ABC ANALYSIS

The Mukuru Co produces three products, A, B and C, all made from the
same material. Until now, it has used traditional absorption costing to
allocate overheads to its products. The company is now considering an
activity-based costing system in the hope that it will improve profitability.
Information for the three products for the last year is as follows:
A B C
Production and sales volumes (units) 15,000 12,000 18,00
0
Selling price per unit $7.50 $12 $13
Raw material usage (kg) per unit 2 3 4
Direct labour hours per unit 0·1 0·15 0·2
Machine hours per unit 0·5 0·7 0·9
Number of production runs per annum 16 12 8
Number of purchase orders per annum 24 28 42
Number of deliveries to retailers per 48 30 62
annum

The price for raw materials remained constant throughout the year at
$1·20 per kg. Similarly, the direct labour cost for the whole workforce was
$14·80 per hour. The annual overhead costs were as follows:
$
Machine set up costs 26,550
Machine running costs 66,400
Procurement costs 48,000
Delivery costs 54,320
YOU ARE REQUIRED TO:
(a)Calculate the full cost per unit for products A, B and C under traditional
absorption costing, using direct labour hours as the basis for
apportionment. (7 marks)
(b)Calculate the full cost per unit of each product using activity-based costing.
(12 marks)
Using your calculation from (a) and (b) above, explain how activity-based
costing may help The Mukuru Co improve the profitability of each product. (6
marks
QUESTION

Kwaedza Ltd. manufactures and sells components used in the computer

hardware industry. The company currently charge overheads to products
using a plant-wide rate based on direct labour hours. This method was
introduced in 1990 when the company was established and the company
only produced one product. Since 1990, the company has invested heavily
in advanced manufacturing technologies and has increased their product
range. Kwaedza Ltd. operates in a very competitive market and due to
current economic conditions they are coming under increasing pressure
by their customers to reduce their prices. The company are considering
the introduction of an Activity Based Costing (ABC) system and has
provided the following information in relation to their three products:

Product A Product B Product C

Direct materials per unit $100 $120 $150
Direct labour hours per 10 hours 8 hours 9 hours
unit
Machine hours per unit 4 hours 6 hours 3 hours
Production/sales in units 10,000 4,000 6,000

Direct labour is paid at $14 per labour hour. The company calculates
selling price by applying a mark-up on cost of 25%.

Details of the overheads of Kwaedza Ltd. are as follows:

$
Machine related costs 246,000
Set-up costs 180,000
Delivery costs 68,000
Quality related costs 64,000

Further information in relation to all three products is given as follows:

Product A Product B Product C

Number of set-ups 100 30 20
Number of deliveries 1,000 550 450
Number of inspections 200 100 100

YOU ARE REQUIRED TO:

(a) Calculate the unit production cost and unit profit using the traditional
approach to costing. (4marks)
(b) Calculate the unit production cost and unit profit based on Activity
Based Costing principles. (15 marks)
(c) Identify three reasons why Kwaedza Ltd. should implement an
Activity Based Costing system. (6 marks)
[Note: Figures to be rounded to two decimal places]
[Total: 25 Marks]
 QUESTION 3
MUSHANDIKE Silverware Products Limited is a leading manufacturer of
silver picture frames. The company used a traditional costing system to
allocate production overheads to products using machine hours.

The newly appointed financial controller believes that activity based

costing would provide a better allocation of production overheads to
products than the current system. You are provided with the following
total production overheads for the last period recorded by the cost
accounting system.
$
Utility costs related to machine hours 189,000
Production set up costs 120,000
Cost of ordering materials 18,000
Cost of handling materials 33,000

Details of the three models of products and relevant actual information for
the last period are also provided as follows.

Model 1 Model 2 Model 3

Number of production runs 17 25 18
Number of material orders 20 30 40
Number of material requisitions 30 100 70
Units produced 1,000 2,000 2,500
Machine hours per unit 1 1.5 2
Direct labour hours per unit ($60 per 0.5 hour 1 hour 2 hours
hour)
Direct material per unit $10 $12 $15

YOU ARE REQUIRED TO:

(a) Calculate the unit production cost of each of the three products using
(i) The traditional absorption costing, and
(ii)The activity based costing approach respectively. (20 marks)
Comment on the calculations in part (a) above and explain why the activity
based costing approach is superior to traditional absorption costing.

