrelated items. Answer each of these items in your
examination booklet by giving the number of your choice. For example, if the best answer for item (a)
is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will
not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.
Note:
3 marks each
a. The 2009 static budget for Xylophone Company estimates a fixed manufacturing overhead cost of
$200,000. The actual production quantity for 2009 was within the relevant range and the overhead
volume variance was unfavourable. Based on this information, which of the following statements is
true?
1) The flexible budget, based on actual quantity, will show that the fixed overhead cost is less than
$200,000.
2) The flexible budget will show that the fixed overhead cost is more than $200,000.
3) There was no fixed overhead spending variance for 2009.
4) The company produced less than the quantity on which the static budget was based.
b. The cost of production report for the fabrication department of a company shows that during July,
total costs accounted for were $4,689. During the month, transferred-in costs were $1,333; raw
material costs were $2,100; direct labour was $855; and overhead cost was $401. The department
transferred out $4,500 at the end of the month. What was the cost of beginning work in process for
July?
1) $ 0
2) $ 189
1,256
3) $
3,356
4) $
c. Beginning work in process in the assembly department of a company was 3,000 units and 50%
completed. During the year, 20,000 units were completed and delivered to customers. Ending work in
process was 5,000 units and 80% completed with respect to conversion. What are the equivalent units
for conversion, assuming the weighted-average method is used?
1) 22,500
2) 23,500
3) 24,000
4) 25,000
Continued...
d. Which of the following is one reason that estimated overhead costs rather than actual overhead costs
are used in the costing process?
1) Actual costs cannot be determined accurately.
2) Customers do not want to pay the actual costs because they believe that management will have no
reason to be efficient.
3) Managers are more concerned that operations are running smoothly and do not want to waste
time.
4) Managers want to know the accounting system’s valuation of completed jobs before the end of the
period.
e. The following journal entry records the application of manufacturing overhead for the month of
August:
Work in process .................................................................................................... 90,000
overhead ................................................................................ 90,000 Manufacturing
The overhead is applied on the basis of direct labour-hours. During August, 15,000 direct labour-hours were incurred. The budgeted direct labour-hours for the month was 12,000 hours. Job Z used 10,000 direct labour-hours during August. What will the job cost sheet for Job Z show for manufacturing overhead cost added during August?
1) $60,000
2) $72,000
3) $75,000
4) $90,000
f. The degree of operating leverage for Balloon Company is 7 and the degree of operating leverage for
Dirigible Company is 4. The two companies have identical sales levels and net incomes. Which of the following statements is incorrect?
1) The break-even quantity for Balloon will be more than that for Dirigible.
2) The margin of safety for Balloon will be less than that for Dirigible.
3) The contribution margin for Balloon will be more than that for Dirigible.
4) A 10% reduction is sales will cause net income for Dirigible to be lower than that for Balloon.
g. Panktual Company uses just-in-time inventory methods to manage its inventories. Which of the
following statements is incorrect concerning this company?
1) Inventory costs will fluctuate greatly from month to month because of variability in sales.
2) The net income from the absorption costing method will be approximately equal to the net income
from the variable costing method.
3) There will typically be very low levels of inventories period to period.
4) The cost of a unit of product will be different between the variable and absorption costing
methods.
h. Guido’s Auto Repair has estimated the annual wage cost of its mechanics in the repair department to
be $348,000. Other costs in the department have been estimated at $204,000. The budgeted repair hours for 2009 are 24,000 hours and the owner wants to earn a profit of $7 per repair-hour. The parts department applies a mark-up of 15% for the parts used in repairs. For 2009, the company has
estimated that it will require $400,000 of parts. The parts department is budgeted to incur $120,000 in labour and other costs during 2009. What will be the labour rate per repair-hour and the material loading charge for 2009?
