Management Accounting
August 2016
2nd Year Paper
Management
Accounting
nd
2 Year Solutions
August 2016
Exam Paper, Solutions & Examiners Comments
Page 1 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
NOTES TO USERS ABOUT THESE SOLUTIONS
The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide
guidance to students and their teachers regarding possible answers to questions in our examinations.
Although they are published by us, we do not necessarily endorse these solutions or agree with the views
expressed by their authors.
There are often many possible approaches to the solution of questions in professional examinations. It should
not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative
answers will be marked on their own merits.
This publication is intended to serve as an educational aid. For this reason, the published solutions will often be
significantly longer than would be expected of a candidate in an examination. This will be particularly the case
where discursive answers are involved.
This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians
Ireland.
© Accounting Technicians Ireland, 2016.
Page 2 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
Accounting Technicians Ireland
2nd Year Examination: Autumn 2016
Paper: MANAGEMENT ACCOUNTING
Monday 15 August 2016
2.30 p.m. to 5.30 p.m.
INSTRUCTIONS TO CANDIDATES
In this examination paper the €/£ symbol may be understood and used by candidates in Northern Ireland
to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro.
Answer ALL THREE questions in Section A and ANY TWO of the three questions from Section B.
If more than the required number of questions is answered, then only the requisite number, in the order
filed, will be corrected.
Candidates should allocate their time carefully.
All figures should be labelled, as appropriate, e.g. €/£’s, units etc.
Answers should be illustrated with examples, where appropriate.
Question 1 begins on Page 2 overleaf.
Note:
Examinees are permitted to use terminology of either International Accounting Standards (I.A.S’s) or Financial
Reporting Standards (F.R.S’s) where appropriate (e.g. Receivables/Debtors) when preparing management
accounting statements.
Page 3 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
SECTION A
ANSWER ALL THREE QUESTIONS
QUESTION 1 (Compulsory)
Peafield plc. manufactures two products, PQ and YZ and both are produced from the same material and
labour. They currently use machine hours as a basis for absorbing production overheads. The company is now
considering implementing an activity based costing system.
The management accountant has supplied the following information for the two products for the last year.
Data per unit
Sales price
Direct material cost
Direct labour cost
PQ
€/£
30
12
10
YZ
€/£
45
15
12
Direct material usage (kg)
Direct labour hours
Machine hours
4.0
1.2
1.5
6.0
1.8
2.4
22
195
60
20
32
85
40
25
45,000
75,000
Activities per annum
Number of production set ups
Number of purchase orders
Number of inspections
Number of designs
Production and sales volumes (units)
The annual production overheads were as follows:
€/£
270,000
135,000
195,000
140,000
151,000
891,000
Machine set up costs
Deign costs
Machine maintenance costs
Ordering costs
Quality control
Total overhead cost
Required:
a) Calculate the full cost and profit per unit for products PQ and YZ using Peafield plc’s current method of
absorbing production overheads.
6 Marks
b) Calculate the full cost and profit per unit for each product using activity based costing.
10 Marks
c) Advise Peafield plc. of four benefits that arise as a result of the implementation of an activity based costing
system.
4 Marks
Total: 20 Marks
Page 4 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
QUESTION 2 (Compulsory)
Gardner Ltd. budgets to sell three products and has provided you with the following selling prices and variable
costs:
Product
Sales
Units
Bit
Bob
Bolt
800,000
1,000,000
1,100,000
Selling price
per unit
€/£
12
11
8
Variable cost per
unit
€/£
7
6
4
Annual fixed costs are budgeted at €/£8,000,000.
Required:
(a) Calculate the total budgeted profit.
3 Marks
(b) Calculate the contribution / sales ratio for each product.
3 Marks
(c)
Calculate the total breakeven sales volume and sales revenue.
5 Marks
(d) How many units of each product and in total would Gardner Ltd need to sell to earn a total profit of
€/£4,200,000?
4 Marks
(e)
Management are deciding whether or not to spend an extra €/£300,000 on the advertising of Product Bolt.
