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University of Dundee INTERMEDIATE MANAGEMENT ACCOUNTING

MODULE 2MA – BU22002

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INTERMEDIATE MANAGEMENT ACCOUNTING 

MODULE 2MA – BU22002 

JULY 2021 

TWO HOURS 

ANSWER BOTH QUESTIONS IN SECTION A, 

ONE QUESTION IN SECTION B and

ONE QUESTION IN SECTION C  

The use of approved calculators (CASIO FX83, FX85 or FX115) is permitted in this examination 

Dictionaries are not permitted in this examination     

SECTION A 

ANSWER BOTH QUESTIONS IN THIS SECTION  

1.   Emerald Private Clinic (Emerald) is a well-known hospital in Greenland.  They provide a range of orthopaedic surgeries such as hip-replacement and knee-replacement operations.  The hospital accountant is considering the introduction of Activity Based Costing (ABC), a technique which he had heard about during his chartered accountancy training.  Emerald currently adopts a traditional approach to costing operations, which allocates overheads based on the patient’s average length of stay in the hospital.

Total hospital overheads for the year are budgeted at £4,801,226 and the total budgeted average length of stay for all patients for the year is 23,375 days.

To facilitate the introduction of activity-based costing, the accountant, has grouped all of the overheads into six categories of expenses and has established the cause or driver of the expense as shown in the table below:

Expense Category

Cause of Expense

X-Ray department costs

Number of x-rays taken

Hospital consultant costs

Number of meetings with hospital consultant

Surgery costs

Number of hours spent in operating theatre

Physiotherapy costs

Number of physiotherapy sessions

Occupational therapy costs

Number of occupational therapy sessions

Other hospital costs

Average length of stay in the hospital (in days) 

Budgeted data relating to the expense categories has also been compiled by the accountant and is as follows: 

Total X-Rays taken

6,312

Total physiotherapy sessions

15,233

Total occupational therapy sessions

15,013

Total hours in operating theatre

9,164

Total meetings with Hospital Consultants

8,324  

Expense Category 

X-Ray department costs

£1,008,320

Hospital consultant costs

£960,267

Surgery costs

£1,104,430

Physiotherapy costs

£624,143

Occupational therapy costs

£528,106

Other hospital costs

£575,960  

Information relating to two operations conducted during the year is given below:  

Knee Replacement Operation

Hip Replacement Operation

Direct material costs

£425

£960

Average length of stay

3.5 days

4.2 days

Number of x-rays

2

5

Meetings with hospital consultant

2 meetings

4 meetings

Physiotherapy

4 sessions

5 sessions

Occupational therapy

3 sessions

4 sessions

Theatre time

1.25 hours

2 hours 

Required:

(a)  Calculate the total cost of each of the two surgeries noted above using: 

(i) The costing approach currently employed by Emerald Private Clinic.    

(4)

(ii) Activity based costing. 

(18)

(b)  Comment on your answers in (a) (i) and (ii) above. 

(5) 

(c)  Discuss some of the challenges which may be associated with the adoption of activity-based costing in Emerald Private Clinic.

(8)

(35) 

  

2.  Parkhead Ltd uses the following standards in its budget for the direct materials inputs to produce 100 kg of a speciality chicken and mushroom pie:      

£

25 kg of onions at £2.00 per kg        

50

60 kg of mushrooms at £ 3.00 per kg        

180

40 kg of chicken at £ 4.00 per kg     

160 

125 kg                 

390 

Note that 125 kg of input quantities are required to produce 100 kg of the chicken and mushroom pie. No stocks of direct materials are kept. Purchases are made as needed, so all price variances are related to direct materials used.  

The actual direct materials inputs used to produce 33,000 kg of Parkhead Ltd’s chicken and mushroom pie for the month of November were:   

8,800 kg of onions at £ 1.70 per kg     £14,960 

19,200 kg of mushrooms at £3.00 per kg  `    £57,600 

12,000 kg of chicken at £4.00 per kg      £48,000     

40,000 kg                  £120,560 

Parkhead Ltd’s manager is concerned about a sudden drop in sales during the last month.  

Required:  

(a)   Calculate the total direct materials price and usage variances for November.   

(10) 

(b)   Calculate the total direct materials yield and mix variances for November.  

(12) 

(c)   Comment on your results in (a) and (b) and discuss how might the management of Parkhead Ltd use the information about the direct materials yield and mix variances in their decision making?

(8) 

(d)   Briefly discuss two approaches used to determine when a variance should be investigated.

(5)      

(35)          

SECTION B 

ANSWER ONE QUESTION IN THIS SECTION   

3.   “The success of customer profitability analysis depends on the information reaching those who make and influence decisions.”   

(ICAEW,2002)

Required: 

Explain the underlying reasons behind companies undertaking customer profitability analysis and examine some of the barriers to its implementation.          

(15)  

4.  (a)   “Joint cost allocations are arbitrary; there is no rational argument for allocating joint costs except for complying with financial or tax reporting requirements.”

(Wouters et al., 2012) 

Required: 

Critically discuss the above statement.    

(8)   

(b)   Explain the difference between the physical measures method and the net realisable value method of allocating joint product costs. Discuss why some management accountants may express a preference for the net-realisable method of joint cost allocation over the physical measures method.   

(7)

(15)  

(continued on next page)

  

SECTION C 

ANSWER ONE QUESTION IN THIS SECTION  

5.   “In virtually all other situations, it is desirable to set highly achievable profit budget targets while allowing the managers few excuses for not achieving the targets but providing them significant additional rewards for exceeding the targets.”    

(Merchant, 1990) 

Required: 

With reference to the academic literature discuss the benefits of setting achievable profit budget targets.         

(15)   

6.  (a) Discuss four limitations associated with breakeven analysis   

(8) 

(b)  The graph, associated with this question shows useful information on two products (product A and product B) as marked.  

After identifying the name given to the graph shown below, explain the usefulness and the meaning of the information conveyed by it.  In particular:   

-  Explain the meaning and significance of Point X, Point Y and Point Z. 

-  Explain which product has the highest contribution margin and which has the lowest.    

-  Comment on the usefulness of this analysis.

(7)  

(15)

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