1) $7 per hour and 15%
2) $8.50 per hour and 15%
3) $30 per hour and 30%
4) $30 per hour and 45%
Jape Company’s income statement for the most recent month is given below:
Sales (19,000 units) $ 570,000
Variable expenses $ 399,000
Contribution margin $ 171,000
Fixed expenses $ 175,500
Operating loss $ (4,500)
Required
4 a. Compute the company’s monthly break-even point in units and in dollars.
4 b. The company intends to increase promotion of its products by increasing its monthly advertising
budget by $15,000. As a consequence, sales are expected to increase by $90,000 each month.
Calculate the monthly operating income if these changes occur.
4 c. Instead of increasing advertising, an alternative proposal is to alter the packaging of the product. The
alteration is expected to cost an additional $1 per unit. The company wants to earn $12,000 each
month after taxes. Assuming a tax rate of 40%, determine how many units must be sold to achieve the
stated target after-tax income. Round up to the next whole unit.
4 d. The production manager does not want to implement either of the marketing-oriented proposals in
parts b) and c). Instead he proposes that operations should be automated to achieve a reduction in
variable manufacturing costs of $1 per unit. The cost to automate operations is expected to be
$1,500,000. The equipment is expected to last for 4 years and have a salvage value of $60,000 at the
end of the 4th year. The company intends to write off the equipment using straight-line depreciation
over the 4 years. Calculate how many units must be sold each month to break even.
Absorbo Company makes and sells computer stands for the home office market. The following
information is available regarding the company’s operations, sales, and costs.
2008 (Actual) 2009 (Expected) Sales
Quantity 54,000 units 54,000 units
Revenue $ 13,500,000 $ 13,500,000 Production
Quantity 60,000 units 50,000 units Costs
Cost of goods manufactured $ 11,800,000 $ 10,250,000 Fixed expenses
administrative $ 300,000 $ 300,000 Selling
and
Net income (absorption costing) ? $ 560,000 Fixed manufacturing costs deferred in inventory ? $ 100,000 Fixed manufacturing costs released from inventory $ 0 $ 250,000
Note:
All unit variable costs were assumed in 2009 to remain at their 2008 levels. In addition, fixed manufacturing costs were also assumed to be the same in 2009 as in 2008.
Required
3 a. Calculate the variable costing net income for 2009 by adjusting the absorption costing net income.
6 b. Determine the following:
i) Fixed manufacturing cost per unit in 2009
ii) Total fixed manufacturing costs for 2009
for
2009
margin
Contribution
iii)
6 c. Prepare a variable costing income statement for 2009 showing the variable selling, variable
manufacturing, and fixed selling costs.
8 Question 4
Cloverfield Manufacturing produces machined parts for small motors using job-order costing. Its sales are
from bidding on orders. There are two support departments and two producing departments. The budgeted
costs and the normal activity levels for each department are given below.
Departments
Departments Producing
Support
P Department Q Department R Department S
Department
Overhead costs $ 200,000 $ 100,000 $ 100,000 $ 50,000
Number of employees 8 4 30 30
hours 200 2,000 6,000 2,000 Maintenance
1,000 hours 9,000
Machine
1,000 Labour
hours 1,000
The costs of Department P are allocated on the basis of maintenance hours and the costs of Department Q
are allocated on the basis of number of employees. Departments R and S assign overhead costs on the
basis of machine hours and labour hours respectively.
The company is preparing a bid on a job that requires 3 machine hours per unit produced in Department R
and no time in Department S. The prime costs per unit have been estimated to be $67. Under the present
system of allocating overhead costs, the overhead cost per unit is $113.33. Typical industry practice is to
prepare a bid of full cost plus 20% markup.
Required
5 a. Determine the bid price per unit for the job if the step method is used to allocate service department
costs to the producing departments.
1 b. Set up the equations that should be solved if the reciprocal method to determine service department
cost allocations is used. Do not solve the equations.
2 c. Assume that the total costs to be allocated for Department P is $216,868 and for Department Q is
$143,374, after solving the equations for the reciprocal method. Allocate these costs to the appropriate
departments using the reciprocal method.