It is considering reducing its selling price to 90% of the current price which will result in an increase in
sales of 30%. Advise whether or not it is financially worthwhile spending €/£300,000 on the advertising.
5 Marks
Total 20 Marks
Page 5 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
QUESTION 3 (Compulsory)
McNulty plc. manufactures three products, X1, Y2 and Z3, of which unit costs, machine hours and selling
prices are as follows:
X1
Y2
Z3
Selling price per unit
Direct materials at €/£2.00 per kg
Direct wages at €/£2.50 per hour
Variable overheads
Variable cost per unit
Fixed cost per unit
Profit per unit
€/£
42.0
14.0
12.5
5.0
–––
31.5
8.0
–––
2.5
€/£
32.5
12.0
7.5
3.0
–––
22.5
8.5
–––
1.5
€/£
37.0
10.0
10.0
4.0
–––
24.0
6.0
–––
7.0
Sales demand for the period is limited as follows.
Product X1
Product Y2
Product Z3
Units
6,000
8,000
9,000
The production manager of McNulty plc. has informed the management accountant that the supply of labour and
machine capacity in any period is unlimited. However materials will be in short supply as a result of some
suppliers ceasing to trade due to the recession. McNulty plc. can only source 114,000kg materials.
Required:
a) Assuming there is no limiting factor, calculate the maximum achievable contribution.
4 Marks
b) Given the constraint advised by the production manager, indicate the production levels that should be
adopted for the three products in order to maximise contribution and state the maximum contribution
achievable in the period.
12 Marks
c) Advise the management accountant of four ways that may help to overcome the direct material constraint
that exists within McNulty plc.
4 Marks
Total: 20 Marks
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Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
SECTION B
ANSWER TWO OUT OF THE FOLLOWING THREE QUESTIONS
QUESTION 4
‘The budgeting process is an important feature of effective management performance’.
Required:
a) Outline and briefly explain five benefits of budgeting.
5 Marks
b) Provide a brief overview of the budgeting process.
6 Marks
c) Explain each of the following approaches to budgeting;
(i) Activity based budgeting;
(ii) Zero based budgeting;
(iii) Rolling budgets.
9 Marks
Total 20 Marks
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Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
QUESTION 5
Thornfield plc. manufactures sand products in its forming department. Thornfield plc. operate a process costing
system. All direct materials are added at the beginning of the process, and conversion costs are added evenly
during the process.
The management accountant of Thornfield plc. has provided you with the following summary data for
December.
Units
Materials added
Completed during the month
Normal loss 8% of input
Total costs
Direct
Materials
€/£
Labour
Overheads
€/£
€/£
1,360,000
1,284,000
1,172,000
10,000
9,000
Scrap value of the normal loss is €/£55 per unit.
There is no opening or closing stock of work-in-progress in December.
Required:
a) Prepare for the month of December:
(i) the process account;
(ii) the normal loss (scrap) account;
(iii) the abnormal loss/abnormal gain account.
12 Marks
b) Explain the terms:
(i) Normal loss;
(ii) Abnormal loss;
(iii) Abnormal gain;
(iv) Equivalent units.
8 Marks
Total 20 Marks
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Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
QUESTION 6
The following information relates to product Jupiter, produced by Brierfield plc. during January.
This represents the information that remains after a fire in the premises destroyed most of the accounting
records.
Variances
Selling price
Materials price
Materials usage
Labour rate
Labour efficiency
€/£
50,000A
28,500 F
7,500 A
18,700 F
20,400A
Actual data
Sales (25,000 units at €/£10)
Materials costs (112,500 kg at €/£1.20)
Labour costs (75,000 hrs at €/£1.9)
250,000
135,000
142,500
There was no opening or closing inventories
Required:
a) Calculate the following;
(i) Standard selling price per unit;
(ii) Standard cost of material per kilogram;
(iii) Standard kilograms of materials required per unit;
(iv) Standard labour rate per hour;
(v) Standard hours of labour required per unit.
