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QUESTIONS AND ANSWER

Chapter 1

LC Company

LC Company has total budgeted production overheads for next year of #816,000 and has traditionally absorbed overheads on a machine hour basis. It makes two products, Product V and Product W.

Product V Product W

Direct material cost per unit #20 #60

Direct labour cost per unit #50 #40

Machine time per unit 3 hours 4 hours

Annual production 6,000 units 4,000 units

Required

(a) Calculate the product cost for each of the two products on the assumption the firm continues to absorb overhead costs on a machine hour basis.

(b) The firm is considering changing to an activity based costing (ABC) system and has identified the following information:

Product V Product W

Number of set-ups 18 32

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Number of purchase orders 48 112

Overhead cost analysis #

Machine-related overhead costs 204,000

Set up related overhead costs 280,000

Purchasing-related overhead costs 332,000

Total production overheads 816,000

You are required to calculate the unit cost for each of the two products on the assumption that the firm changes to an ABC system, using whatever assumptions you consider appropriate.

(c) Suggest how ABC analysis could be useful for measuring performance and improving profitability.

THROUGHPUT

A company manufactures two products, product X and product Y, on the same machines. Sales demand for the products exceeds the machine capacity of the company’s production department. The potential sales demand in each period is for 8,000 units of Product X and 12,000 units of Product Y. Sales prices cannot be increased due to competition from other firms in the market. The maximum machine capacity in the production department is 32,000 hours in each period.

The following cost and profitability estimates have been prepared:

Product X Product Y

# #

3

Sales price 22 27

Direct materials 10 9

Direct labour and variable overhead 6 11

Contribution per unit 6 7

Machine hours per unit 1.5 hours 2 hours

Fixed costs in each period are #90,000.

Required

(a) Using marginal costing principles, calculate the profit-maximising output in each period, and calculate the amount of profit.

(b) Explain how throughput accounting differs from marginal costing in its approach to maximising profit.

(c) Use throughput accounting to calculate the throughput accounting ratio for Product X and for Product Y. You should assume that the direct labour cost and variable overhead cost in your answer to part (a) is fixed in the short- term.

(d) Using throughput accounting principles, calculate the profit-maximising output in each period, and calculate the amount of profit.

Throughput ratio

Dust Company exports cases to Spain. Each pallet of cases costs #2,000 in material costs and are sold for #3,000. Production and sales are limited by a shortage of highly trained quality control inspectors. Only 200 inspection hours are available per week. Every pallet is inspected and an inspection takes 30 minutes. Other factory costs are #300,000 per week.

Required

Calculate the throughput accounting ratio.

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BACKFLUSH

Transactions for the year for AYZ are as follows:

Purchases of raw materials #5,000,000

Conversion costs #3,000,000

Finished goods manufactured 100,000 units

Sales 98,000 units at #100 per unit There was no inventory at the beginning of the year. The cost per unit is #80, consisting of #50 per unit for materials and #30 per unit for conversion costs.

Required

Show the book-keeping entries in the cost accounting system using backflush accounting, with two trigger points.

Target cost A company has designed a new product that it would like to introduce to the market. It has spent #250,000 on the design work so far. A market research report has indicated that the product will have a life of four years, and at a selling price of #35 per unit, annual sales would be as follows:

Year Sales

units

1 40,000

2 60,000

3 50,000

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4 20,000 It has been estimated that to produce the new product, annual fixed production costs (all cash flows) will increase by #200,000, and the variable cost per unit will be #10.

Other cash flows for the project will be:

Capital expenditure of #1,400,000 at the beginning of the project.

There will be a residual value of #600,000 from this investment at the end of Year 4. „

An investment of #400,000 will be required in working capital. This will be recovered at the end of Year 4.

Expenditure on advertising will be required, as follows:

Year Advertising costs

#

0 800,000

1 600,000

2 400,000

3 200,000 Required

(a) Calculate the expected NPV of the project to launch the new product, if the company’s cost of capital is 12%.

(b) Calculate the target cost for the product that is needed to achieve a return of 12% on investment, and calculate the size of the current cost gap.