Cagney Company applies overhead to the single product it manufactures on the basis of standard direct
labour-hours (DLH). Each unit of product is expected to require 4 direct labour-hours and 10 kg of direct materials. The variable overhead application rate is $5/DLH. The standard hourly wage rate is $25, the
standard overhead cost per unit is $30, and the standard price per kilogram of direct materials is $6. Total monthly overhead cost in the flexible budget is predicted by the following cost equation:
$15,000 + $20 × Quantity of production
During September, the company produced 1,200 units using 5,200 DLH and 12,500 kg of direct materials.
It incurred overhead costs of $41,000, of which $26,000 was variable overhead. There was 2,000 kg of
direct materials in inventory at the beginning of September and the company purchased 10,500 kg of direct materials for $65,000. Cagney’s average wage rate in September was $26.65 per hour.
Required
12 a. Calculate the following variances:
variance
i) Materials
price
variance
quantity
ii) Materials
variance
rate
Labour
iii)
iv) Variable overhead spending variance
v) Variable overhead efficiency variance
9 b. Calculate the fixed overhead volume variance.
Baker and Charlie Company makes and sells two products, Baker and Charlie. The financial results for the year ended December 31, 2008 are as follows: Baker Charlie Total
Unit sales 250,000 93,750 343,750 Revenues $ 50,000 $ 43,125 $ 93,125 Cost of sales Variable 17,500 11,250 28,750
Fixed 14,450
8,340 22,790 Gross margin 18,050 23,535 41,585 Selling and administrative expenses Variable 10,000 6,000 16,000
Fixed 5,050
8,910 13,960 $ 3,000 $ 8,625 11,625 Organization-wide costs Fixed costs 16,210 Equipment lease expense 5,000 Equipment rental revenue 6,000 Income $ (3,585)
To address the poor financial performance in 2008, the company is considering adding a new product, Able.
1. The company expects to sell 5,000 units of Able at a price of $9.25 per unit. Variable manufacturing
cost per unit will be $2.85 and the variable selling and general administrative expense per unit will be $2.70. 2. The introduction of Able is expected to add $4,290 to the fixed manufacturing costs of Able. 3. Of the present fixed organization-wide costs of $16,210, $6,210 will be allocated to the fixed
manufacturing cost of Able; and $5,000 will be allocated to the marketing of Able. 4. Currently, the company is earning rental revenue of $6,000 by renting equipment that it did not
require for either Baker or Charlie. The company is leasing this equipment for $5,000 per year. This equipment will now be used for making Able. 5. The product manager of Charlie has indicated that the sales of Charlie will decline by one-third from
its present level with the addition of Able, as these products compete in the same market. Due to this decline, the company will no longer require leased space that is being used for the purpose of selling and administrative activities of Charlie and the company will allow the lease to expire. The annual lease payments for leasing the space have been $5,000.
Required
Determine whether the company should introduce Able. Show all calculations.
END OF EXAMINATION
100
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1]
EXAMINATION
Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 7 pages. There are 6 questions for a total of 100 marks.
READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.
To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer.
Calculate Mathematically determine the
amount or number, showing
formulas used and steps taken. (Also
Compute).
Compare Examine qualities or characteristics
that resemble each other. Emphasize
similarities, although differences
may be mentioned.
Contrast Compare
by
observing
differences.
Stress the dissimilarities of qualities
or characteristics. (Also Distinguish
between)
Criticize Express your own judgment
concerning the topic or viewpoint in
question. Discuss both pros and
cons.
Define Clearly state the meaning of the
word or term. Relate the meaning
specifically to the way it is used in
the subject area under discussion.
Perhaps also show how the item
defined differs from items in other
classes.