2 Marks
2 Marks
2 Marks
2 Marks
2 Marks
b) Prepare the standard cost card per unit of product Jupiter.
4 Marks
c) Outline two possible reasons for each of the sales, material and labour variances produced by Brierfield
plc. above.
6 Marks
Total: 20 Marks

Page 9 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
2nd Year Examination: August 2016
Management Accounting
Suggested Solutions
and
Examiner’s Comments
Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct
and will be marked on their own merits.
Statistical Analysis – By Question
Question No.
Average Mark
(%)
Nos.
Attempting
1
47%
2
30%
3
42%
4
70%
5
47%
6
55%
192
196
183
129
110
141
Statistical Analysis - Overall
43%
Pass Rate
46%
Average Mark
Range of Marks
Nos. of Students
0-39
78
40-49
33
50-59
39
60-69
27
70 and over
19
Total No. Sitting Exam
196
247
Total Absent
14
Total Approved Absent
51
Total No. Applied for Exam
Page 10 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
General Comments:
GENERAL COMMENTS ON THE PAPER AS A WHOLE
This paper was divided into two sections A and B each consisting of three questions. All three
questions in section A were compulsory and candidates had a choice of two from three questions from
section B. All of the questions carried 20 marks each. Five out of the six questions were mainly
computational with some narrative elements whilst question 4 was all narrative.
Overall, I am very disappointed with the performance of candidates sitting this paper. There was
evidence of rote learning and it was clear that many candidates were not prepared for the questions
which were examined. The majority of scripts were very badly presented.
There is no excuse for the standard of answers presented at this sitting. All of the areas examined are
covered in the study text, past exam papers and sample papers and they should not have created any
difficulty.
In many cases there was no evidence of workings. Candidates presented a final figure rather than
showing the workings which lead to this figure. If this final figure is not correct then valuable marks are
lost for workings.
Furthermore, candidates should be aware that marks are awarded if the principle is correct even if the
incorrect figures are used. In order to answer some parts of a question the solution to a previous part is
required. If the figures carried forward are incorrect marks will not be lost if the principle is correct.
The candidate will not be penalised twice, so it is important that all parts of a question are attempted.
Page 11 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
Examiners Comments on Question One
This question was compulsory and tested the candidate’s knowledge traditional and absorption costing.
Part (a) required candidates to calculate the cost per unit of two products using the traditional method of
absorption costing. Candidates demonstrated a poor command of the traditional method of accounting.
Many candidates were unable to calculate the overhead absorption rate per machine hour. Others did
calculate the overhead absorption rate per hour correctly but failed to then convert it to a cost per unit.
Part (b) required candidates to calculate the cost per unit of each product using an activity based costing
approach. This part of the question was exceptionally well answered in the vast majority of cases.
Part (c) required candidates to discuss four benefits that arise as a result of the implementation of an
activity based costing system. The answers to this part of the question were mixed with some
candidates not attempting this part.
SOLUTION 1
a)
Selling price
PQ
€/£
30.00
YZ
€/£
45.00
Direct material
Direct labour
Overhead (working 1)
Total cost
12.00
10.00
5.40
27.40
15.00
12.00
8.64
35.64
Profit
2.60
9.36
6 Marks
b)
Selling price
PQ
€/£
30.00
YZ
€/£
45.00
Direct material
Direct labour
Overhead (working 2)
Total cost
12.00
10.00
9.14
31.14
15.00
12.00
6.40
33.40
Profit/(loss)
(1.14)
11.60
10 Marks
c)
Four potential benefits from implementing an activity based costing system
1. Improves the accuracy of the cost of a product/service. The overhead
2. is allocated according to the activity that caused it to occur. It is based on a cause-and-effect
relationship rather than based on an arbitrary measure.
3. Costs are firstly divided into cost pools and then allocated to the product using cost drivers.
Management are more aware of how costs arise using this method.