QUESTION
Duff Co manufactures three products, X, Y and Z. Demand for products X
and Y is relatively elastic whilst demand for product Z is relatively
inelastic. Each product uses the same materials and the same type of
direct labour but in different quantities. For many years, the company has
been using full absorption costing and absorbing overheads on the basis
of direct labour hours. Selling prices are then determined using cost plus
pricing. This is common within this industry, with most competitors
applying a standard mark-up.
 Budgeted production and sales volumes for X, Y and Z for the next year
are 20,000 units, 16,000 units and 22,000 units respectively.
The budgeted direct costs of the three products are shown below:
Product X Y Z
$ per unit $ per unit $ per unit
Direct materials 25 28 22
Direct labour ($12 per hour) 30 36 24
In the next year, Duff Co also expects to incur indirect production costs of
$1,377,400, which are analysed as follows:
Cost pools $ Cost drivers
Machine set up costs 280,000 Number of batches
Material ordering costs 316,000 Number of purchase
orders
Machine running costs 420,000 Number of machine
hours
General facility costs 361,400 Number of machine
hours
1,377,400
The following additional data relate to each product:
Product X Y Z
Batch size (units) 500 800 400
No of purchase orders per 4 5 4
batch
Machine hours per unit 1·5 1·25 1·4

Duff Co wants to boost sales revenue in order to increase profits but its
capacity to do this is limited because of its use of cost plus pricing and the
application of the standard mark-up. The finance director has suggested
using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different
price to be charged.

YOU ARE REQUIRED TO:

(a) Calculate the budgeted full production cost per unit of each product
using Duff Co’s current method of absorption costing. All workings
should be to two decimal places. (5 marks)
(b)Calculate the budgeted full production cost per unit of each product
using activity based costing. All workings should be to two decimal
places. (14 marks)
Discuss the impact on the selling prices and the sales volumes OF EACH
PRODUCT which a change to activity based costing would be expected to bring
about.

THROUGHPUT ACCOUNTING

QUESTION 9

Solar Systems Co (S Co) makes two types of solar panels at its

manufacturing plant: large panels for commercial customers and small
panels for domestic customers. All panels are produced using the same
materials, machinery and a skilled labour force. Production takes place for
five days per week, from 7 am until 8 pm (13 hours), 50 weeks of the
year. Each panel has to be cut, moulded and then assembled using a
cutting machine (Machine C), a moulding machine (Machine M) and an
assembly machine (Machine A).

As part of a government scheme to increase renewable energy sources, S

Co has guaranteed not to increase the price of small or large panels for
the next three years. It has also agreed to supply a minimum of 1,000
small panels each year to domestic customers for this three-year period.

Due to poor productivity levels, late orders and declining profits over
recent years, the finance director has suggested the introduction of
throughput accounting within the organisation, together with a ‘Just in
Time’ system of production. Material costs and selling prices for each type
of panel are shown below.

Large panels Small panels

$ $
Selling price per unit 12,600 3,800
Material costs per unit 4,300 1,160

Total factory costs, which include the cost of labour and all factory
overheads, are $12 million each year at the plant.

Out of the 13 hours available for production each day, workers take a one
hour lunch break. For the remaining 12 hours, Machine C is utilized 85% of
the time and Machines M and A are utilized 90% of the time. The
unproductive time arises either as a result
of routine maintenance or because of staff absenteeism, as each machine
needs to be manned by skilled workers in order for the machine to run.
The skilled workers are currently only trained to work on one type of
machine each. Maintenance work is carried out by external contractors
who provide a round the clock service (that is, they are available 24 hours
a day, seven days a week), should it be required.

