Paper 2 – Management Accounting Fundamentals (FMAF)

Post Exam Guide

November 2001 exam

Objective test questions are awarded 2 marks each. Explanations follow for answers to objective test questions involving
calculations.

Question 1.1

A standard cost is

A the planned unit cost of a product, component or service in a period.

B the budgeted cost ascribed to the level of activity achieved in a budget centre in a control period.
C the budgeted production cost ascribed to the level of activity in a budget period.
D the budgeted non-production cost for a product, component or service in a period.

The answer is A.

Question 1.2

The term “budget slack” refers to the

A extended lead time between the preparation of the functional budgets and the master budget.
B difference between the budgeted output and the breakeven output.
C additional capacity available which can be budgeted for.
D deliberate over-estimation of costs and under-estimation of revenues in a budget.

The answer is D.

The following information is required for sub-questions 1.3 and 1.4

RS Ltd is currently preparing the production budget for Product A and the material purchase budget for material X for the
forthcoming year. Each unit of Product A requires 5 kgs of material X.

The anticipated opening stock for Product A is 5,000 units and the company wishes to increase the closing stock by 30%
by the end of the year.

The anticipated opening stock for material X is 50,000 kgs and in order to avoid stock-outs the required closing stock has
been increased to 60,000 kgs.

The Sales Director has confirmed a sales requirement of 70,000 units of Product A.

Question 1.3

How many units of Product A will need to be produced?

A 68,500 units. B 71,500 units. C 76,500 units. D 80,000 units.

The answer is B.

Workings

Production budget Units

Required sales 70,000
Required closing stock 6,500
Less: Anticipated opening stock ( 5,000)
Production budget 71,500

Question 1.4

What will be the purchases budget for material X?

A 347,500 kgs. B 350,000 kgs. C 357,500 kgs. D 367,500 kgs.

The answer is D.

© The Chartered Institute of Management Accountants 2002 Page 1

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Workings

Material purchase budget kgs

Material usage 71,500 x 5 kgs 357,500
Required closing stock 60,000
Less: Anticipated opening stock (50,000)
Purchase budget 367,500

Question 1.5

S Ltd absorbs overheads on the basis of direct labour hours. Details of budgeted and actual figures for the latest period are as follows:

Budget Actual
Overheads £350,000 £400,000
Output 70,000 units 60,000 units
Labour hours 35,000 hours 30,000 hours

Which ONE of the following statements is correct?

A Overheads were £50,000 over-absorbed.

B Overheads were £50,000 under-absorbed.
C Overheads were £100,000 over-absorbed.
D Overheads were £100,000 under-absorbed.

The answer is D.

Workings

£350,000
OAR = = £10 per labour hour
35,000
35,000
Standard labour hours per unit = = 0∙5 hours per unit
70,000

£
Absorbed 60,000 x 0∙5 x £10 300,000
Incurred 400,000
Under-absorbed overhead 100,000

Question 1.6

PP Ltd has recorded the following distribution costs during the last three months:

Month Volume Total cost

units £
1 32,000 100,000
2 40,000 120,000
3 50,000 145,000

What will be the distribution costs (to the nearest £) in month 4 when the expected activity level is 42,500 units?

A £126,250. B £127,500. C £129,861. D £132,813.

The answer is A.

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Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Workings

High low method Units £

Highest 50,000 145,000
Lowest 32,000 100,000
18,000 45,000

£45,000
= £2.50 per unit variable cost
18,000

Substitute into highest £

Total cost 145,000
50,000 x 2∙50 (125,000) Variable cost
Fixed cost 20,000

42,500 x 2∙50 106,250 Variable cost

Fixed cost 20,000
Total cost 126,250

The following information is required for sub-questions 1.7 and 1.8

ZK Ltd has been asked to quote a price for a special job that must be completed within one week.

The job requires a total of 100 skilled labour hours and 50 unskilled labour hours. The current employees are paid a
guaranteed minimum wage of £525 for skilled workers and £280 for unskilled workers for a 35-hour week. Currently,
skilled labour has spare capacity amounting to 75 labour hours each week and unskilled labour has spare capacity
amounting to 100 labour hours each week. Additional skilled workers and unskilled workers can be employed and paid by
the hour at rates based on the wages paid to the current workers.