4. ABC can aid the identification of non- value added activities.
5. ABC makes waste more visible.
Page 12 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
(Other reasonable benefits also acceptable)
4 Marks
Working 1
Machine Hours
hrs
PQ 45,000 units x 1.5 hrs = 67,500
YZ 75,000 units x 2.4 hrs = 180,000
247,500
Total overhead
€/£ 891,000
Overhead absorption rate €/£891,000 / 247,500 machine hours = €/£3.60 per machine hour
PQ
YZ
1.5 Machine hours x €/£3.60 = €/£ 5.40
2.4 Machine hours x €/£3.60 = €/£ 8.64
Working 2
Cost pool
Machine set up
Design costs
Machine maintenance
Ordering costs
Quality control
Total
Cost driver
€/£
270,000
135,000
195,000
140,000
151,000
891,000
54 set ups
45 designs
247,500 MH
280 orders
100 inspections
€/£
5,000 per set up
3,000 per design
0.788 per MH
500 per order
1,510 per inspection
Total units
Overhead per unit
PQ
€/£
110,000
60,000
53,190
97,500
90,600
411,290
YZ
€/£
160,000
75,000
141,810
42,500
60,400
479,710
45,000
9.14
75,000
6.40
4 Marks
Total: 20 Marks
Page 13 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
Examiners Comments on Question Two
This question was compulsory and tested the candidate’s knowledge of cost volume profit analysis.
Parts (a) to (d) required calculations of total budgeted profit, contribution to sales ratio, breakeven sales
volume and sales revenue and activity required to produce a certain profit.
The answers were very disappointing as many candidates demonstrated a complete lack of
understanding of the concepts underlying CVP analysis.
Part (e) required candidates to decide if it was financially worthwhile for the company to spend an extra
€300,000 on advertising. Many candidates did not attempt this part and those that attempted it displayed
a very poor understanding of what the question actually asked.
SOLUTION 2
(a) Total budgeted profit
Bit
Bob
Bolt
Selling Price
Variable Cost
Contribution per unit
Total contribution
€/£
12
7
5
4m
€/£
11
6
5
5m
€/£
8
4
4
4.40m
Total Contribution
Fixed Cost
Profit
€/£m
13.40
8.00
5.40
3 Marks
(b) Contribution /sales ratio
C/S %
Bit
5/12 = 41.7%
Bob
5/11 = 45.45%
Bolt
4/8 = 50%
3 Marks
(c)
Breakeven total sales volume
Weighted average CPU
= €/£13.4m / 2.9m units = €/£4.62 per unit
BEP = Fixed cost / Weighted average CPU = €/£8m / €/£4.62 = 1,731,602 units
Breakeven total sales revenue
Average sales price:
Selling Price €/£
Sales units
Total sales €/£
Bit
Bob
Bolt
Total
12
800,000
9,600,000
11
1,000,000
11,000,000
8
1,100,000
8,800,000
2,900,000
29,400,000
Page 14 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
Average sales price €/£
10.137
Breakeven total sales revenue = 1,731,602 x €/£10.137 = €/£17,553,249
5 Marks
(d)
Total
(Fixed Cost + Target Profit) / Weighted average CPU
(€/£8 million + €/£4.20 million) / €/£4.62 = 2,640,693 units
Per product
Bit
2,640,693 x 800/2,900 = 728,467
Bob 2,640,693 x 1,000/2,900 = 910,584
Bolt 2,640,693 x 1,100/2,900 = 1,001,642
2,640,693
4 Marks
(e)
€/£m
Existing Contribution (1,100,000 x €4)
Revised Contribution (1,430,000 x €3.2)
Increase in Contribution
4.400
4,576
0.176
Therefore spending the extra €300,000 on advertising is not financially worthwhile.
5 Marks
Total: 20 Marks
Page 15 of 25
Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
Examiners Comments on Question Three
This question was compulsory and tested the candidate’s knowledge of limiting factors.
This question required the calculation of the total contribution for three products, maximum
contribution achievable when there is a constrained resource and listing four ways to overcome a labour
constraint.
Part (a) of the question required the calculation of total contribution for three products and
this part of the question was answered quite well.
