Ethiopian Civil Service University

M.Sc. in Accounting and Finance Program

Advanced Cost & Management Accounting Individual Assignment (20%)
Submission Date: Before the Final Exam date

Problem 1: Howard, financial analyst at KMW Corporation, is examining the behavior of quarterly
maintenance costs for budgeting purposes. Howard collects the following data on machine hours worked
and maintenance costs for the past five quarters.

Machine Hours Maintenance Cost

100,000 $205,000
120,000 240,000
110,000 220,000
125,000 260,000
95,000 200,000
Required:
a) Formulate the cost function from the quarterly data using the high-low and regression methods.
b) Estimate maintenance cost for next three quarters if the forecasted machine hours for the three
quarters are 140,000, 80,000, and 170,000 respectively using the two method under „a‟

Problem 2: Mr. Abebe is the new manager of the purchasing department for ABC Manufacturing. Mr.
Abebe has been asked to estimate future monthly purchase costs for raw material X, used in two of ABC‟s
products. Mr. Abebe has purchase cost and quantity data for the past nine months as follows:

Month Quantity purchased Cost of Purchase

January 2,700 12,468
February 2,820 12,660
March 4,068 17,280
April 3,744 15,816
May 2,988 13,164
June 3,216 13,896
July 3,636 15,228
August 2,316 10,272
September 3,552 14,940

Estimated monthly purchases for this part based on expected demand of the two products for the rest of the
three months are as follows:

Month Quantity purchased

October 3,360
November 3,720
December 3,000

Formulate the cost function used for forecasting under each of the following methods and forecast cost of
purchase for the remaining three months using
a) High low method
b) Regression method

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Problem 3: ABC Company is a retailer of office software packages .ABC sells each office software package
at $200 to customers. ABC purchases each packages for $120 from a whole seller .In addition a fixed cost of
$2000 will be incurred with in a relevant range of 0- 120 software packages bought and sold
Requirements (solved independently)
a) What is the break-even point in quantity and in dollar amount?
b) Show the break-even point using break-even chart
c) How money units must be sold to earn target operating income of $1200. What is the dollar value of
unit sold?
d) Calculate the margin of safety in quantity and in dollar considering requirement “b” & “ c” above
e) What quantity of software package should be sold to earn a net income of $960 assuming an income
tax rate of 40%
f) Assume that currently ABC Company is selling 50 units of office software package; ABC is
considering placing an advertisement that will increase sales by 10%. Additional fixed cost of $500
will be incurred because of the advertisement. Should ABC advertise or not? Why? or why not?
g) Assume that currently ABC Company is selling 50 units of office software package. ABC is
contemplating whether to reduce the selling price to $185. At this price, it will sell 60 units. At this
quantity the software whole seller who supplies the office software will sell the package to ABC for
$115 per unit instead of $120.Should ABC reduce the selling price or not? Why? Or why not?

Problem 4: Assume, Ethio Tire company produces 3 types of tire: for trucks, cars and motor-bikes. The
following data is available:

Truck Tire Car Tire Motor-bike Tire

Share in physical volume sold 30% 45% 25%
Selling price per unit, Birr 10 8 7
Variable cost per unit, Birr 7 6 5
Fixed costs total, Birr Birr 10,000

Required
a) Compute the total breakeven point for in quantity and Birr
b) Compute the sales in quantity and birr amount for each tires

Problem 5: Dino Dog Collars uses activity-based costing in producing Collars. Dino‟s system has the
following features. Each collar has 4 parts; direct materials cost per collar is $9. Direct labour cost is $4 per
collar. Suppose Animal Hut has asked for a bid on 25,000 dog collars. Dino will issue a total of 150
purchase orders for direct material if Animal Hut accepts Dino‟s bid. MOH is allocated as follows.

Activities MOH Cost Allocation Base

Purchasing $65 per purchase order

Assembling $0.36 per Part
Packaging $0.25 Per collar
Required
a) Compute the total cost Dino will incur to purchase the needed materials and then assemble and package
25,000 dog collars. Also compute the cost per collar.
b) For bidding, Dino adds a 40% mark-up to total cost. What total price will the company bid for the entire
Animal Hut order?
c) Suppose that instead of an ABC system, Dino has a traditional product costing system that allocates
indirect costs other than direct materials and direct labour at the rate of $9.60 per direct labour hour. The
dog collar order will require 12,000 direct labour hours. What total price will Dino bid using this
system‟s total cost?
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d) Use your answers to Requirements b and c to explain how ABC can help Dino make a better decision
about the bid price it will offer Animal Hut.

