INTERMEDIATE MANAGEMENT ACCOUNTING

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Shamrock Printing produces a variety of diaries and notebooks that are sold only on the company’s website. The design of the diaries and notebooks is customised depending on the customers’ requirements.  Historically, the company used a traditional overhead system based on machine hours to allocate overheads to products.  The company recorded a loss for the first time, since it commenced trading ten years ago.  The managing director, James Forrest is very concerned and has suggested that the company should increase the price of the notebooks and diaries by at least 25%.  However, the management accountant has suggested that the problem could relate to overhead allocation, and argued the case for the adoption of an activity based costing system.

An initial activity analysis has been carried out.  This shows that a customer first places the individual order and then discusses the design of the notebooks and diaries using emails.  The artwork depends on the number of setups required to compile for each product.  In addition, it is company policy to dispatch each order individually.  Ordering costs and despatch costs are the same for each product ordered.

Financial information relating to the most recent trading period, and to the two last orders received has been provided below:

(a)        Calculate the cost of each order received using:

• The existing overhead allocation method

• Activity based costing (ABC)

(22)

(b)        Comment briefly on your answer in part (a) (i) and (ii) above

(c)        With reference to the academic literature discuss why organisations may be reluctant to adopt activity based costing.

2. In January 2019, Emerald Ltd acquired Kilmala Ltd, a company which manufactures and sells electrical components. For many years, Kilmala Ltd was renowned for its experienced sales force, some of whom had been employed for by the company for over 20 years.  The following data from July 2018 relates to the sales department which was responsible for distributing the three products manufactured by Kilmala Ltd, products A, B and C:

The following is a summary of the variable costs incurred/budgeted for July 2018:

The company evaluated the performance of the sales department on the basis of the sales quantities and selling prices achieved.  There is a proposal that staff would be paid a further bonus on the contribution of the products sold.

(a)        Calculate:

1. Sales price variance

(4)

1. Sales volume variance

(4)

• Sales mix variance

(8)

1. Sales quantity variance

(8)

(b)        Comment on the results of the variance analysis calculated in part (a) and identify one possible reason for each of the variances calculated.

(6)

(c)        Explain the factors that influence the decision to investigate a variance and describe the different methods that can be used to determine whether a variance should be investigated.

SECTION B

Answer one question from this section

3. Outline the typical stakeholders of an organisation and describe the information they would wish to have provided by a management accounting system

4. (a) When might an organisation use process costing as part of its control process?

(b)        Distinguish between a joint product and a by-product.

(15)

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SECTION C

Answer one question from this section

5. Critically discuss the three different ways managers use to evaluate performance, as discussed in Hopwood (1972)

(15)

6. “Waldron (1988) contrasted fundamental concepts of conventional cost accounting with ‘new principles’ of throughput accounting… Guiding this thinking is the view that ‘Products are not profitable or unprofitable, businesses are’.”

(Dugdale and Jones,1998)

Required:

With reference to the above statement, discuss the main differences between the fundamental concepts of conventional cost accounting and those of throughput accounting. In your answer, you should also explain why the throughput accounting approach may be more appealing to some companies than activity based costing approaches.