Part (b) required the calculation of the maximum contribution achievable when materials were limiting.
This part of the question was very poorly answered.
Students failed to identify the limiting factor and for those that did identify it they were unable to rank
the products according to the highest contribution per limiting factor.
Many ranked them according to the highest contribution per unit.
In order to answer this type of question there are four steps. Many answers did not follow those steps
with the result that candidates ended up with no format which caused them confusion and many
answers were unfinished.
I was surprised at the number of candidates that multiplied the kg of materials per unit by the
contribution per unit rather than dividing which meant that the rankings were incorrect. However marks
were awarded because the principle was correct.
Part (c) required candidates to list four ways to overcome labour constraints and this part of the
question was answered very well.
SOLUTION 3
a)
6,000 x €/£10.50
8,000 x €/£10
9,000 x €/£13
Product X1
Product Y2
Product Z3
Total contribution
€/£
63,000
80,000
117,000
260,000
4 Marks
b)
CPU (€/£)
Kg material per unit
Contribution per kg (€/£)
Rank
X1
10.50
7
1.50
3
Y2
10.00
6
1.67
2
Z3
13.00
5
2.60
1
Kg
Total kgs available
Total kgs required
114,000
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Mgmt Acc A2016 MA
Management Accounting
August 2016
Product X1
Product Y2
Product Z3
6,000 x 7kg
8,000 x 6kg
9,000 x 5kg
2nd Year Paper
42,000
48,000
45,000
135,000
12 Marks
Production Plan
Product Z3
Product Y2
Product X1
Production
units
9,000
8,000
3,000
20,000
Kg
9,000 x 5 kg per unit
8,000 x 6 kg per unit
3,000 x 7 kg per unit
45,000
48,000
21,000
114,000
Contribution
Product X1
Product Y2
Product Z3
3,000 units x €/£10.50
8,000 units x €/£10.00
9,000 units x €/£13.00
€/£
31,500
80,000
117,000
228,500
c)
1.
2.
3.
4.
That part of the production that cannot be carried out in-house due to the constraint could be
subcontracted out.
A different type of material may be used as a substitute, without compromising quality.
Check if the materials may be sourced internationally.
Productivity could be improved by eliminating waste in order to reduce the kg required per unit.
(Note: Other reasonable suggestions are acceptable)
4 Marks
Total: 20 Marks
Page 17 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
Examiners Comments on Question Four
This question was optional and tested the candidate’s knowledge of budgeting.
It required candidates to give a brief overview of the budgeting process and to explain certain budgeting
terms.
Part (a) of the question required candidates to demonstrate their knowledge of the benefits of budgeting
and this part of the question was answered very well.
Part (b) required candidates to demonstrate their knowledge of the budgeting process and again was
well answered. Many candidates listed the points directly from the study text whilst others used
practical examples rather than word for word from the study text. Both answers scored highly.
Part (c) required an explanation of Activity based budgeting, Zero Based Budgeting and Rolling
Budgets. Some candidates confused rolling budgets and incremental budgets but otherwise this part of
the question was well answered.
SOLUTION 4
a) There are many advantages to using budgets. The use of budgets:






provide a method of allocating and using resources within the organisation
help to monitor and control operations
promote forward thinking
show employees an overall picture of the direction of the organisation which can motivate staff
help to co-ordinate different departments and align them towards shared objectives
provide a framework for delegation.
(Note: Other reasonable suggestions are acceptable)
5 Marks
b) The budgeting process normally follows a set structure as follows;

Form a budget committee

Establish a budget administration system

Set the budget period

Set budget guidelines

Prepare initial budgets

Negotiate, review and approve

Budget revision
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Mgmt Acc A2016 MA
Management Accounting
2nd Year Paper
August 2016
(each needs to be briefly explained to get marks)
6 Marks
c) (i) Activity Based Budgeting is a method of budgeting in which the activities that incur costs in every
functional area of an organisation are recorded and their relationships are defined and analyzed. Activity
based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's
budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides
opportunities to align activities with objectives, streamline costs and improve business practices.
