1pmr Trial Exam Papers

Question 1 Cost-volume-profit analysis (CVP analysis) examines the interrelationships between costs, revenues, selling prices, revenues, production volume and profits. This analysis deals with how profits and costs change with a change in volume. By studying the relationships of costs, sales, and net income, management is better able to cope with many planning and strategic making decisions to increase the profit of the company which is Butik Menawan. By using the CVP analysis the company can determine the sales quantity needed to break even, as well as the sales quantity required to earn a desired profit or profit margin. This analysis can also tell us the profit that can be expected on a given sales volume planned. By doing this analysis the company will also know how would changes in selling price, variable costs, fixed costs, and output affect profits. This analysis also shows how a change in the mix of products sold would affect the break-even and target volume and profit potential. CVP analysis can assist in life-cycle costing by helping to determine whether a product is likely to achieve its desired profitability, the most cost-effective manufacturing process, the best marketing and distribution channels, the best compensation plan. For example, whether to offer discounts Therefore, CVP analysis is very useful to the management in planning and making strategic decision in order to increase the company’s profit when the new collection for woman’s apparel is introduce.

Question 2 (a) Production Cost per Unit Marginal Costing = Direct Material + Direct Labour + Variable Manufacturing Overhead Cost = RM 18 + RM 22 + RM 5 = RM 45 Absorption Costing = Direct Material + Direct Labour + Variable Manufacturing Overhead Cost + Fixed Manufacturing Overhead = RM 18 + RM 22 + RM 5 + RM 15 = RM60 (b) (i)Contribution Margin using Marginal Costing Format Marginal Costing RM Sales ($100 ×4000units) Less: Marginal Expenses Beginning Inventory (+) Cost of goods Manufactured ($45× 4500 units) Cost of goods for Sale (-) Ending inventory Contribution Margin

0 202500 202500 500

RM 400000

202000 198000

(ii) Gross Profit using Absorption Costing Format Absorption Costing RM Sales ($100 ×4000units) Less: Cost of Goods Sold Beginning Inventory Product Cost ($60× 4500 units) Total Production Cost (-) Ending inventory Gross Profit

0 270000 270000 500

RM 400000

269500 130500

(c) (i)Period Cost Marginal Costing = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost = (RM5 × RM4000) + RM67500 + RM3000 = RM20000 + RM67500 + RM3000 = RM90500 Absorption Costing = Variable selling and administrative cost + Fixed selling and administrative cost = RM20000 + RM3000 = RM23000 (ii) Net income Marginal Costing RM Sales ($100 ×4000units) Less: Marginal Expenses Beginning Inventory (+) Cost of goods Manufactured ($45× 4500 units) Cost of goods for Sale (-) Ending inventory Contribution Margin Less: Period Cost Variable selling and administrative cost (RM5 × RM4000) Fixed manufacturing overhead Fixed selling and administrative cost

0 202500 202500 500

RM 400000

202000 198000

RM20000 RM67500 RM3000

90500 198000

Absorption Costing RM Sales ($100 ×4000units) Less: Cost of Goods Sold Beginning Inventory Product Cost ($60× 4500 units) Total Production Cost (-) Ending inventory Gross Profit Less: Variable selling and administrative cost Fixed selling and administrative cost Net Profit

0 270000 270000 500 RM20000 RM3000

RM 400000

269500 130500 23000 107500

(d) The marginal costing method reports a higher net income. In marginal costing, however, the actual fixed overhead incurred is wholly charged against contribution and hence, there will be some difference in net profits. In absorption costing, fixed overheads can never be absorbed exactly because of difficulty in forecasting costs and volume of output.

(e) Marginal costing method is not suitable to be used by manufacturer for external financial reporting and tax purpose because in marginal costing, the costs are separated into fixed and variable and therefore is difficult because it sometimes gives misleading results. Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from inventories affect profit and therefore true and fair view of financial affairs of an organization may not be clearly transparent. In order to know the net profit, we should not be satisfied with contribution and hence, fixed overhead is also a valuable item. A system which ignores fixed costs is less effective since a major portion of fixed cost is not taken care of under marginal costing. In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the assumptions underlying the theory of marginal costing sometimes becomes unrealistic. For long term profit planning, absorption costing is preferable.

Question 3 (a) Firms use a predetermined overhead rate to allocate the overhead to a job or a product because the calculation of overhead rates based on the actual overheads is not feasible because it will delay the calculation of product costs until the end of the accounting period. However, information on product costs is required quickly for monthly profit calculations and inventory valuations or as a basis for setting the selling prices. Therefore, firms use a predetermined overhead rate to establish a budgeted overhead rate on annual estimated overhead expenditure and activity. (b) (i) Predetermined = Budgeted Total Factory Overhead Overhead Rate Budgeted Activity (OAR)

Mixing Department Predetermined = Budgeted Manufacturing Overhead Cost Overhead Rate Budgeted Machine Hour (OAR) = RM301000 35000 = RM8.6 per machine hour

Decorating Department Predetermined = Budgeted Manufacturing Overhead Cost Overhead Rate Budgeted Direct Labor Hour (OAR) = RM301000 45000 = RM6.7 per direct labor hour

(ii)

(c)

(d) Yes, job order costing is suitable to be applied for cake bakery business because joborder costing is a cost system that is used to accumulate costs by jobs. These jobs could also be called batches, as each job is generally a “batch” of similar products. Each batch should be individualized in some way to make it differentiated from other batches for it to be a separate job. Labor and materials are entered on a job ticket. Overhead is usually added to the amount the customer will be charged for labor and materials. In a cake bakery business there is a lot of work that is broken into jobs which requires the Job-Order Costing Process which is: A production order is issued from the sales order. Materials and labor are ordered and tracked for the set of products. Manufacturing overhead is allocated to the job using a predetermined rate. Actual manufacturing overhead will not affect the work-in-process account, instead it is charged to a control account. 4) Direct labor and materials are charged by the accountant to the work-in-process accounts using the actual amounts incurred. 1) 2) 3)

These amounts are all tracked using a job-costing sheet, which will most likely be in a computerized format and a subsidiary ledger is kept for each job. 6) Abnormal spoilage is considered a period cost and is reclassified from the work-in-process account into a separate account so it can be addressed by management. 5)

Job Order:

Cost to Make One Unit

=

Cost of the Job No. of Units in the Job