CIMA - C1 Fundamentals of Management Accounting
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380 Answer Bank
Option A
is incorrect because it is based on the opening inventory rate of $5 per unit – this is certainly not
the latest batch received.
Option B
is a FIFO calculation based on the receipts on 4 and 6 June.
Option D
is incorrect because it values all the issues at the latest price paid, $6 per unit. However there
were only 50 units in this batch. The price for the remaining 20 units issued is the $5.50 per unit paid for
the next latest batch received.
24 C
$
60
units received on day 3 of week 3 @ $10.00
600.00
15
units received in week 2 @ $8.00
120.00
75
720.00
25 Cost in $
669
Value of units held on day 4:
$
Wk 1
80
×
$8 =
640
Wk 2
120
×
$9 =
1,080
Wk 3
60
×
$10 =
600
260
2,320
∴
Issues are priced at $2,320/260 = $8.92
∴
Total cost is $8.92
×
75 = $669
26 C
Product K Product L Product M
Contribution per unit $57 $83 $79
Labour hours per unit 3 4 3
Contribution per labour hour $19 $20.75 $26.33
Ranking 3 2 1
Therefore M is the most profitable and K is the least profitable.
If you selected
option A
you reversed the ranking.
Option B
ranks the products according to the
contribution per unit, but this takes no account of the
limiting factor
. If you selected
option D
you ranked
the products according to their profit per unit, but this takes no account of the
limiting factor
and is
distorted by the fixed costs
.
27 V1 = 1
st
V2 = 3
rd
V3 = 2
nd
V1
V2
V3
$
$
$
Selling price per unit
30
36
34.00
Variable costs per unit
14
22
25.40
Contribution per unit
16
14
8.60
Labour cost per unit
$4
$8
$3.60
Contribution per $ of labour cost
$4
$1.75
$2.39
Rank order of production
1
3
2
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Answer Bank 381
28 D The breakeven point cannot be calculated in terms of units because we do not know the unit selling price.
Option C
gives the breakeven point in terms of sales value:
0.2
$80,000
= $400,000
To convert this to a number of units we would need to divide by the selling price per unit.
29 (a) B The distance H is the total cost at zero activity, ie the fixed cost.
Option A
, contribution, is the
distance between the sales line and the variable cost line, which are the two lines that pass through
the origin. Sales value (
option C
) is represented by the steepest of the two lines passing through the
origin. Variable cost (
option D
) is represented by the less steep of the two lines passing through the
origin.
(b) A The chart shows the variable cost line and the contribution can be read directly as the distance
between this and the sales value line. Therefore this is a contribution breakeven chart.
A conventional breakeven chart (
option B
) shows the fixed cost line instead of the variable cost line.
A profit volume chart (
option C
) plots a single line to indicate the profit at any level of activity.
Option D
is not a generally recognised description of a chart used for breakeven analysis.
30 The profit/volume ratio for product V is
50
%
The profit/volume ratio (P/V ratio) is another term used to describe the contribution/sales ratio (C/S ratio)
P/V ratio =
unit per price Selling
unitperonContributi
=
$40
2)
_
4
_
6
_
8
_
$(40
× 100% = 50%
31 (a) The contribution per unit of product FF is $5.60.
Workings
Sales are 60,000 units at the normal level of activity. Variable costs at 60,000 units of production/sales are
as follows.
$
$ per unit
Production overhead
30,000
0.50
Sales costs (5% of $600,000)
30,000
0.50
Distribution costs
15,000
0.25
Administration overhead
9,000
0.15
84,000
1.40
Direct costs
180,000
3.00
Total variable costs
264,000
4.40
Sales revenue
600,000
10.00
Contribution
336,000
5.60
(b) The fixed cost per period is $252,000.
Fixed costs
$
Production overhead
126,000
Sales costs
50,000
Distribution costs
45,000
Administration overhead
31,000
252,000
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382 Answer Bank
(c) The breakeven volume of sales per period is 45,000 units.
Workings
Breakeven point =
unit per oncontributi
costsfixed
=
$5.60
$252,000
= 45,000 units
32 (a) Grade I $72.00
Grade II $345.60
Grade III $33.60
Grade IV $14.40
Workings
Overtime premium Overtime hours
Grade (50% of basic rate) payable Overtime premium
$/hour $
(a) (b)
((a)
×
(b))
I 6.00
2 hrs
×
6 = 12
72.00
II 4.80
4 hrs
×
18 = 72
345.60
III 4.20
2 hrs
×
4 = 8
33.60
IV 2.40
6 hrs
×
1 = 6
14.40
(b) The number of standard hours produced is 1,560.
