Special Revision Session – Paper 04

 
Cost Management
 

 
CL3 – Advanced Management Accounting

Section 01
Question 01
Explain the use of value chain analysis to gain competitive advantage
Question 02
How entity can use benchmarking and balanced score card to improve the
organizational performance. Explain the usefulness of Balanced Score Card
when evaluating organizational performance.
Question 03
Why Just-In-Time system considered as a “Pull system” rather than a “Push
System”? Explain the available methods and techniques for JIT Management.
Question 04
What are the recent changes in manufacturing environment and explain the
irrelevancy of traditional management accounting practices?
Question 05
What are the management accounting techniques available to asses the
environmental impact of an organization??
Question 06
Explain the four types of quality costs while giving 2 examples for each.
Question 07
How Marginal costing contribution is different from the throughput accounting
contribution.
Question 08
Explain the relationship between Target Costing, Kaizen costing and Lifecycle
costing
Question 09
What is the purpose of “Business Process Re-engineering”?
Question 10
What are the drawbacks of using Traditional absorption Costing?
 

 
 Section 02
Question 01
 

Brick by Brick (BBB) is a building business that provides a range of

building services to the public. Recently they have been asked to quote for
garage conversions (GC) and extensions to properties (EX) and have found
that they are winning fewer GC contracts than expected.

BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads
are currently absorbed on a labour hour basis. BBB thinks that a switch to
Activity Based Costing (ABC) to absorb overheads would reduce the cost
associated to GC and hence make them more competitive.

You are provided with the following data:

Total
Annual
Overhead Category Activity Driver Activity
Overhead Volume
Supervisors 90,000 Site Visits 500
Planners 70,000 Planning Documents 250
Property Related 240,000 Labour Hours 40,000

A typical GC costs Rs.3,500 in materials and takes 300 labour hours to

complete. A GC requires only one site visit by a supervisor and needs only
one planning document to be raised. The typical EX costs Rs. 8,000 in
materials and takes 500 hours to complete. An EX requires six site visits
and five planning documents. In all cases labour is paid Rs. 15 per hour.

Required
(a) Calculate the cost and quoted price of a GC and of an EX using labour
hours to absorb the overheads.

(b) Calculate the cost and the quoted price of a GC and of an EX using ABC
to absorb the overheads.
 c.) Assuming that the cost of a GC falls by nearly 7% and the price of an EX
rises by about 2% as a result of the change to ABC, suggest possible pricing
strategies for the two products that BBB sells and suggest two reasons
other than high prices for the current poor sales of the GC.

Question 02
Holts (Pvt) Ltd (HPL) produces curd in 1 litre plastic cups and sells it in the
local market. HPL has identified three main sales categories: outlets,
supermarkets and wholesalers. Sales to outlets are made at a 5% discount.
Supermarkets are awarded with a 25% normal discount on the marked price
if HPL provides transport to the customers’ main stores. However, a special
discount of 30% was awarded last year to the supermarkets since the
customers collected the goods from HPL’s stores themselves. The wholesalers
are eligible only for a 20% discount on the marked price.
The following information relating to the last year has been extracted.
Description Outlets Supermarkets Wholesalers Total
No. of cups sold 10,000 80,000 120,000 210,000
No. of sales visits to Nil 200 1,800 2,000
customers
No. of customer orders 400 100 500 1,000
No. of deliveries to Nil Nil 600 600
customers
The order size for supermarkets was, in general, 400 cups per delivery.
The composition of selling and distribution overheads for the last year was as
follows.
Activity Overheads (Rs.)
Sales visits to customers 7,000,000
Processing of customer orders 3,000,000
Customer delivery 6,700,000
Total selling and distribution overheads 16,700,000

The marked selling price per cup is Rs. 1,000 and the marginal cost of
manufacturing is Rs. 600 per cup.
Required:
(a) Prepare a customer profitability analysis (CPA) for each sales category
using the activity-based costing (ABC) principles.
(6 marks)
(b) Assess whether HPL should continue the special discount scheme for
supermarkets.
(2 marks)
(c) Based on the CPA prepared, explain two (02) initiatives that the
management of HPL could take to improve the profitability of the company.
(2 marks)
(2019 Dec. Q1 ‐ Total: 10 marks)
Question 03
Protech (Pvt) Ltd (PPL) is an innovative products manufacturing company.
Since their product designs and features change over a short period of time it
operates the life cycle costing method in product costing.
The television set (model X) recently developed by PPL is expected to have a
lifetime of 3 years for which the following forecast has been made.
Year 2019 2020 2021
Units to be manufactured and sold 20,000 30,000 6,000
Expected profit margin based on life cycle
cost 40% 35% 25%
Material costs (Rs. million) 240 60 100
Labour costs (Rs. million) 58 330 81
Marketing costs (Rs. million) 80 38 72
Other overheads (Rs. million) 18 20 8

The plant modification cost for production of model X is estimated to be Rs. 10

million. PPL has already spent Rs. 5 million on the development of model X.
Both of these expenses are not included in the expenses forecasted above.
Ignore time value of money.

Required:
(a) Compute the expected unit prices for the model X for years 2019, 2020
and 2021.
(5 marks)
(b) Explain two (02) benefits of using life cycle costing at PPL.
(2 marks)
(c) The marketing manager of PPL is of the opinion that PPL will face
competition from other suppliers who may offer similar television sets at a
lesser price than the prices computed per (a) above.

Explain how target costing could be used in order to gain a competitive

advantage in marketing model X.
(3 marks)
(2018 June Q 01‐ Total: 10 marks)

Question 04
Wash Co assembles and sells two types of washing machines – the Spin (S) and
the Rinse (R). The company has two divisions: the assembly division, and the
retail division.
The company’s policy is to transfer the machines from the assembly division to
the retail division at full cost plus 10%. This has resulted in internal transfer
prices, when S and R are being transferred to the retail division, of
$220·17 and $241·69 respectively. The retail division currently sells S to the
general public for $320 per machine and R for $260 per machine. Assume it
incurs no other costs except for the transfer price.
The retail division’s manager is convinced that, if he could obtain R at a lower
cost and therefore reduce the external selling price from $260 to $230 per unit,
he could significantly increase sales of R, which would be beneficial to both
divisions. He has questioned the fact that the overhead costs are allocated to
the products on the basis of labour hours; he thinks it should be done using
machine hours or even activity based costing.
You have obtained the following information for the last month from the
assembly division:
Product S Product R
Production and sales (units) 3,200 5,450
Materials cost $117 $95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80
Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
––––––––
Total 877,620
––––––––
Required:
(a) Using traditional absorption costing, calculate new transfer prices for S
and R if machine hours are used as a basis for absorption rather than labour
hours.
Note: round all workings to 2 decimal places. (3 marks)
(b) Using activity-based costing to allocate the overheads, recalculate the
transfer prices for S and R.
Note: round all workings to 2 decimal places. (8 marks)
(c) (i) Calculate last month’s profit for each division, showing it both for each
product and in total, if activity
based costing is used. (3 marks)

Question 05

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 batch 4 5 4
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.
Required:
(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.
(b) Calculate the budgeted full production cost per unit of each product using
activity based costing. All workings should be to two decimal places.

(c) 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.