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Activity based costing

Suwegbe manufactures three products: A, B, and C. Data for the period just ended is as follows:

A B C

Production (units) 20,000 25,000 2,000

Sales price ( per unit) #20 #20 #20

Material cost (per unit) #5 #10 #10

Labour hours (per unit) 2 hours 1 hour 1 hour

(Labour is paid at the rate of #5 per hour)

Overheads for the period were as follows:

Set-up costs 90,000

Receiving 30,000

Despatch 15,000

Machining 55,000

#190,000

Cost driver data: A B C

Machine hours per unit 2 2 2

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Number of set-ups 10 13 2

Number of deliveries received 10 10 2

Number of orders despatched 20 20 20

(a) Calculate the cost (and hence profit) per unit, absorbing all the overheads on the basis of labour hours.

(b) Calculate the cost (and hence profit) per unit absorbing the overheads using an Activity Based Costing approach

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Target costingkuluso plc are considering whether or not to launch a new product. The sales department has determined that a realistic selling price will be #20 per unit. kuluso plc have a requirement that all products generate a gross profit of 40% of selling price. Calculate the target cost.

Q2

Heavy weight plc is about to launch a new product on which it requires a pre-tax ROI of 30% p.a.. Buildings and equipment needed for production will cost #5,000,000. The expected sales are 40,000 units p.a. at a selling price of #67.50 p.u.. Calculate the target cost.

Throughput accounting

Papilo plc manufactures 2 products, A and B. The cost cards are as follows:

A B

Selling price 25 28

Materials 8 20

Labour 5 2

Other variable costs 7 2

Fixed costs 3 2

23 26

Profit #2 #2

Machine hours p.u. 2 hrs 1 hr

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Maximum demand 20,000 units 10,000 units

The total hours available are 48,000.(a) Calculate the optimum production plan and the maximum profit using conventional key

factor analysis

(b) Calculate the optimum production plan and the maximum profit, on the assumption that in the short-term only material costs are variable i.e. using a throughput accounting approach

(c) Calculate the Throughput Accounting ratios

Life cycle costing A company manufactures MP3 players. It is planning to introduce a new model and development will begin very soon. It expects the new product to have a life cycle of 3 years and the following costs have been estimated.

Year 0 Year 1 Year 2 Year 3

Units manufactured and sold 25,000 100,000 75,000

Price per unit #90 #80 #70

R&D costs #850,000 #90,000 - -

Production costs

Variable cost per unit #30 #25 #25

Fixed costs #500,000 #500,000 #500,000

Marketing costs

Variable cost per unit #5 #4 #3

Fixed costs #300,000 #200,000 #200,000

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Distribution costs

Variable cost per unit #1 #1 #1

Fixed costs #190,000 #190,000 #190,000

Customer service costs per unit #3 #2 #2

Required

(a) Explain life cycle costing and state what distinguishes it from more traditional management accounting techniques.

(b) Calculate the cost per unit looking at the whole lifecycle and comment on the price to be charged.

Life-Cycle CostingA company is planning a new product. Market research suggests that demand for the product would last for 5 years. At a selling price of #10.50 per unit they expect to sell 2,000 units in the first year and 12,000 units in each of the other four years. The company wishes to achieve a mark up of 50% on cost. It is estimated that the lifetime costs of the product will be as follows: 1. Manufacturing costs - #6.00 per unit 2. Design and development costs - #60,000 3. End of life costs - #30,000

You are required to:

(a) Calculate the target cost for the product.

(b) Calculate the lifecycle cost per unit and determine whether or not the product is worth

making.It has been further estimated that if the company were to spend an additional #20,000 on design, then the manufacturing costs per unit could be reduced.

(c) If the additional amount on design were to be spent, calculate the maximum manufacturing cost per unit that could be allowed if the company is to achieve the required mark-up.

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Chapter two

Villaco

Villaco produces two products with the following costs and revenue per unit.

Product A Product B

# #

Sales price 20 10

Variable cost 8 6

Fixed cost 4 3

Units Units

Sales demand 2,000 3,000 There are only 7,000 machine hours available, and Product A requires four machine hours per unit and Product B requires one machine hour per unit

Required

(a) Calculate the profit-maximising production and sales mix.

(b) Assume that all the data is the same, except that we are able to sub-contract the products for an additional variable cost of #1 per unit for A and #0.50 per unit for B. What is the profit-maximising decision?

Bottlenecks

F Co makes and sells two products, A and B, each of which passes through the same automated production operations. The following estimated information is available for period 1.

