SECTION A
Candidates must answer ONE question from this section.
QUESTION ONE
Astoms Asbestos Ltd is in the business of removing potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not take enough care in distinguishing between routine work such as removal of asbestos insulation around heating pipes in older homes and non-routine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that non-routine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “my job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square metreage by £2.50 to determine the bid price. Since our average cost is only £2.175 per square metre, that leaves enough cushion to take care of additional costs of nonroutine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart”.
Partly to shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based system follow:
Required:
(a) Perform the first-stage allocation of costs to the activity cost pools. (20 Marks)
(b) Compute the activity rates for the activity cost pools. (20 Marks)
(c) By referring to the long-simmering dispute between the company’s estimator (estimator’s position) and the work supervisors, explain how ABC system can address the distortions or disputes that may be associated with contract estimates. (10 Marks) [TOTAL: 50 MARKS]
QUESTION TWO
Special Ice Water Ltd is a manufacturer of various products including one that is marketed as PureAqua. The company has developed standard costs for one bottle of Pure-Aqua.
During the month of May, the following activity was recorded by the company in relation to the production of Pure-Aqua: - Materials purchased were 32,000 litres at a cost of £390,400.
- There were no beginning stocks of materials on hand to start the month. At the end of the month, 2,400 litres of materials remained unused in the warehouse.
- The company employs 70 skilled workers to work on the production of Pure-Aqua. During May, each of them worked an average of 300 hours at an average rate of £15 per hour.
- Variable manufacturing overhead is assigned to Pure-Aqua on the basis of direct labourhours. Variable manufacturing overhead costs incurred during May totalled £93,450.
- During May, 4,250 bottles of Pure-Aqua were produced.
Required:
(a) Compute the following variances for May: - Direct material price and quantity variances. - Direct labour rate and efficiency variances. - Variable overhead spending and efficiency variances. (24 Marks)
(b) Identify two possible reasons for each of the variances that you have computed above. (12 Marks)
(c) Explain what is meant by the term ‘management by exception’ and critically evaluate the usefulness of standard costs in facilitating this process. (14 Marks) [TOTAL: 50 MARKS]
SECTION B
Candidates must answer ONE question from this section.
QUESTION THREE
a) Customer profitability analysis is very important topic to managers in the modern business environment (Bhimani, A., Horngren, C., Datar, S and Rajan, M. (2019) Management and Cost Accounting, 7th Edition. Harlow: Pearson.). Evaluate the above statement. (20 marks)
b) Budgets are useful vehicles for communication. Critically discuss the above statement and provide some relevant examples to support your answer. (30 marks) [TOTAL: 50 MARKS]
QUESTION FOUR
a) Explain why standard costing is more suitable for controlling the cost of unit-level activities. (10 marks)
b) Despite the widespread use of return on investment (ROI) in all types of organisations, a number of problems exist when this measure is used to evaluate the performance of divisional managers. Critically evaluate the above statement and provide some examples to support your arguments. (25 marks)
c) Explain how the balanced scorecard links strategy formulation to financial outcomes. (15 marks) [TOTAL: 50 MARKS]
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