Workings
Component Standard hours
A 444
×
60
30
hours 222
B 900
×
60
54
hours 810
C 480
×
60
66
hours
528
1,560
(c) The amount of bonus payable in total to all employees is $2,630.88.
Workings
Actual time taken
Grade
Hours
I
6
× 40 hrs
240
II
18
× 42 hrs
756
III
4
× 40 hrs
160
IV
1
× 44 hrs
44
1,200
∴ Time saved = (1,560 – 1,200) hrs = 360 hrs
Time saved as a percentage of hours worked =
1,200
360
× 100% = 30%
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Answer Bank 383
Calculation of bonus payable
Bonus
Grade
Bonus hours
75% basic rate
payable
$
$
I
240
× 30%
= 72.0
× 9.00
648.00
II
756
× 30%
= 226.8
× 7.20
1,632.96
III
160
× 30%
= 48.0
× 6.30
302.40
IV
44
× 30%
= 13.2
× 3.60
47.52
2,630.88
33 (a) Targets and measures of performance
9
(b) Information for budgeting
9
(c) Simplification of inventory control systems
9
(d) Actual future costs
Standard costing provides targets for achievement, and yardsticks against which actual performance can be
monitored (
item (a)). It also provides the unit cost information for evaluating the volume figures contained
in a budget (
item (b)). Inventory control systems are simplified with standard costing. Once the variances
have been eliminated, all inventory units are evaluated at standard price (
item (c)).
Item (d) is incorrect because standard costs are an estimate of what will happen in the future, and a unit
cost target that the organisation is aiming to achieve.
34 D Required liquid input = 1 litre
×
80
100
= 1.25 litres
If you selected
option A you deducted 20 per cent from the required output, instead of adding extra to
allow for losses, whereas
option B makes no allowance for losses.
Option C simply adds an extra 20 per cent to the completed output, but the wastage is 20 per cent of the
liquid input, not 20 per cent of output.
35 B
$ per unit
$ per unit
Material P 7 kg
× $4
28
Material S 3 kg
× $9
27
55
Direct labour 5hr
× $7
35
Standard prime cost of product J
90
Option A is the standard material cost and option C is the standard total production cost, including
overheads which are not part of prime cost.
Option D includes the absorption of general overhead; always read the question carefully!
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384 Answer Bank
36
STANDARD COST CARD
Toy car wheels Part number 5917B - 100 wheels Date:
Quantity Rate/price Total
$
Direct materials
Tyres 100 10c each 10.00
Steel strip 50 $10.40 per 100 5.20
Wire 1000 2c each 20.00
35.20
Direct labour hours $
Bending 4 0.8 3.20
Cutting 6 0.5 3.00
Assembly 5 1.2 6.00
12.20
STANDARD COST 47.40
37 A
$
5,800 hours should have cost (
× $9.20)
53,360
but did cost
55,100
Labour rate variance
1,740
(A)
1,600 units should take (
× 3.5 hours)
5,600
hrs
but did take
5,800
hrs
Variance in hours
200
hrs (A)
× standard rate per hour
× $9.20
Labour efficiency variance
$1,840
(A)
If you selected option B you valued the efficiency variance in hours at the actual rate per hour instead of the
standard rate per hour.
If you selected option C or option D you calculated the money values of the variances correctly but
misinterpreted their direction.
38
Would help Would not help
to explain to explain
variance variance
(a) The standard price per unit of direct material was
unrealistically high
9
(b) Output quantity was greater than budgeted and it was
possible to obtain bulk purchase discounts
9
(c) The material purchased was of a higher quality than
standard
9
Statement (a) is consistent with a favourable material price variance. If the standard is high then actual prices are
likely to be below the standard.
Statement (b) is consistent with a favourable material price variance. Bulk purchase discounts would not have been
allowed at the same level in the standard, because purchases were greater than expected.
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Answer Bank 385
Statement (c) is not consistent with a favourable material price variance. Higher quality material is likely to cost
more than standard, resulting in an adverse material price variance.