Describe Provide detail on the relevant
characteristics, qualities, or events. Design Create an outcome (e.g., a plan or
program) that incorporates the
relevant issues and information. Determine Calculate or formulate a response
that considers the relevant
qualitative and quantitative factors. Diagram Give a drawing, chart, plan or
graphic answer. Usually you should
label a diagram. In some cases, add
a brief explanation or description.
(Also Draw)
Discuss This calls for the most complete and
detailed answer. Examine and
analyze carefully and present both
pros and cons. To discuss briefly
requires you to state in a few
sentences the critical factors. Evaluate This requires making an informed
judgment. Your judgment must be
shown to be based on knowledge and
information about the subject. (Just
stating your own ideas is not
sufficient.) Cite authorities. Cite
advantages and limitations. Explain In explanatory answers you must
clarify the cause(s), or reasons(s).
State the “how” and “why” of the
subject. Give reasons for differences
of opinions or of results.
Identify Distinguish and specify the important
issues, factors, or items, usually based
on an evaluation or analysis of a
scenario.
Illustrate Make clear by giving an example,
e.g., a figure, diagram or concrete
example.
Interpret Translate, give examples of, solve, or
comment on a subject, usually
making a judgment on it.
Justify Prove or give reasons for decisions or
conclusions.
List Present an itemized series or
tabulation. Be concise. Point form is
often acceptable.
Outline This is an organized description. Give
a general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form.
Omit minor details.
Prove Establish that something is true by
citing evidence or giving clear logical
reasons.
Recommend Propose an appropriate solution or
course of action based on an
evaluation or analysis of a scenario. Relate Show how things are connected with
each other or how one causes another,
correlates with another, or is like
another.
Review Examine a subject critically,
analyzing and commenting on the
important statements to be made
about it.
State Clearly provide a position based on
an evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Indicate)
Summarize Give the main points or facts in
condensed form, like the summary of
a chapter, omitting details and
illustrations.
Trace In narrative form, describe progress,
development, or historical events
from some point of origin.
CGA-CANADA
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION
June 2009
SUGGESTED SOLUTIONS
Marks Time: 3 Hours 1
24 Question
Note:
3 marks each
calculations:
Sources/explanations
and
a. 4) Topic 8.4 (Level 1)
An unfavourable overhead volume variance occurs when the quantity of overhead driver allowed
for the actual output produced is less than the budgeted quantity of the overhead driver from the
static budget. This will occur only if the actual output is less than the budgeted output in the static
budget.
b. 1) Topic 3.3 (Level 1)
The total costs added during the period equal the costs accounted for. Hence there is no beginning
work in process inventory.
c. 3) Topic 3.4 (Level 1)
During the year a total of 20,000 whole units plus 80% × 5,000 = 24,000 equivalent units were
processed with regard to conversion.
d. 4) Topic 2.1 (Level 1)
Managers want to know the value of jobs before the end of the period to assist in pricing and
managing the completion of jobs. The other options are incorrect since each of these asserts a
falsehood about cost systems, managers’ motivation, or customers’ beliefs.
e. 1) Topic 2.3 (Level 1)
Budgeted OH application rate is $90,000/15,000 = $6 / DLH. Applied OH to Job Z is $6 × 10,000
= $60,000.
f. 4) Topic 4.7 (Level 1)
A 10% reduction in sales will affect the company with the higher DOL more. This is
Balloon Company. Its net income will be lower than that of Dirigible Company.
g. 1) Topic 6.4 (Level 1)
Inventory costs will be based on the inventory levels not on the sales variability. Hence, option 1)
is an incorrect statement.
h. 4) Topic 10.4 (Level 1)
Total cost to bill for in the repair shop is $348,000 + $204,000 + $7 × 24,000 = $720,000. On a
per-hour basis, this is $720,000 / 24,000 = $30. In the parts department, the amount to bill is
$120,000 + 15% × Invoice value of $400,000 = $180,000. This is a 45% ($180,000 / $400,000)
loading charge.
