B7AF107

___________________________________________________________________________

QQI
BA (Honours) Accounting and Finance
Autumn 2022 EXAMINATIONS

Module Code: B7AF107

Module Description: Cost Management

Examiner: Mr Paul Walsh

Internal Moderator: Nor Affidah Yahaya

External Examiner: Mr Eoin Langan

Date: Tuesday, 26 July 2022

Time: 09.30 – 12.30
INSTRUCTIONS TO CANDIDATES
Time allowed is (3) hours
Answer (4) out of (5) questions
All questions carry equal marks

Page 1 of 9 Autumn 2022

 B7AF107

QUESTION 1

Funfone Style limited commenced trading twelve months ago and as a result of a very
successful year is seeking bank finance to expand. The company imports a specialised mobile
phone case from an overseas supplier and currently sells it in a limited range of stores in
Ireland and the UK. The case is unique in that it comprises a high quality, durable resin and
can be adjusted to fit either of the two leading Smartphones in the market. Additional bank
funding would allow the company to extend its retailer network in the UK with the possibility
of establishing outlets in other parts of Europe. However, to consider an application for
finance, the bank requires Funfone Style limited to prepare a cash budget, forecasting its
receipts and payments for the next six months commencing on 1 May 2022. The company
has provided the following information:

1. Each case will cost €6.20 to purchase from the overseas supplier and the company
has agreed to pay 50% of all purchases in cash with the remainder paid in the month
after purchase.

2. Funfone Style limited will sell the case to retail customers for €11.25 and projects the
following sales (in units) for the next six months:

May June July August September October November

10,000 12,000 15,000 15,000 16,000 18,000 r18 ,000

3. To encourage prompt payments from customers, effective from 1 May 2022, the
company has decided to give a discount for cash payment. Funfone Style limited
expects that 20% of all customers will avail of this offer and will receive a discount of
5%. Of the remaining monies receivable, the company expects to receive 50% one
month after the month of sale, 45% two months after the month of sale and the
remainder will be irrecoverable.

4. To ensure that sales opportunities are not missed, the company will hold inventory
at the end of each month amounting to 10% of the following month’s projected sales.
At 1 May 2022, the company expects to have 1,000 cases in inventory.

5. Salary and wage costs per month are expected to be €19,000 for the first two months
and to increase by €2,000 per month for each of the next four months, as the
company hires new staff.

6. Administration costs are projected to be €82,200 for the year, including depreciation
of €9,900.

7. The company has decided to purchase additional computer equipment to support its
sales staff. Laptops and printers costing €16,200 will be purchased and paid for in
October.

Page 2 of 9 Autumn 2022

 B7AF107

…Question 1 continued

At 1 May 2022, Funfone Style Limited projects that it will have the following balances:

Bank overdraft €2,960

Receivables (all amounts to be received in May 2022) €30,980
Payables (due in May 2022) €25,100

REQUIREMENT:

a) Prepare a Cash budget for Funfone Style limited, on a monthly basis, for the six month
period commencing 1 May 2021, clearly showing the closing cash balance at the end
of each month.
(21 marks)
a) Outline TWO benefits of Cash budgets.
(4 marks)
(Total: 25 marks)

Page 3 of 9 Autumn 2022

 B7AF107

QUESTION 2

Jams Limited, based in Wexford, produces a range of delicious chutneys which it sells to
selected supermarkets in the Ireland. In manufacturing its chutney there are two production
processes, Mixing and Cooking. The Mixing process incurs both materials and conversion
costs (labour and overheads) in preparing the fruit and vegetables and blending all of the
ingredients together. The Cooking process only incurs conversion costs which arise from
heating the ingredients and boiling and testing the chutney to ensure that it is properly ‘set’
before being poured into jars. The company uses the First in First out method of process
costing to value production and inventory. Information relating to one of the company’s
most popular products, Apple Chutney, for the month of March is provided below.

Mixing process

During March, a total of 36,000 Kgs of mixed apples, vinegar and sugar were input to the
Mixing process costing €14,544 and the conversion costs incurred during the month
amounted to €9,470.

At the beginning of March there was 1,800 Kgs of opening inventory in the Mixing process.
The opening inventory included all ingredients which cost €765 but was only 40% complete
in terms of conversion and this cost amounted to €385.

Losses or gains may arise in the Mixing process but that a loss of 5% of materials input is
expected to occur in the Cooking process.

During March, 35,400 Kgs of fully mixed and blended apples, vinegar and sugar were
transferred to the Cooking process and 2,600 Kgs of partially mixed and blended ingredients
remained in work in progress. The work in progress mixture was fully complete in relation to
materials but only 50% complete in terms of conversion costs.

Cooking process

Conversion costs incurred in the Cooking process during the financial period amounted to
€15,198.

At the beginning of March, there was 560 kgs of opening inventory in the Cooking process.
This inventory was complete in relation to materials which cost €125 and 50% complete in
terms of conversion costs which totalled €48.

During March, 33,700 kgs of completed Apple Chutney was transferred from the Cooking
process to the bottling area.

The closing work in progress in the Cooking process at the end of March was 300 Kgs. This
was fully complete in terms of material and 60% complete in terms of conversion costs.