39 A
Variable overhead total variance
$
Budgeted 5,000 units should cost (
× $4)
20,000
But did cost
17,500
Variable overhead total variance
2,500
(F)
The variance is favourable because the actual expenditure was less than the amount budgeted.
If you selected an incorrect option you misinterpreted the direction of the variance or calculated one
element of it only.
40 C Standard price per kg of material = $576,000/48,000 = $12
Standard material usage per unit = 48,000 kg/6,000 = 8 kg per unit
6,300 units should have used (
× 8 kg)
50,400
kg
but did use
51,150
kg
Usage variance in kg
750
kg (A)
× standard price per kg
× $12
Material usage variance
$9,000
(A)
41 B
$
51,150 kg of material should have cost (
× $12 (from question 40))
613,800
but did cost
562,650
Material price variance
51,150
(F)
42 C
$
18,780 units should sell for (
× $27.10)
508,938
but did sell for
529,596
Sales price variance
20,658
(F)
43 A
$
11,000 units should have sold for (
× $8)
88,000
but did sell for
99,000
Selling price variance
11,000
(F)
Budgeted sales volume ($100,000
÷ $8)
12,500
units
Actual sales volume
11,000
units
Sales volume variance in units
1,500
units (A)
× standard contribution per unit
× $2.50
Sales volume contribution variance
$3,750
(A)
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386 Answer Bank
44 D
Actual sales
850
units
Budgeted sales
800
units
Variance in units
50
units (F)
× standard contribution per unit ($(9 – 4))
× $5
Sales volume contribution variance
$250
(F)
$
Revenue for 850 units should have been (
× $9)
7,650
but was
7,480
Selling price variance
170
(A)
45 B Since J Co uses a standard marginal costing system, the sales volume variance will be valued at the
standard contribution of $4.40 per unit ($10.00 – $5.60).
Budgeted sales volume
5,000
units
Actual sales volume
4,500
units
Sales volume variance in units
500
units (A)
× standard contribution per unit
× $4.40
Sales volume contribution variance in $
$2,200
(A)
46 C
Situation (i) would result in an adverse sales volume variance because volumes were reduced.
Situation (ii) would result in a favourable sales volume variance, evaluated at the standard contribution
achievable on the extra sales volume above standard.
A higher contribution per unit (
situation (iii)) would not affect the sales volume variance because the
variance is evaluated at standard
contribution per unit.
Situation (iv) would lead to an increased sales volume and hence a favourable sales volume variance.
47 C Material usage budget = 5,000 units produced
× 2 kg per unit
= 10,000 kg
Option D is the material purchases budget. If you selected this you need to read the question more
carefully. If you selected
option B you adjusted incorrectly for the inventory change in attempting to
calculate the purchases budget, but the material usage budget was required. If you selected
option A you
seem to have taken 20 per cent of the usage budget as the correct answer: the change in material inventory
will have no effect at all on the usage budget for the year.
48 (a) Production volume from the production budget
9
(b) Budgeted change in materials inventory
(c) Standard material usage per unit
9
Since there are no production resource limitations, the production budget would be prepared before the material
usage budget (a). The standard material usage per unit (c) would then indicate the total material usage required to
produce the budgeted production volume.
It would not be necessary to know the budgeted change in materials inventory (b) since this would affect the
material purchases, rather than the material usage.
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Answer Bank 387
49 B
Received in April
$
March sales
$60,000
× 80% × 99%*
47,520
February sales
$40,000
× 10%
4,000
January sales
$35,000
× 5%
1,750
53,270
*This reduction allows for the 1% settlement discount.
If you selected
option A you misinterpreted 'month after sale' to be the month the sale was made. The
invoices are issued on the last day of each month, therefore cash receipts in respect of each month's sales
will begin in the following month.
Option C makes no allowance for the settlement discount and option D includes the receipt of bad debts;
those amounts will never be received cash.
50
Order
Material usage budget 4
Sales budget 1
Material purchase budget 6
Finished goods inventory budget 2
Production budget 3
Material inventory budget 5
51 B Sales = opening inventory + production – closing inventory
∴ Production = sales – opening inventory + closing inventory
52 C
Units
$
High activity
14,000
10,500
Low activity
8,000
7,200
Increase
6,000
3,300
Variable cost per unit = $3,300/6,000 = $0.55
Fixed cost, substituting in high activity = $10,500 – (14,000
× 0.55)
= $2,800
Budget cost allowance to distribute 12,000 units:
$
Variable cost (12,000
× $0.55)
6,600
Fixed cost
2,800
9,400
If you selected
option A you did not include an allowance for fixed cost, and if you selected option B or D
you calculated the answer on a pro rata basis from the data given. This does not take account of the fixed
element of the distribution cost.