The contribution margin per unit = $171,000 / 19,000 = $9. Unit selling price = 570,000 / 19,000 = $30
Break-even sales (units) = Fixed cost / Contribution margin per unit = $175,500 / $9
= 19,500 units or 19,500 × $30 = $585,000 or,
Break-even sales ($) = F E
CM R
= $ ,
, / ,
= $585,000
4
b. Source: Topic 4.6 (Level 1)
Sales (22,000 units) $ 660,000 Variable expenses $ 462,000 Contribution margin
$ 198,000 Fixed expenses ($175,500 + $15,000) $ 190,500 Operating income $ 7,500
4
c. Source: Topic 4.8 (Level 1) Desired income before tax is after-tax target income / (1 – Tax rate) = $12,000 / 0.6 = $20,000
Let the required sales quantity be Q. The proposal will reduce the unit contribution by $1 from $9 to
$8. Therefore,
$8Q – $175,500 = $20,000 Q = 24,438 units
4
d. Source: Topic 4.7 (Level 1)
The new equipment will increase fixed costs per month by ($1,500,000 – $60,000) / (4 × 12)
= $30,000 to $205,500 (175,500 + 30,000). The unit contribution margin will improve by $1 to $10 per unit.
Break-even sales quantity = $205,500 / $10 = 20,550 units
Net income, variable costing approach: $560,000 – $100,000 + $250,000 = $710,000.
6 b. Source: Topic 1.
7 (Level 2) and Topic 6.2 (Level 1)
i) Fixed manufacturing cost per unit, in 2009: Fixed costs in ending inventory / Units in ending inventory = $100,000 / 2,000* = $50. * Ending inventory is 6,000 + 50,000 – 54,000 = 2,000 units Alternative solution (high/low approach)
Variable manufacturing cost per unit =
$ , , $ , ,
$ , $ ,
= $155
Total manufacturing cost per unit = $10,250,000 / 50,000
= $205
Fixed manufacturing cost per unit = $205 – $155 = $50
ii) Total fixed costs of manufacturing = $50 × 50,000 = $2,500,000
iii) Contribution margin = Variable costing net income + Fixed costs = $710,000 + 2,500,000 + 300,000 = $3,510,000
6 c. Source: Topic 6.2 (Level 1)
Variable format income statement:
Sales
$ 13,500,000
Variable selling expense 1,620,000 1 Variable manufacturing cost 8,370,000 2
Contribution margin 3,510,000 Fixed manufacturing cost 2,500,000 Fixed selling expense 300,000 Net income
$ 710,000
1
Variable selling expense can be determined independently from the approach shown in part a):
Net income, variable costing approach: $560,000 – $100,000 + $250,000 = $710,000. Fixed manufacturing costs are: $2,500,000 ($50 × 50,000 units). See note 2. Fixed selling expense is $300,000.
Therefore, contribution margin is: $710,000 + 2,500,000 + 300,000 = $3,510,000. Variable manufacturing cost per unit is: $155. See note 2. Variable cost of sales is $155 × 54,000 = $8,370,000.
Therefore, variable selling expense is: $3,510,000 + $8,370,000 – $13,500,000 = $1,620,000.
2
Variable manufacturing cost per unit is:
Total manufacturing cost per unit – Fixed manufacturing cost per unit = $205 – $50 = $155.
Fixed manufacturing costs per unit are $100,000 / 2,000 (that is, fixed costs deferred in inventory divided by the units in ending inventory).
Variable manufacturing costs for 2009 = 54,000 × $155 = $8,370,000.
