5 MA2 Student Note Agust 2023

2023 - 2024
Management
Accounting 2
(ACCO 4035)
1, INTRODUCTION TO THE COURSE
This subject is built upon the accounting techniques studied in MA1 by introducing further
concepts and techniques. The subject addresses impact of contemporary management
philosophies and reflects the applicability and validity of techniques considered in the current
business environment
The aim of this subject is develop further students’ knowledge and understanding of
management accounting concepts, techniques related MA1. We emphasise the role of
management accounting in decision making, particularly in providing information and
analysis to support strategic management activities, and question the relevance of various
aspects of traditional management accounting.
Specific objectives will enable students to:
(a) Identify and measure the costs of activities that add value to organization;
(b) Use EOQ model to inventory management;
(c) Identify qualitative and qualitative relevant costs and benefits of decision alternatives and
how to use them for making different decisions;
(d) Understand the methods used for pricing.
(e) Determine and analysis variance analysis;
(f) Understand the role of responsibility accounting in fostering goal and behavioral
congruence.
1.1, LEARNING OUTCOMES
DETAILED IN LIST DETALIED IN

NO OUTCOME
OF TOPICS ASSESSMENT
Identify and measure the Test
1 costs of activities that add Topic 1
value to organization;
2 Inventory management Topic 2 Test
Decision making with Test
3 Topic 3
limited factors
4 Relevant cost Topic 4 Test, Final exam
Understand the methods
5 Topic 5 Final exam
used for pricing.
6 Prepare variance analysis Topic 6 Final exam
Specialist cost and
7 management accounting Topic 7 Final exam
techniques
Page 1 of 130
1.2, LEARNING AND TEACHING ACTIVITY
Overall
NO LIST OF TOPIC Hours
percentages
1 Scheduled teaching & group work 63 25%
2 Guided independent study 189 75%
Total 252 100%
2, ASSESSMENT DETAILS
2.1, Detailed assessment
Weigh
towards
No Assessment title Requirement/ length & content
final
grade
1 Performance 10% Regular
Closed test, 120’
Content of exam:
1, Activity based costing and
absorption costing
2 Test 15% 2, Inventory management
3, Decision making with limiting
factors
4, Relevant costing: One off contract,
further processing
3 Group work (*) 15% 1,500 words report for a group
Closed exam, 180’
1, Relevant costing: Shut down
decision, make or buy
4 Final exam 60% 2, Pricing decision
3, Variance analysis
4, Specialist cost and management
accounting techniques
Total 100%
To gain a pass in this subject, students MUST:
1, Achieve a PASSING GRADE IN THE FINAL EXAMINATION (50%).
2, ATTEMPT ALL AREAS OF ASSESSMENT; and achieve a TOTAL RESULT OF
40% OR BETTER OVERALL.
Page 2 of 130
2.2, Requirement for group work
A, Group member: Each group has MAXIUM 5 members (no exception)
B, Detailed requirement of group work
Word length Title of essay
Research essay 1,500 (+/- 10%) words Organizations need to understand

excluding list of references why some management accounting
techniques may be more widely used
than others. Critically discuss.
Requirements for Essay
 The word count for the essay is 1,500 (+/- 10%) words. The indicative marking
scheme in Appendix A will help you to structure your work. The word count must be
included at the end of your essay as Appendix 1. There will be marks deducted if your
essay goes over or under the limit by more than 10%, or if there is no Appendix 1.
 In your essay you will analyse at least 6 academic articles (the starter article + 5
additional articles found by you).
This is an essay about a current issue in accounting and so your articles must be as
up-to-date as possible. Therefore most of the articles which you analyse should have
been published in the past 5 years. However, 1 or 2 articles published 5-10 years ago
may be included if they are appropriate to the discussion in your essay and their findings
remain relevant.
 The topic is a current issue in accounting and therefore, in addition to your academic
references, you should include a minimum of 1 and maximum of 3 references to
professional sources. Examples include, but are not restricted to, publications by the
International Accounting Standards Board, professional accounting bodies and big
accounting firms.
 You may want to use sub-headings based on a few themes. This might help you to
organise your work while you are writing, enabling you to produce a better structure and
logical flow to your argument. However, remember that this is an academic essay and
not a report so do not use too many headings and do not include a contents list. A
suggestion is that you use the following sub-headings only based on the indicative
marking scheme in Appendix A:
o Introduction
o Analysis
o Conclusion
o References
o Appendix 1 – word count
 Your essay must use Harvard referencing correctly, including full web browser
addresses used for internet sources. The address is not required for a properly referenced
article from an academic journal. The accuracy of your referencing is very important.
Page 3 of 130
Avoid using double citations (Smith, 2014, cited in Brown, 2017). You should generally
aim to use only the primary source of information in an article rather than bringing in
secondary references found by another author. If you must use a secondary reference,
make sure you know how to do that properly using the Harvard system both in-text and in
the list of full references. Many students do not do this correctly.
Before you copy any text directly from another author, think whether it is necessary to do
so because it is usually better to put other people’s ideas in your own words (paraphrase).
If you do want to use a direct quote:
o Put it in italics and in speech marks to show it is a “direct quote”

o Give the author(s), year of publication and page number of the original source.
 Your essay should use:
o The third person so do not write ‘I’, ‘my’, ‘we’, etc
o Black ink on white
o Arial typeface, point size 11 for the text with line spacing of 1.5 lines
o Size 14 in bold for the essay title on page 1
o No clipart or similar illustrations
o Header and footer:
o Include a central header to show the title ‘Management Accounting 2’
o Include footers to show ‘Dual degree programme (centre) and the page
number (right).
o Have headers and footers in Arial typeface, size point 8
Page 4 of 130
C, Marking scheme of group work
Word count Indicative

(total 1,500 mark
+/- 10%)
Introduction 120 - 200 10%
 Link the essay’s focus to the CW title
 Use key references to selected academic journals
 Use one or two references to other sources (eg
technical or professional reports/ websites)
 Link to the Analysis

Analysis 900 – 1200 60%
 Link to the essay title throughout – good flow to essay
 Critical discussion throughout the analysis
 A well-developed argument which progresses through
your essay and is not a series of random points which
lack connections;
 Supported by sufficient
 Academic journal articles (at least 10
‘current’ articles including the CW article)
 Additional evidence (professional
journals)
Appropriate use of sub-headings (if any)
Conclusion 300 – 400 20%
 Links to the title and the Introduction
 Summarises the main findings
 Draws reasonable conclusion(s) based on the analysis
 Makes recommendations for practice and future
research based on the Analysis and concluding
comments
Spelling, grammar and punctuation 5%

 Spell checked with good grammar and punctuation

Referencing: 5%
 Correct citations and a single list of references (A-Z
order for all sources)

Total 100%
Page 5 of 130
D, Marking criteria of group work
90 - Excellent work - As below plus - contains accurate, relevant material;

100 demonstrates understanding of complex subject matter & is able to view it in a
wider context; demonstrates confidence in analysing and criticising assumptions;
some originality of thought with good critique & analysis of assumptions; well-
structured, logical and well-reasoned arguments; where necessary, succinct and
accurate explanations of academic terms or phrases; excellent concluding
comments that summarise the work and provide meaningful insights; some
awareness of the limits of knowledge; considered and succinct use of examples;
evidence of extensive research with excellent use of high-quality primary
sources; uses & presents references effectively and accurately; excellent
structure, use & flow of language, grammar, spelling, format, presentation,
diagrams, tables etc.
81 - 90 Very good work - As below plus - contains most of the information required, is
largely accurate & relevant; demonstrates very good understanding of the
subject matter & makes a good attempt to view it in a wider context; shows
some awareness of the limits of knowledge; arguments are on the whole well-
structured and argued; examples are mostly but not always relevant, mostly
succinct and accurate explanations of academic terms or phrases; necessary or
presented succinctly; conclusions summarise the work accurately but lack
insight; evidence of good research, using mostly but not exclusively high-quality
and primary references; good and accurate application of the Harvard
referencing system but with some minor errors; complete and accurate web
browser addresses; very good use & flow of language, grammar, spelling,
format, presentation, diagrams, tables etc.
71- 80 Good work - As 40-49 below plus - Work that attempts to address the topic with
some understanding & analysis, plus key aspects of the subject matter covered;
references from a variety of sources, some of which are high-quality; too many
examples or given in more detail than is necessary to make the point; reasonably
structured in places, but not always easy to follow the argument; the work is not
always clearly related to the topic; academic terms or phrases are not always
adequately explained; conclusions attempt to summarise the work but do not add
insights or are too brief to be of value; some repetition; contains some irrelevant
information; includes some journalistic or idiomatic language; reasonable
application of Harvard referencing system, but not always accurately presented;
not all web browser addresses included in the bibliography; satisfactory
grammar, spelling, format, presentation, diagrams, tables etc. but weaknesses in
several of these areas.
49 - 70 Satisfactory work - Work that addresses the topic in a limited way; demonstrates
limited understanding & cursory analysis; references include a few textbooks,
journalistic, internet & a few key reference sources; irrelevant material in places;
Page 6 of 130
poorly structured so that the argument is difficult to follow; inaccurate or
inconsistent application of Harvard referencing system for references and
bibliography; weak or very brief conclusions; academic terms and phrases are
used without adequate explanation; journalistic or idiomatic language; the work
contains factual or theoretical errors; web browser addresses largely omitted
from bibliography; some attempt to follow directions regarding referencing,
organisation, structure, use & flow of language, grammar, spelling, format,
diagrams, tables etc but generally weak in some of these areas.
31-49 Anything which is inadequate in most or all of the following: length, content,
structure, analysis, expression, argument, relevance, research, number of
references, quality of references, breadth of references, presentation. In
particular, the work does not address the question in most places; is substantially
incomplete and deficient; contains a large number of factual or theoretical errors;
serious problems with a number of aspects of language use; incomplete or
missing referencing demonstrating poor understanding of Harvard referencing
system; very few or no web browser addresses included in bibliography.
0 - 30 No serious attempt to address the question or problem; the work manifests a

serious misunderstanding of the requirements of the assignment; student has
substantively failed to engage with the topic; informed and meaningful feedback
is not possible because the work is acutely deficient in all aspects.
Page 7 of 130
3, LIST OF TOPICS
3.1, List of topics
Topic Content
1 Activity based costing and absorption costing
2 Inventory management
3 Decision making with limiting factors
4 Relevant costing
5 Pricing decision
6 Variance analysis
7 Specialist cost and management accounting techniques
Page 8 of 130
3.2, Objectives of each topic
Topic Detailed learning objective

1 Activity based costing and absorption costing
1. Determine cost per unit using absorption costing
2. Identify appropriate cost drivers under ABC.
3. Calculate costs per driver and per unit using ABC.
4. Discuss advantages and disadvantages of ABC
5. Compare ABC and traditional methods of overhead absorption and explain
why there are differences in cost allocation between absorption costing and
ABC.
2 Inventory management
1. Identify, explain and calculate the costs of ordering and holding inventory
(including buffer inventory).
2. Calculate and interpret optimal reorder quantities.
3. Calculate and interpret optimal reorder quantities when discounts apply.
4. Describe and apply appropriate methods for establishing reorder levels
where demand in the lead time is constant.
3 Decision making with limiting factors

1. Identify limiting factors in a scarce resource situation and select an
appropriate technique.
2. Formulate and solve a multiple scarce resource problem both graphically

and using simultaneous equations as appropriate.
3. Explain and calculate shadow prices (dual prices) and discuss their
implications on decision-making and performance management.
4. Calculate slack and explain the implications of the existence of slack for
decision-making and performance management.
4 Relevant costing
1. Explain the concept of relevant costing.
2. Identify and calculate relevant costs for specific decision situations from
given data.
3. Explain and apply the concept of opportunity costs.
4. Explain the issues surrounding make vs buy and outsourcing decisions.
5. Calculate and compare 'make' costs with 'buy-in' costs.
Page 9 of 130
6. Compare in-house costs and outsource costs of completing tasks and
consider other issues surrounding this decision.
7. Apply relevant costing principles in situations involving shutdown, one-off

contracts and the further processing of joint products.
5 Pricing decision
1. Explain the factors that influence the pricing of a product or service
2. Derive and manipulate a straight-line demand equation. Derive an equation

for the total cost function
3. Calculate the optimum selling price and quantity for an organisation,

equating marginal cost and marginal revenue
4. Calculate a price from a given strategy using cost-plus
5. Explain different price strategies, including: Cost-plus, Skimming,

Penetration
6 Variance analysis
1. Calculate, identify the cause of, and explain material mix and yield
variances
2. Explain the wider issues involved in changing material mix e.g. cost,
quality and performance measurement issues
3. Identify and explain the relationship of the material usage variance with the
material mix and yield variances.
4. Suggest and justify alternative methods of controlling production processes
5. Calculate, identify the cause of, and explain sales mix and quantity
variances
6. Identify and explain the relationship of the sales volume variances with the
sales mix contribution variance and quantity contribution variances
7. Calculate, identify the cause of and explain planning and operational

variances for: sales, including market size (contribution variance) and
market share (contribution variance); materials; labour.
Specialist cost and management accounting techniques

7
1, Target costing
- Explain a target cost in manufacturing and service industries and the
difficulties of using target costing in service industries.
- Suggest how a target cost gap might be closed.
2, Life-cycle costing
Page 10 of 130
- Identify the costs involved at different stages of the life-cycle.
- Derive a life-cycle cost or profit in manufacturing and service industries.
- Identify the benefits of life-cycle costing.
3, Throughput accounting
- Discuss and apply the theory of constraints.
- Calculate and interpret a throughput accounting ratio (TPAR).
- Suggest how a TPAR could be improved.
- Apply throughput accounting to a multi-product decision-making
problem
4, LECTURER INFORMATION
N Mobile
Name Email
o
Ngô Như Vinh PhD, FCCA, 0978846788
1 n.n.vinhACCO@iife.edu.vn
CPA
2 Le Van Lien PhD l.v.lienacco@iife.edu.vn 0903426736
Nguyen Bich Ngoc PhD, ngocnguyen.hvnh2012@gmail.co
3 0984711985
ACCA m
Page 11 of 130
5, SESSION PLAN
5.1, Session plan (5 hours per week)

