LCCI International Qualifications

Management Accounting
Level 3

Model Answers
Series 2 2009 (3024M) Malaysia

For further Tel. +44 (0) 8707 202909

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Management Accounting Level 3
Series 2 2009 (Malaysia)

How to use this booklet

Model Answers have been developed by EDI to offer additional information and guidance to Centres,
teachers and candidates as they prepare for LCCI International Qualifications. The contents of this
booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper

(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

EDI provides Model Answers to help candidates gain a general understanding of the standard
required. The general standard of model answers is one that would achieve a Distinction grade. EDI
accepts that candidates may offer other answers that could be equally valid.

© Education Development International plc 2009

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
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Page 1 of 14
QUESTION 1

A company manufactures and sells four products. Details of the four products are as follows:

Product A Product B Product C Product D

RM per unit RM per unit RM per unit RM per unit

Selling price 112 100 69 195

Deduct costs
Direct materials (at RM16 per kg) 16 24 32 40
Direct labour (at RM12 per hour) 36 24 12 60
Variable overheads 27 18 9 45
Fixed overheads 18 12 6 30
97 78 59 175

Profit 15 22 10 20

Production and sales per period 4,500 units 5,750 units 6,450 units 2,460 units

Fixed overheads are absorbed on the basis of direct labour hours.

The availability of direct labour and direct materials will be limited to 31,000 hours and 33,000 kg
respectively for the coming period.

REQUIRED

For the coming period:

(a) Determine which of the resources (direct labour or direct materials) will be the limiting factor,
showing clearly your workings.
(5 marks)

(b) Prepare a production schedule that will maximise profit and calculate the amount of the profit.
(11 marks)

(c) Suggest two courses of action that the company may take in order to address the limiting factor
problem identified in part (a) above.
(4 marks)

(Total 20 marks)

3024M/2/09/MA Page 2 of 14
MODEL ANSWER TO QUESTION 1

(a) The limiting factor is determined by comparing the number of direct labour hours and the amount
of direct materials required with the availability of these resources for production and sales.

Product A Product B Product C Product D Total

Labour requirement
Production/sales units 4,500 5,750 6,450 2,460
x hours per unit (W1) x 3 x 2 x 1 x 5
13,500 11,500 6,450 12,300 43,750 hours

Materials requirement
Production/sales units 4,500 5,750 6,450 2,460
x kg per unit (W2) x 1 x 1.5 x 2 x 2.5
4,500 8,625 12,900 6,150 32,175 kg

Direct labour is the limiting factor since 43,750 hours are required but only 31,000 hours are currently
available. The materials requirement of 32,175 kg is less than the available amount of 33,000 kg.

(b)
Product A Product B Product C Product D
RM per unit RM per unit RM per unit RM per unit

Selling price 112 100 69 195

Deduct Variable costs
Direct materials 16 24 32 40
Direct labour 36 24 12 60
Variable overheads 27 18 9 45
79 66 53 145

Contribution per unit RM33 RM34 RM16 RM50

Direct labour hours per unit 3 2 1 5
Contribution per labour hour RM11 RM17 RM16 RM10
rd st nd th
Ranking 3 1 2 4

Optimum product mix and the resulting net profit

Units Labour hours Total contribution

RM
Product B 5,750 x 2 hours = 11,500 x RM17 = 195,500
Product C 6,450 x 1 hour = 6,450 x RM16 = 103,200
Product A (13,050 ÷ 3) 4,350 x 3 hours = 13,050 x RM11 = 143,550
31,000 442,250

Less Fixed costs – 262,500 [W3] 2

Net profit 179,750

3024M/2/09/MA Page 3 of 14
MODEL ANSWER TO QUESTION 1 CONTINUED

Workings A B C D
W1 – Direct labour hours per unit

Direct labour cost per unit RM36 = 3 RM24 = 2 RM12 = 1 RM60 = 5

Direct labour rate per hour RM12 RM12 RM12 RM12

W2 – Direct material (kg per unit)

Direct material cost per unit RM16 = 1 RM24 = 1.5 RM32 = 2 RM40 = 2.5
Direct material cost per kg RM16 RM16 RM16 RM16

W3 – Total fixed costs = [ (4,500xRM18) + (5,750xRM12) + (6,450xRM6) + (2,460 × RM30) ]

= RM 262,500 [2]

(c) As direct labour is the limiting factor, the company may attempt to address the shortage of direct
labour hours by:

ƒ arranging overtime work

sub-contracting unmet production to outside supplier.

