BE111-5-AU-1



UNIVERSITY OF ESSEX

SECOND YEAR EXAMINATION 2021

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MANAGEMENT ACCOUNTING I

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The paper consists of FOUR questions.
Candidates must answer TWO questions:
ONE question from Section A (60 MARKS)
and
ONE question from Section B (40 MARKS)

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BE111-5-AU-2



SECTION A - Answer ONE question from Section A.
QUESTION ONE
Soyota is an automobile manufacturing, which uses an actual-costing system that determines costs
on a monthly basis. Data relating to October, November and December of 2020 are:

October November December
Unit data
Opening stock 0 300 300
Production 1200 800 1250
Sales 900 800 1500
Variable-cost data
Manufacturing costs
per unit produced
£500 £500 £500
Marketing costs per
unit sold
300 300 300
Fixed-cost data
Manufacturing costs £300 000 £300 000 £300 000
Marketing costs 120 000 120 000 120 000
The selling price of motor vehicle is £2,600.

Required:
a. Calculate unit manufacturing cost for Soyota in October, November and December of 2020
under (i) variable costing and (ii) absorption costing.
(10 marks)
b. Prepare income statements for three months under (i) variable costing and (ii) absorption
costing.
(30 marks)
c. Explain any differences between (i) and (ii) for the three months.
(5 marks)
d. What are the benefits of using variable and absorption costing methods and what are their
limitations? As a manager, which costing system(s) will you adopt and how will you
overcome the limitations?
(15 marks)

[TOTAL 60 MARKS]



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QUESTION TWO
Odeon Cinema is currently showing a movie named “Last House on Elm Avenue”. It is a horror
movie and is doing really well for the past 3 weeks. The management of the cinema is certain that a
fairly large audience will come and watch the movie for another two weeks. However, being a horror
movie, children cannot watch it. Meanwhile, another comedy movie, by famous actor Adam Sadler,
“Cute Guerilla” has been booked by the cinema for the next two weeks. However, despite the comedy
movie being booked, strong performance of the horror movie is making management have second
thoughts about taking it off the cinema. While the building has the capacity of another theatre, there
is only one screen in the cinema so the two movies cannot be run in parallel. However, even if the
management decides to show the horror movie for the next 1 or 2 weeks, it still has to pay the cost to
distributors of the comedy movie as well, as it was booked quite a few weeks in advance. While the
cost to be paid to the distributor for booking a movie does not change with booking it weeks in
advance or merely a few days, it has been an established practice of Odeon to book movies in advance
and start advertising them on their website. Almost all the tickets are still sold on the day of the show
with negligible advance booking.

Normal attendance at the cinema is 2,000 people per week, with around one-fourth being children
under the age of 12. Attendance for the horror film has been 50% greater than the normal total in the
past weeks i.e. 3,000 people per week. However, management believes that this would gradually go
down during the next two weeks. In the first week, it will go down by 25% and in the second week,
by 33.33% of what it was, on average, in the last three weeks. On the contrary, the viewing for comedy
movie is expected to remain the same as is the normal attendance for the next two weeks and possibly
beyond.

The price charged by cinema is £2 for adults and £1.20 for children under 12. The charge that the
cinema has to pay to distributors for the horror movie is £900 for one week. If management decided
to run it for next two weeks, the cost to be paid to distributor will be £1,500 for two weeks. The
comedy movie is a low-budget film so the cost to be paid to the distributor is £750 for one week or
£1,200 for two weeks. Operating fixed costs of the cinema are £4,200 per week. In addition to tickets,
the cinema also makes money through sale of popcorn and drinks, which on average amounts to £1.20
per person. The cost of popcorn and drinks to the cinema is on average 60% of the selling price.

Management is investigating the following three options: show the horror movie for the next two
weeks; show the comedy movie for the next two weeks; or show the horror movie for one week and
then show the comedy movie for the next.

a. What is the net profit/loss of the three options?
(39 marks)

b. What strategic or operational lessons can be drawn by the management from this situation?
(21 marks)
[TOTAL 60 MARKS]

END OF SECTION A
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SECTION B - Answer ONE question from Section B

QUESTION THREE
a. “Adjusting for over/under applied overhead at the end of an accounting period is of no
managerial use; it is simply an exercise for the sake of financial reporting”. Critically
discuss whether you agree with this statement.
(20 marks)

b. Job costing in service industry is a more difficult task than job costing in manufacturing
industry, yet the significance of accurate job costing is much more in manufacturing
industry than in service industry” Critically discuss whether you agree with this statement.
(20 marks)
[TOTAL 40 MARKS]


QUESTION FOUR
a. “Operating leverage of a firm is largely determined by managerial discretion”. Given the
nature and significance of operating leverage, explain with reasons, why you agree or
disagree with the statement?
(24 marks)
b. As a manager, what factors will influence your decision of opting for high vs low operating
leverage? What are the risks/downside of ending up choosing the wrong level of operating
leverage?
(16 marks)
[TOTAL 40 MARKS]