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Product unit data

A B

Direct material cost (#) 2 40

Variable production overhead cost (#) 28 4

Overall hours per product unit (hours) 0.25 0.15 Original estimates of production/sales of products A and B are 120,000 units and 45,000 units respectively. The selling prices per unit for A and B are #60 and #70 respectively.

Maximum demand for each product is 20% above the estimated sales levels.

Total fixed production overhead cost is #1,470,000. This is absorbed by products A and B at an average rate per hour based on the estimated production levels. One of the production operations has a maximum capacity of 3,075 hours which has been identified as a bottleneck which limits the overall estimated production/sales of products A and B. The bottleneck hours required per product unit for products A and B are 0.02 and 0.015 respectively.

Required

(a) Calculate the mix (in units) of products A and B which will maximise net profit and the value (in #) of the maximum net profit.

(b) F Co has now decided to determine the profit-maximising mix of products A and B based on the throughput accounting principle of maximising the throughput return per production hour of the bottleneck resource.

Given that the variable overhead cost, based on the value (in #) which applies to the original estimated production/sales mix, is now considered to be fixed for the short/intermediate term:

(i) Calculate the mix (of units) of products A and B which will maximise net profit and the value of that net profit.

(ii) Calculate the throughput accounting ratio for product B and comment on it.

(iii) It is estimated that the direct material cost per unit of product B may increase by 20% due to shortage of supply. Calculate the revised throughput accounting ratio for product B and comment on it.

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Stow Health Centre

Stow Health Centre specialises in the provision of sports/exercise and medical/dietary advice to clients. The service is provided on a residential basis and clients stay for whatever number of days suits their needs. Budgeted estimates for the year ending 31 June 20X1 are as follows.

(a) The maximum capacity of the centre is 50 clients per day for 350 days in the year.

(b) Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with the client fee level per day and is estimated at different percentages of maximum capacity as follows.

Client fee Occupancy Occupancy as percentage

per day level of maximum capacity

#180 High 90%

#200 Most likely 75%

#220 Low 60% (c) Variable costs are also estimated at one of three levels per client day. The high, most likely

and low levels per client day are #95, #85 and #70 respectively. The range of cost levels reflects only the possible effect of the purchase prices of goods and services.

Required

(a) Prepare a summary which shows the budgeted contribution earned by Stow Health Centre for the year ended 30 June 20X1 for each of nine possible outcomes.

(b) State the client fee strategy for the year to 30 June 20X1 which will result from the use of each of the following decision rules.

(i) Maximax

(ii) Maximin

(iii) Minimax regret

Your answer should explain the basis of operation of each rule. Use the information from your answer to

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(a) As relevant and show any additional working calculations as necessary.

(c) The probabilities of variable cost levels occurring at the high, most likely and low levels provided in the question are estimated as 0.1, 0.6 and 0.3 respectively. Using the information available, determine the client fee strategy which will be chosen where maximisation of expected value of contribution is used as the decision basis.

SHORT-TERM DECISION MAKINGShutdown problems

A company manufactures three products, Pawns, Rooks and Bishops. The present net annual income from these is as follows:

Pawns Rooks Bishop Total

#’000 #’000 #’000 #’000

Sales 50 40 60 150

Less variable costs 30 25 35 90

Contribution 20 15 25 60

Less fixed costs 17 18 20 55

Profit/loss 3 (3) 5 5 The company is considering whether or not to cease selling Rooks. It is felt that selling prices cannot be raised or lowered without adversely affecting net income. #5,000 of the fixed costs of Rooks are direct fixed costs which would be saved if production ceased. All other fixed costs would remain the same.

(b) Suppose, however, that it were possible to use the resources released by stopping production of Rooks to produce a new item, Crowners, which would sell for #50,000 and incur variable costs of #30,000 and extra direct fixed costs of #6,000.

Consider whether the company should cease production and sale of Rooks under each of the scenarios in (a) and (b) above.

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Relevant costingThe managing director of Parser Ltd, a small business, is considering undertaking a one-off contract and has asked her inexperienced accountant to advise on what costs are likely to be incurred so that she can price at a profit. The following schedule has been prepared: Costs for special order:

Notes #

Direct wages 1 28,500

Supervisor costs 2 11,500

General overheads 3 4,000

Machine depreciation 4 2,300

Machine overheads 5 18,000

Materials 6 34,000

98,300 Notes:

1. Direct wages comprise the wages of two employees, particularly skilled in the labour process for this job, who could be transferred from another department to undertake work on the special order. They are fully occupied in their usual department and sub-contracting staff would have to be bought-in to undertake the work left behind. Subcontracting costs would be #32,000 for the period of the work. Different subcontractors who are skilled in the special order techniques are available to work on the special order and their costs would amount to #31,300.