(ii) Zero based budgeting is an alternative approach that is sometimes used particularly in government
and not for profit sectors of the economy. Under zero based budgeting managers are required to justify
all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero
rather than last year's budget.
Zero based budgeting approach requires considerable documentation. In addition to all of the schedules
in the usual master budget, the manager must prepare a series of decision packages in which all of the
activities of the department are ranked according to their relative importance and the cost of each activity
is identified. Higher level managers can then review the decision packages and cut back in those areas
that appear to be less critical or whose costs do not appear to be justified.
(iii) A rolling budget is one that is revised at regular intervals by adding a new budget period to the full
budget as each budget period expires. A budget for one year, for example, could have a new quarter
added to it as each quarter expires.
In this way, the budget will continue to look one year forward. Cash budgets are often prepared on a
continuous basis.
Advantages of rolling budgets:
 The budgeting process should be more accurate
 Much better information upon which to appraise the performance of management
 The budget will be much more ‘relevant’ by the end of the traditional budgeting period
Disadvantages of rolling budgets:
 More costly and time consuming
 An increase in budgeting work may lead to less control of the actual results
9 Marks
Total 20 Marks
Page 19 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
Examiners Comments on Question Five
This question was optional and tested the candidate’s knowledge of process costing. This is the first
time that process costing has been examined in detail.
Part (a) required candidates to prepare the process account, the normal loss account and the abnormal
loss/gain account. Many candidates displayed an understanding of the process account but very few
produced the normal and abnormal loss/gain account correctly.
Part (b) required candidates to explain four terms associated with process costing and this part was
answered very well.
SOLUTION 5
a)
(i)
Process Account
Materials
Labour
Overhead
Unit Reconciliation
Input
Normal loss (8%)
Expected Output
Actual Output
Abnormal Loss
UNITS
10,000
€/£
1,360,000
1,284,000
1,172,000
10,000
3,816,000
Normal loss
Output
Abnormal loss
UNITS
800
9,000
200
€/£
44,000
3,690,000
82,000
10,000
3,816,000
units
10,000
800
9,200
9,000
200
Cost per unit = Cost of Production less scrap value of normal loss
Expected Output
€/£(3,816,000-44,000)/9,200
= €410
Valued as follows:
Actual output: 9,000 x €410
Abnormal loss: 200 x €410
= €3,690,000
= €82,000
Scrap value of normal loss: 800 units x €/£ 55 = €/£ 44,000
(ii)
Normal loss Account (Scrap Account)
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Mgmt Acc A2016 MA
Management Accounting
Process Account
Abnormal loss
August 2016
UNITS
800
200
€/£
44,000
11,000
1,000
55,000
Bank
2nd Year Paper
UNITS
1,000
€/£
55,000
1,000
55,000
UNITS
200
€/£
11,000
71,000
82,000
12 Marks
Scrap Value for Abnormal Loss: 200 units x €/£ 55 = €/£ 11,00
(iii)
Process Account
Abnormal loss Account
UNITS
200
€/£
82,000
200
82,000
Normal loss Account
Statement of P/L and OCI
200
b) (i) Normal loss
A normal loss is a loss whose occurrence is inevitable. It is a loss that occurs each time an activity is carried out.
(ii) Abnormal loss
An abnormal loss is a loss whose occurrence can be avoided. It is a loss that does not occur each time an activity
takes place. It occurs when the actual loss is higher than the normal loss.
(iii) Abnormal gain
This is a gain that occurs when the actual loss is lower than the normal loss.
(iv) Equivalent units
In order to calculate the cost of production the number of units produced is required together with the cost of
materials, labour and overhead costs. The output will consist of fully completed units together with partially
completed units. Those partially completed units will be mathematically converted to the equivalent of full units
of production. E.g. 1,000units that are 80% complete is the equivalent of 800 fully completed units.