The materials required for the job are currently held in stock at a book value of £5,000. The materials are regularly used by
ZK Ltd and the current replacement cost for the materials is £4,500. The total scrap value of the materials is £1,000.

Question 1.7

What is the total relevant cost to ZK Ltd of using skilled and unskilled labour on this job?

A Nil. B £375. C £775. D £1,540.

The answer is B.

Workings

Relevant cost of skilled and unskilled labour

100 skilled hours required, but there are 75 skilled hours available in the period, therefore the relevant cost of skilled labour is the
additional 25 hours x £15 = £375

50 unskilled hours required, but there are 100 unskilled hours available, therefore there is no relevant cost for unskilled labour.

Question 1.8

What is the relevant cost to ZK Ltd of using the materials in stock on this job?

A £1,000. B £3,500. C £4,500. D £5,000.

The answer is C.

Workings

Relevant cost of materials is £4,500 as they are regularly used by the organisation and if they are used on the contract they will need to
be replaced.

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Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 1.9

Which ONE of the following statements is true?

A The total variable cost varies with a measure of activity.

B A variable cost is an unavoidable cost.
C A variable cost is not relevant for decision-making.
D A variable cost becomes fixed in the long run.

The answer is A.

Question 1.10

ABC Ltd operates an integrated cost accounting system. The fixed production overhead account at 31 July 2001, which is ABC Ltd’s
year end, showed the following information:

Fixed production overhead account

£ £
Trade creditors 50,000 Work-in-progress 120,000
Bank 20,000 ? 5,000
Depreciation 5,000
Salaries 40,000
Materials 10,000
125,000 125,000

The £5,000 credit entry represents the value of the transfer to the

A profit and loss account for the under-recovery of fixed production overheads.
B profit and loss account for the over-recovery of fixed production overheads.
C work-in-progress account for the under-recovery of fixed production overheads.
D following period.

The answer is A.

Question 1.11

The following budgeted information is available for a company that manufactures four types of specialist paints:

Product W Product X Product Y Product Z

per litre per litre per litre per litre
£ £ £ £
Selling price 20∙00 15∙00 15∙00 17∙50
Variable overhead 9∙60 6∙00 9∙60 8∙50
Fixed overhead 3∙60 3∙00 2.10 2∙10
Profit 6∙80 6∙00 3∙30 6∙90

Machine hours per unit 12 10 7 11

All four products use the same machine.

In a period when machine hours are in short supply, the product that makes the most profitable use of machine hours is

A product W. B product X. C product Y. D product Z.

The answer is B.

Workings

Product W Product X Product Y Product Z

£ £ £ £
Contribution per unit 10∙40 9∙00 5∙40 9∙00
Contribution per machine hour 10∙40/12 9∙00/10 5∙40/7 9∙00/11
0∙87 0∙9 0∙77 0∙82
Ranking 2nd 1st 4th 3rd

© The Chartered Institute of Management Accountants 2002 Page 4

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 1.12

For decision-making purposes, which of the following are relevant costs?

(i) Avoidable cost

(ii) Future cost
(iii) Opportunity cost
(iv) Differential cost

A (i), (ii), (iii) and (iv).

B (i) and (ii) only.
C (ii) and (iii) only.
D (i) and (iv) only.

The answer is A.

The following information is required for sub-questions 1.13 to 1.15

A company produces a single product that passes through two processes. The details for process 1 are as follows:

Materials input 20,000 kg at £2∙50 per kg

Direct labour £15,000
Production overheads 150% of direct labour

Normal losses are 15% of input in process 1 and without further processing any losses can be sold as scrap for £1 per kg.

The output for the period was 18,500 kg from process 1.

There was no work-in-progress at the beginning or end of the period.

Question 1.13

What value (to the nearest £) will be credited to the process 1 account in respect of the normal loss?

A Nil. B £3,000. C £4,070. D £5,250.

The answer is B.

Workings

20,000 kgs x 15% = 3,000 kgs x £1 = £3,000

Question 1.14

What is the value (to the nearest £) of the abnormal loss/gain for the period for process 1?

A £6,104. B £6,563. C £7,257. D £7,456.

The answer is D.