2. A supervisor would have to work on the special order. The cost of #11,500 is comprised of #8,000 normal payments plus #3,500 additional bonus for working on the special order. Normal payments refer to the fixed salary of the supervisor. In addition, the supervisor would lose

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incentive payments in his normal work amounting to #2,500. It is not anticipated that any replacement costs relating to the supervisor’s work on other jobs would arise.

3. General overheads comprise an apportionment of #3,000 plus an estimate of #1,000 incremental overheads.

4. Machine depreciation represents the normal period cost based on the duration of the contract. It is anticipated that #500 will be incurred in additional machine maintenance costs.

5. Machine overheads (for running costs such as electricity) are charged at #3 per hour. It is estimated that 6000 hours will be needed for the special order. The machine has 4000 hours available capacity. The further 2000 hours required will mean an existing job is taken off the machine resulting in a lost contribution of #2 per hour.

6. Materials represent the purchase costs of 7,500 kg bought some time ago. The materials are no longer used and are unlikely to be wanted in the future except on the special order. The complete inventory of materials (amounting to 10,000 kg), or part thereof, could be sold for #4.20 per kg. The replacement cost of material used would be #33,375.

Because the business does not have adequate funds to finance the special order, a bank overdraft amounting to #20,000 would be required for the project duration of three months. The overdraft would be repaid at the end of the period. The bank’s overdraft rate is 18%. The managing director has heard that, for special orders such as this, relevant costing should be used that also incorporates opportunity costs. She has approached you to create a revised costing schedule based on relevant costing principles.

Adjust the schedule prepared by the accountant to a relevant cost basis, incorporating appropriate opportunity costs.

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Make or Buy decisions

The availability of Material B is limited to 8,000 kg

Product X Y Z

Demand (units) 2,000 2,500 4,000

Variable cost to make (# per unit) 10 12 14

Buy-in price (# per unit) 13 17 16

Kg of B required per unit 3 2 1

(included in variable cost)

Which products should the company make and which should it buy?

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Chapter 3Cost Volume Profit Analysis

Product X has variable costs of #2 per unit, and selling price of #6 per unit. The fixed costs are #1,000 per year

(a) If budgeted sales and production are 300 units, what is the budgeted profit (or loss) for the year?

(b) What is the breakeven point (in units)?

(c) What is the breakeven revenue?

(d) How many units need to be sold to achieve a target profit of #300 per year?

(e) Calculate the margin of safety

(f) Calculate the C/S ratio

(g) What sales revenue is needed to generate a target profit of #320?

Question

A company produces and sells three products: C, V and P. The budget information for the coming year is as follows:

C V P

Sales (units) 4,800 4,800 12,000

Selling price (p.u.) #5 #6 #7

Variable cost (p.u.) #3.75 #5.25 #4.35

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Contribution (p.u.) #1.25 #0.75 #2.65 The total budgeted fixed overheads for the year are #8,000

(a) Calculate the CS ratio for each product individually

(b) Calculate the average CS ratio (assuming that the budget mix of production remains unchanged)

(c) Calculate the breakeven revenue (assuming that the budget mix of production remains un-changed)

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Chapter Four

Decision under Risk and UncertaintyPayoff table

A baker pays #0.10 for buns and sells them for #0.30. At the end of a day, any pastries that have not been sold must be thrown away. On any particular day, the probability distribution of sales demand is as follows:

Number of pastries demanded by customers 20 40 60

Probability 0.3 0.5 0.2 Required

(a) Construct a payoff matrix to show all the possible outcomes

(b) What is the maximum amount the baker should be willing to pay for perfect information (in advance) about sales demand each day?

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Uncertain A company is considering whether or not to undertake an investment in a project to acquire an item of equipment.

The equipment would cost #7,200,000 and would have a three-year operating life. At the end of that time, its residual value would be zero.