3024M/2/09/MA Page 4 of 14
QUESTION 2

The balance sheet of a retail company at the end of Year 3 is presented as follows:

RM000 RM000
Fixed assets (at cost) 1,250
Less: Accumulated depreciation 385 865

Current assets:
Stock 175
Trade debtors 110
Cash at bank 40 325
1,190
Less: Current liabilities
Trade creditors 140
1,050
Capital and reserves
Share capital 600
Reserves 200
800
Long-term liability
10% Loan stock 250
1,050

The following is a summary of the transactions expected by the company during Year 4:

(1) Sales (all on credit) are estimated at RM 1,300,000 and the company expects to earn a constant
gross profit of 45% on sales. It is expected that 15% of the year’s sales will remain unpaid by
customers at the end of the year.

(2) All purchases will be made on credit. The company expects to owe its suppliers RM 165,000 at
the end of the year. The value of unsold stock at the end of the year is expected to be
RM 210,000 at cost price.

(3) Additional fixed assets costing RM 270,000 are expected to be purchased for cash. No fixed
assets are expected to be sold. It is company policy to charge depreciation at the rate of 12½%
on the original cost of fixed assets (including those purchased during the year).

(4) The interest charges on the loan stock are to be paid at the end of the year.

(5) Operating expenses for the year (excluding depreciation charges) are estimated to be
RM 245,000. All operating expenses are expected to be paid as they are incurred.

(6) The company does not intend to declare or pay any dividends.

REQUIRED

(a) Prepare the following for the company:

(i) budgeted profit statement for Year 4 (6 marks)

(ii) budgeted balance sheet at the end of Year 4. (9 marks)

(b) Explain the meaning of the term principal budget factor in relation to the operating activities of a
manufacturing business.
(5 marks)

(Total 20 marks)

3024M/2/09/MA Page 5 of 14
MODEL ANSWER TO QUESTION 2

(a) (i)
Budgeted profit statement for Year 3

RM000 RM000
Sales 1,300
Less: Cost of sales:
Opening stock 175
Add Purchases 750
925
Less: Closing stock 210 715
Gross profit (0.45 x 1,300) 585

Less: Expenses
Depreciation [ 0.125 x (1,250 + 270) ] 190
Operating expenses 245
Loan interest (0.1 x 250) 25 460
Budgeted net profit 125

(ii)
Budgeted balance sheet at end of Year 3

RM000 RM000
Fixed assets (at cost) (1,250 + 270) 1,520
Less: Accumulated depreciation (385 + 190) 575 945

Current assets:
Stock 210
Trade debtors (0.15 x 1,300) 195 405
1,350
Less: Current liabilities:
Trade creditors 165
Bank overdraft* 10 [W1] 4 175
1,175

Capital and reserves

Share capital 600
Reserves (200 + 125) 325
925
Long-term liability
10% Loan stock 250
1,175

* W1 – Budgeted cash balance

RM000 RM000
Balance at start of Year 3 40
Add: Receipts from debtors (110 +1,300 – 195) 1,215
1,255
Less: Payments
Suppliers (140 + 750 – 165) 725
Purchase of fixed assets 270
Operating expenses 245
Loan interest (0.1 x 250) 25 1,265
Balance at end of Year 3 – bank overdraft 10 [W1] 4

3024M/2/09/MA Page 6 of 14
MODEL ANSWER TO QUESTION 2 CONTINUED

(b) Before the commencement of the preparation of budgets, it is essential that all the elements used
in formulating them are carefully examined to identify the existence of any limiting factors. If one
particular item is of major significance, it will be regarded as the principal budget factor. The
determination of the principal budget factor or limiting factor is important in the budgeting process
since this is the budget which must be prepared first, with all other budgets constructed around it.

It is quite common for the level of sales to be the principal budget factor and this would have to be
forecast before any other budget plans are put in place. Thus, the sales budget usually provides
the basis for the production budget and other budgets such as the raw materials purchase budget
and the cash budget. However, sales may not necessarily be the principal budget factor. For
instance, the restricted availability of a particular type of material, grade of labour and limited
plant capacity may each act as the principal budget factor.

3024M/2/09/MA Page 7 of 14
QUESTION 3

A company operates a standard costing system for the single product which it manufactures and sells.
The following data relate to the standards and budgets set for Period 6:

RM per unit
Selling price 210.00
Direct material (5 kg x RM16.50 per kg) 82.50
Direct labour (4 hours x RM15.00 per hour) 60.00
Fixed overheads 31.25

Budgeted production and sales 3,600 units

The actual results for Period 6 were as follows:

Production and sales 3,920 units

Sales revenue RM 788,750

Direct materials 21,940 kg costing RM 356,525

Direct labour 14,880 hours costing RM 234,360

Fixed overheads RM 104,300.

REQUIRED

(a) Calculate the following variances for Period 6:

(i) sales volume profit (3 marks)

(ii) direct material price (2 marks)

(iii) direct material usage (2 marks)

(iv) direct labour rate (2 marks)

(v) direct labour efficiency (2 marks)

(vi) fixed overhead expenditure (2 marks)

(vii) fixed overhead volume. (2 marks)

(b) Outline the usefulness of standard costing as a management accounting system for control.