The following information is available for Machine M, which has been

identified as the bottleneck resource:

Large panels Small panels

Hours per unit Hours per unit
Machine M 1·4 0·6

There is currently plenty of spare capacity on Machines C and A. Maximum

annual demand for large panels and small panels is 1,800 units and 1,700
units respectively.

YOU ARE REQUIRED TO:

(a) Calculate the throughput accounting ratio for large panels and for
small panels and explain what they indicate to S Co about
production of large and small panels. (12 marks)
(b) Assume that your calculations in part (a) have shown that large
panels have a higher throughput accounting ratio than small panels.

YOU ARE REQUIRED TO:

Using throughput accounting, prepare calculations to determine the

optimum production mix and maximum profit of S Co for the next
year. (7 marks)

(c) Suggest and discuss THREE ways in which S Co could try to increase
its production capacity and hence increase throughput in the next
year without making any additional investment in machinery. (6
marks)

[Total: 25 Marks]
QUESTION
A Co makes two products, B1 and B2. Its machines can only work on one
product at a time. The two products are worked on in two departments by
differing grades of labour. The labour requirements for the two products
are as follows:
Minutes per unit of
product B1

B2
Department 1 12 16
Department 2 20 15
There is currently a shortage of labour and the maximum times available
each day in Departments 1 and 2 are 480 minutes and 840 minutes,
respectively.
The current selling prices and costs for the two products are shown below:
B1 B2
$ per unit $ per
unit
Selling price 50·00 65·00
Direct materials 10·00 15·00
Direct labour 10·40 6·20
Variable overheads 6·40 9·20
Fixed overheads 12·80 18·40
Profit per unit 10·40 16·20

As part of the budget-setting process, A Co needs to know the optimum

output levels. All output is sold.
(a)Calculate the maximum number of each product that could be
produced each day, and identify the limiting factor/bottleneck. (4 marks)
(b)Using traditional contribution analysis, calculate the 'profit-maximizing'
output each day, and the contribution at this level of output. (5 marks)
(c) Using a throughput approach, calculate the 'throughput-maximizing'
output each day, and the 'throughput contribution' at this level of output.
(8 marks)
(d)Explain the term 'value chain costing or accounting' and the
circumstances in which its use would be appropriate. (4 marks)
(e) Discuss why any management accounting system (and a value chain
costing system in particular) may report figures for inventory value which
are not the same as those given by a traditional stock take. (4 marks)
(Total: 25 marks)

QUESTION

MUSHAMBANZOU Ltd produces three products using three different

machines. The following information is available for a product for a

 period:

Product X Y Z
($) ($) ($)
Selling price per unit 20 15 10
Direct materials 8 5 4
Direct labour 5 3 2
Overheads 2 1 1

Estimated sale demand (unit) 310 280 250

Machine hours required per

unit: 4 2 1
Machine 1
Machine 2 4 3 2
Machine 3 3 1 3

Machine capacity is limited to 2,000 hours for each machine.

Required:

(a) Calculate throughput accounting ratio and rank the products. (18 marks)
(b) Calculate the revised production schedule and the maximum profit that
the company is likely to get given that there is a bottleneck. (7
marks)
(TOTAL MARKS: 25)