The following estimates have been made of the cash flows from the investment:

Year Cash flow benefits Cash outflows

# #

1 6,000,000 3,000,000

2 8,000,000 4,000,000

3 5,000,000 3,000,000 However, there is some uncertainty in these cash flow figures, and it is estimated that:

(e) annual cash flow benefits could be up to 6% higher or 6% lower

(f) annual cash outflows could be up to 10% higher or lower. The equipment would be depreciated by the straight-line method.

The appropriate cost of capital for the project is 9%, but there is some uncertainty about the risk in the project and the appropriate cost of capital could be anywhere in the range 7% to 11%.

Required

(a) Assuming that the most optimistic estimates should be applied, calculate:

(i) The NPV of the project

(ii) The residual income each year from the project, assuming that notional interest is calculated on the net book value of the equipment at the beginning of the year.

(b) Assuming that the most pessimistic estimates should be applied, calculate:

(i) The NPV of the project

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(ii) The residual income each year from the project, assuming that notional interest is calculated on the net book value of the equipment at the beginning of the year.

(c) Suggest whether the company is likely to undertake the project.

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Risk and Uncertainty

John has a factory capacity of 1,200 units per month. Units cost him #6 each to make and his normal selling price is #11 each. However, the demand per month is uncertain and is as follows: Demand Probability 400 0.2 500 0.3 700 0.4 900 0.1 He has been approached by a customer who is prepared to contract to a fixed quantity per month at a price of #9 per unit. The customer is prepared to sign a contract to purchase 300, 500, 700 or 800 units per month. The company can vary production levels during the month up to the maximum capacity, but cannot carry forward any unsold units in inventory.

(a) Calculate all possible profits that could result

(b) Determine for what quantity John should sign the contract, under each of the following criteria:

i) expected value

ii) maximin

iii) maximax

iv) minimax regret

(c) What is the most that John would be prepared to pay in order to obtain perfect knowledge as to the level of demand?

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Chapter 5

Discounted cashflow and long term decisionSensitivity

A company is considering an investment in a new project to make and sell a new product that will have a five-year life. The project will require an investment of #3 million in equipment. The residual value of this equipment after five years will be 30% of its original cost.

The estimates of net cash flows from operations in each year of the project are as follows:

Year Net cash flow

#

1 400,000

2 800,000

3 800,000

4 700,000

5 400,000 These cash flows are based on estimates that the annual increase in cash spending on fixed costs will be #200,000, and the contribution/sales ratio from transactions will be 40%. The company’s cost of capital is 8%.

The management of the company are aware that actual cash flows could be higher or lower than those expected, and sensitivity analysis should be carried out to establish the extent to which costs or revenues could differ from the estimate before the project ceased to have a positive NPV.

The investment in working capital will be minimal. Inflation and taxation should be ignored.

Required

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(a) Calculate the net present value of the project.

(b) Carry out sensitivity analysis on the following items: (i) the cost of the equipment, assuming that the residual value will be 30% of cost

(ii) the residual value of the equipment

(iii) sales revenue

(iv) variable costs

(v) annual fixed costs.

By how much could each of these items vary in amount before the project ceased to have a positive NPV?

(c) Comment on the risk in undertaking this project.

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Chapter 6

Divisional Performance Measurement

Decentralisation

(a) Define the following concepts:

(i) Responsibility accounting

(ii) An investment centre

(iii) Return on investment (for a division)

(iv) Residual income (for a division).

(b) The following information available about Divisions M and W, which are investment centres in LK Group.

Division M Division W

Divisional investment #200,000 #5,000,000

Division profit #20,000 #410,000

The weighted average cost of capital for LK Group is 8%.

Ignore taxation.

Required

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(a) Evaluate the performance of Division M and Division W.

(b) Re-evaluate the situation given that the weighted cost of capital is

(1) 6%

(2) 10%.Divisional performance measures

(a) Compare and contrast the use of residual income and return on investment in divisional performance measurement, stating the advantages and disadvantages of each.

(b) Division Y of Chardonnay currently has capital employed of #100,000 and earns an annual profit after depreciation of #18,000. The divisional manager is considering an investment of #10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of #1,600. The cost of capital is 15%.

Calculate the following and comment on the results.

(i) The return on divisional investment, before and after the new investment

(ii) The divisional residual income before and after the new investment

(c) Explain the potential benefits of operating a transfer pricing system within a divisionalised company.