Deadline
Teachin Hour
Lecture Title for group
g week s
work
1 Introduction MA2 & Absorption costing 1 3
2 Absorption costing and ABC 1 2
Deadline
send list of
3 Inventory management 2 3
group
members
4 Decision making 1: introduction and 1 limiting factor 2 3
5 Decision making 2: Linear programming 3 2
6 Relevant costing 1: Introduction and one off contract 3 3
7 Relevant costing 2: Futher processing & make or buy 4 2
8 Relevant costing 3: Shut down decision and other issue 4 3
9 Pricing decision: Maximum profit pricing decision 5 2
Pricing decision 2: Dicuss pricing decision & first
10 5 3
revision for middle term test
11 Revision for middle term test 1 6 2
Middle term test 6
Variance analysis 1: Determine basic, planning and
12 6 3
operating
Deadline
Variance analysis 1: Determine basic, planning and send outline
13 7 2
operating of group
work
14 Variance analysis 2: Material mix and yield 7 3
Variance analysis 3: Market size and share & sale mix,
15 8 2
sale volume
16 Variance analysis 4: Correct other questions 8 3
Specialist cost and management accounting
17 9 2
techniques 1
18 9 3
techniques 2
19 10 2
techniques 3
Specialist cost and management accounting Deadline
20 10 3
techniques 4 send draft 1
21 Correct group work 1 11 2
Deadline
send draft 2
Deadline
23 Revision for exam 12 2 send group
work
24 Presentation 1 12 3
25 Presentation 2 13 2
Page 12 of 130
5.1, Session plan (6 hours per week)
Deadline
Teachin Hour
Lecture Title for group
g week s
work
1 Introduction MA2 & Absorption costing 1 3
2 Absorption costing and ABC 1 3
Deadline
send list of
3 Inventory management 2 3
group
members
4 Decision making 1: Introduction and 1 limiting factor 2 3
5 Decision making 2: Linear programming 3 3
6 Relevant costing 1: Introduction and one off contract 3 3
7 Relevant costing 2: Futher processing & make or buy 4 3
8 Relevant costing 3: Shut down decision and other issue 4 3
Pricing decision: Maximum profit pricing decision &
9 5 3
Dicuss pricing decision & Revision for middle term test
Middle term test 5 3
Variance analysis 1: Determine basic, planning and
10 5 3
operating (1)
11 Variance analysis 2: Planning and operating variance 6 3
Deadline
send outline
12 Variance analysis 3: Material mix and yield 6 3
of group
work
Variance analysis 4: Market size and share & sale mix,
13 7 3
sale volume
14 7 3
16 8 3
techniques 2
17 9 3
18 Correct group work 2 9
Deadline
19 Revision for exam 10 send group
work
20 Presentation 1 10
Page 13 of 130
6, SESSION REQUIRED READING
The SET TEXT is BPP Learning Media (2022) Performance measurement workbook &
BPP Learning Media (2022) ACCA Paper Management Accounting workbook
Reading is essential for students in order to understand fully the technical and conceptual
aspects of the various topics. It is expected that self-motivated students will consult a variety
of texts, journals and websites.
Author Title Publisher

Horngren, C. T., Datar, Cost Accounting: A New Pearson: Global Edition
S. M., Rajan, M. V, Managerial Emphasis, 14th
(2012). Ed
Hilton, R.W., Maher, Cost Management: Ed. Boston: McGraw Hill.
M.W. and Selto, F.H. Strategies for Business
(2008) Decisions, 4th
7, OTHER INFORMATION
ENTRY REQUIREMENT
The student must pass subject Management Accounting 1 and IELTS 5.5 English level
before taking part in Management Accounting 2.
Page 14 of 130
CHAPTER 1 ACTIVITY BASED COSTING
LEARNING OBJECTIVES
1, Determine cost per unit using absorption costing
2, Identify appropriate cost drivers under ABC.
3, Calculate costs per driver and per unit using ABC.
4, Discuss advantages and disadvantages of ABC
5, Compare ABC and traditional methods of overhead absorption and explain why there are
ABSORPTION COSTING & ABC (OUTLINE)
differences in cost allocation between absorption costing and ABC.
ABSORPTION COSTING ACTIVITY BASED COSTING
Overhead absorption rate = Activity based costing (ABC) is a method of costing which involves
Budgeted overhead / budgeted identifying the costs of the main support activities and the factors that
activity level 'drive' the costs of each activity. Support overheads are charged to products
by absorbing cost on the basis of the product's usage of the factor driving
Based for overhead absorption the overheads.
 A percentage of direct Outline of an ABC system
materials cost
 A percentage of direct labour Step 1 Identify major activities
cost
Step 2 Use cost allocation and apportionment methods to charge overhead
 A percentage of prime cost
costs to each of these activities.
 A rate per machine hour
 A rate per direct labour hour Step 3 Identify cost drivers
 A rate per unit
Cost pool Possible cost driver
Disadvantages of absorption Ordering costs: handling customer
Number of orders
costing orders
Materials handling costs Number of production runs
(a) It under-allocates overhead Machine set-up costs Number of machine set-ups
costs to low-volume products and Machine operating costs Number of machine hours
over-allocates overheads to Production scheduling costs Number of production runs
higher-volume products. Despatching costs Number of orders despatched
Step 4 Calculate an absorption rate per unit of cost driver.
(b) It under-allocates overhead
costs to smaller products and Step 5 Charge overhead costs to products for each activity
over-allocates overheads to larger
products
ABC ADVANTAGES ABC DISADVANTAGES
(a) ABC recognises this complexity 

with its multiple cost drivers.
Cost apportionment can be an arbitrary way of sharing
Pagecosts.
15 of 130
(b) ABC facilitates a good
understanding of what drives  A single cost driver may not explain the cost behaviour of all items in a
overhead costs. cost pool.
ACTIVITY BASED COSTING & ABSORPTION COSTING
1.1 Definition of ABC

Activity based costing (ABC) is a method of costing which involves identifying the costs of the main
support activities and the factors that 'drive' the costs of each activity. Support overheads are charged
to products by absorbing cost on the basis of the product's usage of the factor driving the overheads.
The major ideas behind activity based costing are as follows.
(a) Activities cause costs. Activities include ordering, materials handling, machining, assembly,
production scheduling and despatching.
(b) Manufacturing products creates demand for the support activities.
(c) Costs are assigned to a product on the basis of the product's consumption of these activities.
1.2. Outline of an ABC system
An ABC system operates as follows.
Step 1 Identify an organisation's major activities that support the manufacture of the organisation’s
products or the provision of its services.
Step 2 Use cost allocation and apportionment methods to charge overhead costs to each of these
activities. The costs that accumulate for each activity cost centre is called a cost pool.
Step 3 Identify the factors which determine the size of the costs of an activity/affect the costs of an
activity. These are known as cost drivers.
A cost driver is a factor which has most influence on the cost of an activity.
Look at the following examples.
Cost pool Possible cost driver
Ordering costs: handling customer orders Number of orders
Materials handling costs Number of production runs
Machine set-up costs Number of machine set-ups
Machine operating costs Number of machine hours
Production scheduling costs Number of production runs
Despatching costs Number of orders despatched
Step 4 For each cost pool/activity cost centre, calculate an absorption rate per unit of cost driver.
Step 5 Charge overhead costs to products for each activity, on the basis of their usage of the activity
(the number of cost drivers they use). Overheads are charged by absorbing them into product costs at
a rate per unit of cost driver.
Page 16 of 130
1.3. Example: Activity based costing
Suppose that Cooplan manufactures four products, W, X, Y and Z. Output and cost data for the period
just ended are as follows.
Number of Material cost in Direct labour Machine hours
Output units
production runs the period per unit per unit
W 10 2 20 1 1
X 10 2 80 3 3
Y 100 5 20 1 1
Z 100 5 80 3 3
Direct labour cost per hour: $5
Overhead costs $
Short-run variable costs 3,080
Set-up costs 10,920
Expediting and scheduling costs 9,100
Materials handling costs 7,700
Required: Prepare unit costs for each product using:
(a) Conventional absorption costing, and
(b) ABC.
Assume that, in the traditional absorption costing system, overheads are absorbed at a direct
labour hour rate.
Page 17 of 130
Answer
Page 18 of 130
1.4 Cost drivers
ABC focuses attention on what factors are most influential in determining the level of support activity
costs, ie the cost drivers. However, it is important to understand that activity based costs should not be
regarded as variable costs that vary with the volume of the cost driver. Some activity costs may be
variable, but many are not. Cost drivers affect or influence total costs of the activity, but not in a
direct 'variable cost' relationship between activity level and cost.
(a) Activity costs that relate to production volume, such as power costs, should be traced to products
using production volume-related cost drivers, such as direct labour hours or direct machine hours
worked.
Overheads which do not relate to production volume but to some other activity should be traced to
products using transaction-based cost drivers, such as number of production runs and number of
orders received.
(b) Traditional absorption costing charges overhead costs to products in a way that ignores the costs
of support activities and their cost drivers. As a consequence, it produces less satisfactory or 'reliable'
product costs.
1.5. Traditional costing (v) ABC
A company manufactures two products, L and M, using the same equipment and similar processes.
An extract of the production data for these products in one period is shown below.
L M
Quantity produced (units) 5,000 7,000
Direct labour hours per unit 1 2
Machine hours per unit 3 1
Set-ups in the period 10 40
Orders handled in the period 15 60
Overhead costs $
Relating to machine activity 220,000
Relating to production run set- 20,000
Page 19 of 130
ups
Relating to handling of orders 45,000
285,000
Required
Calculate the production overheads to be absorbed by one unit of each of the products using the
following costing methods.
(a) A traditional costing approach, using a direct labour hour rate to absorb overheads
(b) An activity based costing approach, using suitable cost drivers to trace overheads to
products
Page 20 of 130
1.6. Advantages of ABC
1, Improved accuracy: more accurate allocation of costs to products and services, as it considers the
specific resources consumed by each activity. This results in a better reflection of the true costs of
producing and delivering a product or service.
2, Better cost management: With a better understanding of the costs of specific activities, managers
can make informed decisions about how to reduce costs and improve efficiency. This can lead to
significant cost savings over time.
Page 21 of 130
3, Better pricing decisions: By having a better understanding of the cost structure, organizations can
set prices more accurately, ensuring that they are able to recover their costs and earn a profit.
4, Improved focus on value-adding activities: Activity-based costing helps organizations identify non-
value-adding activities and focus their efforts on improving value-adding activities. This results in a
more efficient and productive use of resources.
5, Better alignment with organizational strategy: By understanding the costs associated with specific
activities, organizations can better align their cost structure with their overall strategy and make
decisions that support their long-term goals and objectives.
1.7. Disadvantages of ABC
1, Complexity: Implementing activity-based costing can be complex, requiring a significant
investment of time and resources to accurately identify and track all of the activities involved in
producing a product or service.
2, Increased cost: The implementation of activity-based costing can result in increased costs, as it
requires specialized software and trained personnel to track and allocate costs to specific activities.
3, Resistance to change: Implementing activity-based costing can result in resistance from employees,
who may feel that the new system is too complicated and difficult to understand. This can lead to
resistance to change and a reluctance to adopt the new method.
4, Limited applicability: Activity-based costing may not be appropriate for all organizations or all
products, as it is most effective in organizations that produce a variety of products with different cost
structures.
5, Inaccurate data: The accuracy of activity-based costing depends on the quality of the data used to
allocate costs to specific activities. If the data is inaccurate, the resulting cost allocations may also be
inaccurate, leading to incorrect decisions about pricing, cost control, and resource allocation.
1.8. Application of ABC
1, Manufacturing, such as automobike industry: specific activities, such as design, development,
production, marketing, and distribution
2, Healthcare: allocate costs to specific procedures and treatments. Example: patient examination,
diagnosis, treatment, and follow-up care
3, Service industries: consulting, advertising, and professional services to allocate costs to specific
projects and activities.
4, Retail: allocate costs to specific product lines, providing a better understanding of the cost structure
and enabling improved pricing and cost control decisions.
5, Construction: allocate costs to specific projects and activities
Page 22 of 130
PRACTISE QUESTION
QUESTION 1
The directors are keen to introduce ABC for the coming year and have provided the following cost
and selling price data:
1. The paper used costs $2 per kg for a CB but the TJ paper costs only $1 per kg. The CB uses 400g
of paper for each book, four times as much as the TJ uses.
2. Printing ink costs $30 per litre. The CB uses one third of the printing ink of the larger TJ. The TJ
uses 150ml of printing ink per book.
3. The CB needs six minutes of machine time to produce each book, whereas the TJ needs 10
minutes per book. The machines cost $12 per hour to run.
4. The sales prices are to be $9·30 for the CB and $14·00 for the TJ
As mentioned above there are three main overheads, the data for these are:
Overhead Annual cost for the coming year

$
Property costs 2,160,000
Quality control 668,000
Production set up costs 52,000
––––––––––
Total 2,880,000
––––––––––
The CB will be inspected on 180 occasions next year, whereas the TJ will be inspected just 20 times.
Jola (ABC) Publishing will produce its annual output of 1,000,000 CBs in four production runs and
approximately 10,000 TJs per month in each of 12 production runs.
Required:
(a) Calculate the cost per unit and the margin for the CB and the TJ using machine
hours to absorb the overheads.
(b) Calculate the cost per unit and the margin for the CB and the TJ using activity based costing
principles to absorb the overheads.
Page 23 of 130
QUESTION 2
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:
Overhead category Annual overheads Total number of