Workings

(£20,000 x £2.50) + £15,000 + (150% x £15,000) − £3,000

= £4∙97058/unit
18,500 − 1,500

£4∙97058 x 1,500 = £7,456

© The Chartered Institute of Management Accountants 2002 Page 5

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 1.15

What is the value (to the nearest £) of the output to process 2?

A £88,813. B £90,604. C £91,956. D £94,063.

The answer is C.

Workings

£4∙97058 (as above) x 18,500 = £91,956

Question 1.16

A joint product is

(i) the incidental product produced as a result of a process.

(ii) not saleable at the point of separation and must always be processed further.
(iii) one of two or more products separated during processing, each having a significant sales value.

Which of the above is/are correct?

A (iii) only.
B (i) and (iii) only.
C (ii) and (iii) only.
D (i), (ii) and (iii).

The answer is A.

Question 1.17

BH Ltd is currently undertaking a contract to build an apartment block. The contract commenced on 1 January 2001 and is expected to
take thirteen months to complete. The contract value is £54 million. The contractor’s financial year ends on 30 September.

The contract account for the building of the apartment block indicates the following situation at 30 September 2001:

Value of work certified £30 million

Costs incurred to date £20 million
Future costs to completion £28 million

The amount of profits to be recognised is based on the value of work certified to date.
It is company policy not to recognise profit on contracts unless the value certified is at least 50% of the total contract value.

The maximum amount of profit/loss for the contract that can be taken to the profit and loss account for the year ended 30 September
2001 is

A nil. B £1∙99 million. C £3∙33 million. D £5∙55 million.

The answer is C.

Workings

The maximum amount of profit/loss for the contract that might be recognised at 30 September is:

Expected profit £ million

Contract value 54
Less:
Cost to date 20
Future costs 28
Expected profit 6

£30 million
Profit recognised £6 million x = £3 ⋅ 33 million
£54 million

© The Chartered Institute of Management Accountants 2002 Page 6

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 1.18

XX Ltd absorbs overheads based on units produced. In one period, 23,000 units were produced, actual overheads were £276,000 and
there was £46,000 under-absorption. The budgeted overhead absorption rate per unit was

A £10. B £12. C £13. D £14.

The answer is A.

Workings

£000
Actual incurred 276
Under-absorption (46)
Absorbed 230

No. of units 23,000

£230,000
Rate per unit = £10 per unit
23,000

Question 1.19

RD Limited uses the LIFO system for valuing material issues from stores to production.

The Materials account had an opening value of £850 on 1 October 2001:

500 units at £1∙20 purchased 12 September 2001

200 units at £1∙25 purchased 27 September 2001

The following receipts and issues were recorded during October:

8 October 2001 Receipts 600 units £1∙30 per unit

20 October 2001 Receipts 600 units £1∙50 per unit
29 October 2001 Issues 1,500 units

What was the total value (to the nearest £) of the issues on 29 October?

A £1,930. B £1,969. C £1,997. D £2,050.

The answer is D.

Workings

LIFO method
Date Description Receipts Issues Balance
1/10 Opening balance 500 @ £1∙20 = £600
200 @ £1∙25 = £250

8/10 Receipts 600 @ £1∙30 500 @ £1∙20 = £600

200 @ £1∙25 = £250
600 @ £1∙30 = £780

20/10 Receipts 600 @ £1∙50 500 @ £1∙20 = £600

200 @ £1∙25 = £250
600 @ £1∙30 = £780
600 @ £1∙50 = £900

29/10 1,500
600 @ £1∙50
600 @ £1∙30
200 @ £1∙25
100 @ £1∙20
£2,050 400 @ £1∙20 = £480

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Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 1.20

During a period of rising prices, which ONE of the following statements is correct?

A The LIFO method will produce lower profits than the FIFO method, and lower closing stock values.
B The LIFO method will produce lower profits than the FIFO method, and higher closing stock values.
C The FIFO method will produce lower profits than the LIFO method, and lower closing stock values.
D The FIFO method will produce lower profits than the LIFO method, and higher closing stock values.

The answer is A.

Question 1.21

The economic order quantity is

A the order quantity which minimises the total of stock ordering and holding costs.
B the order quantity used for special ordering purposes.
C the order quantity used for buffer stock.
D the order quantity used to avoid stock outs.

The answer is A.

