CA Proficiency 1

PAPER 2 - MANAGEMENT ACCOUNTING

SUMMER 2009 (Tuesday 26th May 2009 - 9.30 a.m. to 12.30 p.m.)

INSTRUCTIONS TO CANDIDATES

1. Answer BOTH questions in Section A.

Answer ANY THREE of the four questions in Section B.

2. Candidates should indicate clearly whether they are answering the paper in accordance with the law and
practice of Northern Ireland or the Republic of Ireland.

3. Candidates should deem each monetary amount shown with the €/£ symbol to be stated in their relevant
currency.

4. All workings should be shown.

5. Answers should be illustrated with examples, where appropriate.

6. Question 1 appears on Page 2 overleaf.

CAP1-MA-S09 1 5/14/2009
 SECTION A

Answer BOTH questions in this Section

QUESTION 1 (Compulsory)

DELAWARE Dairies manufactures a range of cheeses using four processes. The first process (PROCESS 1) yields
three basic cheeses (C1, C2 and C3) in fixed proportions. The cheeses could be sold at the split-off point but the
addition of more ingredients enhances their saleable value. Consequently, DELAWARE decides to further process
C1, C2 and C3 in PROCESSES 2, 3 and 4 respectively. The process accounts for month of May 2009 for the four
processes are as follows:

PROCESS 1

Kgs €/£ Kgs €/£

Opening WIP 4,000 1,200 Transferred:
Direct material 99,000 9,900 C1 to PROCESS 2 50,000 25,000
Processing costs 39,500 C2 to PROCESS 3 30,000 15,000
C3 to PROCESS 4 20,000 10,000
______ _____ Closing WIP 3,000 600
103,000 50,600 103,000 50,600

PROCESS 2 (C1)

Kgs €/£ Kgs €/£

Opening WIP 2,000 1,267 Sales revenue 50,000 60,000
From PROCESS 1 50,000 25,000 Closing WIP 2,000 1,267
Processing costs 13,333
Profit _____ 21,667 _____ ______
52,000 61,267 52,000 61,267

PROCESS 3 (C2)

Kgs €/£ Kgs €/£

Opening WIP 1,000 650 Sales revenue 30,000 21,000
From PROCESS 1 30,000 15,000 Loss 3,000
Processing costs ______ 9,000 Closing WIP 1,000 650
31,000 24,650 31,000 24,650

PROCESS 4 (C3)

Kgs €/£ Kgs €/£

Opening WIP 2,000 1,700 Sales revenue 20,000 35,000
From PROCESS 1 20,000 10,000 Closing WIP 2,000 1,700
Processing costs 14,000
Profit 11,000
22,000 36,700 22,000 36,700

All of the work-in-progress (WIP) is fully complete with respect to materials and is 50% processed (except for
PROCESS 1 which is 25% processed).

The selling prices of C1, C2 and C3 at the split-off point and after additional processing are as follows:

Price per Kg

C1 C2 C3

€/£ €/£ €/£

If sold at split-off ....................................................................... 0.80 0.30 1.30
Sold after additional processing............................................... 1.20 0.70 1.75

CAP1-MA-S09 2 5/14/2009
QUESTION 1 (Cont’d.)

Requirement

(a) Identify and evaluate the method which has been used to apportion the joint costs in PROCESS 1.
2 Marks

(b) (i) Analyse and comment upon the current policy of further processing all three cheeses after the split-off
point.
4 Marks
(ii) Identify the optimal solution and estimate the profit obtained from the optimal solution.
4 Marks

(c) Revise the process accounts for PROCESSES 2, 3 and 4 using the sales value at split-off method of
apportioning joint costs. Comment upon the revisions (assume that the allocation of costs to stock in
PROCESS 1 remain unchanged).
6 Marks

(d) In addition to the three cheeses produced at split-off, PROCESS 1 also produces a by-product which can be
sold for animal feed.

Discuss briefly TWO alternative methods of accounting for the revenue from sales of the by-product.
4 Marks
Total 20 Marks

CAP1-MA-S09 3 5/14/2009
QUESTION 2 (Compulsory)

GOLFGEAR plc (“GOLFGEAR”), a rapidly growing distributor of golf clubs to retail outlets, is in the process of
formulating plans for next year. Joan Caldwell, the marketing director, has completed her sales budget for 2010
and is confident that sales estimates will be met or exceeded. The following sales figures show the growth
expected and provide the planning basis for other corporate departments:

Budgeted sales (all on credit):

€/£
January 1,800,000
February 2,000,000
March 1,800,000
April 2,200,000
May 2,500,000
June 2,800,000

George Brown, the assistant chief accountant, has been give responsibility for formulating the cash budget, a
critical element during a period of rapid expansion. The following information provided by operating managers will
be used in preparing the cash budget:

(i) The company has experienced an excellent record in debtor collection and expects this trend to continue.
60% of invoices are collected in the month after sale and the remainder in the second month after sale. Bad
debts are negligible and are not considered.

