Question 1 (25 Marks/30mins)

A company manufactures MP3 players. It is planning to introduce a new model and

development with begin very soon. It expects the new products to have a life cycle of 3 years
and the following costs have been estimated.

Particulars Year 0 Year 1 Year 2 Year 3

Units manufactured and
-- 12,500 50,000 37,500
sold
Price per unit -- £45.00 £40.00 £35.00
Research and
£425,000 £45,000 -- -
Development Costs
Production Costs
Variable cost per unit -- £30.00 £25.00 £25.00
Fixed costs -- £250,000 £250,000 £250,000
Marketing Costs
Variable cost per unit £5.00 £4.00 £3.00
Fixed Cost £150,000 £100,000 £100,000
Distribution Cost
Variable cost per unit £1.00 £1.00 £1.00
Fixed Cost £95,000 £95,000 £95,000
Customer service cost
£3.00 £2.00 £2.00
per unit

Required:
(a) Explain life cycle costing and state what distinguishes it from more traditional
management accounting techniques. (10
marks)
(b) Narrate the benefits of life cycle costing. (5 marks)
(c) Calculate the cost per unit looking at the whole lifecycle and comment on the price to
be charged. (10 marks)

[Total 25 marks]
Question 2 (25 marks / 30 minutes)

Lam Soon Ltd specialises in the manufacturing of a different types of cooking pot for the
Asian market. The R & D department is doing a research on a new type of high tech cooking
pot, which would be the first of its kind in the market. The high tech cooking pot takes one
year to research and develop, with sales commencing at the beginning of the year 2019. The
high tech cooking pot is expected to have a product life cycle of three years, before it is
replaced with a more sophisticated cooking pot. The following are the budgeted cost prepared
by the financial planner.
PARTICULARS YEAR 2011 YEAR 2012 YEAR 2013
Output in units and sales -- 125,000 units 250,000 units
Research and development Cost £170,000
Product design costs £680,000
Marketing and Advertising Cost £1,250,000 £1,850,000 £2,350,000
Manufacturing Overhead
Marginal cost per unit £27.50 £30.75
Fixed Manufacturing Overhead £850,000 £1,500,000
Distribution Overhead
Variable cost per unit £4.50 £4.80
Fixed distribution overhead £180,000 £275,000
Selling Overhead
Variable cost per unit £4.50 £5.50
Fixed Selling Overhead £450,000 £450.000
Administration Overhead £375,000 £680,000 £1,800,000
Note: You should ignore the time value of money.

REQUIRED:

(a) Calculate the Product Life Cycle Cost per unit.

(8 marks)

(b) After preparing the budget above, Sime Furniture Ltd realises that it has not taken into
account of the learning curve in the manufacturing process. The marginal production
cost per unit as given above in year 2012 £27.50 and £30.75` in year 2013, includes a
cost for 0.6 standard hours per unit. The remainder of the variable production cost is
not driven by labour hours. The year 2012 labour rate is £18 and year 2013 labour rate
 is £19.50 per hour. Subsequently, it has been estimated that, although the first unit is
expected to take 0.6 hours, a learning curve of 95% is expected to occur until the 100 th
unit has been completed.

Compute the revised product life cycle cost per unit, taking into consideration the
learning curve.
Note: the value of the learning co-efficient, b is -0.070085
(12 marks)
(c) Analyse the benefits of life cycle costing as specialist cost and management
accounting techniques.
(5 marks)
[Total: 25 marks]