END OF SECTION B

END OF QUESTION PAPER

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BE111-5-AU-5




ANSWER SHEET
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TYPE THE QUESTION NUMBER AND YOUR ANSWERS HERE

BE111-5-AU-6





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TYPE THE QUESTION NUMBER AND YOUR ANSWERS HERE
SECTION A
QUESTION ONE
[A]
unit manufacturing cost = Manufacturing costs per unit produced + manufacturing cost / units produced
Unit manufacturing cost in OCTOBER
Manufacturing cost per unit £500 + £300,000 / 1200
£500 + £250 = £750
Unit manufacturing cost in NOVEMBER
Manufacturing cost per unit £500 + £300,000 / 800
£500 + £375 = £875
Unit manufacturing cost in DECEMBER
Manufacturing cost per unit £500 + £300,000 / 1250
£500 + £240= £740










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[B]
{I}
SOYOTA PLC INCOME STATEMENT
FOR THE QUARTER ENDED DECEMBER 2020





October November December
Revenues 2340000 2080000 3900000
Variable cost





Opening stock 0 150,000 150,000
Variable
manufacturing
costs
£600,000 £400,000 £625,000
Cost of goods
available
£600,000 £550,000 £775,000
Less closing
stock
(150,000) (150,000) (25,000)
Variable cost
of goods sold
£450,000 £400,000 £750,000
Variable
marketing cost
£270,000 £240,000 £450,000
Total variable
cost
£720,000 £640,000 £1,200,000
Contribution 1,620,000 1,440,000 2,700,000
FIXED COSTS





Fixed
manufacturing
costs
£300,000 £300,000 £300,000
Fixed marketing
costs
£120,000 £120,000 £120,000
Operating profit £1,200,000 £1,020,000 £2,280,000




BE111-5-AU-8







{II}
SOYOTA PLC INCOME STATEMENT
FOR THE QUARTER ENDED DECEMBER 2020


October November December
Revenue 2340000 2080000 3900000
Variable cost:





Opening stock

225000 262500
Variable cost of
goods
manufactured
600000 400000 625000
Fixed
Manufacturing
cost
300000 300000 300000
Cost of goods
available for
sale
900000 925000 1187500
Closing stock (225,000) (262,500) (37,000)
Cost of goods
sold
(£675,000) (£662,500) (£1,150,500)
Gross margin 1665000 1417500 2749500
Marketing cost:





Variable
marketing cost
270000 240000 450000
Fixed marketing
cost
120000 120000 120000
Total marketing
cost
(390000) (360000) (570000)
Operating profit £1,275,000 £1,057,500 £2,179,500






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[C]
Absorption costing operating income - Variable costing operating income
=
Fixed manufacturing cost in closing stock - Fixed manufacturing cost in opening


Difference in October:
£1,275,000 - £1,200,000 = £75,000
(250*300) - 0 = £75,000


Difference in November:
£1,057,500 - £1,020,000 = £37,500
(375*300) - (250*300) = £37,500


Difference in December:
£2,179,500 - £2,280,000 = £-100,500
(240*50) - (375*300) = £-100,500
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[D]
Variable costing is determined solely by varying manufacturing cost. Changes in the factory overhead is
does not affect variable costing.
Advantages of variable costing
Variable costing helps with operations planning as it always gives management data on variable cost which
can help them make decisions on special orders or the capacity of their production. It also provides data that
could be used to carry out a cost volume profit analyses.
Limitations of variable costing
Variable costing has a few limitations like inaccurate production cost as due to how the fixed cost is treated
in this method. Variable costing is also not accepted in certain contexts as it does not meet the generally
accepted accounting principles (GAAP). It also neglects that no cost is fixed over an extended time frame,
which might lead to problems with long term pricing and production cost.
Absorption costing
All manufacturing cost are taken into account in absorption costing, this is required by GAAP for external
reports. This method allows all the companies cost to reflect on the product.
Advantages of absorption costing
The first and obvious advantage would be that it conforms with GAAP and all costs are factored into
production. It also paints a very accurate picture of the profits the company makes.
Disadvantages of absorption costing
It might not paint an accurate picture of profit in an accounting period. It also makes it difficult to determine
differences in cost at different production levels.
Variable costing should be preferred for internal operations of the company.

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QUESTION FOUR
[A]
I disagree with the statement. Operating leverage of a firm is not largely determined by managerial discretion
because managerial discretion is a method of directing action against a set of predetermined objectives while
operating leverage is the extent to which an organisation can raise sales while still rising operating income.
An assembly floor worker must always be present at the assembly line as they do not have the freedom than
say someone at a managerial role has who could choose to work remotely on certain days if they feel it is as
productive.
Operating leverage is not the same for all industries, different industries have different operating leverage.
So, a manager in the automobile industry will have a different level of operating leverage and organizational
flexibility as someone in a small-scale restaurant business.
[B]
My decision will be influenced by Higher profits, sales, and revenues and if I could get the majority of my
expenses remain the same, then I would opt for high operating leverage. This high operating leverage
increases the potential danger for risk forecasting, a small error can have very big effect in the company’s
future financial position. Choosing a high operating leverage will also raise the proportion of fixed costs in
the manufacturing process which puts the company under threat.
The managerial discretion has more to do with how the organization is being handled, it does not affect the
operating leverage. This allows managers to be more independent and helps them pursuit personal goals.