Problem 6: Suppose that Akaki Metal tools factory manufactures 35-Gauge and 37-Gauge corrugated sheet.
The factory uses the application of one cost pool of manufacturing overhead costs to the product lines.
Assume the factory uses machine hours as cost driver. The total hours worked on during the year for the
same are 10,000 hours. The total manufacturing labour cost amounted to birr 100,000. The total
manufacturing overhead costs for the next year are birr 300,000. Direct materials consumed are birr
200,000, during the year, 15,000 machine hours are used to produce 6,000; 35-Gauge and 35,000 machine
hours are used to produce 5,000; 37-Gauge sheet. The total machine hours worked will be 50,000 hours.
Prime costs are consumed 1/3 by 35-Gauge and 2/3 by 37-Gauges sheets.
Required:
a) Calculate the predetermined overhead rate under traditional method
b) Apply manufacturing overhead costs to product lines and compute overhead cost per unit
c) Calculate the cost per unit for each products
d) If the company wanted to have 10% of the total cost as a profit margin, determine unit price of each
product
Assume the same case above, except the general cost pool is disintegrated in to several activity cost pools
related to the production of the two types as shown below
Total
Budgeted Activity
Activity Cost Pool MOH cost Cost deriver level 35 - Gauge 37-Gauge
Machine setup 120,000 No. of Setup 1200 500 700
Quality Control 50,000 No. of inspection 500 250 250
Machine Depreciation 50,000 Machine Hours 50,000 20,000 30,000
Engineering & Design 80,000 Hours in Designing 10,000 4500 5500
Required:
a) Compute the MOH rate in each activity cost pools
b) Apply MOH cost to the two product lines
c) Calculate the unit cost for each product line
d) Interpret the reason for the wide difference of MOH cost per unit under the two costing
systems

Problem 7: John Beck is the managing partner of a partnership that has just finished a building, a 60- room
motel. Beck anticipates that he will rent these rooms for 16,000 nights next year. All rooms are similar and
will rent for the same price. Beck estimates the following operating costs for next year.
Variable operating cost---------------- $3 per room night
Fixed cost
Salaries and wages ------- $175,000
Maintenance of building--- 37,000
Other operating& Adm.cost-140,000
Total fixed cost---------------- $352,000

The capital invested in the motel is $960,000.The partnership target return on investment is 20%. Beck
expected demand to be about uniform throughout the year. He plans to price the rooms at a cost plus a mark
up to earn the target return on investment.
Required
a) What price should Beck charge for a room night?
b) What is the markup percentage over the full cost of a room night?
c) Beck‟s market research indicate that if the price of a room night determined in requirement “a” was
reduced by10%, the expected number of room night beck could rent would increase by 10%. Should
Beck make the 10% cut?

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Problem 8: The Slate Company manufactures and sells television sets. Its assembly division (AD) buys
television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at
capacity, incurs an incremental manufacturing cost of $65 per screen. The SD can sell all its output to the
outside market at a price of $100 per screen, after incurring a variable marketing and distribution cost of $8
per screen. If the AD purchases screens from outside suppliers at a price of $100 per screen, it will incur a
variable purchasing cost of $7 per screen. Slate‟s division managers can act autonomously to maximize their
own division‟s operating income.
a) What is the minimum transfer price at which the SD manager would be willing to sell screens to the
AD?
b) What is the maximum transfer price at which the AD manager would be willing to purchase screens
from the SD?
c) Now suppose that the SD can sell only 70% of its output capacity of 20,000 screens per month on the
open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than
20,000 TV sets per month.
i. What is the minimum transfer price at which the SD manager would be willing to sell screens
to the AD?
ii. From the point of view of Slate‟s management, how much of the SD output should be
transferred to the AD?
iii. If Slate mandates the SD and AD managers to “split the difference” on the minimum and
maximum transfer prices they would be willing to negotiate over, what would be the resulting
transfer price? Does this price achieve the outcome desired in requirement ii?

Problem 9: A multinational corporation has a number of divisions, two of which are the Pacific Rim
Division and the European Division. Data on the two divisions are as follows:
PacificRim European
Average operating Asset 9,000,000 9,000,000
Operating Income 126,000 1,350,000
Minimum Required return 12% 12%

Required:
a) Compute residual income for each division. By comparing residual income, is it possible to make a
useful comparison of divisional performance? Explain.
b) Compute the residual rate of return by dividing the residual income by the average operating assets.
Is it possible now to say that one division outperformed the other? Explain.
c) Compute the return on investment for each division. Can we make meaningful comparisons of
divisional performance? Explain.
d) Add the residual rate of return computed in Requirement b to the required rate of return. Compare
these rates with the ROI computed in Requirement c. Will this relationship always be the same?

Problem 10: Whirlmore, Inc., manufactures and sells washers and dryers through three divisions: Home-
Supreme, Apartment, and International. Each division is evaluated as a profit center. Data for each division
for last year are as follows
Home-Suprems Apartment International
Sales $2,700,000 $2,400,000 $1,300,000
Cost of Goods Sold 1,770,000 1,870,000 1,040,000
Selling and Adm. Expense 640,000 180,000 100,000
Average Asset 2,100,000 500,000 400,000
Minimum return 10% 10% 10%

Whirlmore, Inc., has two sources of financing: bonds paying 5.6 percent interest after tax, which account for
20 percent of total investment, and equity accounting for the remaining 80 percent of total investment.
Whirlmore, Inc., has been in business for over 15 years and is considered a relatively stable stock, despite its

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link to the cyclical construction industry. As a result, Whirlmore stock has an opportunity cost of 5 percent
over the 6 percent long-term government bond rate. Whirlmore‟s total capital employed is $3 million
($2,100,000 for the Home-Supreme Division, $500,000 for the Apartment Division, and the remainder for
the International Division).

Required: Calculate each of the following for the three divisions and evaluate their performance
a) Operating Profit margin
b) Return on investment
c) Residual income
d) Economic Value Added
e) Which performance measurement do you prefer and why?