LIFE CYCLE COSTING

Wargrin designs, develops and sells many PC games. Games have a short
lifecycle lasting around three years only. Performance of the games is
measured by reference to the profits made in each of the expected three
years of popularity. Wargrin accepts a net profit of 35% of turnover as
reasonable. A rate of contribution (sales price less variable cost) of 75% is
also considered acceptable.
Wargrin has a large centralized development department which carries
out all the design work before it passes the completed game to the sales
and distribution department to market and distribute the product.
Wargrin has developed a brand new game called Stealth and this has the
following budgeted performance figures.
The selling price of Stealth will be a constant $30 per game. Analysis of
the costs show that at a volume of 10,000 units a total cost of $130,000 is
expected. However at a volume of 14,000 units a total cost of $150,000 is
expected. If volumes exceed 15,000 units the fixed costs will increase by
50%.
Stealth's budgeted volumes are as follows:
Year 1 Year 2 Year 3
Sales volume 8,000 units 16,000 units 4,000 units
In addition, marketing costs for Stealth will be $60,000 in year one and
$40,000 in year two. Design and development costs are all incurred
before the game is launched and has cost $300,000 for Stealth. These
costs are written off to the income statement as incurred (i.e. before year
1 above).
YOU ARE REQUIRED TO:
(a) Explain the principles behind lifecycle costing and briefly state why
Wargrin in particular should consider these lifecycle principles. (5 marks)
(b)Produce the budgeted results for the game 'Stealth' and briefly assess
the game's expected performance, taking into account the whole lifecycle
of the game. (10 marks)
(c) Explain why environmental management accounting has become so
common these days and how is this related to life cycle costing. (6 marks)
(d) Discuss the extent to which a meaningful standard cost can be set for
games produced by Wargrin. You should consider each of the cost
classifications mentioned above. (4 marks)
(Total 25 marks)
QUESTION 23
Fit Co specialises in the manufacture of a small range of hi-tech products
for the fitness market. They are currently considering the development of
a new type of fitness monitor, which would be the first of its kind in the
market. It would take one year to develop, with sales then commencing at
the beginning of the second year. The product is expected to have a life
cycle of two years, before it is replaced with a technologically superior
product. The following cost estimates have been made.

Year 1 Year 2 Year 3

Units manufactured and sold 100,000 200,000
Research and development costs $160,000
Product design costs $800,000
Marketing costs $1,200,00 $1,000,00 $1,750,00
0 0 0
Manufacturing costs:
Variable cost per unit $40 $42
Fixed production $650,000 $1,290,00
costs 0
Distribution costs:
 Variable cost per unit $4 $4·50
Fixed distribution $120,000 $120,000
costs
Selling
costs:
Variable cost per unit $3 $3·20
Fixed selling costs $180,000 $180,000
Administration costs $200,000 $900,000 $1,500,00
0
Note: You should ignore the time value of
money. YOU ARE REQUIRED TO:
(a) Calculate the life cycle cost per unit.(7 marks)
(b)After preparing the cost estimates above, the company realises
that it has not taken into account the effect of the learning curve on
the production process. The variable manufacturing cost per unit
above, of $40 in year 2 and $42 in year 3, includes a cost for 0·5
hours of labour. The remainder of the variable manufacturing cost is
not driven by labour hours. The year 2 cost per hour for labour is
$24 and the year 3 cost is $26 per hour. Subsequently, it has now
been estimated that, although the first unit is expected to take 0·5
hours, a learning curve of 95% is expected to occur until the 100th
unit has been completed.
Calculate the revised life cycle cost per unit, taking into account the
effect of the learning curve.
Note: the value of the learning co-efficient, b, is –0·0740005.(13 marks)
(c) Discuss the benefits of life cycle costing.(5 marks) (Total 25 marks)

Relevant cost analysis

QUESTION

Promo Tees Ltd specialises in manufacturing good quality pure cotton

t-shirts that are sold to two top retailers. The company has recently
been approached by a conference organiser to provide a quotation for
the supply of 5,000 t-shirts over the next three months. As Promo
Tees Ltd is currently working at 80% of its full production capacity it is
seriously considering undertaking this short term contract to boost its
profits. The following information is available:
1. The conference organiser requires the t-shirts to be in equal
quantities of black and white cotton. To fulfil the contract
2,000 metres of white cotton fabric and 2,000 metres of black
cotton fabric is required.

2. Currently, Promo Tees Ltd only manufactures white t-shirts

and has plenty of fabric available which was purchased in bulk
six months ago at $2.25 per metre. The current price of this
cotton fabric is $2.40.

3. The company does not have any black cotton fabric in stock.
However, it could buy some from an existing supplier for
$2.60 per metre but must purchase a minimum of 2,500
metres. At present the company has no use for any unused black
cotton fabric.

4. When manufacturing t-shirts, only white thread may be used

to make white t- shirts and only black thread may be used to
make black t-shirts.

5. For each 1,000 t-shirts produced, 200 reels of cotton thread

would be required. At present there are 2,000 reels of white
cotton thread in stock which originally cost $1,800 in total
some months ago. The purchase price has not increased since
that time.