8 Marks
Total 20 Marks
Page 21 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
Examiners Comments on Question Six
This question was optional and tested the candidate’s knowledge of standard costing and variance
analysis. Candidates were required to work backwards from variances to standard cost.
Part (a) of the question required candidates to prepare a standard cost sheet for a product.
This area of the syllabus is still creating problems. The standard of answers has not improved over the
past few years.
Part (b) of the question required candidates to outline one possible reason for each of the sales, material
and labour variances. This part of the question was answered well even by candidates who did not
demonstrate a competency in answering part (a).
SOLUTION 6
Sales price per unit
Sales price variance
€/£
25,000S
250,000
50,000A
25,000 units should have brought in (25,000 x S)
25,000 units did bring in
Variance
€/£
300,000
250,000
50,000A
25,000 units should have brought in (25,000 x S)
25,000 units did bring in
Variance
Therefore 25,000 x S = €/£300,000
S = €/£300,000/25,000 = €/£12
Cost per kg of material
Material price variance
€/£
112,500C
135,000
28,500F
112,500 kg should have cost (112,500 x C)
112,500 kg did cost
Variance
€/£
163,500 (BF)
135,000
28,500F
112,500 kg should have cost
112,500 kg did cost
Variance
Page 22 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
Therefore 112,500 x Cost = €/£163,500
C = €/£163,500/112,500 = €/£1.453
Kg material per unit of product
Material usage variance
Kg
25,000Kg
112,500
5,162A
25,000 units should have used (25,000 x Kg)
25,000 units did use
x standard cost per kg €/£1.453
Variance
€/£7,500A
25,000 units should have used (25,000 x Kg)
25,000 units did use
107,338
112,500
5,162A
x standard cost per kg €/£1.453
Variance
€/£7,500A
Therefore 25,000 x Kg = 107,338
Kg = 107,338/25,000 = 4.29Kg
Cost per labour hour
Labour rate variance
75,000 hours should have cost (75,000 x C)
75,000 hours did cost
Variance
€/£
75,000C
142,500
18,700F
75,000 hours should have cost (75,000 x C)
75,000 hours did cost
Variance
€/£
161,200 (Bal. Fig.)
142,500
18,700F
Therefore 75,000 x Cost = €/£161,200
C = €/£161,200/75,000 = €/£2.15
Labour hours per unit of product
Labour efficiency variance
Page 23 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
2nd Year Paper
Hrs
25,000Hrs
75,000
25,000 units should have used (25,000 x Hrs)
25,000 units did use
x standard cost per kg €/£2.15
Variance
€/£20,400A
Hrs
65,512 (Bal.Fig.)
75,000
25,000 units should have used (25,000 x Hrs)
25,000 units did use
x standard cost per kg €/£2.150 (€/£20,400/€/£2.15)
Variance
9,488A
€/£20,400A
Therefore 25,000 x Hrs = 65,512
Hrs = 65,512/25,000 = 2.62hrs
10 Marks
a) Standard cost card per unit
Sales price
Materials cost
Labour cost
Contribution
€/£
12.00
6.23
5.63
0.14
4.29kg @ € / £ 1.453 per kg
2.62 hours @ € / £ 2.15 per hour
4 Marks
b) Reasons for the variances
Material Variances
The business may have sourced cheaper materials of a lower quality for production. Accordingly, these cost
less, resulting in the favourable price variance of €/£28,500. However, there has been more usage (perhaps more
wastage) with an adverse usage variance of €/£7,500.
Labour Variances
The adverse labour efficiency variance of €/£20,400 could be attributable to less-skilled or less-experienced
staff that have proved to be cheaper to employ, hence the favourable labour rate variance of €/£18,700, but have
taken longer to do the job.
Sales price variance
The adverse sales price variance may be due to more competition in the market and due to the original standard
being incorrect.
6 Marks
Total 20 Marks
Page 24 of 25
Mgmt Acc A2016 MA
Management Accounting
August 2016
Page 25 of 25
2nd Year Paper
Mgmt Acc A2016 MA