MN1018: MANAGEMENT ACCOUNTING

Seminar 3: Short-term decision-making

Exercise 1 (based on the ACCA exam):

(Read Bhimani et al., pp. 299-300)

Cab Co owns and runs 350 taxis and had sales of $10 million in the last year.
Cab Co is considering introducing a new computerised taxi tracking system.

The expected costs and benefits of the new computerised tracking system are
as follows:

1. The system would cost $2,100,000 to implement.

2. $75,000 has already been spent on staff training in order to evaluate the
potential of the new system. Further training costs of $425,000 would be
required in the first year if the new system is implemented.

3. Six new members of staff would be recruited to manage the new system at a
total cost of $120,000 per annum.

4. Interest on money borrowed to finance the project would cost $150,000 per
annum.

Required:

State whether each of the following items are relevant or irrelevant cost.

(i) Computerised tracking system investment of $2,100,000;

(ii) Staff training costs of $75,000

(iii) New staff total salary of $120,000 per annum;

(iv) Staff training costs of $425,000

(v) Interest cost of $150,000 per annum.

Exercise 2:
A business provides three different services, the details of which are as follows:

Service (code name) X Y Z

£ £ £
Selling price per unit 50 40 65
Variable cost per unit (25) (20) (35)
Contribution per unit 25 20 30
Labor time per unit 5 hours 3 hours 5 hours

If sales demand are for X, 1000; Y, 2000 and Z, 3000 and available labour hour
is 10,000 hours, how many of each should be produced in order to maximise
contribution?

Exercise 3:
Beta Ltd. needed to determine if it would be cheaper to make 10,000 units of a
component in-house or to purchase them from an outside supplier for $4.75
each. Cost information on internal production includes the following:

Cost Description Unit cost ($) Total cost ($)

Direct materials 1.00 10,000

Direct labour 2.00 20,000

Variable overheads 0.80 8,000

Fixed overhead 4.40 44,000

Total costs 8.20 82,000

Fixed overhead will continue whether the component is produced internally or

externally. No additional costs of purchasing will be incurred beyond the
purchase price.
Required:

1. What are the alternatives for Beta Ltd.?

2. List the relevant costs of internal production and of external purchase.

3. Which alternative is more cost effective and by how much?

4. Now assume the fixed overhead includes $10,000 of cost that can be
avoided if the component is purchased externally. Which alternative is
more cost effective and by how much?

Exercise 4:
Read pp. 81-89 in the Atrill/McLaney textbook; use your lecture notes and
internet.

Make a list of non-financial factors that might be relevant for - but are not
considered in - marginal short-term analysis.