Question 1.22

In a standard cost bookkeeping system, when the actual material price exceeds the standard price, the double entry to record the
difference in price is

A debit the material price variance account and credit the raw material control account.
B credit the material price variance account and debit the raw material control account.
C debit the material price variance account and credit the work-in-progress account.
D credit the material price variance account and debit the work-in-progress account.

The answer is A.

Question 1.23

An overhead absorption rate is used to

A allocate overhead costs to cost centres.

B attribute overheads to products.
C spread indirect cost across a number of cost centres.
D control overheads.

The answer is B.

Question 1.24

A company operates a premium bonus system by which employees receive a bonus of 75% of the time saved compared with a
standard time allowance (at the normal hourly rate).

Details relating to employee X are shown below:

Employee X
Actual hours worked 42 hours
Hourly rate of pay £10
Output achieved 400 units of product Y
Standard time allowed (per unit of Y) 7 minutes

The bonus payable (to the nearest £) to employee X is

A £35. B £47. C £70. D £82.

The answer is A.

© The Chartered Institute of Management Accountants 2002 Page 8

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Workings

Time allowed 400 units @ 7 minutes 2,800 minutes

Time taken 42 x 60 2,520 minutes
Time saved 280 minutes
280 minutes
x 75% x £10 = £35
60 minutes

Question 1.25

HD Ltd currently uses absorption costing to calculate profit.

During the last period, the fixed production overhead absorption rate was £25 per unit. There were 500 units of opening stock for the
period and 350 units of closing stock.

If marginal costing principles had been used, the profit for the period compared to the absorption costing profit would have been

A £3,750 lower.
B £3,750 higher.
C £8,750 lower.
D £8,750 higher.

The answer is B.

Workings

Opening stock 500 units

Closing stock 350 units
150 units x £25 = £3,750 higher in marginal costing

© The Chartered Institute of Management Accountants 2002 Page 9

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 2(a)

Prepare a statement that reconciles budgeted profit with actual profit for the year ended 31 October 2001, showing the analysis of
variances in as much detail as possible from the information given.
(14 marks)

Rationale

This question examines the application of standard costing. Standard costing has a syllabus weighting of 15%. The question focuses
on reconciling the budgeted profit with the actual profit. The variances for sales margin, labour rate, labour efficiency, variable
overhead expenditure, variable overhead efficiency, fixed overhead volume and fixed overhead expenditure are examined. The
question is designed to encompass as many aspects as possible within this area. It is important that candidates have a good
understanding of this topic as it forms the basis of the underpinning knowledge required for Performance Management at the
Intermediate level.

Suggested Approach

• Draw up the pro-forma for the operating statement.

• Then calculate the budgeted profit and actual profit, placing the amounts into the pro-forma.
• The total sales margin variance and operational variances should then be calculated and placed into the pro-forma. The sum of
the variances along with the budgeted profit should reconcile to the actual profit.

Marking Guide Marks

Format of the operating statement 1

Budgeted profit 1
Total sales margin variance 2
Labour and variable overhead variances – 1 mark each 4
Fixed overhead variances – 2½ marks each 5
Actual profit 1

Examiner’s Comments

The majority of candidates performed poorly on this question. In a large number of cases there was no attempt at reconciliation. The
vast majority of candidates gave the total cost variance rather than the sub variances. Only a small number of candidates were able
to calculate the total sales margin variance with most avoiding the calculation entirely. Despite the fact that there were no material
usage or price variances many candidates appeared to find some! Overall a very disappointing performance on this question.

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Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 2(b)

Referring to your analysis in part (a), suggest two possible reasons for the labour efficiency variance and two possible reasons for
the labour rate variance that you have calculated.
(4 marks)

Rationale

Part (b) requires candidates to give reasons for the labour efficiency and rate variances arising. Candidates should apply a common
sense approach when answering this part of the question.

Suggested Approach

• Apply logic when addressing this part of the question. Nothing sophisticated is being asked here, it is simply suggesting reasons
for the variances which you have calculated.

Marking Guide Marks

Direct Labour Efficiency Variance - £4,000A

• Poorly trained staff
• Motivational problems causing inefficiency 2

Direct Labour Rate Variance - £3,500A

• Higher grade of labour used
• Higher rate paid due to wage award 2

Other causes will be awarded marks accordingly.