53 C
A flexible budget identifies fixed costs separately from variable costs. The allowance for variable costs can
be flexed to derive a realistic target in the light of the actual activity level achieved.
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388 Answer Bank
54 True False
(a) Budgetary control procedures are useful only to maintain
control over an organisation's expenditure
9
(b) A prerequisite of flexible budgeting is a knowledge of cost
behaviour patterns
9
(c) Fixed budgets are not useful for control purposes
9
Comments
(a) Budgetary control procedures can also be useful to maintain control over an organisation's revenue.
(b) A knowledge of cost behaviour patterns is necessary so that the variable cost allowance can be flexed in line
with changes in activity.
(c) Fixed budgets may be useful for control purposes when:
(i) Variable costs are negligible or non-existent
(ii) Activity levels are not subject to change
55 C Learn this definition.
56 B
Change
Production units 2,000 3,000 +1,000
Production cost $17,760 $20,640 $2,880
Variable cost per unit =
000,1
880,2$
= $2.88; Fixed costs = $17,760 – (2,000
× $2.88) = $12,000
Therefore, budget cost allowance for activity level of 4,000 units = $12,000 + (4,000
× $2.88) = $23,520
57 A The labour rate variance is recorded in the wages control account. Since the actual rate paid was higher
than the standard rate, the labour rate variance is adverse. Therefore the variance will be debited in the
labour rate variance account.
Options B and D are incorrect because it is the labour efficiency variance that is recorded in the work in
progress account, not the labour rate variance.
If you selected
option C you identified the correct accounts, but you reversed the debit and credit.
58 D Direct material cost variance = material price variance + material usage variance
The adverse material usage variance could be larger than the favourable material price variance. The total of
the two variances would therefore represent a net result of an adverse total direct material cost variance.
The situation in
option A would sometimes arise, but not always, because of the possibility of the situation
described in
option D.
Option B could sometimes be correct, depending on the magnitude of each of the variances. However it will
not always be correct as stated in the wording.
Option C is incorrect because the sum of the two favourable variances would always be a larger favourable
variance.
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Answer Bank 389
59
Consistent Not consistent
with the account with the account
entries entries
(a) The material used in production was more than the
standard allowed for the number of units produced
9
(b) All of the material issued to production was
completely processed during the period
9
(c) The number of labour hours worked was greater
than the standard allowed for the number of units
produced
9
Statement (a) is correct because the resulting adverse usage variance is a debit in the variance account.
Statement (b) is correct because there is no opening or closing balance on the work in progress account.
Statement (c) is incorrect because the labour efficiency variance will be transferred as a credit in the variance
account. Therefore it is a favourable variance and the number of labour hours worked was actually lower than the
standard allowed.
60 DR WORK IN PROGRESS CONTROL ACCOUNT
CR DIRECT LABOUR EFFICIENCY VARIANCE ACCOUNT
61 C The
direct costs of production, of which direct wages are a part, are debited to the work in progress
account
. The credit entry is made in the wages control account, where the wages cost has been 'collected',
as it is paid or accrued, prior to
its analysis between direct and indirect wages.
If you selected option A you identified the correct accounts but your
entries were reversed.
Option B represents the entries for direct wages paid, and option D is the (incorrect) reversal of these
entries.
62 C Overhead is absorbed into the cost of production for the period by debiting the work in progress account
with the appropriate amount of overhead based on the predetermined overhead absorption rate. The credit
entry is made in the overhead control account, where the overhead has been 'collected' in the debit side, as
it is paid or accrued.
If you selected
option D you identified the correct accounts but your entries were reversed.
Option A is incorrect because the cost of production must first be 'collected' in the work in progress
account
before the final transfer of the cost of completed production to the finished goods account.
Option B represents the entries, usually made at the end of a period, to account for any production
overhead under absorbed.
63 D There are two possible transfers from the raw materials control account:
• the cost of direct materials is transferred to the work in progress account
• the cost of indirect materials is transferred to the production overhead control account
The transfer of the cost of indirect materials to the production overhead control account is already shown as
$6,000. Therefore the $71,000 must represent the issue of direct materials to work in progress.
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