Activity driver
($) activities per year
Supervisors 90,000 Site visits 500
Planners 70,000 Planning documents 250
Property related 240,000 Labour hours 40,000
A typical GC costs $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
$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 $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.
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QUESTION 3
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 analyzed 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.
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QUESTION 4
Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients. Each type of
procedure incurs the following direct costs:
Procedure A B
$ $
Surgical time and materials 1,200 2,640
Anaesthesia time and materials 800 1,620
BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply
dividing it by the number of procedures, then rounding the cost to the nearest 2 decimal places. Using
this method, the total cost is $2,475·85 for Procedure A and $4,735·85 for Procedure B.
Recently, another local hospital has implemented activity-based costing (ABC). This has led the
finance director at BH to consider whether this alternative costing technique would bring any benefits
to BH. He has obtained an analysis of BH’s total overheads for the last year and some additional data,
all of which is shown below:
Cost Cost driver $

Administrative costs Administrative time per procedure 1,870,160
Nursing costs Length of patient stay 6,215,616
Catering costs Number of meals 966,976
General facility costs Length of patient stay 8,553,600
Total overhead costs 17,606,352
Procedure A B
No. of procedures 14,600 22,400
Administrative time per procedure (hours) 1 1·5
Length of patient stay per procedure (hours) 24 48
Average no. of meals required per patient 1 4
Required:
(a) Calculate the full cost per procedure using activity-based costing.
(b) Making reference to your findings in part (a), advise the finance director as to whether
activity-based costing should be implemented at BH.
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CHAPTER 2 INVENTORY MANAGEMENT
LEARNING OBJECTIVES
1, Identify, explain, and calculate the costs of ordering and holding inventory (including buffer
inventory).
2, Calculate and interpret optimal reorder quantities.
3, Calculate and interpret optimal reorder quantities when discounts apply.
4, Describe and apply appropriate methods for establishing reorder levels where demand in the lead
time is constant. INVENTORY MANAGEMENT
WHAT IS EOQ KEY FORMULATION
The economic order quantity (EOQ) is the order  Average inventory = order quantity / 2 (ie
quantity which minimises inventory costs. assuming no safety inventory)
 average inventory = buffer inventory +
reorder quantity / 2
 Number of orders = annual demand /
order quantity
 Annual holding cost = average inventory x
holding cost per unit
 Annual order cost = number of orders *
cost per order
EOQ PARAGRAPH
IMPACT OF DISCOUNT
To decide mathematically whether it would be

worthwhile taking a discount and ordering larger
quantities, it is necessary to minimise the total of
the following.
 Total material costs
 Inventory holding costs
 Ordering costs
The total cost will be minimised at one of the
following.
 At the pre-discount EOQ level, so that a
discount is not worthwhile
At the minimum order size necessary to earn the
discount
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INVENTORY COST
2.1 Inventory costs
Inventory costs include purchase costs, holding costs, ordering costs and costs of running out of
inventory.
The costs of purchasing inventory are usually one of the largest costs faced by an organisation and,
once obtained, inventory has to be carefully controlled and checked.
2.2. Reasons for holding inventories
o To ensure sufficient goods are available to meet expected demand
o To provide a buffer between processes
o To meet any future shortages
o To take advantage of bulk purchasing discounts
o To absorb seasonal fluctuations and any variations in usage and demand
o To allow production processes to flow smoothly and efficiently
o As a necessary part of the production process (such as when maturing cheese)
o As a deliberate investment policy, especially in times of inflation or possible shortages
2.3 Holding costs
If inventories are too high, holding costs will be incurred unnecessarily. Such costs occur for a
number of reasons.
(a) Costs of storage and stores operations. Larger inventories require more storage space and
possibly extra staff and equipment to control and handle them.
(b) Interest charges. Holding inventories involves the tying up of capital (cash) on which interest
must be paid.
(c) Insurance costs. The larger the value of inventories held, the greater insurance premiums are
likely to be.
(d) Risk of obsolescence. The longer a inventory item is held, the greater the risk of obsolescence.
(e) Deterioration. When materials in store deteriorate to the extent that they are unusable, they must
be thrown away with the likelihood that disposal costs would be incurred.
2.4 Costs of obtaining inventory
On the other hand, if inventories are kept low, small quantities of inventory will have to be ordered
more frequently, thereby increasing the following ordering or procurement costs.
(a) Clerical and administrative costs associated with purchasing, accounting for and receiving goods
(b) Transport costs
(c) Production run costs, for inventory which is manufactured internally rather than purchased from
external sources
2.5 Stockout costs (running out of inventory)
An additional type of cost which may arise if inventory is kept too low is the type associated with
running out of inventory. There are a number of causes of stockout costs.
o Lost contribution from lost sales
o Loss of future sales due to disgruntled customers
o Loss of customer goodwill
o Cost of production stoppages
o Labour frustration over stoppages
o Extra costs of urgent, small quantity, replenishment orders
2.6 Objective of inventory control
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The overall objective of inventory control is, therefore, to maintain inventory levels so that the total of
the following costs is minimised.
o Holding costs
o Stockout costs
o Ordering costs
INVENTORY LEVEL
2.2 Inventory control levels
Inventory control levels can be calculated in order to maintain inventories at the optimum level. The
three critical control levels are reorder level, minimum level and maximum level.
Based on an analysis of past inventory usage and delivery times, inventory control levels can be
calculated and used to maintain inventory at their optimum level (in other words, a level which
minimises costs). These levels will determine 'when to order' and 'how many to order'.
4.2.4 Reorder quantity
This is the quantity of inventory which is to be ordered when inventory reaches the reorder level. If it
is set so as to minimise the total costs associated with holding and ordering inventory, then it is
known as the economic order quantity.
4.2.5 Average inventory
The formula for the average inventory level assumes that inventory levels fluctuate evenly between
the minimum (or safety) inventory level and the highest possible inventory level (the amount of
inventory immediately after an order is received, ie safety inventory + reorder quantity).
Average inventory = safety inventory + ½ reorder quantity
ECONOMIC ORDER QUANTITY (EOQ)
The economic order quantity (EOQ) is the order quantity which minimises inventory costs. The EOQ
can be calculated using a table, graph or formula.
Economic order theory assumes that the average inventory held is equal to one half of the reorder
quantity (although, as we saw in the last section, if an organisation maintains some sort of buffer or
safety inventory then average inventory = buffer inventory + half of the reorder quantity). We have
seen that there are certain costs associated with holding inventory. These costs tend to increase with
the level of inventories, and so could be reduced by ordering smaller amounts from suppliers each
time.
On the other hand, as we have seen, there are costs associated with ordering from suppliers:
documentation, telephone calls, payment of invoices, receiving goods into stores and so on. These
costs tend to increase if small orders are placed, because a larger number of orders would then be
needed for a given annual demand.
4.5 Bulk discounts
The solution obtained from using the simple EOQ formula may need to be modified if bulk discounts
(also called quantity discounts) are available. The following graph shows the effect that discounts
granted for orders of certain sizes may have on total costs.
Page 29 of 130
To decide mathematically whether it would be worthwhile taking a discount and ordering larger
quantities, it is necessary to minimise the total of the following.
o Total material costs
o Inventory holding costs
o Ordering costs
The total cost will be minimised at one of the following.
o At the pre-discount EOQ level, so that a discount is not worthwhile
o At the minimum order size necessary to earn the discount
4.5.1 Example: Bulk discounts
The annual demand for an item of inventory is 45 units. The item costs $200 a unit to purchase, the
holding cost for 1 unit for 1 year is 15% of the unit cost and ordering costs are $300 an order. The
supplier offers a 3% discount for orders of 60 units or more, and a discount of 5% for orders of 90
units or more.
Required: Calculate the cost-minimising order size.
Answer:
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PRACTISE QUESTION
QUESTION 1
Fan Base (FB) operates a megastore featuring sports merchandise. It uses an EOQ decision model to
make inventory decisions. It is now considering inventory decisions for its Los Angeles Galaxy soccer
jerseys product line. This is a highly popular item. Data for 2011 are as follows:
Expected annual demand for Galaxy jerseys (D) 10,000
Ordering cost per purchase order (Co) $200
Carrying cost (holding cost) per unit per year (Ch
excluding insuarance. Handling, theft) $7 per jersey
Each jersey costs FB $40 and sells for $80. The $7 carrying (holding cost) per jersey per year plus
$2.20 in relevant insurance, handling, and theft-related costs. The purchasing lead time is 7 days. FB
is open 365 days a year.
Required:
1, Calculate the EOQ.
2, Calculate the number of orders that will be placed each year.
3, Calculate the reorder point (reorder level)
Athletic Textiles (AT) manufactures the Galaxy jerseys that Fan Base (FB) sells to its customers. AT
has recently installed computer software that enables its customers to conduct “one-stop”
purchasing using state-of-the-art Web site technology. FB’s ordering cost per purchase order will
be $30 using this new technology.
Required
4, Calculate the EOQ for the Galaxy jerseys using the revised ordering cost of $30 per purchase
order. Assume all other data above are the same. Comment on the result.
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QUESTION 2
The Denim World sells fabrics to a wide range of industrial and consumer users.
One of the products it carries is denim cloth, used in the manufacture of jeans and carrying bags. The
supplier for the denim cloth pays all incoming freight. No incoming inspection of the denim
is necessary because the supplier has a track record of delivering high-quality merchandise. The
purchasing officer of the Denim World has collected the following information:
Annual demand for denim cloth 26,400 yards
Ordering cost per purchase order $165
Carrying cost per year 20% of purchase costs
Safety-stock requirements None
Cost of denim cloth $9 per yard
The purchasing lead time is 2 weeks. The Denim World is open 250 days a year (50 weeks for 5 days
a week).
Required
1. Calculate the EOQ for denim cloth.
2. Calculate the number of orders that will be placed each year.
3. Calculate the reorder point for denim cloth.
4, If the supplier offer discount 10% of the entity purchase more than 10,000 yards per order.
Determine total inventory cost (purchase cost, ordering cost, holding cost) in both situation
(order at EOQ level and order at discount level) and advise the management reorder quantity
that the entity should choose? Discuss other non-financial factor that the entity should consider
before making final decision?
5, If the entity keeps safety stock at 1 week demand. Determine following:
 Reorder quantity
 Reorder level
 Ordering cost
 Holding cost
 Purchase cost
Explain impact of safety stock on those cost?
Page 34 of 130
QUESTION 3
Lakeland Company produces lawn mowers and purchases 18,000 units of a rotor blade part each year
at a cost of $60 per unit. In addition, the relevant carrying cost (for insurance, materials handling,
breakage, and so on) is $6 per unit per year. The relevant ordering cost per purchase order is $150.
Required
1. Calculate Lakeland’s EOQ for the rotor blade part.
2. Calculate Lakeland’s annual relevant ordering costs for the EOQ calculated in requirement
1.
3. Calculate Lakeland’s annual relevant carrying costs for the EOQ calculated in requirement
1.
4. Assume that demand is uniform throughout the year and known with certainty so that there
is no need for safety stocks. The purchase-order lead time is half a month. Calculate Lakeland’s
reorder point for the rotor blade part.
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CHAPTER 3 DECISION MAKING WITH LIMITING FACTOR
LEARNING OBJECTIVES
1, Identify limiting factors in a scarce resource situation and select an appropriate technique.
2, Formulate and solve a multiple scarce resource problem both graphically and using simultaneous
equations as appropriate.
3, Explain and calculate shadow prices (dual prices) and discuss their implications on decision-
making and performance management.
4, Calculate slack and explain the implications of the existence of slack for decision-making and
DECISION MAKING WITH LIMITING FACTOR
performance management.
LIMITING FACTOR LINEAR PROGRAMMING
What is limiting factor? WHAT: a technique that may be used to determine the
A limiting factor is any factor that is in scarce contribution-maximising or cost-minimising solution to a
supply and that stops the organization from problem when there are two (or more) limiting factors,
expanding its activities further, so that there is a not just one.
maximum level of activity at which the GRAPHICAL METHOD
organization can operate. Application: when there are just two products (or
How to decide with 1 limiting factor services).
Step 1: Confirm that the limiting factor is Step 1: Define the problem:
something other than sales demand. (a) Define variables
Step 2: Identify the contribution earned by each (b) Establish constraints
product per unit of scarce resource; that is, per (c) Construct objective function
labor hour worked.
Step 2: Draw the constraints on a graph
Step 3: Determine the budgeted production and
Step 3: Establish the feasible region
sales.
A feasible region is the area contained within all of the
constraint lines shown on a graphical depiction of a linear
1 LIMITING FACTOR programming problem.
Step 1: Determine contribution per limiting factor