Even if candidates calculate variances in part (a) incorrectly, they will still be awarded marks in part (b) providing the reasons are
consistent with the variances calculated in part (a).

Examiner’s Comments

The majority of candidates produced well thought out reasons for the variances occurring. However some candidates simply
explained what the variances were and how they are calculated and offered no explanation as to why they may have arisen.

© The Chartered Institute of Management Accountants 2002 Page 11

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 2(c)

Explain the factors that should be considered when selecting the most appropriate base to use for an overhead absorption rate. Your
answer should include a discussion of the method used by SS Ltd.
(7 marks)

Rationale

This part of the question is designed to examine candidates’ understanding of what factors affect the choice of method used when
calculating the overhead absorption rate (OAR). The question also looks for a discussion in relation to SS Ltd and the percentage
labour cost method.

Suggested Approach

• Firstly, consider the occurrence of overheads in the cost centre and the ease of collecting the data.
• Then, consider the most commonly used bases for calculating the OARs, that is machine hour and labour hour.
• A discussion must take place around the method used by SS Ltd, that is percentage of labour cost.
• Point out that the company is producing a single product and therefore the overhead cost per unit would still be the same
regardless of the method used to calculate the OAR.

Marking Guide Marks

Occurrence of overheads in cost centre 1

Ease of collecting data 1
Machine hour/labour hour – increase in relation to time 2
Appropriateness of percentage of labour cost method 2
Single product – overhead cost per unit 1

Examiner’s Comments

This part of the question was very poorly answered. Many candidates stated that SS Ltd were using labour hours to calculate the
OAR despite the fact that the question specifically stated that the company was using the percentage of labour cost method. Other
candidates offered machine hours and labour hours for calculating the OAR but the majority failed to identify the fact that the
company produced a single product and therefore the overhead cost per unit would be the same regardless of the method used to
calculate the OAR. Other candidates confused absorption with apportionment and spent a long time discussing the bases that could
be used to apportion rent, rates and so on, across the production and service departments.

© The Chartered Institute of Management Accountants 2002 Page 12

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 3(a)

Prepare the cash budget by month and in total for the first quarter of 2002.
(15 marks)

Rationale

This question examines the cash flow difficulties encountered by new companies and requires candidates to prepare a simple cash
flow budget.

Suggested Approach

• Firstly draw up the cash flow pro-forma.

• Then, aim to score maximum marks by placing straightforward cash flows in to the pro-forma.
• Cash flows requiring workings should then be calculated.

Marking Guide Marks

Cash budget pro-forma 2

Sales receipts 2
Cash injection 1
Salaries 1
Capital expenditure 2
Serviced offices 2
Variable production costs 1
Marketing and advertising 1
Administration overheads 3

Examiner’s Comments

This question was well answered by the majority of candidates. Some candidates mistakenly included the initial cash injection as the
opening balance rather than as a cash inflow in January. Another common error was to include depreciation in the cash flow budget
despite the fact that it is a non cash item.

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Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 3(b)

Identify and comment on those areas of the cash budget that you wish to draw to the attention of the Directors of T Ltd, and
recommend action to improve cash flow.
(7 marks)

Rationale

This question requires candidates to discuss the cash flow budget prepared in the previous part of the question and to recommend
action that could be taken to improve the cash flow for the company. Lack of cash flow in a small business is common and the
investigation and correction of the problem is an issue faced by many accountants today.

Suggested Approach

• Use a common sense approach, that is if you were having cash flow problems, what would you do to remedy them? Prepare a
plan before writing the answer, listing down the various points, and then expand on these further.

Marking Guide Marks

General comment on findings in part (a) 1

Action to remedy problem – 1 mark for each area, to a maximum of 6

Examples:
• Change the deposit paid by clients
• Find an additional amount of investment
• Ascertain the number of staff needed
• Change capital expenditure profiling
• Review serviced office costs
• Examine variable production costs
• Reschedule marketing and advertising campaign
• Examine variable overhead costs for savings

Examiner’s Comments

This question was well answered by candidates.

Question 3(c)

Briefly explain three advantages for T Ltd of using a spreadsheet when preparing a cash budget.
(3 marks)

Rationale

This part of the question aims to examine candidates’ knowledge of how spreadsheets can assist in budgeting. The spreadsheet is a
very important tool for accountants today and has revolutionised the preparation of management information.