Page 4 of 9 Autumn 2022

 B7AF107

…Question 2 continued

REQUIREMENT:

a) For the month of March prepare the following accounts, ensuring that all workings
are clearly shown:
i. Mixing Process
(10 marks)
ii. Cooking Process
(10 marks)
b) In some cases a scrap value is placed on the loss arising from a production process
and this scrap material can be sold for cash. Explain how the scrap value of a normal
loss and the scrap value of an abnormal loss are treated in the cost accounts.
(5 marks)
(Total: 25 marks)

Page 5 of 9 Autumn 2022

 B7AF107

QUESTION 3
Fixtures Limited has grown steadily over the last five years due to the phenomenal success
of its innovative product, the ‘plantform’. The ‘plantform’ is a unique stand for houseplants
that is produced using carefully sectioned pieces of pine wood slotted together to form a
flat, stable and decorative base. Fixtures Limited uses an absorption costing system to report
profits and value production.

The company is currently reviewing its operating results for the year ended 31 March 2022.
However, the management accountant is unwell and the managing director has asked for
your assistance with this task. The following information is available:

Last year, when the budget was being prepared, it was expected that ‘plantforms’ would
be sold for €17.50 each. The budget was finalised based on production and sales of 45,000
‘plantforms’.

Details per unit

Materials 0.3 metres of pine wood at €18.50 per metre
Labour 0.25 hours at €11.60 per hour
Variable overheads Direct labour hours at €1.60 per hour

The company had budgeted fixed production overhead for the year to 31 March 2022 to be
€76,500.

The actual results for the year to 31 March 2022 are shown below:
Number of ‘plantforms’ produced and sold were 46,200

Total sales value €796,950

Direct materials: 16,170 metres of pine wood €295,911
Direct labour: 13,860 hours €166,320
Variable production overhead €21,483
Fixed production overhead €78,950

REQUIREMENT:
a) Prepare the standard profit for one unit of ‘plantform’.
(2 marks)
b) Calculate all relevant variances.
(19 marks)
c) Prepare a statement reconciling the profit that was originally budgeted to
actual profit achieved.
(2 marks)
d) Suggest TWO reasons to explain the direct materials variances.
(2 marks)
(Total: 25 marks)

Page 6 of 9 Autumn 2022

 B7AF107

QUESTION 4

Celebration Ltd. produces three products, P, Q, R, all made from the same material. Until
now, it has used traditional absorption costing to allocate overheads to it products. The
company is now considering an activity based costing system. Information for the three
products for the last year is as follows:

P Q R

Production and Sales volumes (units) 15,000 12,000 18,000

Selling price per unit €7.50 €12 €13
Raw materials usage (kg) per unit 2 3 4
Direct labour hours per unit 0.1 0.15 0.2
Machine hours per unit 0.5 0.7 0.9
Number of production runs per annum 16 12 8
Number of purchase orders per annum 24 28 42
Number of deliveries to retailers per annum 48 30 62

The price for raw materials remained constant throughout the year at €1.20 per kg. Similarly,
the direct labour cost for the whole workforce was €14.80 per hour. The annual overhead
costs were as follows:

€
Machine set up costs 26,550
Machine running costs 66,400
Procurement costs 48,000
Delivery costs 54,320

REQUIREMENT

a) Calculate the full cost per unit for product P, Q, and R under traditional
absorptioncosting, using direct labour hours as the basis of apportionment. (6 marks)

b) Calculate the full cost per unit for products P, Q, and R using an activity based costing
approach.
(14 marks)
c) Using your calculations from (a) and (b) above, explain how activity based costing may
help Celebration Ltd to improve profitability of each product.
(5 marks)
(Total: 25 marks)

Page 7 of 9 Autumn 2022

 B7AF107

QUESTION 5 – Complete BOTH Part A and Part B

PART A
Trouble Ltd., sell two products and the following information is available for 2022;

Product M

Sales Revenue €280,000

Variable Costs €152,000
Budgeted Sales 32,000 units

Fixed Costs are budgeted to be €60,000

REQUIREMENT:

(i) Calculate the contribution to sales ratio.

(3 marks) (ii) Calculate the Breakeven point in units and euro value.
(3 marks) (iii) Calculate the Margin of Safety in units and the % margin of safety.
(3 marks)
PART B
X Limited makes 3 products of which the details are as follows:

Product A Product B Product C

Selling price €25 €20 €15

Machine hours per unit 10 12 7

Materials 14kg 12kg 10kg
Labour hours 1.2 hours 0.8 hours 0.4 hours

Material rate of €0.50 per kg

Labour rate of €7.50 per hour

Sales units for the period are as follow:

Product A 4,000
Product B 6,000
Product C 6,000

The supply of materials in the period are unlimited but machine hours are limited to 200,000 hours
and direct labours are limited to 5,000 hours.

Page 8 of 9 Autumn 2022

 B7AF107

REQUIREMENT:
a) Identify the limiting factor
(6 marks)
b) Calculate the production plan to maximise the contribution for X Limited
(10 marks)
(Total: 25 marks)

END OF EXAMINATION

Page 9 of 9 Autumn 2022