(5 marks)

(Total 20 marks)

3024M/2/09/MA Page 8 of 14
MODEL ANSWER TO QUESTION 3

(a) (i) Selling volume profit variance:

(Standard profit* x Actual units) – (Standard profit x Budgeted units)

(RM36.25* x 3,920 units) – (RM36.25 x 3,600 units)
RM 142,100 – RM 130,500 = RM 11,600 Favourable

*Standard profit = RM210 – (RM82.50 + RM60.00 + RM31.25) = RM36.25

(ii) Direct material price variance:

(Standard price x Actual usage) – (Actual price x Actual usage)

(RM16.50 x 21,940 kg) – RM 356,525
RM 362,010 – RM 356,525 = RM 5,485 Favourable

(iii) Direct material usage variance:

(Standard price x Standard usage) – (Standard price x Actual usage)

[RM16.50 x (3,920 x 5 kg)] – (RM16.50 x 21,940 kg)
RM 323,400 – RM 362,010 = RM 38,610 Adverse

(iv) Direct labour rate variance:

(Standard rate x Actual hours) – (Actual rate x Actual hours)

(RM15.00 x 14,880 hours) – RM 234,360
RM 223,200 – RM 234,360 = RM 11,160 Adverse

(v) Direct labour efficiency variance:

(Standard rate x Standard hours) – (Standard rate x Actual hours)

[RM15.00 x (3,920 x 4 hours)] – (RM15.00 x 14,880 hours)
RM 235,200 – RM 223,200 = RM 12,000 Favourable

(vi) Fixed overhead expenditure variance:

Budgeted fixed overheads – Actual fixed overheads

(RM31.25 x 3,600 units) – RM 104,300
RM 112,500 – RM 104,300 = RM 8,200 Favourable

(vii) Fixed overhead volume variance:

(Standard rate x Actual units) – (Standard rate x Budgeted units)

(RM31.25 x 3,920 units) – (RM31.25 x 3,600 units)
RM 122,500 – RM 112,500 = RM 10,000 Favourable

(b) Standard costing, as a management accounting system for control, may be used to:

ƒ set, revise and monitor standards for different activities and their costs, thus encouraging the
reassessment of operational methods and usage of material resources which are likely to
result in cost reductions

ƒ establish the basis for setting realistic selling prices of products and services

ƒ highlight variances through ‘management by exception’, thereby directing attention towards

those items which are not proceeding according to plan

ƒ provide the framework for assessing performance and efficiency, thereby promoting greater
economy by making employees more ‘cost conscious’.

3024M/2/09/MA Page 9 of 14
QUESTION 4

A company manufacturing a single product is budgeting to sell 500,000 units of the product at RM9.60
per unit in the coming year. The product’s unit production costs as a percentage of its selling price are
as follows:

%
Direct materials 35
Direct labour 20
Production overheads 25

The following information is also available:

(1) Production and sales are expected to occur evenly throughout the year.

(2) Production is expected to take place with an average of 12 days from the start of manufacture to
the completion of product.

(3) Direct materials are expected to be stored for an average of 7 days before being used in
production.

(4) Work-in-progress is expected to be 100% complete in terms of material input and an average of
50% complete in terms of direct labour and production overheads.

(5) Finished products are expected to be in stock for an average of 10 days before their sale.

(6) The company plans to grant its customers an average credit period of 75 days while it expects to
take an average of 60 days to pay its suppliers of direct materials.

REQUIRED

(a) Calculate the company’s total working capital requirements for the coming year (to the nearest
RM 000).
(14 marks)

(b) Explain why the management of working capital is important for the successful operation of a
business.
(6 marks)

(Total 20 marks)

3024M/2/09/MA Page 10 of 14
MODEL ANSWER TO QUESTION 4

(a) Working capital requirements:

Workings:
RM000
Direct materials 35% x RM 4,800,000* 1,680
Direct labour 20% x RM 4,800,000 960
Production overheads 25% x RM 4,800,000 1,200
Total production costs 3,840

*Sales value = 500,000 x RM9.60 = RM4,800,000

RM000 RM000
Direct material (7 ÷ 365) days x RM 1,680,000 32

Work-in-progress
Direct material (12 ÷ 365) days x RM 1,680,000 x 100% 55
Direct labour (12 ÷ 365) days x RM 960,000 x 50% 16
Production overheads (12 ÷ 365) days x RM 1,200,000 x 50% 20 9

Finished goods (10 ÷ 365) days x RM 3,840,000 105

Trade debtors (75 ÷ 365) days x RM 4,800,000 986
1,214
Less: Trade creditors (60 ÷ 365) days x RM 1,680,000 – 276
Total working capital requirements for the year 938

(b) Working capital is the excess of current assets over current liabilities; it is the amount of additional
funds needed by a business organisation to meet the requirements of its operations. An investment
in plant and equipment often calls for additional working capital to pay for extra wages and other
expenses, stock of raw materials and supplies required for operations of the investment.

