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Exam Paper 2020-21 S2 (v5) Question
Exam Paper 2020-21 S2 (v5) Question
Exam Paper 2020-21 S2 (v5) Question
Notes to Candidates:
1
Question 1 (25 marks)
Hang Seng Bus Limited has the following information for May.
Required:
(a) Prepare a contribution format income statement for May showing both total and per passenger columns.
(6 marks)
(c) Compute the monthly break-even number of passengers, the monthly break-even number of double-
decker buses and monthly break-even dollar revenue. Use the formula method. (6 marks)
(d) Compute the number of double-decker buses required to achieve a desired target profit of $145,600. Use
the formula method. (2 marks)
(f) Compute the degree of operating leverage. (correct your answer to 2 decimal places.) (2 marks)
(g) Determine the net income if total number of passengers increases by 10%. Use the degree of operating
leverage obtained in (f) to calculate your answer. (2 marks)
(h) The directors of the company are planning for the operations in June. It is proposed that the average fare
per passenger will increase to $68. However, it is expected that the load factor would drop to only 60%.
Extra administrative cost for this proposal will cost $23,200 in June. If this proposal is executed, what
will be the new contribution margin ratio? Would you recommend the execution of this proposal if the
contribution margin ratio is higher? Explain. (correct your answer to the nearest percentage.)
(3 marks)
2
Question 2 (25 marks)
On 1 April 2021, the Production Department of Seng Hang Company had a work in process inventory of
20,000 units. The units were 100% complete for materials and 20% complete for conversion, with respective
costs of $80,000 and $13,000.
During April, 52,000 units were completed and transferred to finished goods. As at 30 April, the ending work-
in-process inventory consisted of 10,000 units that were 100% complete with respect to materials and 80%
complete with respect to conversion. Costs added during the month were $1,470,000 for materials and
$224,000 for conversion.
Seng Hang Company uses First-in-First-out method (FIFO) to account for the product costs.
Required:
(a) Calculate the equivalent units of production for materials and conversion costs in the Production
Department for the month of April. (3 marks)
(b) Determine the costs assigned to the ending work-in-process on 30 April. (3 marks)
(c) Determine the costs assigned to units completed and transferred out during April. (3 marks)
(d) Stephen is the new CEO of Seng Hang Company. He does not understand why FIFO was adopted and
seeks for your advice. Explain to Stephen why FIFO is more preferable than weighted average method.
(6 marks)
(e) Stephen would like to compare the difference of cost allocation between FIFO and weighted average
method. He asks you to help, with the use of weighted average method,
(i) calculate the equivalent units of production for materials and conversion costs in the Production
Department for the month of April; (3 marks)
(ii) determine the costs assigned to the ending work-in-process and the units completed and
transferred out during April; and (4 marks)
(iii) explain why there are differences in the results compared with those in parts (a) to (c).
(3 marks)
3
Question 3 (25 marks)
Holly Company produces Product 002 and adopts absorption costing method to determine its net operating
income. The company also uses weighted average method for the valuation of inventory. The total variable
manufacturing costs per unit for 2019 was $76.5.
During the year ended 31 December 2020, the company had the following data related to Product 002:
Required:
(b) Determine the value of ending inventory using variable costing method. (3 marks)
(c) Determine the the value of ending inventory using absorption costing method. (4 marks)
(d) Prepare an income statement for the year ended 31 December 2020 using variable costing method.
(6 marks)
(e) Calculate the net operating income using absorption costing method and explain the reason for the
difference in the ending inventory balances and the impact of this difference in the net operating incomes
under the two costing methods. (4 marks)
At the end of 2020, Holly Company wanted to use absorption cost-plus pricing to set the selling price on a new
version of Product 002 and named it Product 002(A). The company planned to invest $1,580,000 in operating
assets to produce and sell 15,000 units. Its required return on investment (ROI) in its operating assets was 10%.
The management used the cost data of Product 002 in 2020 to project the cost of Product 002(A).
(f) What is the markup percentage on absorption cost for Product 002(A)? (2 marks)
(g) What selling price would the company establish for Product 002(A) using a markup percentage on
absorption cost? (1 mark)
(h) Assume that the company wants to raise the price of Product 002(A) with the intention of achieving the
product’s desired ROI by producing and selling at 10,000 units. Using absorption cost-plus pricing, what
would be the revised selling price at this sales volume? How might customers react to this new price?
(4 marks)
4
Question 4 (25 marks)
Established in 2021, Hang Sin Cafe (HSC) is a local brand devoting to serve quality coffee to its customers.
The marketing department of HSC has submitted the following forecasts for the upcoming months:
May June July August September
Budgeted sales (units) 12,000 24,000 40,000 20,000 60,000
Budgeted production (units) 13,000 26,000 50,000 25,000 20,000
1. Direct materials are mainly coffee beans from Nicaragua and Ethiopia. The information for the purchases
of these materials is given below. The payment is made in the month following the purchases.
Coffee beans June July August September
- Nicaragua ($) 90,000 150,000 75,000 60,000
- Ethiopia ($) 14,800 28,000 14,000 10,200
Total ($) 104,800 178,000 89,000 70,200
2. Each cup of coffee needs 0.25 direct labor hour and each direct labor hour costs $8. Labor costs are paid
in the month incurred.
3. HSC also incurs fixed manufacturing overhead costs of $85,000 per month (including $10,000 for
depreciation of manufacturing equipment). The cost is paid in the month incurred.
4. The average selling price per cup of coffee is $17.5. All sales are on credit. Based on past experience,
HSC projects that 30% of invoices are paid in the month of sale, 50% are paid in the month following the
sale, and another 15% are paid two months following the sale. The remaining 5% will be uncollectible.
5. The beginning cash balance for 1 July is $5,000 and HSC wants to maintain a cash balance not less than
this level at the end of each month. On 1 April, HSC experienced a cash shortage and borrowed $200,000
at 12% interest per year from the bank with interest paid in the month incurred. The company would like
to pay back the borrowings as soon as it can. No partial payback is allowed. Any payment is made at the
end of the month.
6. In August, HSC purchased a new piece of equipment for $30,000 with cash. The depreciation of this
equipment has been included in the fixed manufacturing cost mentioned in (3).
Required:
(a) Prepare a schedule of expected cash collections for July, August, and September. (6 marks)
(b) Prepare a cash budget by month for July, August, and September. (16 marks)
(c) Suggest three possible ways to improve the budgeting process to be more effective. (3 marks)