(ii) The purchases of the golf clubs are the company’s largest expenditure with the cost equalling 50% of sales.
Clubs are purchased in the month before sale. Prior experience shows that 80% of the creditors are paid in
the month after receipt of clubs and the remaining 20% are paid in the second month after receipt.

(iii) Wages, including fringe benefits, depend on sales volume and are equal to 20% of the current month’s sales.
These wages are paid in the month incurred.

(iv) General and administrative expenses are budgeted to be €/£ 2,640,000 for the year and the composition is
shown below. All of these expenses are incurred evenly throughout the year, except for the rent which is
paid in four equal instalments in the last month of each quarter.

€/£
Salaries 480,000
Promotion 660,000
Rent 240,000
Insurance 360,000
Utilities 300,000
Depreciation 600,000

(v) Corporation Tax payments are made in the first month of each quarter and are based upon the profit of the
prior quarter. The tax rate is 40%. GOLFGEAR’s net profit for the first quarter is projected to be €/£ 612,000.

(vi) Equipment and warehouse facilities are being purchased to support the company’s expanding sales.
Purchases of warehouse facilities and equipment are budgeted at €/£ 28,000 for April and €/£ 324,000 for
May and are paid for in the month after purchase.

(vii) GOLFGEAR has a corporate policy of maintaining an end-of-month cash balance of €/£ 100,000. Cash is
borrowed or invested monthly to maintain this balance. In the second quarter it is estimated that there will
be a net interest cost of €/£ 8,000, which is payable in June.

Requirement

(a) Prepare monthly cash budgets for April, May and June.
12 Marks
(b) Explain briefly why cash budgeting is particularly important for a growing company such as GOLFGEAR.
4 Marks
(c) Assess briefly the usefulness of spreadsheets in the budget preparation process.
4 Marks
Total 20 Marks

CAP1-MA-S09 4 5/14/2009
 SECTION B

Answer ANY THREE of the four questions in this Section

QUESTION 3

FIRMAFLOORS Ltd. manufactures a range of terracotta floor tiles designed for kitchens and conservatories
installation. The best selling tile from the range is the glazed Terraplus tile which is a medium-sized tile covering
0.125 square metres (per tile). The tiles are fired in a kiln and are manufactured from a mix of four materials with
each mix comprised of 100 kilograms in the following proportions:

Material Quantity (kgs) Price (€/£ per kg) Total Cost

€/£
Red clay 40 1.50 60
Sandstone 30 1.20 36
Limestone 10 1.40 14
Cement 20 0.50 10
100 120

Each mix should produce 100 square metres of the Terraplus tiles which are then sold to building contractors and
DIY outlets at €/£ 15 per square metre.

In April 2009 a total of 46,400 tiles were manufactured from the following input of materials:

Material Quantity (kgs) Price (€/£ per kg) Total Cost

€/£
Red clay 2,200 1.60 3,520
Sandstone 2,000 1.10 2,200
Limestone 500 1.50 750
Cement 1,400 0.50 700

Requirement

(a) Calculate the following variances for April 2009:

(i) The usage variance for each material.

(ii) The price variance for each material.
(iii) The total mix variance.
(iv) The total yield variance.
16 Marks

(b) Identify TWO uses of mix and TWO uses of yield variances.
4 Marks
Total 20 Marks

CAP1-MA-S09 5 5/14/2009
QUESTION 4

The management of STARLIGHT CINEMA is considering whether to show an advance screening of a forthcoming
action movie. The hiring of the film will cost the cinema €/£ 2,500 and the revenue obtained from the screening will
depend upon two factors, namely the number attending the movie and the amount spent by each person on
confectionary.

Past experience suggests that the average audience if the screening proves to be very popular is 600 people, if
popular 500 people and if unpopular 350 people. The amount spent on confectionary per person does not depend
upon the popularity of the film and will be either €/£ 6, €/£ 4 or €/£ 2 person. The profit margin on confectionary
sales is 50%.