Step 2: Ranking based on contribution per limiting
factor
Step 3: Optimal production plan, consider
following factors: Product ranking, Maximum
demand, Minimum demand
WHAT: Amount of change in the value of the

objective function (for example, the increase in
contribution) created by the availability of one Step 4: Determine the optimal solution
extra unit of the limited resource at its original Optimal point: 'best' solution is going to be at a point on
cost. the edge of the feasible region.
MEANING OF SHADOW PRICE
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1, maximum premium above the basic rate that an SLACK
organisation should be willing to pay for one extra
unit of a resource.
PRACTISE QUESTION
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QUESTION 1:
Sausage makes two products, the Mash and the Sauce. Unit variable costs are as follows.
Mash Sauce
$ $
Direct materials 1 3
Direct labour ($3 per hour) 6 3
Variable overhead 1 1
8 7
The sales price per unit is $14 per Mash and $11 per Sauce. During July the available direct labour is
limited to 8,000 hours. Sales demand in July is expected to be as follows.
Mash 3,000 units
Sauce 5,000 units
Required: Determine the production budget that will maximise profit, assuming that fixed costs
per month are $20,000 and that there is no opening inventory of finished goods or work in
progress.
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QUESTION 2:
Lucky manufactures and sells three products, X, Y and Z, for which budgeted sales demand, unit
selling prices and unit variable costs are as follows.
Product X Y Z
550 500 400
Budgeted sale demand units units units
$ $ $
Unit sale price 16 18 14
Variable cost
- Material 8 6 2
- Labor 4 6 9
Unit contribution 4 6 3
The organisation has existing inventory of 250 units of X and 200 units of Z, which it is quite willing
to use up to meet sales demand. All three products use the same direct materials and the same type of
direct labour. In the next year, the available supply of materials will be restricted to $4,800 (at cost)
and the available supply of labour to $6,600 (at cost).
Required: Determine what product mix and sales mix would maximise the organisation's profits
in the next year.
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QUESTION 3
CSC Co is a health food company producing and selling three types of high-energy products: cakes,
shakes and cookies, to gyms and health food shops. Shakes are the newest of the three products and
were first launched three months ago. Each of the three products has two special ingredients, sourced
from a remote part the world. The first of these, Singa, is a super-energising rare type of
caffeine. The second, Betta, is derived from an unusual plant believed to have miraculous health
benefits.
CSC Co’s projected manufacture costs and selling prices for the three products are as follows:
Cakes Cookies Shakes

Per unit $ $ $
Selling price 5·40 4·90 6·00
Costs:
Ingredients: Singa ($1·20 per gram) 0·30 0·60 1·20
Ingredients: Betta ($1·50 per gram) 0·75 0·30 1·50
Other ingredients 0·25 0·45 0·90
Labour ($10 per hour) 1·00 1·20 0·80
Variable overheads 0·50 0·60 0·40
Contribution 2·60 1·75 1·20
For each of the three products, the expected demand for the next month is 11,200 cakes,
9,800 cookies and 2,500 shakes. The total fixed costs for the next month are $3,000. CSC Co has
just found out that the supply of Betta is going to be limited to 12,000 grams next month. Prior to this,
CSC Co had signed a contract with a leading chain of gyms, Encompass Health, to supply it with
5,000 shakes each month, at a discounted price of $5·80 per shake, starting immediately. The order
for the 5,000 shakes is not included in the expected demand levels above.
Required:
(a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate the
shortage of Betta, the resulting optimum production plan and the total profit for next month.
One month later, the supply of Betta is still limited and CSC Co is considering whether it should
breach its contract with Encompass Health so that it can optimise its profits.
Required:
(b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required.
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QUESTION 4
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type
of good quality wood (ash) which can be difficult to source in sufficient quantity. The supply of ash is
restricted to 5,400 kg per period. Ash costs $40 per kg.
The cues are made by skilled craftsmen (highly skilled labour) who are well known for their
workmanship. The skilled craftsmen take years to train and are difficult to recruit. HC’s craftsmen are
generally only able to work for 12,000 hours in a period. The craftsmen are paid $18 per hour.
HC sells the cues to a large market. Demand for the cues is strong, and in any period, up to 15,000
pool cues and 12,000 snooker cues could be sold. The selling price for pool cues is $41 and the selling
price for snooker cues is $69.
Manufacturing details for the two products are as follows:
Product Pool cues Snooker cues

Craftsmen time per cue 0·5 hours 0·75 hours
Ash per cue 270 g 270 g
Other variable costs per cue $1·20 $4·70
HC does not keep inventory.
Required:
(a) Calculate the contribution earned from each cue. (2 marks)
(b) Determine the optimal production plan for a typical period assuming that HC is seeking to
maximise the contribution earned. You should use a linear programming graph (using the
graph paper provided), identify the feasible region and the optimal point and accurately
calculate the maximum contribution that could be earned using whichever equations you need.
(12 marks)
Some of the craftsmen have offered to work overtime, provided that they are paid double time for the
extra hours over the contracted 12,000 hours. HC has estimated that up to 1,200 hours per period
could be gained in this way.
Required:
(c) Explain the meaning of a shadow price (dual price) and calculate the shadow price
of both the labour (craftsmen) and the materials (ash).
(d) Advise HC whether to accept the craftsmens’ initial offer of working overtime, discussing
the rate of pay requested, the quantity of hours and one other factor that HC should consider.
(25 marks)
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GRAPH PAPER
30,000
20,000
15,000 A B
C
10,000
E s
Page 42 of 130
QUESTION 5
Cut and Stitch (CS) make two types of suits using skilled tailors (labour) and a delicate and unique
fabric (material). Both the tailors and the fabric are in short supply and so the accountant at
CS has correctly produced a linear programming model to help decide the optimal production mix.
The model is as follows:
Variables:
Let W = the number of work suits produced
Let L = the number of lounge suits produced
Constraints
Tailors’ time: 7W + 5L ≤ 3,500 (hours) – this is line T on the diagram
Fabric: 2W + 2L ≤ 1,200 (metres) – this is line F on the diagram
Production of work suits: W ≤ 400 – this is line P on the diagram
Objective is to maximise contribution subject to:
C = 48W + 40L
On the diagram provided the accountant has correctly identifi ed OABCD as the feasible region and
point B as the optimal point.
Required:
(a) Find by appropriate calculation the optimal production mix and related maximum
contribution that could be earned by CS.
(b) Calculate the shadow prices of the fabric per metre and the tailor time per hour.
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The tailors have offered to work an extra 500 hours provided that they are paid three times
their normal rate of $1·50 per hour at $4·50 per hour.
Required:
(c) Briefly discuss whether CS should accept the offer of overtime at three times the normal
rate.
(d) Calculate the new optimum production plan if maximum demand for W falls to 200 units.
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QUESTION 6
Tablet Co makes two types of tablet computer, the Xeno (X) and the Yong (Y). X currently generates
a contribution of $30 per unit and Y generates a contribution of $40 per unit. There are three main
stages of production: the build stage, the program stage and the test stage. Each of these stages
requires the use of skilled labour which, due to a huge increase in demand for tablet computers over
recent months, is now in short supply. The following information is available for the two products:
Stage Xeno (X) Yong (Y)

Minutes per unit Minutes per unit
Build ($10 per hour) 24 20
Program ($16 per hour) 16 14
Test ($12 per hour) 10 4
Tablet Co is now preparing its detailed production plans for the next quarter. During this period it
expects that the skilled labour available will be 30,000 hours (1,800,000 minutes) for the build
stage, 28,000 hours (1,680,000 minutes) for the program stage and 12,000 hours (720,000 minutes)
for the test stage. The maximum demand for X and Y over the three-month period is expected to be
85,000 units and 66,000 units respectively. Fixed costs are $650,000 per month.
Due to rapid technological change, the company holds no inventory of finished goods.
Required:
(a) Use linear programming to calculate the optimum number of each product which Tablet Co
should make in the next quarter assuming it wishes to maximise contribution. Calculate the
total profit for the quarter. (14 marks)
(b) Calculate the amount of any slack resources arising as a result of the optimum production
plan and explain the implications of these amounts for decision-making within Tablet Co. (5
marks)
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GRAPH PAPER
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QUESTION 7
Cara Co makes two products, the Seebach and the Herdorf.
To make a unit of each product the following resources are required:
Seebach Herdorf
Materials ($100 per kg) 5 kg 7 kg
Labour hours ($45 per hour) 2 hours 3 hours
Machine hours ($60 per hour) 3 hours 2 hours
Fixed overheads are $300,000 each month.
The contribution per unit made on each product is as follows:
Seebach Herdorf
Contribution ($ per unit) 250 315
The maximum demand each month is 4,000 units of Seebach and 3,000 units of Herdorf. The
products and materials are perishable and inventories of raw materials or finished goods cannot be
stored.
Cara Co has a legally binding obligation to produce a minimum of 2,000 units of Herdorf in each of
months 1 and 2. There is no minimum production required in month 3.
The manufacturing manager is planning production volumes and the maximum availability of
resources for months 1, 2 and 3 are as follows:
Month 1 2 3
Materials (kg) 34,000 42,000 35,000
Labour (hours) 18,000 12,000 24,000
Machine (hours) 18,000 19,000 12,000
Required:
A, Determine the limiting factor(s) in month 1?
B, if the production manager has identified that the only limiting factor in month 2 is labour
hours.
Determine the production volume for Herdorf for month 2?
C, Use linear programming to calculate the optimum number of each product which Cara
should make in the quarter 3 assuming it wishes to maximise contribution. Calculate the total
profit for the quarter. (14 marks)
D, Calculate the amount of any slack resources arising as a result of the optimum production
plan and explain the implications of these amounts for decision-making.
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GRAPH PAPER
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QUESTION 8 (ACCA F5 – Dec 2021)
Bellahouston Co manufactures three types of running shoes which it sells to sports clothing retailers:
Road which are for running on roads, Spikes which are used for racing on athletics tracks and Trail
which are used for running off-road in rural locations. Each of these products use differing amounts of
the same resources. Financial information and the resource requirements related to these products are
as follows:
Road Spikes Trail

$ $ $
Selling price per pair of shoes 60.00 45.00 52.00
Variable costs per pair of shoes:
Direct material ($5 per metre) 7.50 3.00 6.00
Direct labour ($7 per hour) 7.00 10.50 7.00
Machine hours ($10 per hour) 4.00 2.00 3.00
Fixed overheads absorbed per pair of 4.00 6.00 4.00
shoes
Profit per pair of shoes 37.50 23.50 32.00
Fixed overheads are absorbed at a rate of $4 per direct labour hour. Bellahouston Co uses a just-in-
time production system.
Demand and resource availability for March

Demand for the three products for the month of March is expected to be:
Road 2,300 pairs

Spikes 1,400 pairs
Trail 1,650 pairs
Bellahouston Co has received a special order from RunWild, which is not included in the demand
estimates above. RunWild are a major sports retailer who have an extensive customer base and are
known for stocking the most popular brands of sportswear. The order is to supply a maximum of 200
pairs of each type of shoe at a discount of $8.00 on the standard selling price.
RunWild will charge a financial penalty if the order is not fully complete in March. If this first order
is successful, RunWild would be keen to enter into a regular supply contract.
Usually Bellahouston Co has sufficient resources to meet production, however during March the
maximum availability for the following resources has been identified:
Direct material 7,200 metres

Direct labour 6,900 hours
Machine time 1,815 hours
Demand and resource availability for April

Bellahouston Co predicted that the resource availability in March would continue into April, however
it has been discovered that the availability of direct material and direct labour will be 15% less than in
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March. The available machine time and demand estimates are unchanged. RunWild would not be
placing an order in April.
Required:
(a)
(i) Calculate the optimum production plan and the resulting total contribution earned for
March, assuming that the order with RunWild is supplied in full.
(ii) Calculate the maximum financial penalty Bellahouston Co would be prepared to accept
from RunWild, if it does not complete RunWild's order in full.
(b) Discuss whether Bellahouston Co should fulfil RunWild's order in full in March.
(c) Define the variables and formulate the constraints and objective function to be used in a
linear programming model to determine the optimum usage of resources in April.
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GRAPH PAPER
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CHAPTER 4 RELEVANT COSTS
LEARNING OBJECTIVES
1, Explain the concept of relevant costing.
2, Identify and calculate relevant costs for specific decision situations from given data.
3, Explain and apply the concept of opportunity costs.
4, Explain the issues surrounding make vs buy and outsourcing decisions.
5, Calculate and compare 'make' costs with 'buy-in' costs.
6, Compare in-house costs and outsource costs of completing tasks and consider other issues
surrounding this decision.
7, Apply relevant costing principles in situations involving shutdown, one-off contracts and the
further processing of joint products. RELEVANT COSTING
WHAT IS RELEVANT COST RELEVANT COST OF MATERIAL
1, Cost that will occur in the future.