Working capital management, therefore, involves the management of stock, debtors, creditors and
cash resources with the aim of minimising the risk of insolvency and at the same time maximising the
return on assets. Efficient working capital management will ensure that a company has sufficient
cash to meet its day-to-day operational needs.

This may involve minimising the amount of cash tied up in stocks, collecting money owed by
debtors quickly, delaying payments to creditors – without putting future supplies in jeopardy – and
reducing the level of overdraft or increasing bank balances.

3024M/2/09/MA Page 11 of 14
QUESTION 5

Fidel Limited is considering an investment project that requires the purchase of new equipment.
Details of the investment project are as follows:

Estimated duration of project 3 years

Purchase cost of equipment RM 300,000

Estimated annual accounting profits/losses:

Year 1 RM 10,000 loss
Year 2 RM 125,000 profit
Year 3 RM 20,000 profit

Estimated disposal value of equipment RM 60,000.

The company’s depreciation policy is to write off the cost of equipment using the straight-line method.
It is assumed that net cash flows occur at the end of the years to which they relate and that the
company’s cost of capital is 15% per annum.

Discount factors: Year 10% 15% 20% 25%

1 0.909 0.870 0.833 0.800
2 0.826 0.756 0.694 0.640
3 0.751 0.658 0.579 0.512
2.486 2.284 2.106 1.952

REQUIRED

(a) Calculate, in relation to the investment project, the:

(i) net present value (7 marks)

(ii) internal rate of return. (3 marks)

Castro Limited has a maximum of RM 6,000,000 to undertake the following mutually exclusive
investment projects which all yield positive net present values:

Project Initial cost Present values of

(RM000) net cash inflows
(RM000)
A 2,000 2,300
B 3,500 3,780
C 2,000 2,440
D 2,400 2,700
E 1,500 1,800

Assume that investment projects are divisible (that is, it is possible to undertake only a part of each
investment project).

REQUIRED

(b) Prepare suitable calculations to determine which of the investment projects the company should
undertake in order to maximise net present values.
(10 marks)

(Total 20 marks)

3024M/2/09/MA Page 12 of 14
MODEL ANSWER TO QUESTION 5

(a) (i) NPV of project:

Workings

Annual depreciation = RM 300,000 – RM 60,000 = RM 80,000

3 years

Annual net cash flows of project:

Year 1 Year 2 Year 3

RM000 RM000 RM000
Accounting profit/loss (10) 125 20
Add depreciation 80 80 80
Net cash inflow 70 205 100

Discounting @ 15%
Year Cash flow Factor Present value
RM000 RM000
0 (300) 1.000 (300.00)
1 70 0.870 60.90
2 205 0.756 154.98
3 160 * 0.658 105.28
NPV = 21.16 = RM 21,160

* Includes residual value of RM 60,000

(ii) IRR of project:

Discounting @ 20%
Year Cash flow Factor Present value
RM000 RM000
0 (300) 1.000 (300.00)
1 70 0.833 58.31
2 205 0.694 142.27
3 160 0.579 92.64
NPV = (6.78)

IRR = 15% + {5% × [21.16 ÷ (21.16 + 6.78)]} = 18.8%

3024M/2/09/MA Page 13 of 14
QUESTION 5 CONTINUED

(b)
Using Profitability Index (PI), the investment projects can be ranked as follows:

Present value of Profitability

Project Initial cost net cash flows index Ranking

RM000 RM000 RM000

rd
A 2,000 2,300 2,300 = 1.15 3
2,000
th
B 3,500 3,780 3,780 = 1.08 5
3,500
st
C 2,000 2,440 2,440 = 1.22 1
2,000
th
D 2,400 2,700 2,700 = 1.125 4
2,400
nd
E 1,500 1,800 1,800 = 1.20 2
1,500

The RM 6,000,000 funds can be allocated based on the above rankings as follows:

Funds NPV
RM000 RM000

Total funds available 6,000

First, invest in Project C – 2,000 440.0 (2,440 – 2,000)
4,000
Next, invest in Project E – 1,500 300.0 (1,800 – 1,500)
2,500
Next, invest in Project A – 2,000 300.0 (2,300 – 2,000)
500
Partially invest in Project D – 500 62.5 [(500 ÷ 2,400) x(2,700 – 2,400)]
1,102.5

= RM 1,102,500

3024M/2/09/MA Page 14 of 14 © Education Development International plc

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