8 Question 4
Source: Topic 5.5 (Level 1)
5 a. The step method allocation is as follows:
Step Method
Departments
Departments Producing
Support
P Department Q Department R Department S
Department
50,000 $450,000
100,000 $
100,000 $
Overhead
costs $
200,000 $
Allocation:
Department P
(2/10, 6/10, 2/10) $(200,000) 40,000 1120,000 40,000
Department Q
(30/60, 30/60) $ (140,000) 70,000 270,000 Total 0 0 290,000 160,000 $450,000
1 (2,000 / 10,000) × $200,000 = $40,000
2 (30 / 60) × $140,000 = $70,000
Overhead application rate for Department R $290,000 / 9,000 = $32.22 / MH
Overhead application rate for Department S $160,000 / 1,000 = $160 / LH
Unit cost for the job
cost $ 67.00
Prime
Overhead: Department R (3 MH at $32.22 / MH) $ 96.66
Total
163.66
cost $
Bid price (1.2 × Unit cost) $ 196.39
1 b. The equations to solve if the reciprocal method is used are:
Let P denote the costs to be allocated from Department P (direct plus costs allocated from
Department Q).
Let Q denote the costs of Department Q to be allocated, which includes the costs within the
department plus the costs allocated from Department P.
P = $200,000 + 8 / 68 × Q
Q = $100,000 + 2,000 / 10,000 × P
2 c. Reciprocal method of cost allocation:
Reciprocal Method
Departments
Departments Producing
Support
P Department Q Department R Department S
Department
Overhead costs ($) 200,000 100,000 100,000 50,000 450,000
Allocation
($):
P
Department
(2/10, 6/10, 2/10) (216,868) 43,374 130,121 43,373 0
Q
Department
(8/68, 30/68, 30/68) 16,868 (143,374) 63,253 63,253 0
0 293,374 156,626 450,000
Total 0
12 a. Source: Topic 7.3 (Level 1)
variance
price
i) Materials
(AP – SP) × Quantity purchased = ($6.19 – $6) × 10,500 = $1,995 U
or
65,000 – (6 × 10,500) = 2,000 U
variance
quantity
ii) Materials
(AQ – SQ) × SP = (12,500 – 12,000) × $6 = $3,000 U
variance
price
Labour
iii)
(AW – SW) × AH = (26.65 – 25) × 5,200 = $8,580 U
iv) Variable overhead spending variance
(AR – SR) × AH = ($26,000 / 5,200 – $5) × 5,200 = 0
v) Variable overhead efficiency variance
(AH – SH) × SR = (5,200 – 4 × 1,200) × $5 = $2,000 U
9 b. Source: Topic 8.4 (Level 1)
Fixed overhead volume variance
Standard fixed overhead rate = Total OH per unit – Variable OH per unit
= $30 – 4 × $5 = $10
Budgeted denominator level of volume = Budgeted fixed OH / $10 = $15,000 / $10 = 1,500 units.
Variance = (Denominator volume – Actual volume) × Application rate
i) Using output units: (1,500 – 1,200) × $10 = $3,000 U
ii) Using labour hours: (1,500 × 4 – 1,200 × 4) × $10 / 4 = $3,000 U
Source: Topic 9.2 (Level 1)
Five alternative solution approaches will be illustrated. Regardless of the approach the recommendation is to introduce Able. The company’s profit will improve by $4,585.