2, Cost (or benefit) that results in cash flow.
3, Direct consequence of the decision.
4, Opportunity cost
RELEVANT COST OF LABOR
1, Labor cost is incremental, relevant cost

2, If the labor force could be put to an alter-
native use, relevant costs = labor cost + con-
tribution lost per hour
APPLICAITON OF RELEVANT COST
OUTSOURCING SHUT DOWN
Key principle for outsourcing decision: Compare cost of Key principle for shut down decision
purchase and cost of manufacturing (based on relevant cost) Step 1: Set ASSUMPTION (continue or shut
down)
Step 2: Determine RELEVANT COST BASED
A, Reasons for outsourcing activities
ON ASSUMPTION
 Specialist contractors can offer superior quality and Step 3: Conclusion based on computation (If
efficiency. total relevant income more than expense,
 Rrees capital that can then be invested in core activities assumption is appropriate and vice versal)
 Start production very quickly to meet sudden variations in
demand.
Factors consider
 if internal staff not fully occupied, cheaper to outsource the
work
1, Savings in annual
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operating costs
2, Release unwanted non-current assets for
B, Typical outsourcing decision sale
PRACTISE QUESTION
QUESTION 1
The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a
one-off order of sofas, in excess of normal budgeted production. The order would need to be
completed within two weeks. The following cost estimate has already been prepared:
Cost statement Note $
Direct materials:
Fabric 200 m2 at $17 per m2 1 3,400
Wood 50 m at $8·20 per m2 2 410
Direct labour: Skilled 200 hours at $16 per hour 3 3,200
Semi-skilled 300 hours at $12 per hour 4 3,600
Factory overheads 500 hours at $3 per hour 5 1,500
Total production cost 12,110
Administration overheads at 10% of total production cost 6 1,211
Total cost 13,321
Notes
1 The fabric is regularly used by HL Co. There are currently 300 m2 in inventory, which cost $17 per
m2. The current purchase price of the fabric is $17·50 per m2.
2 This type of wood is regularly used by HL Co and usually costs $8·20 per m2. However, the
company’s current supplier’s earliest delivery time for the wood is in three weeks’ time. An
alternative supplier could deliver immediately but they would charge $8·50 per m 2 . HL Co already
has 500 m 2 in inventory but 480 m 2 of this is needed to complete other existing orders in the next
two weeks. The remaining 20 m 2 is not going to be needed until four weeks’ time.
3 The skilled labour force is employed under permanent contracts of employment under which they
must be paid for 40 hours’ per week’s labour, even if their time is idle due to absence of orders. Their
rate of pay is $16 per hour, although any overtime is paid at time and a half. In the next two
weeks, there is spare capacity of 150 labour hours.
4 There is no spare capacity for semi-skilled workers. They are currently paid $12 per hour or time
and a half for overtime. However, a local agency can provide additional semi-skilled workers for $14
per hour.
5 The $3 absorption rate is HL Co’s standard factory overhead absorption rate; $1·50 per hour reflects
the cost of the factory supervisor’s salary and the other $1·50 per hour reflects general factory costs.
The supervisor is paid an annual salary and is also paid $15 per hour for any overtime he works. He
will need to work 20 hours’ overtime if this order is accepted.
6 This is an apportionment of the general administration overheads incurred by HL Co.
Required: Prepare, on a relevant cost basis, the lowest cost estimate which could be used as the
basis for the quotation. (Explain briefly your reasons for including or excluding each of the
costs in your estimate)
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QUESTION 2
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. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
Required:
(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.
(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.
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QUESTION 3
Robber Co manufactures control panels for burglar alarms, a very profitable product. Every product
comes with a one year warranty offering free repairs if any faults arise in this period.
It currently produces and sells 80,000 units per annum, with production of them being restricted by
the short supply of labour. Each control panel includes two main components – one key pad and one
display screen. At present, Robber Co manufactures both of these components in-house.
However, the company is currently considering outsourcing the production of keypads and/or
display screens. A newly established company based in Burgistan is keen to secure a place in the
market, and has offered to supply the keypads for the equivalent of $4·10 per unit and the display
screens for the equivalent of $4·30 per unit. This price has been guaranteed for two years.
The current total annual costs of producing the keypads and the display screens are:
Keypads Display screens
Production cost 80,000 units 80,000 units
$’000 $’000
Direct materials 160 116
Direct labour 40 60
Machine costs 26 30
Depreciation and insurance costs 84 96
Notes:
1. Materials costs for keypads are expected to increase by 5% in six months’ time; materials costs for
display screens are only expected to increase by 2%, but with immediate effect.
2. Direct labour costs are purely variable and not expected to change over the next year.
3. Machine costs are semi-variable; the variable element relates to set up costs, which are based upon
the number of batches made. The keypads’ machine has fixed costs of $4,000 per annum and the
display screens’ machine has fixed costs of $6,000 per annum. Whilst both components are currently
made in batches of 500, this would need to change, with immediate effect, to batches of 400.
4. 60% of depreciation and insurance costs relate to an apportionment of the general factory
depreciation and insurance costs; the remaining 40% is specific to the manufacture of keypads and
display screens.
Required:
(a) Advise Robber Co whether it should continue to manufacture the keypads and display
screens in-house or whether it should outsource their manufacture to the supplier in Burgistan,
assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels
in the coming year.
(b) Discuss the non-financial factors that Robber Co should consider when making a decision
about outsourcing the manufacture of keypads and display screens.
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QUESTION 4
Process Co has two divisions, A and B. Division A produces three types of chemicals: products L, M
and S, using a common process. Each of the products can either be sold by Division A to the external
market at split-off point (after the common process is complete) or can be transferred to Division B
for individual further processing into products LX, MX and SX.
In November 2013, which is a typical month, Division A’s output was as follows:
Product Kg
L 1,200
M 1,400
S 1,800
The market selling prices per kg for the products, both at split-off point and after further processing,
are as follows:
Product $ Further process product $

L 5.6 LX 6.7
M 6.5 MX 7.9
S 6.1 SX 7.9
The specific costs for each of the individual further processes are:
$
Variable cost of $0·50 per kg of LX
Variable cost of $0·70 per kg of MX
Variable cost of $0·80 per kg of SX
Further processing leads to a normal loss of 5% at the beginning of the process for each of
the products being processed.
Required: Calculate and conclude whether any of the products should be further processed in
Division B in order to optimize the profit for the company as a whole.
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QUESTION 6
Bits and Pieces (B&P) operates a retail store selling spares and accessories for the car market. The
store has previously only opened for six days per week for the 50 working weeks in the year, but B&P
is now considering also opening on Sundays.
The sales of the business on Monday through to Saturday averages at $10,000 per day with average
gross profit of 70% earned.
B&P expects that the gross profit % earned on a Sunday will be 20 percentage points lower than the
average earned on the other days in the week. This is because they plan to offer substantial discounts
and promotions on a Sunday to attract customers. Given the price reduction, Sunday sales revenues
are expected to be 60% more than the average daily sales revenues for the other days. These Sunday
sales estimates are for new customers only, with no allowance being made for those customers that
may transfer from other days.
B&P buys all its goods from one supplier. This supplier gives a 5% discount on all purchases if
annual spend exceeds $1,000,000.
It has been agreed to pay time and a half to sales assistants that work on Sundays. The normal hourly
rate is $20 per hour. In total five sales assistants will be needed for the six hours that the store will be
open on a Sunday. They will also be able to take a half-day off (four hours) during the week. Staffing
levels will be allowed to reduce slightly during the week to avoid extra costs being incurred.
The staff will have to be supervised by a manager, currently employed by the company and paid an
annual salary of $80,000. If he works on a Sunday he will take the equivalent time off during the
week when the assistant manager is available to cover for him at no extra cost to B&P. He will also be
paid a bonus of 1% of the extra sales generated on the Sunday project.
The store will have to be lit at a cost of $30 per hour and heated at a cost of $45 per hour. The heating
will come on two hours before the store opens in the 25 ‘winter’ weeks to make sure it is warm
enough for customers to come in at opening time. The store is not heated in the other weeks
The rent of the store amounts to $420,000 per annum.
Required:
(a) Calculate whether the Sunday opening incremental revenue exceeds the incremental costs
over a year (ignore inventory movements) and on this basis reach a conclusion as to
whether Sunday opening is financially justifiable.
(b) Discuss whether the manager’s pay deal (time off and bonus) is likely to motivate him.
(c) Briefly discuss whether offering substantial price discounts and promotions on Sunday is a
good suggestion.
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QUESTION 7
Stay Clean manufactures and sells a small range of kitchen equipment. Specifically the product range
contains a dishwasher (DW), a washing machine (WM) and a tumble dryer (TD). The TD is of a
rather old design and has for some time generated negative contribution. It is widely expected that in
one year’s time the market for this design of TD will cease, as people switch to a washing machine
that can also dry clothes after the washing cycle has completed.
Stay Clean is trying to decide whether or not to cease the production of TD now or in 12 months’ time
when the new combined washing machine/drier will be ready. To help with this decision the
following information has been provided:
1. The normal selling prices, annual sales volumes and total variable costs for the three products are as
follows:
Product DW WM TD
Selling price per unit $130 $250 $30
Labour cost per unit $50 $80 $40
Contribution per unit $80 $170 –$10
Annual sales 5,000 units 6,000 units 1,200 units
2. It is thought that some of the customers that buy a TD also buy a DW and a WM. It is estimated
that 5% of the sales of WM and DW will be lost if the TD ceases to be produced.
3. All the direct labour force currently working on the TD will be made redundant immediately if TD
is ceased now. This would cost $6,000 in redundancy payments. If Stay Clean waited for 12 months
the existing labour force would be retained and retrained at a cost of $3,500 to enable them to produce
the new washing/drying product. Recruitment and training costs of labour in 12 months’ time would
be $1,200 in the event that redundancy takes place now.
5. The space in the factory currently used for the TD will be sublet for 12 months on a short-term
lease contract if production of TD stops now. The income from that contract will be $12,000.
6. The supervisor (currently classed as an overhead) supervises the production of all three
products spending approximately 20% of his time on the TD production. He would continue to be
fully employed if the TD ceases to be produced now.
Required:
(a) Calculate whether or not it is worthwhile ceasing to produce the TD now rather than waiting
12 months (ignore any adjustment to allow for the time value of money).
(b) Briefly describe three issues that Stay Clean should consider if it decides to outsource the
manufacture of one of its future products.
Page 58 of 130
QUESTION 8 (with answer)
Belton Park Resort is a new theme park resort located in the country of Beeland. The resort is made
up of a theme park, a hotel. The resort opened two months ago and is already very popular.
Belton Park Resort must decide whether to shut down the whole resort in January (because of the risk
of accidents). It could choose to keep open the hotel.
Since Belton Park Resort has not been open for long, there is limited historical data available about
costs and revenues. However, based on the last two months, the following average monthly data is
available:
Hotel
Number of rooms 120
Average room rate per night $100
Average occupancy rate per month 90%
Average nightly spend on ‘extras’ per room $20
Contribution margin for ‘extras’* 60%
*‘Extras’ includes anything purchased by the customer not included in the room rate or admission
price.
Management estimates that, for January, the average room rate per night would need to decrease by
30% and the admission price. With such reductions, it is estimated that an occupancy rate of 50%
would be achieved for the hotel.
The running costs for the hotel and water park for each of the last two months are as follows:
Notes Hotel
$
Staff costs 1 120,000
Maintenance costs 2 14,600
Power costs 3 20,000
Security costs 4 13,600
Water costs 5 12,900
Notes:
(1) Staff costs
Permanent staff
Included in the staff costs for the hotel is the salary of $30,000 per annum for the hotel manager and
$24,000 per annum for the head chef. These are both permanent members of staff who are paid for the
full year regardless of their working hours.
Temporary staff
The remaining staff costs relate to temporary staff who are only paid for the hours they work. If the
hotel stays open in January, half of these staff members will continue to work their current hours
because their jobs are largely unaffected by guest occupancy rates. However, the other half of the staff
will work proportionately less hours to reflect the 50% occupancy rate in January as opposed to the
90% occupancy rate of the last two months.
(2) Maintenance costs
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Maintenance is undertaken by a local company, ‘Techworks’, which bills Belton Park Resort for all
work carried out each month. If the hotel are closed, Techworks will instead be paid a flat fee for the
month of $4,000 for the hotel.
(3) Power costs
Electricity
Belton Park Resort pays a fixed monthly charge for electricity of $8,000 for the hotel.
Gas
The gas charges relate to heating and include a fixed charge of $2,200 per month for the hotel. The
remainder of the gas charges is based solely on usage and would be expected to increase by 50% in
January because of the colder weather.
(4) Security costs
If the hotel and water park close, no changes will be made to the current arrangements for security
whilst the premises are empty.
(5) Water costs
It is estimated that water costs for the hotel would fall to $6,450 for the month if it remains open in
January. If the hotel and water park were closed, all water would be turned off and no charges would
arise.
Required:
(a) Calculate the incremental cash flows, for the month of January (31 days), if Belton Park
Resort decides to keep open:
(i) the hotel;
(ii) the water park.
In each case, state whether it should remain open or should close.
(b) Discuss any other factors which Belton Park Resort should consider when making the
decision in part (a).
Answer
(i) Hotel
Incremental revenue and contribution
$
Room revenue
Number of rooms 120
Number of nights 31
Total room nights 3,720
Occupancy rate 50%
Total nights occupied 1,860
Rate per night $70
Total room revenue 130,200
Extras’ contribution
Total nights occupied 1,860
Contribution per night $12·00
Total ‘extras’ contribution 22,320
––––––––
Total cash inflows 152,520
––––––––
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Incremental running costs
Staff costs $120,000
Less: manager’s salary ($2,500)
Less: chef’s salary ($2,000)
–––––––––
$115,500
50% normal hours 57,750
50% at reduced hours x 50/90 32,083
Maintenance costs:
If open $14,600
If closed $4,000
–––––––––
Incremental cost 10,600
Power costs:
Electric $0
Gas – fixed charge $0
Gas – variable ($20,000 – $10,200) 14,700
x 1·5
Security 0
Water 6,450
––––––––
Total cash outflows 121,583
––––––––
Total incremental cash flows 30,937
––––––––
(ii) Water park
Incremental revenue and contribution
$
Visitor revenue
Number of visitors 5,760
Admission cost $16·80
Admission revenue 96,768
Extras’ contribution
Number of visitors 5,760
Contribution per visitor $7·20
Total contribution 41,472
––––––––
Total cash inflows 138,240
––––––––
Incremental running costs
Staff costs:
Manager $0
Other staff ($75,600 – $2,000) x 48% 35,328
Maintenance costs:
If open $6,000
If closed ($2,000)
–––––––
Page 61 of 130
Incremental cost 4,000
Power costs:
Electric $0
Gas – fixed charge $0
Gas – variable ($18,000 – $8,500) x 1·5 14,250
Security 0
Water 12,100
––––––––
Total cash outflows 65,678
––––––––
Total incremental cash flows 72,562
––––––––
As regards the estimates calculated, these have been based on very limited data and should be
approached with caution.
The calculations are based on the first two months’ of opening only and, consequently, it is difficult to
say how accurate they are likely to be.
In addition, the basis of estimating the revised occupancy rates for the hotel, for example, has not
been given. If these estimates are too optimistic, the actual results could be far worse.
The figures suggest that both the water park and the hotel should stay open. Given that this is a new
business and therefore it is still building up its customer base, this would seem like a wise decision
anyway, even if the calculations had shown that the estimated incremental cash flows were not as
positive as this.
Similarly, if Belton Park were to close either the hotel or the water park, they would invariably lose
some valuable staff who might seek out other jobs after the closure.
These staff might not be available again when the hotel and water park reopened in February.
The interdependency of the two sets of projections has not been taken into account in the calculations
either. Since the incremental cash flows suggest that both the hotel and the water park should stay
open, it is not a big problem.
However, if they had shown, for example, that the water park alone should close, the effect that this
could have on the number of hotel visitors would also need to be taken into account. Many visitors
may be attracted to the hotel because it has a water park.
Page 62 of 130
Page 63 of 130
CHAPTE 5 PRICING DECISION
LEARNING OBJECTIVES
1, Explain the factors that influence the pricing of a product or service
2, Derive and manipulate a straight line demand equation. Derive an equation for the total cost
function
3, Calculate the optimum selling price and quantity for an organisation, equating marginal cost and
marginal revenue
4, Calculate a price from a given strategy using cost-plus