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Chapter 7

Divisional Performance System Responsibility

A multinational company established a new operating division in Fenland four years ago. The operating division has been established as a profit centre. Decisions relating to the purchase of capital equipment for the division, and borrowing to finance the capital, have been taken at head office.

The results for the first four years of operation have been as follows:

Year 1 Year 2 Year 3 Year 4

#000 #000 #000 #000

Sales revenue 172 646 810 1,792

Operating costs 167 620 718 1,490

Depreciation 25 104 187 530

Interest charges 0 132 240 462

Profit/(loss) (20) (210) (335) (690) The managing director of the division has been asked to explain its poor performance and the escalating losses. In response, the managing director has argued that the performance of the division has improved, and is not getting worse.

Required

(a) Identify a measure of performance that would suggest that the performance of the division has been improving over the four-year period.

(b) Suggest how the performance of the division should be assessed, and state whether you agree or disagree with the view of the managing director that performance has improved.

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Value for money

A school teaches children from the age of 11 to the age of 18. The governors of the school have been concerned that in recent years, the performance of the school has deteriorated. The chairman of the board of governors has stated his view that parents of the children at the school have a right to expect more value for money, and he proposes that a value for money exercise should be carried out.

Required

(i) What aspects of the school and its operations would a value for money exercise investigate?

(ii) What might be the benefits of a value for money exercise?

Balanced

A balanced scorecard approach may be used to set performance targets and monitor performance.

(a) List the four aspects of performance in a balanced scorecard approach.

(b) Suggest how a professional football club might use a balanced scorecard approach. Indicate what key aspects of performance might be identified and suggest performance targets that a football club might use in a balanced scorecard approach.

Non-profit seeking organisations (a) The absence of the profit measure in non-profit seeking organisations causes problems for the

measurement of their efficiency and effectiveness. Required

(i) Explain why the absence of the profit measure should be a cause of the problems referred to.

(ii) Explain how these problems extend to activities within business entities which have a profit motive. Support your answer with examples.

(b) A public health clinic is the subject of a scheme to measure its efficiency and effectiveness. Amongst a number of factors, the 'quality of care provided' has been included as an aspect of the clinic's service to be measured. Three features of 'quality of care provided' have been listed.

(i) Clinic's adherence to appointment times

(ii) Patients' ability to contact the clinic and make appointment without difficulty

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(iii) The provision of a comprehensive patient health monitoring programme

Required

(i) Suggest a set of quantitative measures which can be used to identify the effective level of achievement of each of the features listed.

(ii) Indicate how these measures could be combined into a single 'quality of care' measure.

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Chapter 8

Pricing

A new product is being launched, and the following costs have been estimated:

Materials #10 per unit

Labour #8 per unit

Variable overheads #5 per unit

Fixed overheads have been estimated to be #50,000 per year, and the budgeted production is 10,000 units per year.

Calculate the selling price based on:

(a) Full cost plus 20%

(b) Marginal cost plus 40%

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Q2

Kennedy plc has established that the price demand relationship is as follows:

S.P. p.u. Demand

16 100

15.5 200

15 300

14.5 400

14 500

13.5 600

13 700

They have also established that the cost per unit for production of jars of coffee is as follows:

Quantity Cost p.u.

100 14.0

200 13.9

300 13.8

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400 13.7

500 13.6

600 13.5

700 13.4

800 13.3

900 13.2

Determine the optimal selling price in order to maximise profitQ3

At a selling price of #100 p.u. the company will sell 20,000 units p.a.. For every #2 change in the selling price, the demand will change by 2,000 units. The costs comprise a fixed cost of #100,000, together with a variable cost of #5 p.u.. Calculate the selling price p.u. that will result in maximum profit p.a., and the amount of that profit.

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Chapter 9Two divisions

A company has two operating divisions, X and Y, that are treated as profit centres for the purpose of performance reporting.

Division X makes two products, Product A and Product B. Product A is sold to external customers for #62 per unit. Product B is a part-finished item that is sold only to Division Y.

Division Y can obtain the part-finished item from either Division X or from an external supplier. The external supplier charges a price of #55 per unit.

The production capacity of Division X is measured in total units of output for Products A and B. Each unit requires the same direct labour time. The costs of production in Division X are as follows:

Product A Product B

# #

Variable cost 46 48

Fixed cost 19 19

Full cost 65 67 Required

You have been asked to recommend the optimal transfer price, or range of transfer prices, for Product B.