1. Non-incremental approach, absorption format (relevant costs only):
Able
Baker Charlie Total
Unit sales 5,000 250,000 62,500 317,500
Revenues $ 46,250 $ 50,000 $ 28,750
3
$ 125,000 Cost of sales Variable $ 14,250 $ 17,500 $ 7,500 $ 39,250
Fixed $ 9,290
1
$ 14,450 $ 8,340 $ 32,080 Gross margin $ 22,710 $ 18,050 $ 12,910 $ 53,670 Lease rental revenue
Selling and administrative expenses Variable $ 13,500 $ 10,000 $ 4,000 $ 27,500
Fixed $ 0 2 $ 5,050 $
3,910 4
$ 8,960 Segment income $ 9,210 $ 3,000 $ 5,000 $ 17,210 Organization-wide costs Fixed costs $ 16,210 5 Income $ 1,000 1
$4,290 + 5,000 2
Marketing and selling expense 3
Sales of Charlie product is reduced by 1/3 4
$8,910 – $5,000 (savings from expiry of lease) 5
Represents the remaining untraceable cost from before the introduction of Able
2. The above analysis can also be presented in the contribution format (relevant costs only):
Able Baker Charlie Total
Revenues $ 46,250 $ 50,000 $ 28,750 $ 125,000 Variable manufacturing
$ 14,250 $ 17,500 $ 7,500 $ 39,250 Variable selling and administrative $ 13,500 $ 10,000 $ 4,000 $ 27,500 Contribution margin $ 18,500 $ 22,500 $ 17,250 $ 58,250 Fixed manufacturing
$ 9,290 $ 14,450 $ 8,340 $ 32,080
Fixed selling and administrative $ 0 $
5,050 $ 3,910 $ 8,960 Segment income
$ 9,210 $ 3,000 $ 5,000 $ 17,210 Organization-wide costs (fixed) $ 16,210 Net income $ 1,000
3. Incremental (differential) cost analysis. Revenue (Able)
$ 46,250 Variable manufacturing cost
$ 14,250 Variable selling and administrative $ 13,500 Contribution margin $ 18,500 Incremental fixed manufacturing cost $ (4,290) Loss of lease revenue
$ (6,000) Loss of Charlie contribution $ (8,625) 1 Saving from lease expiry $ 5,000 Incremental profit (loss) $ 4,585
1
1/3 × ($43,125 – $11,250 – $6,000) = $8,625.
Continued...
4. Non-incremental approach, absorption format (all costs):
Able
Baker Charlie Total
Unit sales 5,000 250,000 62,500 312,500
Revenues $ 46,250 $ 50,000 $ 28,750 3
$ 125,000 Cost of sales Variable $ 14,250 $ 17,500 $ 7,500 $ 39,250
Fixed $ 15,500
1
$ 14,450 $ 8,340 $ 38,290 Gross margin $ 16,500 $ 18,050 $ 12,910 $ 47,460 Lease rental revenue
Selling and administrative expenses Variable $ 13,500 $ 10,000 $ 4,000 $ 27,500
Fixed $ 5,000
2 $ 5,050 $ 3,910 4 $ 13,960 Organization wide costs
Fixed costs $ 5,000
5 Income $ (2,000) $ 3,000 $ 5,000 $ 1,000 1
$4,290 + $6,210 + 5,000 2
Marketing and selling expense 3
Sales of Charlie product is reduced by 1/3 4
$8,910 – $5,000 (savings from expiry of lease) 5
Represents the remaining untraceable cost from before the introduction of Able
5. The above analysis can also be presented in the contribution format (all costs):
Able
Baker
Charlie
Total
Revenues $ 46,250 $ 50,000 $ 28,750 $ 125,000 Variable manufacturing $ 14,250 $ 17,500 $ 7,500 $ 39,250 Variable selling and administrative $ 13,500 $ 10,000 $ 4,000 $ 27,500 Contribution margin $ 18,500 $ 22,500 $ 17,250 $ 58,250 Fixed manufacturing $ 15,500 $ 14,450 $ 8,340 $ 38,290 Fixed selling and administrative $ 5,000 $ 5,050 $ 3,910 $ 13,960 Organisation-wide cost (fixed) $ 5,000 Net income $ (2,000) $ 3,000 $ 5,000 $ 1,000
The above analysis shows that profits will improve by $4,585. The profit after introducing Able will be: ($3,585) + $4,585 = $1,000. Therefore, Able should be introduced.