Suggested Approach

• A plan of the answer should be prepared by quickly writing down key words, and then structuring the answer around those
words. Candidates should be careful not to write too much and should keep within their time allocation.

Marking Guide Marks

Advantages of using a spreadsheet for preparing the cash budget:

• Less time consuming.
• ‘What if’ analysis can be carried out.
• Variances can be identified easily. 3

Other advantages will be awarded marks accordingly.

Examiner’s Comments

© The Chartered Institute of Management Accountants 2002 Page 14

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

This question was well answered by candidates.

Question 4(a)

Prepare the actual profit and loss statements for each of the two years using:
(i) absorption costing;
(ii) marginal costing.
(14 marks)

Rationale

This question tests the candidates’ understanding of absorption costing and marginal costing. It brings in breakeven techniques in
later parts of the question. The question is designed in such a way as to examine all of these areas and to ensure the candidate is
aware of the main differences between the two systems.

Suggested Approach

• Take a columnar approach for each profit and loss statement and draw up the pro-forma.
• Then proceed to fill in the easier aspects of the question ensuring maximum scoring of marks.
• More complex parts will require workings and care should be taken when calculating the under/over absorption adjustment.

Marking Guide Marks

Absorption costing
• Format 1
• Sales ½
• Total production costs 2
• Closing stock valuation 2
• Under/over absorption adjustment 2

Marginal costing
• Format 1
• Sales ½
• Variable production costs 2
• Closing stock valuation 1
• Fixed costs 2

Examiner’s Comments

Part (i)
A large number of candidates had little knowledge of how to prepare an absorption costing profit statement. Many included the actual
fixed production overhead costs in the production costs rather than the absorbed overheads. Many candidates failed to identify the
stock in the question. A large majority of candidates appeared to have little or no knowledge of the under/over absorption adjustment.
Overall a very disappointing performance by candidates in this question.

Part (ii)
The marginal costing profit statement was well attempted by the majority of candidates. However, many failed to achieve the format
mark due to failing to identify the contribution.

© The Chartered Institute of Management Accountants 2002 Page 15

Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

Question 4(b)

Calculate the budgeted breakeven point in units and the budgeted margin of safety as a percentage of sales for year 1 and then
again for year 2.
(6 marks)

Rationale

The question is designed to examine the candidates’ application of the budgeted marginal costing information to break even
analysis. Candidates are required to calculate the budgeted breakeven point and margin of safety for each year.

Suggested Approach

• Jot down the breakeven units formula and then extract the information for each year from the budgeted information and place it
into the formula to calculate the breakeven units.
• Once this has been calculated, apply the margin of safety formula to the breakeven units and expected sales to calculate the
margin of safety.

Marking Guide Marks

Breakeven Year 1 1½
Breakeven Year 2 1½
Margin of safety Year 1 1½
Margin of safety Year 2 1½

Examiner’s Comments

A straightforward application of the breakeven and margin of safety formulae.

Common Errors
A large number of candidates used the actual fixed costs and actual contribution rather than the budgeted information when
calculating the breakeven units and margin of safety. This error arose from not reading the question correctly. From the variety of
answers given, there was evidence that some candidates had not studied this area of the syllabus properly.

Question 4(c)

Explain how the change in cost structure (as detailed in the budgeted information) has affected the values you have calculated in
your answer to part (b).
(5 marks)

Rationale

This question requires candidates to interpret and discuss their answer to part (b). It examines the candidates’ understanding of why
the breakeven units have increased in year 2.

Suggested Approach

• Approach the answer by referring to the answer to part (b).

• Identify and explain the reason why the breakeven units have changed in year 2 and why the margin of safety is different from
year 1 to year 2.

Marking Guide Marks

Increase in variable overheads 1

Effect on breakeven 1
Effect on margin of safety 1
Fixed costs remain constant 1
Selling price remains constant 1

Examiner’s Comments

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Paper 2 – Management Accounting Fundamentals (FMAF)
Post Exam Guide
November 2001 exam

In the majority of cases this question was reasonably well answered by candidates. However, some candidates failed to score full
marks as they failed to state that the fixed costs and selling price remained constant and that it was simply the change in variable
overheads that was affecting the breakeven and margin of safety.

© The Chartered Institute of Management Accountants 2002 Page 17