The estimated probabilities for the audience and the amount spent on confectionary are shown in the table below:

Audience size 600 500 350

Probability 0.3 0.5 0.2

Confectionary spend €/£ 6 €/£ 4 €/£ 2

Probability 0.4 0.4 0.2

In an attempt to attract cinema goers to view the film, a concessionary ticket price of €/£ 5 per person will be
charged.

Requirement

(a) Calculate the expected profit from the screening of the film.
3 Marks

(b) Prepare a table showing the profit from each of the 9 combinations of audience size and confectionary
spend.
9 Marks

(c) Calculate the probability of:

(i) the cinema making a profit from the viewing;

(ii) the cinema making a profit of at least €/£ 1,500 from the viewing.
4 Marks

(d) A local film critic claims that he is able to predict exactly how many people would attend the advance
screening and how much they would spend on confectionary.

Estimate the maximum amount STARLIGHT CINEMA should be prepared to pay for this information.
4 Marks
Total 20 Marks

CAP1-MA-S09 6 5/14/2009
QUESTION 5

(a) Four important principles regarding the ethical behaviour of professional accountants have been identified as
follows:

(i) Integrity
(ii) Objectivity
(iii) Professional competence
(iv) Confidentiality

Requirement

Explain the meaning of each of the FOUR principles and discuss their impact upon the activities of the
management accountant.
12 Marks

(b) You have recently been promoted to the position of divisional accountant in a rapidly growing division of a
transport company. Your first task in your new position has been the preparation of the divisional budget for
the forthcoming year. However, you have faced certain difficulties in attempting to complete this task, as
follows:

(1) The first draft reflected a pessimistic forecast by operational managers and projected a profit figure
below the current level.

(2) This first draft was rejected by the divisional managing director who proceeded to put pressure on the
operational managers to revise their forecasts to indicate a 50% increase in profits over the current
year.

You were not involved in the discussions between the divisional managing director and the operational
managers but he later explained to you that the increased profit figure forecast for next year was necessary
to guarantee that the capital expenditure proposals for the division would be accepted at group level.

The group finance director, to whom you formerly reported, has requested a meeting with you to discuss both
the details of the divisional budget and help him assess the validity of the profit forecast.

Requirement

(i) Identify and explain your organisational responsibilities in your role as divisional accountant.
4 Marks

(ii) Assess the ethical issues involved in the situation.

4 Marks
Total 20 Marks

QUESTION 6 APPEARS ON PAGE 8 OVERLEAF – P.T.O.

CAP1-MA-S09 7 5/14/2009
QUESTION 6

SAWGRASS plc manufactures an artificial ceiling unit.

The managing director of SAWGRASS plc has recently attended a seminar on Total Quality Management and has
expressed interest in implementing a quality initiative aimed at reducing quality costs within the company. As
management accountant, you have been asked to prepare a report detailing the potential gains from the
implementation of a quality programme.

The information gathered is shown below:

Pre Quality Programme Post Quality Programme

Material loss due to poor storage 5% 3%
Material loss during processing 4% 2.5%
Product and equipment inspection €/£ 25,000 €/£ 15,000
Product rejected at final inspection 12.5% 7.5%
Product returned by customers 5% 2.5%
Product liability claims 3% of sales revenue 1% of sales revenue
Machine idle time 20% of gross hours 12.5% of gross hours
Selling and distribution costs €/£ 60,000 €/£ 50,000
Machine time per unit produced 36 mins 30 mins

The company budgets to produce and sell 5,000 units in the third quarter of 2009. Each ceiling sells for €/£ 100
and requires 8 square metres of plastic sheeting per ceiling which costs €/£ 4 per square metre. Machine operating
costs are €/£ 40 per hour.

The units which are rejected at the final production stage and the units which are returned by customers are both
sold as “seconds” at a discount of 40% on the standard selling price. The units returned by customers are replaced
free of charge and incur additional delivery costs of €/£ 10 per ceiling unit.

It is anticipated that the quality programme would cost €/£ 50,000 to implement.

Requirement

(a) The managing director has asked you to prepare calculations for the third quarter of 2009 showing the
following, both before and after implementation of the quality programme:

(i) Total units produced (pre-inspection).

(ii) Purchases of materials.

(iii) Gross machine hours.

Base your calculations on the assumption that budgeted sales will be achieved.
12 Marks

(b) Upon the basis of the estimated cost savings for the third quarter of 2009, advise the company whether the
quality program should be implemented. Explain your decision.
8 Marks
Total 20 Marks

CAP1-MA-S09 8 5/14/2009