BE 111-5-AU/1

UNIVERSITY OF ESSEX

SECOND YEAR EXAMINATION 2018

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MANAGEMENT ACCOUNTING I

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BE111 Main Examination

Learning outcomes
Technical and critical understanding of:


• the contexts in which management accounting (MA) operates. Q3, Q4
• understand introductory ideas of cost and management
accounting issues;
Q4
• understand costs, volume and relevance for decision making in
various business contexts;
Q1
• understand various issues of cost allocations and accumulations
in relation to business and technology;
Q3, Q2
• understand conventional costing systems; and Q4
• develop an understanding of various issues in relation to
determining product costs, including relevant costs.
Q2, Q1


BE 111-5-AU/2

Indicative Answers

SECTION A

Question 1

Requirement (a) - 25 marks

No, production and sale of the cruiser motorcycle should not be discontinued. If the racing bikes are
discontinued, then the net profit for the company as a whole will decrease by £22,000 each quarter:


Contribution margin lost (£54,000)
Less fixed costs which can be avoided:
Advertising, traceable £12,000
Salary of the product line manager £20,000 32,000
Decrease in net operating profit for the
company as a whole (£22,000)


The depreciation of the special equipment represents a sunk cost, and therefore is not relevant to the
decision.
The common costs are allocated and will continue regardless of whether or not the racing bikes are
discontinued; thus, they are not relevant to the decision.

Requirement (b) - 10 marks

Only additional costs are relevant to the decision. These are the variable selling costs of £4 per speaker
and this should be the minimum price. All other costs have already been incurred and thus should be
ignored.


Requirement (c) - 25 marks

Milk Cheese Butter
Selling price after further processing £40 £26 £64
Selling price before further processing £32 £16 £50
Contribution margin per unit £8 £10 £14
Output 30,000 40,000 8,000
Total contribution margin £240,000 £400,000 £112,000
Additional processing costs £246,000 £360,000 £128,000
Benefit for processing a product -£6,000 £40,000 -£16,000

Therefore, only cheese should be processed further.

[TOTAL 60 MARKS]






BE 111-5-AU/3


Question 2

Requirement (a) - 40 marks

Prepare a statement of profit and loss for each year in the contribution format using variable costing.
The unit product cost under the variable costing method would be computed as follows:

Direct materials £8
Direct labour 14
Variable manufacturing
overhead 2
Unit product cost £24


Lighting Company
Statement of profit and loss (contribution format)
For the year ended on 31 December

Year 1 Year 2
Sales £2,000,000 £2,500,000
Less variable expenses:
Variable cost of goods sold (@ £24) 960,000 1,200,000
Variable selling and administrative expenses (@ £4) 160,000 200,000

Total variable expenses 1,120,000 1,400,000
Contribution margin 880,000 1,100,000
Less fixed expenses:
Fixed manufacturing overhead 540,000 540,000
Fixed selling and administrative expenses 260,000 260,000
Total fixed expenses 800,000 800,000
Net profit £80,000 £300,000


Requirement (b) - 20 marks

Reconcile the absorption costing and the variable costing profit figures for each year.

Year 1 Year 2
Variable costing net profit £80,000 £300,000
Add: Fixed manufacturing overhead
deferred in inventory under absorption
costing (5,000 units ´ £12 per unit) £60,000 -
Deduct: Fixed manufacturing overhead
released from inventory under
absorption costing (5,000 units ´
£12 per unit) - £60,000
Absorption costing net profit £140,000 £240,000
[TOTAL 60 MARKS]