PRICING
5, Explain different price strategies, including: Cost-plus, Skimming, Penetration
FACTORS INFLUENCE PRICE THE PROFIT-MAXIMISING PRICE
1, Price sensitivity Demand function: P = a – bQ

2, Price perception a = the price at which demand would be nil
3, Quality b = change in price / change in quantity
4, Intermediaries The constant a is calculated as follows.
5, Competitors
6, Suppliers
7, Inflation Profit maximization: marginal cost (MC) = marginal revenue
8, Newness (MR)
9, Incomes Marginal revenue: MR = a – 2bQ
10, Product range Marginal cost = variable cost
11, Ethics
FULL COST-PLUS PRICING MARGINAL COST-PLUS PRICING
WHAT: adding a percentage mark-up for profit to the WHAT: adding a profit margin to the marginal cost of
full cost of the product. the product.
DISADVANTAGES Advantages
1, Need to adjust prices to market and demand 1, simple and easy method to use.
conditions. 2, Adjusted to reflect demand conditions.
2, Budgeted output volume needs to be established. 3, Attention to contribution, and the effects of higher or
3, Suitable basis for overhead absorption must be lower sales volumes on profit
selected 4, In practice, mark-up pricing is used in businesses
ADVANTAGES where there is a readily identifiable basic variable cost.
1, It is a quick, simple and cheap Disadvantages
2, Ensure cover all of its fixed costs and make a profit. not ensure that sufficient attention profit is paid to
3, Ensure that the organization makes a profit. demand conditions, competitors' prices and profit
maximisation.
MARKET SKIMMING MARKET PENETRATION
What: charging high prices when a new product is first

launched on the market, in order to maximise short-
What: policy of low prices when a product is first
term profitability.
launched in order to obtain strong demand for the
How to apply market skimming: product as soon as it is launched on the market. Low
Initially heavy spending on advertising and sales prices should encourage bigger demand.
promotion to encourage sales demand. As the product Page 64 of 130
moves into the later stages of its life cycle (growth, Conditions for applying market penetration
maturity and decline), progressively lower prices are 1, The firm wishes to discourage new entrants from
PRACTISE QUESTION
QUESTION 1
Heat Co specialises in the production of a range of air conditioning appliances for industrial premises.
It is about to launch a new product, the ‘Energy Buster’, a unique air conditioning unit which is
capable of providing unprecedented levels of air conditioning using a minimal amount of electricity.
The technology used in the Energy Buster is unique so Heat Co has patented it so that no competitors
can enter the market for two years. The company’s development costs have been high and it is
expected that the product will only have a five-year life cycle.
Heat Co is now trying to ascertain the best pricing policy that they should adopt for the Energy
Buster’s launch onto the market. Demand is very responsive to price changes and research has
established that, for every $15 increase in price, demand would be expected to fall by 1,000 units. If
the company set the price at $735, only 1,000 units would be demanded.
The costs of producing each air conditioning unit are as follows:

Cost statement $ Note
Direct materials 42
Labour 12 (1·5 hours at $8 per hour)
Fixed overheads 6 (based on producing 50,000 units per annum)
Total cost 60
Notes: All other costs are expected to remain the same up to the maximum demand levels.
Required:
1, Establish the demand function (equation) for air conditioning units;
2, Calculate the marginal cost for each air conditioning unit after adjusting the labour cost as
required by the note above;
3, Equate marginal cost and marginal revenue in order to calculate the optimum price and
quantity.
4, Explain what is meant by a ‘penetration pricing’ strategy and a ‘market skimming’

strategy and discuss whether either strategy might be suitable for Heat Co when launching the
Energy Buster.
Page 65 of 130
QUESTION 2:
ALG Co is launching a new, innovative product onto the market and is trying to decide on the right
launch price for the product. The product’s expected life is three years. Given the high level of costs
which have been incurred in developing the product, ALG Co wants to ensure that it sets its price at
the right level and has therefore consulted a market research company to help it do this. The research,
which relates to similar but not identical products launched by other companies, has revealed that at a
price of $60, annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and
for every $2 decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new
product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000

$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
Required:
1, Calculate the total variable cost per unit and total fixed overheads.
2, If the entity applies marginal cost plus with mark up 25%. Determine selling price per unit
3, If the entity applies full cost plus with margin 25%. Determine selling price per unit
The entity use absorption costing to allocate overhead and determine OAR based on number of
products produced.
4, Calculate the optimum (profit maximizing) selling price for the new product AND calculate
the resulting profit for the period.
Note: If P = a – bx then MR = a – 2bx.
5, The sales director is unconvinced that the sales price calculated in (b) above is the right one to
charge on the initial launch of the product. He believes that a high price should be charged at launch
so that those customers prepared to pay a higher price for the product can be ‘skimmed off’ first.
Required:
Discuss the conditions which would make market skimming a more suitable pricing strategy for
ALG, and recommend whether ALG should adopt this approach instead.
Page 66 of 130
QUESTION 3:
TR Co is a pharmaceutical company which researches, develops and manufactures a wide range of
drugs. One of these drugs, ‘Parapain’, is a pain relief drug used for the treatment of headaches and
until last month TR Co had a patent on Parapain which prevented other companies from
manufacturing it. The patent has now expired and several competitors have already entered the market
with similar versions of Parapain, which are made using the same active ingredients.
TR Co is reviewing its pricing policy in light of the changing market. It has carried out some market
research in an attempt to establish an optimum price for Parapain. The research has established that
for every $2 decrease in price, demand would be expected to increase by 5,000 batches, with
maximum demand for Parapain being one million batches.
Each batch of Parapain is currently made using the following materials:
Material Z: 500 grams at $0·10 per gram
Material Y: 300 grams at $0·50 per gram
Each batch of Parapain requires 20 minutes of machine time to make and the variable running costs
for machine time are $6 per hour. The fixed production overhead cost is expected to be $2 per batch
for the period, based on a budgeted production level of 250,000 batches.
The skilled workers who have been working on Parapain until now are being moved onto the
production of TR Co’s new and unique anti-malaria drug which cost millions of dollars to develop.
TR Co has obtained a patent for this revolutionary drug and it is expected to save millions of lives. No
other similar drug exists and, whilst demand levels are unknown, the launch of the drug is eagerly
anticipated all over the world.
Required:
1, If the entity apply marginal cost plus with mark up 25%. Determine selling price per unit
2, If the entity apply full cost plus with margin 25%. Determine selling price per unit
3, Calculate the optimum (profit-maximising) selling price for Parapain and the resulting
annual profit which TR Co will make from charging this price.
Note: If P = a – bQ, then MR = a – 2bQ
4, Discuss and recommend whether market penetration or market skimming would be the most
suitable pricing strategy for TR Co when launching the new anti-malaria drug.
Page 67 of 130
CHAPTER 6 VARIANCE ANALYSIS
LEARNING OBJECTIVES
1, Calculate, identify the cause of, and explain material mix and yield variances
2, Explain the wider issues involved in changing material mix e.g. cost, quality and performance
measurement issues
3, Identify and explain the relationship of the material usage variance with the material mix and yield
variances.
4, Suggest and justify alternative methods of controlling production processes
5, Calculate, identify the cause of, and explain sales mix and quantity variances
6, Identify and explain the relationship of the sales volume variances with the sales mix contribution
variance and quantity contribution variances
BASIC VARIANCE ANALYSIS

7, Calculate, identify the cause of and explain planning and operational variances for: sales, including
market size (contribution variance) and market share (contribution variance); materials; labour.
Material price variance Labor rate variance

Selling price variance
MPV = (AP – SP) * AQ LRV = (AR – SR) * AH
SPV = (AP – SP) * AQ
Material usage variance Labour efficiency variance
Sales volume variance
MUV = (AQ – SQ) * SP
LEV = (AH – SH) * SR
SVV = (AQ – BQ) * Standard
contribution per unit
REASONS FOR VARIANCE
Favorable Material price Favorable Labor rate

Favourable Selling price
Unforeseen discounts received OR Use of workers at a lower rate of
Unplanned price increase
Greater care in purchasing pay than standard
Change in material standard OR Adverse Selling price
Adverse Labor rate
Price increase Unplanned price reduction
Wage rate increase
Adverse Material price Favourable Sales volume
Careless purchasing OR Change in Favourable Labour efficiency
material standard Additional demand
work motivation, better quality
Favorable Material usage of equipment or materials, Adverse sales volume
Material used of higher quality better learning rate, Errors in Unexpected fall in demand
than standard allocating time to jobs
Production difficulties
More effective use made of Adverse Labour efficiency
material Lost time in excess of standard
Errors in allocating material to jobs allowed OR lack of training,
Adverse Material usage substandard material, etc
Defective material OR Excessive Errors in allocating time to jobs
waste
Theft OR Stricter quality control Page 68 of 130
Errors in allocating material to jobs
PLANNING & OPERATING
WHAT IS PLANNING AND OPERATIONAL ADVANTAGES

VARIANCE highlights variances controllable & non-controllable
PLANNING VARIANCES are calculated by motivation increase if they know they will not be held
comparing the original budget/standard responsible for poor planning and faulty standard setting.
cost with the revised budget/standard cost. Standards should be more accurate, relevant and
appropriate.
OPERATIONAL VARIANCES are calculated in
the same way as 'normal' basic variances, More realistic and 'fair' reflection of actual performance.
except that they are based on a comparison LIMITATIONS
between actual results and the revised What the realistic standard should have been.
budget/standard cost.
too easy to justify all the variances as being due to bad
WHEN REVISIONS BE ALLOWED? planning
something has happened which is beyond Time-consuming task.
the control & need approved by senior managers may be resistant to the very idea of variances and
management refuse to see the virtues of the approach.
MATERIAL MIX & YIELD MARKET SIZE & SHARE
A MIX VARIANCE occurs when the materials MARKET SIZE VARIANCE, which is caused by the difference
are not mixed or blended in standard between the sales volume in the original budget and the
proportions and it is a measure of whether sales volume in the revised budget
the actual mix is cheaper or more expensive
than the standard mix. Market size = (BQ – RQ) * Standard contribution per unit
MMV = (AQAM – AQSM) * SP MARKET SHARE VARIANCE, which is caused by the
difference between actual salesPage 69 of and
volume 130 the sales
A YIELD VARIANCE arises because there is a
difference between what the input should volume in the revised budget
have been for the output achieved and the
PRACTISE QUESTION
QUESTION 1 BASIC VARIANCE
In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows:
Cost statement Std cost
$
Materials (2kg at $5/kg) 10
Labour (3hrs at $12/hr) 36
Marginal cost 46
Selling price 68
Contribution margin/unit (standard): 68 – 46 = 22
In May 2010 the following results were achieved:
 40,000kg of wood were bought at a cost of $196,000,.
 No inventory of raw materials is held.
 The labour was paid $694,000.
 Labour worked for 61,500 hours.
 The sales price was reduced to protect the sales levels.
 18,000 cricket bats were produced and sold at an average price of $65.
Required: Calculate the materials, labour and sales variances for May 2010 in as much detail as
the information allows. (13 marks)
Page 70 of 130
QUESTION 2.1 PLANNING AND OPERATING VAIRANCE (Q8)
Marcus manages the production and sales departments for product MN at Grayshott Co. Marcus has
been asked to attend a meeting with Grayshott Co’s finance director to explain the results for product
MN in the last quarter.
Budgeted and actual results for product MN were as follows:
Budget Actual
Sales volume (units) 40,000 38,000
$’000 $’000
Revenue ($65 per unit) 2,600 2,394
Material (5·2 kg at $4 per kg) (832) (836)
Labour (2 hours at $8 per hour) (640) (798)
There was no opening and closing inventory in the last quarter. Grayshott Co operates a marginal
costing system.
Marcus is angry about having to attend the meeting as he has no involvement in setting the original
budget and he believes that the adverse results are due to the following circumstances which were
beyond his control:
(1) A decision by Grayshott Co’s board to increase wages meant that the actual labour rate per hour
was 25% higher than budgeted. This decision was made in response to a request by the production
department to enable it to meet a large, one-off customer order in the last quarter.
(2) Due to the closure of a key supplier, Grayshott Co agreed to a contract with an alternative
supplier to pay 6% more per kg than the budgeted price for material. The actual cost per kg of
material was $4·40.
(3) Difficult economic conditions meant that market demand for product MN was lower by 10%.
At present Grayshott Co does not operate a system of planning and operational variances and Marcus
believes it should do so.
Required:
(a) Determine market share variance for product MN for the last quarter
(b) Determine materials price planning variance for product MN for the last quarter
(c) Determine labour rate operational variance for product MN for the last quarter
(d) Explain reasons for labour efficiency planning variance
(e) Discuss problems of introducing a system of planning and operational variances
Page 71 of 130
QUESTION 2.2 PLANNING AND OPERATING VARIANCE (Q2)
Secure Net (SN) manufacture security cards that restrict access to government owned buildings
around the world. The standard cost for the plastic that goes into making a card is $4 per kg and each
card uses 40g of plastic after an allowance for waste. In November 100,000 cards were produced
and sold by SN and this was well above the budgeted sales of 60,000 cards.
The actual cost of the plastic was $5·25 per kg and the production manager (who is responsible for all
buying and production issues) was asked to explain the increase. He said ‘World oil price increases
pushed up plastic prices by 20% compared to our budget and I also decided to use a different supplier
who promised better quality and increased reliability for a slightly higher price. I know we have
overspent but not all the increase in plastic prices is my fault’ The actual usage of plastic per card was
35g per card and again the production manager had an explanation. He said ‘The world-wide standard
size for security cards increased by 5% due to a change in the card reader technology, however, our
new supplier provided much better quality of plastic and this helped to cut down on the waste.’
SN operates a just in time (JIT) system and hence carries very little inventory.
Required:
(a) Calculate the total material price and total material usage variances ignoring any possible
planning error in the figures.
(b) Analyse the above total variances into component parts for planning and operational
variances in as much detail as the information allows.
(c) Assess the performance of the production manager.
Page 72 of 130
QUESTION 3 PLANNING AND OPERATING VARIANCE (Q3)
Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All
chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard
cost of labour for each batch is $6·00 and the standard labour time for each batch is half an hour. In
November, Truffle Co had budgeted production of 24,000 batches; actual production was only 20,500
batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers
were paid for their actual hours worked. The actual total labour cost for November was $136,800. The
production manager at Truffle Co has no input into the budgeting process. At the end of October, the
managing director decided to hold a meeting and offer staff the choice of either accepting a 5% pay
cut or facing a certain number of redundancies. All staff subsequently agreed to accept the 5% pay cut
with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change
was implemented immediately and made the chocolates more difficult to shape. When recipe changes
such as these are made, it takes time before the workers become used to working with the new
ingredient mix, making the process 20% slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the
system outside of this.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on
the standard cost provided above.
(b) Analyse the total labour rate and total labour efficiency variances into component parts for
planning and operational variances in as much detail as the information allows.
(c) Assess the performance of the production manager for the month of November.
Page 73 of 130
Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2.
Each bed sheet uses 2 m2 of cotton and each pillowcase uses 0·5 m2. Production levels for bed sheets
and pillowcases for November were as follows:
Budgeted production Actual production

levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5·80 per m2. 248,000 m2 of cotton was used to make
the bed sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the
beginning of the month, the hotel chain made an unexpected request for an immediate design change
to the pillowcases. The new design required 10% more cotton than previously. It also resulted in
production delays and therefore a shortfall in production of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues which
occur, although he is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow
cases, and in total:
(i) Material price planning variance; (For bed sheets, Pillowcases individually)
(ii) Material price operational variance;
(iii) Material usage planning variance;
(iv) Material usage operational variance.
(b) Assess the performance of the production manager for the month of November.
Page 74 of 130
The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is
with the Girls’ Private School Trust (GPST), which has 35 schools across the country, all with the
same school uniform.
After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been
re-designed to incorporate a dropped waistband. Each new dress now requires 2·2 metres of material,
which is 10% more material than the previous style of dress required. However, a new material has
also been chosen by the GPST which costs only $2·85 per metre which is 5% cheaper than the
material used on the previous dresses. In February, the total amount of material used and purchased at
this price was 54,560 metres.
The design of the new dresses has meant that a complicated new sewing technique needed to be used.
Consequently, all staff required training before they could begin production. The manager of the
sewing department expected each of the new dresses to take 10 minutes to make as compared to 8
minutes per dress for the old style. SU Co has 24 staff, each of whom works 160 hours per month and
is paid a wage of $12 per hour. All staff worked all of their contracted hours in February on
production of the GPST dresses and there was no idle time. No labour rate variance arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units) 30,000
Actual production and sales (units) 24,000
The production manager at SU Co is responsible for all purchasing and production issues which
occur. SU Co uses standard costing and usually, every time a design change takes place, the standard
cost card is updated prior to production commencing. However, the company accountant responsible
for updating the standards has been off sick for the last two months. Consequently, the standard cost
card for the new dress has not yet been updated.
Required:
(a) Calculate the material variances in as much detail as the information allows for the month
of February.
 Total price variance ; planning price variance; operating price variance
 Total usage variance: planning usage variance, operating usage variance
 Total DM variance = Total price variance + Total usage variance
(b) Calculate the labour efficiency variances in as much detail as the information allows
for the month of February.
(c) Assess the performance of the production manager for the month of February.
Page 75 of 130
The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is
with the Girls’ Private School Trust (GPST), which has 35 schools across the country, all with the
same school uniform.
After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been
re-designed to incorporate a dropped waistband. Each new dress now requires 2·2 metres of material,
which is 10% more material than the previous style of dress required. However, a new material has
also been chosen by the GPST which costs only $2·85 per metre which is 5% cheaper than the
material used on the previous dresses. In February, the total amount of material used and purchased at
this price was 54,560 metres.
The design of the new dresses has meant that a complicated new sewing technique needed to be used.
Consequently, all staff required training before they could begin production. The manager of the
sewing department expected each of the new dresses to take 10 minutes to make as compared to 8
minutes per dress for the old style. SU Co has 24 staff, each of whom works 160 hours per month and
is paid a wage of $12 per hour. All staff worked all of their contracted hours in February on
production of the GPST dresses and there was no idle time. No labour rate variance arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units) 30,000
Actual production and sales (units) 24,000
The production manager at SU Co is responsible for all purchasing and production issues which
occur. SU Co uses standard costing and usually, every time a design change takes place, the standard
cost card is updated prior to production commencing. However, the company accountant responsible
for updating the standards has been off sick for the last two months. Consequently, the standard cost
card for the new dress has not yet been updated.
Required:
(a) Calculate the material variances in as much detail as the information allows for the month of
February.
(b) Calculate the labour efficiency variances in as much detail as the information allows
for the month of February.
(c) Assess the performance of the production manager for the month of February.
Page 76 of 130
QUESTION 7.1 MARKET SIZE AND MARKET SHARE (Q7)
The market for leather bound diaries has been shrinking as the electronic versions become more
widely available and easier to use. Spike Co has produced the following data relating to leather bound
diary sales for the year to date:
Budget
Sales volume: 180,000 units
Sales price: $17·00 per unit
Standard contribution: $7·00 per unit
The total market for diaries in this period was estimated in the budget to be 1·8m units. In fact, the
actual total market shrank to 1·6m units for the period under review.
Actual results for the same period
Sales volume: 176,000 units
Sales price: $16·40 per unit
Required:
(a) Calculate the total sales price and total sales volume variance.
(b) Analyse the total sales volume variance into components for market size and market share.
(c) Comment on the sales performance of the business.
Page 77 of 130
QUESTION 7.2 MARKET SIZE AND MARKET SHARE
Medical Temp Co (MTC) is one of several agencies in Sictopia supplying medical staff, both nurses
and doctors, under temporary weekly contracts to local hospitals.
Information regarding the size of the market in Sictopia for the supply of medical staff is as follows:
Quarter 1 Quarter 2
$m $m
Size of national market for supply of temporary nurses 14 18.9
Size of national market for supply of temporary 8 8.2
doctors
The increase in the national market for the supply of temporary nurses is due to a shortage of full-time
nurses in Sictopia.
All agencies in Sictopia, including MTC, charge a single market rate for the supply of each type of
staff: $1,000 per week for supplying a nurse and $2,000 per week for supplying a doctor. In quarter 1,
MTC held 30% of the market for the supply of temporary nurses and 40% for the supply of temporary
doctors.
MTC uses quarterly rolling budgets. At the end of quarter 1, it prepared its budgeted revenue figures
for quarter 2. It based these budgeted figures on the assumption that the company would continue to
maintain the market share it had in quarter 1. It also assumed that it would maintain its standard
contribution margin of 80% for both nurses and doctors.
MTC’s actual figures for quarter 2 are as follows:
Actual
Total revenue from supply of nurses $5.3m
Total revenue from supply of doctors $3.6m
Actual contribution margin for both nurses and 75%
doctors
Requirement:
a. Explain why businesses calculate market size and market share variances.
b. Calculate the total market size (planning) variance and the total market share (operational)
variance for MTC for quarter 2.
Page 78 of 130
QUESTION 9 MATERIAL MIX AND YIELD (Q9)
Choc Co is a company which manufactures and sells three types of biscuits in packets. One of them is
called ‘Ooze’ and contains three types of sweeteners: honey, sugar and syrup. The standard materials
usage and cost for one unit of ‘Ooze’ (one packet) is as follows:
Material Note $
Honey 20 grams at $0·02 per gram 0·40
Sugar 15 grams at $0·03 per gram 0·45
Syrup 10 grams at $0·025 per gram 0·25
1.10
In the three months ended 30 November 2011, Choc Co produced 101,000 units of ‘Ooze’ using
2,200 kg of honey, 1,400 kg of sugar and 1,050 kg of syrup. Note: there are 1,000 grams in a kilogram
(kg).
Required:
(a) Calculate the following variances for materials in Ooze:
(i) Total materials usage variance;
(ii) Total materials mix variance;
(iii) Total materials quantity (yield) variance.
(b) Assess performance of production management of the entity
Page 79 of 130
QUESTION 10 MATERIAL MIX AND YIELD
The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard
cost card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0.25 10
Coconut oil 0.6 4
Shea butter 0.5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales
were 136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
Required: Calculate the total material mix variance and the total material yield variance for
September and assess performance of production management of the entity
Page 80 of 130
The Organic Bread Company (OBC) makes a range of breads for sale direct to the public. The
production process begins with workers weighing out ingredients on electronic scales and then
placing them in a machine for mixing. A worker then manually removes the mix from the machine
and shapes it into loaves by hand, after which the bread is then placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged up and
made ready for sale.
Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as follows:
Material Note $
White flour 450 grams at $1·80 per kg 0·81
Wholegrain flour 150 grams at $2·20 per kg 0·33
Yeast 10 grams at $20 per kg 0·20
Total 610 grams 1·34
Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual
production was only 950 units. The total actual quantities used and their actual costs were:
Material Kg $ per kg
White flour 408.5 1.9
Wholegrain flour 152 2.1
Yeast 10 20
Total 570.5
Required:
(a) Calculate the total material mix variance and the total material yield variance for OBC for
the last quarter.
(b) Using the information in the question, suggest THREE possible reasons why an ADVERSE
MATERIAL YIELD variance could arise at OBC.
Page 81 of 130
Kappa Co produces Omega, an animal feed made by mixing and heating three ingredients: Alpha,
Beta and Gamma.
The company uses a standard costing system to monitor its costs.
The standard material cost for 100 kg of Omega is as follows:
Input Kg Cost per kg Cost per 100 kg of Omega

($) ($)
Alpha 40 2 80
Beta 60 5 300
Gamma 20 1 20
120 400
Notes
(1) The mixing and heating process is subject to a standard evaporation loss.
(2) Alpha, Beta and Gamma are agricultural products and their quality and price varies significantly
from year to year. Standard prices are set at the average market price over the last five years. Kappa
Co has a purchasing manager who is responsible for pricing and supplier contracts.
(3) The standard mix is set by the finance department. The last time this was done was at the product
launch which was five years ago. It has not changed since.
Last month 4,600 kg of Omega was produced, using the following inputs:
Input Kg Cost per kg Total cost

($) ($)
Alpha 2,200 1.8 3,960
Beta 2,500 6 15,000
Gamma 920 1 920
5,620 19,880
At the end of each month, the production manager receives a standard cost operating statement from
Kappa Co’s performance manager. The statement contains material price and usage variances, labour
rate and efficiency variances, and overhead expenditure and efficiency variances for the previous
month. No commentary on the variances is given and the production manager receives no other
feedback on the efficiency of the Omega process.
Required:
(a) Calculate the following variances for the last month:
(i) the material usage variance for each ingredient and in total;
(ii) the total material mix variance;
(iii) the total material yield variance.
Page 82 of 130
QUESTION 13 SALE MIX AND QUANTITY
Block Co operates an marginal costing system and sells three types of product – Commodity 1,
Commodity 2 and Commodity 3. Like other competitors operating in the same market, Block Co is
struggling to maintain revenues and profits in face of the economic recession which has engulfed the
country over the last two years. Sales prices fluctuate in the market in which Block Co operates.
Consequently, at the beginning of each quarter, a market specialist, who works on a consultancy basis
for Block Co, sets a budgeted sales price for each product for the quarter, based on his expectations of
the market. This then becomes the ‘standard selling price’ for the quarter. The sales department itself
is run by the company’s sales manager, who negotiates the actual sales prices with customers. The
following budgeted figures are available for the quarter ended 31 May 2013.
Standard
Budgeted production Standard variable
Product selling price
and sale unit production costs per unit
per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28·40
Commodity 3 26,000 $41·60 $26·40
Total 84,000
The following data shows the actual sales prices and volumes achieved for each product by Block Co
for the quarter ended 31 May 2013 and the average market prices per unit.
Actual production Actual selling Average market price per
Product
and sale unit price per unit unit
Commodity 1 29,800 $31 $32·20
Commodity 2 30,400 $34 $33·15
Commodity 3 25,600 $40·40 $39·10
Required:
(a) Calculate the sales price operational variance and the sales price planning variance.
(b) Calculate the total sales mix variance and the total sales quantity variance.
Page 83 of 130
Page 84 of 130
CHAPTER 7 SPECIAL COSTING TECHNIQUES
LEARNING OBJECTIVES
1, Target costing
- Explain a target cost in manufacturing and service industries and the difficulties of using target
costing in service industries.
- Suggest how a target cost gap might be closed.
2, Life-cycle costing
- Identify the costs involved at different stages of the life-cycle.

- Derive a life-cycle cost or profit in manufacturing and service industries.
- Identify the benefits of life-cycle costing.
3, Throughput accounting
- Discuss and apply the theory of constraints.