END OF SOLUTIONS
100
CGA-CANADA
MANAGEMENT ACCOUNTING FUNDAMENTALS [MA1] EXAMINATION
June 2009
EXAMINER’S COMMENTS
General Comments
Student performance on this examination was very good on Questions 2, 4(a), 5(a), and 6. Students had
difficulty on questions where it was necessary to manipulate the given data to obtain the information
required to construct a solution (for example, Question 3). Additionally, students seemed to have been
unprepared for some of the topics covered on the examination. Specifically, overhead volume variance, a
common examination topic, and reconciling variable and absorption costing net incomes, were topics on
which students appeared to have difficulty in demonstrating their knowledge. These topics are listed on the
examination blueprint. Students are reminded that they should construct their examination preparation
strategies using the blueprint. Any topic on the blueprint is examinable in accordance with the weighting
specified on the blueprint.
Specific Comments
Question 1 Multiple choice (Levels 1 and 2)
Performance on this question was unsatisfactory. Parts (a), (b), (c), (e), and (f) were poorly done. The
topics were manufacturing cost flows, processing costing methods, and operating leverage. These topics
are tested regularly on the MA1 examinations and students should be ready for them. Students should
further note that although these topics individually may not be weighted highly on the examination
blueprint, collectively they can add up to 25% of an examination and thus these topics warrant careful
attention. These topics are also dense conceptually and procedurally, and thus can be the basis for intricate
calculations and manipulation of the given data.
Question 2 Cost volume and profit analysis (Level 1)
Performance on all parts of this question was excellent.
Question 3 Absorption and variable costing (Levels 1 and 2)
This question was not addressed satisfactorily and responses from students revealed that many were
unable to derive the variable costing net income from the absorption costing net income, even though all
of the required information was provided in the question and no manipulation of data or relationships was
needed. In addition, responses often contained several fundamental misunderstandings of cost concepts.
For example, many students indicated that the cost of goods manufactured was also the total variable cost,
and thus computed contribution margin as the difference between sales revenue and the cost of goods
manufactured. Many students incorrectly assumed that the variable selling expenses did not exist in this
question. Additionally, there was often little consistency between the responses to parts (a), (b), and (c):
the net income derived in part (a) was not the same as the net income shown in part (c) (they should be the
same). Similarly the contribution margin in part (b) rarely equalled the contribution margin in part (c).
Students are urged to study this question and solution carefully when reviewing this topic in the future.
Question 4 Service department allocations (Level 1)
Part (a) on the step method was well done. Parts (b) and (c) posed problems for students. Many were
unable to write down the equations for the reciprocal method, and others did not know how to allocate
costs based on this method. A common error was to reapply the step approach to the new cost data.
Continued...
Question 5 Cost variances (Level 1)
Part (a) of this question was very well done. Students demonstrated convincingly that they could perform the calculations correctly. Part (b), on overhead volume variance, in contrast, was very poorly done. The calculation required should not have been too difficult; the only challenge in this question was to
recognize that the actual fixed overhead (given in the question) and the budgeted fixed overhead cost (also given in the question) were identical, leading to a zero budget variance. Nonetheless there is a volume variance because the actual volume of 1,200 units (given in the question) differed from the denominator level, that is, the budgeted production of 1,500 units. In other words, a volume variance arises because the actual volume of production is different from the denominator volume. Unless students pointed this out in the solution full marks were not awarded. For 9 marks it was not sufficient to simply compute the
difference between the budgeted fixed cost of $15,000 (given in the cost equation) from applied overhead of 1,200 × $10. For the few students that did at least provide such a response, part marks were awarded.
Simply having the numerically correct value was insufficient in this case.
Question 6 Relevant costs (Level 1)
Performance on Question 6 was highly satisfactory. Students were able to demonstrate competency and receive part marks even if they were unable to address all aspects correctly. A common error here was to mix up a “differential or incremental” cost approach with a “total or direct cost approach.” Thus part of the analysis would use one approach, and then the student would inadvertently apply the incremental approach and thus make an error. The suggested solutions present 5 equivalent ways to arrive at a solution. Students should study these equivalent approaches and ensure that they fully understand their interrelatedness.
Approach 4 was the most popular approach. One error that is worth pointing out is that many students did not adjust the variable costs of manufacture for a reduction in volume and instead only adjusted the
revenues.