6. As the company does not have any black cotton thread in

stock it will have to purchase some and has been quoted a
price of $1.10 per reel. A regular supplier has offered Promo
Tees Ltd an end of batch box of 1,000 reels of black cotton
thread at a discount price of $450. If the black thread is not
used for this contract it cannot be used for producing any
other products.

7. To meet the labour requirements of the contract some skilled

and unskilled workers are required. The cost for skilled staff to
work on the contract amounts to
$9,250. The factory foreman has stated that it would be
feasible for the existing skilled staff to work on the contract as
there is sufficient idle time. Additional unskilled staff will have
to be employed on a casual basis, as required, to work on the
contract at a cost of $15,000 in total.

8. Machinery not needed in the current production set up could

be used for this contract. However, Promo Tees Ltd has been
offered $5,000 to use it for the next three months by another
clothing manufacturer.

9. Depreciation on the machinery, noted at 8 above, amounts to

 $24,000 per annum.

10. The fixed production overhead applicable to the contract is

$5,250. This has been calculated using an overhead
absorption rate of $1.05 per t-shirt.

11. The conference organiser requires a logo to be applied to

each t-shirt. The logos cost $0.25 each and the company
would have to purchase these, in advance, from a specific
supplier. If the logos are not used on the contract they can be
returned to the supplier for a full refund.

YOU ARE REQUIRED TO:

(a) Briefly explain the

following terms:
(i) Relevant cost
(ii)Limiting factor (4
marks)
(b) On the basis of the financial information provided above,
calculate the lowest quotation that Promo Tees Ltd can offer for the
contract without incurring a loss.
(17 marks)
(c) Outline TWO qualitative factors that Promo Tees Ltd should take
into consideration before going ahead with the contract.
(4 marks) [Total: 25 Marks]

QUESTION 9

The Telephone Co (T Co) is a company specialising in the provision of

telephone systems for commercial clients. There are two parts to the
business:
 installing telephone systems in businesses, either first
time installations or replacement installations;
 Supporting the telephone systems
with annually renewable
maintenance contracts.
T Co has been approached by a potential customer, Push Co, who
wants to install a telephone system in new offices it is opening. Whilst
the job is not a particularly large one, T Co is hopeful of future
business in the form of replacement systems and support contracts
for Push Co. T Co is therefore keen to quote a competitive price for
the job. The following information should be considered:
1. One of the company’s salesmen has already been to visit Push
Co, to give them a demonstration of the new system, together
with a complimentary lunch, the costs of which totalled $400.
2. The installation is expected to take one week to complete and
 would require three engineers, each of whom is paid a
monthly salary of $4,000. The engineers have just had their
annually renewable contract renewed with T Co. One of the
three engineers has spare capacity to complete the work, but
the other two would have to be moved from contract X in
order to complete this one. Contract X generates a
contribution of $5 per engineer hour. There are no other
engineers available to continue with Contract X if these two
engineers are taken off the job. It would mean that T Co would
miss its contractual completion deadline on Contract X by one
week. As a result, T Co would have to pay a one-off penalty of
$500. Since there is no other work scheduled for their
engineers in one week’s time, it will not be a problem for them
to complete Contract X at this point.
3. T Co’s technical advisor would also need to dedicate eight
hours of his time to the job. He is working at full capacity, so
he would have to work overtime in order to do this. He is paid
an hourly rate of $40 and is paid for all overtime at a premium
of 50% above his usual hourly rate.
4. Two visits would need to be made by the site inspector to
approve the completed work. He is an independent contractor
who is not employed by T Co, and charges Push Co directly for
the work. His cost is $200 for each visit made.
5. T Co’s system trainer would need to spend one day at Push Co
delivering training. He is paid a monthly salary of $1,500 but
also receives commission of
$125 for each day spent delivering training at a client’s site.
6. 120 telephone handsets would need to be supplied to Push
Co. The current cost of these is $18·20 each, although T Co
already has 80 handsets in inventory. These were bought at a
price of $16·80 each. The handsets are the most popular
model on the market and frequently requested by T Co’s
customers.
7. Push Co would also need a computerised control system called
‘Swipe 2’. The current market price of Swipe 2 is $10,800,
although T Co has an older version of the system, ‘Swipe 1’, in
inventory, which could be modified at a cost of $4,600. T Co
paid $5,400 for Swipe 1 when it ordered it in error two months
ago and has no other use for it. The current market price of
Swipe 1 is $5,450, although if T Co tried to sell the one they
have, it would be deemed to be ‘used’ and therefore only
worth $3,000.
8. 1,000 metres of cable would be required to wire up the
system. The cable is used frequently by T Co and it has 200
metres in inventory, which cost $1·20 per metre. The current
market price for the cable is $1·30 per metre.
 9. You should assume that there are four weeks in each month
and that the standard working week is 40 hours long.
YOU ARE REQUIRED TO:

a) Prepare a cost statement, using relevant costing principles,

showing the minimum cost that T Co should charge for the
contract.
Make DETAILED notes showing how each cost has been
arrived at and EXPLAINING why each of the costs above has
been included or excluded from your cost statement.

(17 marks)
b) Explain the relevant costing principles used in part (a) and
explain the implications of the minimum price that has been
calculated in relation to the final price agreed with Push Co.

(8 marks)
(Total 25 marks)

QUESTION

Roscommon Plc is involved in the design and manufacture of custom

built factory equipment. The company has just received an enquiry
about the supply of 10 machines from one of their regular clients;
Boyle Ltd. Boyle Ltd has informed the company that the maximum
price they are willing to pay for each machine is $7,000.

The following details relates to the production of the machines:

a) Each machine would require 10 units of Material A, which is

used regularly by the company. The company has 120 units of
Material A in stock, which originally cost
$150 per unit. The replacement cost of Material A is $170 per
unit.
Each machine would also require 5 units of Material B. The
company has 50 units of Material B in stock, as it was
purchased a few years ago for use in the production of other
equipment which the company no longer produces. The
original purchase price for the units of Material B, in stock,
was $200 per unit. The replacement cost of Material B is $160
 per unit. The net realisable value for the units of Material B in
stock is $140.
b) Each machine would require 8 units of Material C, a material
that the company has never used. The purchase cost per unit
of Material C is $250.
c) 10 skilled hours, per machine, would be required. Skilled
workers are paid $20 per hour and are part of the permanent
work-force. At present there are 100 paid surplus skilled hours
per month.
d) 20 unskilled hours, per machine, would be required. Unskilled
workers are paid
$12 per hour and are employed on a casual basis.
e) A supervisor, with the necessary experience in the production
of similar machines, who is currently paid $40,000 per annum,
would be transferred to the job. This would necessitate the
hiring of a replacement supervisor for the duration of the
contract at a cost of $7,000.
f) Each machine would require 15 hours processing time on the
factory equipment. If the order is not accepted then
Roscommon Plc would sub-contract the factory equipment to
Castlerea Ltd at a rate of $100 per hour. The company
estimates that the depreciation charge for using the factory
equipment to produce the 10 machines would be $4,000.
g) Variable overheads are absorbed at a rate of $50 per skilled
labour hour.
h) Fixed production overheads are absorbed at a rate of $30 per
skilled labour hour.
i) It is company policy to add 20% on to the production cost as
an allowance against administration costs associated with the
jobs accepted.
j) The planning department of Roscommon Plc estimates that
they have incurred costs to date of $600.

YOU ARE REQUIRED TO:

(a) The Production Manager of Roscommon Plc stated that “it is

essential that in the short-run, only projects that are generating a profit
should be undertaken.” Discuss the above statement.
(6 marks)
(b) Determine using relevant costing principles whether or not
Roscommon Plc should undertake the contract. Your answer must
include an explanation for the inclusion or exclusion of each of the
above points.
(15 marks)
(c) Discuss the importance of qualitative factors in short-term decision
making.
(4 marks)
[Total: 25 marks]