(a) What is an optimal transfer price?

(b) What would be the optimal transfer price for Product B if there is spare production capacity in Division X?

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(c) What would be the optimal transfer price for Product B if Division X is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Product A?

37

Chapter 10

Variance Analysis

(a) I GO DIE-Chem Co manufacture a single product, product W, and

have provided you with the following information which relates to the period which has just ended. Standard cost per unit of product W Materials:

Material Price per kilo Total

Kilos # #

F 15 4 60

G 12 3 36

H 8 6 48

35 144

Labour: Rate per hour

Hours #

Department P 4 10 40

Department Q 2 6 12

196

Budgeted sales for the period are 4,500 units at #260 per unit.

There were no budgeted opening or closing inventories of product W.

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The actual materials and labour used was as follows.

Materials: Material Price per kilo Total

Kilos # #

F 59,800 4.25 254,150

G 53,500 2.80 149,800

H 33,300 6.40 213,120

Labour: Rate per hour

Hours #

Department P 20,500 10.60 217,300

Department Q 9,225 5.60 51,660

4,100 units of product W were produced and sold for #1,115,800. Required

(i) Calculate the following material variances.

(1) Price (2) Usage (3) Mix (4) Yield

(ii) Calculate the following labour variances for each of the production departments.

(1) Cost (2) Efficiency (3) Rate

(iii) Calculate the sales variances.

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(iv) Comment on your findings to help explain what has happened to the yield variance.

Mobel manufactures and sells electronic games. Each year it budgets for its profits, including detailed budgets for sales, materials and labour. Departmental managers are allowed to revise their budgets if they believe there have been planning errors.

The managing director has become concerned that recent budget revisions have meant that there are favourable operational variances but less profit than expected.

Two specific situations have recently arisen, for which budget revisions were sought:

Components

A supplier of an essential component was forced into liquidation. Mobel’s buyer managed to find another supplier overseas at short notice. This second supplier charged more for the components and also a delivery charge. The buyer has said that he had to agree to the price as the component was needed urgently. Two months later, another, more competitive, local supplier was found.

A budget revision is being sought for the two months where higher prices had to be paid.

Labour During the early part of the year, Mobel experienced problems with the quality of work being produced by the game designers. The departmental manager had complained in his board report that his team were complacent and had not attempted to keep up with new developments in the industry.

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It was therefore decided, after discussion of the board report, that something had to be done. The company changed its policy so as to recruit designers with excellent reputations for innovation on short-term contracts. This has had the effect of pushing up the costs involved but increasing productivity.

The design departmental manager has requested a budget revision to cover the extra costs involved following the change of policy.

Required

(a) Discuss each request for a budget revision, putting what you see as both sides of the argument and conclude whether a budget revision should be allowed.

The standard marginal cost of the best selling game is #35 per unit. The standard cost is recalculated once each year. Actual production costs during July 20X1 were #425,600, when 11,200 units were made. The management of Mobel has now accepted that a more realistic standard marginal cost would have been #55 per unit given current conditions. Required

(b) Calculate the planning and operational variances and comment on your results.

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Chapter 11

LINEAR PROGRAMMING

A farmer wants to provide a head of cow with a minimum cost nutrition diet. He is considering two feed grains; feed A costing N15 a kilo and feed B costing N22 a kilo. Cows require three essential nutrients;

Nutrients 1, 2 and 3. The respective minimum daily nutrient requirements per cow are 20 units, 14 units and 16 units. One kilo of feed A provides 4 units of nutrients 1, and 1 unit each of others. One kilo of feed B provides 2 units of nutrients 1 and 2 plus 4 units of nutrient 3.

You are required to;

Determine the most economical blend of feed gains to satisfy each cow’s daily requirement

A tailor has the following materials available for the production of Dress and Suit. 160 sq2 m of cotton, 110 sq2 m of silk and 150 sq2 m of wool. A dress requires 2 sq2 m of cotton and 1 sq2 m each of silk and wool. A suit requires 1 sq2 m of cotton, 2 sq2 m of silk and 3 sq2 m of wool. If the gross profit realizable from dress and the suit is respectively N150 and N200.

How many of each garment should the tailor make in order to maximize profits?