- Calculate and interpret a throughput accounting ratio (TPAR).
LIFE CYCLE
- Suggest how a TPAR could be improved.
- Apply throughput accounting to a multi-product
Life cycle costing decision-making
(LCC) is a method problem
of evaluating the total cost of ownership for
COSTING a product or service over its entire life cycle. It takes into account all the costs
associated with a product or service, including design, development, production,
Growth
Sales
Maturity
Decline
Profit
Development
Time
Introduction
Growth: During this Decline: In this stage,

Development: This Introduction: In this Maturity: where
stage, sales of the sales of the product
stage involves stage, the product is growth slows down
product start to grow start to decline as
researching, developing, introduced to the and the product
and testing a new rapidly as more and newer and better
market. The goal is to reaches its peak in
product idea. The focus more customers products enter the
generate awareness terms of sales. The
is on creating a product become aware of the market. The company
and interest among market becomes
that satisfies a customer product and start may discontinue the
potential customers. saturated, and
need.
using it. The company product or try to
Marketing efforts are competition increases.
may invest heavily in revitalize it with a new
focused on building The company may
marketing, sales, and marketing campaign.
brand recognition and focus on cost-cutting
establishing production to keep up and improving
distribution channels. with demand. efficiency to maintain
profitability.
COSTS INVOLVED AT DIFFERENT STAGES OF THE LIFE-CYCLE

PLANNING AND DESIGN STAGE MANUFACTURING AND SALES STAGE SERVICE AND ABANDONMENT STAGE
Cost involved: Cost involved: Cost involved:
- R&D - Production - After sales service
- Design - Marketing - Disposal of production facilities
- Distribution
Page 85 of 130
ADVANTAGES OF LIFE CYCLE COSTING DISADVANTAGES OF LIFE CYCLE COSTING
1, Better decision making: optimize their 1, Complexity: a significant amount of time, effort, and
investments and minimize costs over the long term. expertise to gather and analyze all the necessary data.
2, Improved cost transparency: identify areas where 2, Data limitations: Accurately predicting the costs
Target
management
costing is accounting
a cost management
approach technique
thatorfocusesusedontoincreasing
itsdetermine
entire life the
THROUGHPUT
TARGET
they can reduce costs and improve efficiency. associated
cycle can be
with a product
challenging
service over
3, Enhanced sustainability: By taking theflow
cost
into ofatgoods
account which and
a product
services orthrough
service must
a production
be developed
process.andIT is
ACCOUNTING
COSTING
the environmental impact of a product or service over
its entire life cycle.
produced
also known in order
as the
3, Increased costs: significant investment in time,
topersonnel,
Theory
meet a of specified
Constraints
target
and resources.
(TOC).
price.
4, Better budgeting and financial planning: more 4, Limited scope: not take into account other important
accurate picture of the total costs associated with a factors, such as customer demand or market conditions.
product or service.KEY STAGES IN TARGET COSTING 1, Customer
5, Focus on cost: demand
environmental impact, quality, or
4, Improved risk management: identifying potential 2, Competitor
customer satisfaction. This canpricing
lead to suboptimal
1. DETERMINE TARGET PRICE: The firstMaximize
OBJECTIVES: step the flow3,of goods
Desired and margin
services to the sole
problems and developing contingency plans to decision-making if the LCCprofit
results are used as
in target costing is to determine the target basis for 4, Cost
decision-making.of goods
mitigate those risks. customers, rather than just to minimize costs.
price for the product or service, taking into 5, Market conditions
account the desired profit margin and the
price at which the product is expected to
sell.
1. Competition
2. DETERMINE TARGET COST: The next step
2. Market demand.
is to determine the target cost for the
3. Cost of materials and labor
product or service, taking into account the
4. Company strategy
target price and the desired profit margin.
5. Brand image
3. ANALYZE COSTS: The third step is to
6. Market segment
analyze the costs associated with the
product or service, including design,
development, production, and distribution
costs.
4. IDENTIFY COST REDUCTION 1. Value Engineering: This involves re-
OPPORTUNITIES: The fourth step is to designing a product to eliminate
identify opportunities for reducing the costs unnecessary features and components,
associated with the product or service, such while still retaining its essential functions
as improving design, streamlining and performance.
production processes, or reducing waste. 2. Process Improvement: improving their
5. IMPLEMENT COST REDUCTIONS: The final production processes, such as through
step is to implement the cost reductions automation, streamlining, and reducing
identified in the previous step, and to waste. This can help to increase efficiency,
continuously monitor and refine the cost lower production costs, and improve
management processes to ensure that the product quality.
target cost is met. 3. Supplier negotiation: Negotiating better
deals with suppliers can also be an
effective way to reduce costs.
4. Cost Sharing: sharing development and
production costs with partners or
suppliers.
5. Cost Accounting: Implementing cost
accounting systems to better understand
their costs and identify areas for
EXAMPLE OF TARGET COSTING APPLICATION
improvement.
1. Toyota Motor Corporation: Camry and
Corolla models.
1. BMW and Daimler AG: electric and
2. Samsung Electronics: smartphones to
autonomous vehicles, sharing the costs
televisions to home appliances, Galaxy
and benefits of R&D.
smartphones
2. Toyota and Subaru: access to its
3. Dell Technologies: personal computers, 86 of 130
technologies andPage
platforms.
laptops, and other technology products.
3. Ford and Volkswagen: development of
4. Honda Motor Company: cars, motorcycles,
electric and autonomous vehicles
and power products such as lawn mowers
TARGET COSTING
1 WHAT IS TARGET COSTING?
Key terms
Target costing involves setting a target cost by subtracting a desired profit margin from a target
selling price.
Target cost is the cost at which a product must be produced and sold in order to achieve the required
amount of profit at the target selling price. When a product is first planned, its estimated cost will
often be higher than its target cost. The aim of target costing is then to find ways of closing this target
cost gap, and producing and selling the product at the target cost.
2 IMPLEMENTING TARGET COSTING
Determine a product specification of which an adequate sales volume is estimated.

Step 1
Decide a target selling price at which the organisation will be able to sell the product
Step 2
successfully and achieve a desired market share.
The target cost is calculated by starting with a market-based target selling price and
subtracting a desired profit margin. The target cost is simply the target price minus the
required profit.
Estimate the required profit, based on required profit margin or return on investment.
Step 3
Calculate: Target cost = Target selling price – Target profit.
Step 4
Prepare an estimated cost for the product, based on the initial design specification and
Step 5
current cost levels.
Calculate: Target cost gap = Estimated cost – Target cost.
Step 6
Make efforts to close the gap. This is more likely to be successful if efforts are made to
Step 7
'design out' costs prior to production, rather than to 'control out' costs after 'live'
production has started.
3 CLOSING A TARGET COST GAP
The target cost gap is the estimated cost less the target cost. Increasing the selling price will not close
the cost gap. In a system of target costing, the total target cost is split into broad cost categories, such
as development, marketing and manufacturing. Then the manufacturing target cost per unit is split up
across the different functional areas of the product. The product is designed so that each functional
product area can be made within the target cost. If a functional product area cannot be made within
the target cost, so that a cost gap exists between the currently achievable cost and the target cost, the
targets for the other areas must be reduced, or the product redesigned or scrapped. The product should
be developed in an atmosphere of continuous improvement using value engineering techniques and
close collaboration with suppliers to enhance the product (in terms of service, quality, durability and
so on) and reduce costs.
Management can then set benchmarks for improvement towards the target cost, by improving
production technologies and processes. Various techniques can be employed.
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 Reducing the number of components
 Using cheaper staff
 Using standard components wherever possible
 Acquiring new, more efficient technology
 Training staff in more efficient techniques
 Cutting out non value added activities
 Using different materials (identified using activity analysis etc)
4 TARGET COSTING IN SERVICE INDUSTRIES
4.1 Characteristics of services
There are five major characteristics of services that distinguish services from products.
(a) Intangibility. This refers to the lack of substance which is involved with service delivery. Unlike
goods (physical products such as confectionery), there are no substantial material or physical aspects
to a service: no taste, feel, visible presence, and so on.
(b) Inseparability/simultaneity. Many services are created at the same time as they are consumed.
(Think of dental treatment.) No service exists until it is actually being experienced or consumed by
the person who has bought it.
(c) Variability/heterogeneity. Many services face the problem of maintaining consistency in the
standard of output. It may be hard to attain precise standardisation of the service offered, but
customers expect it (such as with fast food). When services are delivered by humans, it is very
difficult to ensure that the same service is provided in exactly the same way every time.
(d) Perishability. Services are innately perishable. The services of a beautician, for example, are
purchased for a period of time.
(e) No transfer of ownership. Services do not result in the transfer of property. The purchase of a
service only confers on the customer access to or a right to use a facility.
4.2 Problems with target costing for services
Some of the characteristics of services make it difficult to use target costing, and identify a target cost
for a service having established a target selling price.
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LIFE CYCLE COSTING
1 THE PRODUCT LIFE CYCLE
The 'classical' life cycle of a product has five phases or stages.
(a) Development. The product has a research or design and development stage. Costs are incurred
but the product is not yet on the market and there are no sales revenues.
(b) Introduction. The product is introduced to the market. Potential customers are initially unaware
of the product or service, and the organisation may have to spend heavily on advertising to bring the
product or service to the attention of the market. In addition, capital expenditure costs may be
incurred in order to increase the production capacity as sales demand grows.
(c) Growth. The product gains a bigger market as demand builds up. Sales revenues increase and the
product begins to make a profit.
(d) Maturity. Eventually, the growth in demand for the product will slow down and it will enter a
period of relative maturity, when sales have reached a peak and are fairly stable. This should be the
most profitable phase of the product's life. The product may be modified or improved, as a means of
sustaining its demand and making this phase of the life cycle as long as possible.
(e) Decline. At some stage, the market will have bought enough of the product and it will therefore
reach 'saturation point'. Demand will start to fall. Eventually it will become a loss-maker and this is
the time when the organisation should decide to stop selling the product or service.
2 Life cycle costs
A product's life cycle costs are incurred from its design stage through development to market launch,
production and sales, and finally to its eventual decline and withdrawal from the market.
The component elements of a product's cost over its life cycle could therefore include the following.
 Research and development costs

- Design costs
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- Cost of making a prototype
- Testing costs
- Production process and equipment: development and investment
 The cost of purchasing any technical data required (for example purchasing the right from
another organisation to use a patent)
 Training costs (including initial operator training and skills updating)
 Production costs, when the product is eventually launched in the market
 Distribution costs (including transportation and handling costs)
 Marketing and advertising costs
– Customer service
– Field maintenance
– Brand promotion
 Inventory costs (holding spare parts, warehousing, and so on)
 Retirement and disposal costs, ie costs occurring at the end of a product's life, which may
include the costs of cleaning up a contaminated site
Life cycle costs can also be estimated for services, customers and projects as well as for physical
products.
Traditional cost accumulation systems are based on the financial accounting year and tend to
dissect a product's life cycle into a series of 12-month periods. This means that traditional
management accounting systems do not accumulate costs over a product's entire life cycle and do
not therefore assess a product's profitability over its entire life. Instead they do it on a periodic
basis.
Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues
attributable to each product over the entire product life cycle. Hence the total profitability of any
given product can be determined.
2.1 Why calculate life cycle costs?
The purpose of life cycle costing is to assess the total costs of a product over its entire life, to assess
the expected profitability from the product over its full life. Products that are not expected to be
profitable after allowing for design and development costs, or clean-up costs, should not be
considered for commercial development.
2.2 The benefits of life cycle costing
There are a number of benefits associated with life cycle costing.
(a) It helps management to assess profitability over the full life of a product, which in turn helps
management to decide whether to develop the product, or to continue making the product.
(b) It can be very useful for organisations that continually develop products with a relatively short
life, where it may be possible to estimate sales volumes and prices with reasonable accuracy.
(c) The life cycle concept results in earlier actions to generate more revenue or to lower costs than
otherwise might be considered.
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(d) Better decisions should follow from a more accurate and realistic assessment of revenues and
costs, at least within a particular life cycle stage.
(e) It encourages longer-term thinking and forward planning, and may provide more useful
information than traditional reports of historical costs and profits in each accounting period.
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THROUGHPUT ACCOUNTING
1 THEORY OF CONSTRAINTS
Key terms:
Theory of constraints (TOC) is an approach to production management which aims to maximise

sales revenue less material cost. It focuses on bottlenecks which act as constraints to the maximisation
of throughput.
Throughput is the money generated from sales minus the cost of the materials used in making the
items sold.
Bottleneck resource or binding constraint is an activity which has a lower capacity than preceding
or subsequent activities, thereby limiting throughput.
2, THEORY OF CONSTRAINTS
Goldratt devised a five-step approach to summarise the key stages of TOC.
Step 1 Identify the constraint (bottleneck resource).
Step 2 Decide how to exploit the constraint in order to maximise throughput.
Step 3 Subordinate and synchronise everything else to the decisions made in step 2.
Step 4 Elevate the performance of the constraint.
Step 5 If the constraint has shifted during any of the above steps, go back to step 1. Do not
allow inertia to cause a new constraint.
The overall aim of TOC is to maximise throughput. This may be called 'throughput contribution'
(sales revenue – material cost) while keeping operational costs (all operating costs except material
costs) and investment costs (inventory, equipment, and so on) to a minimum.
3 PRODUCTION SCHEDULING AND THE BOTTLENECK RESOURCE
Taking the theory of constraints a stage further, since there is one bottleneck resource, it follows that
all the other resources in production and elsewhere are not bottlenecks. Since production and
throughput are limited by the bottleneck resource, it follows that there will be idle capacity for all the
other resources.
Idle time should be accepted. Since all operational costs are fixed, idle time is not costing any money.
Resources that are not the bottleneck resource should not be used beyond the amount required for the
maximum achievable throughput, given the bottleneck resource. Using non-binding constraints
beyond this amount will simply result in a build-up of inventories.
(a) In traditional cost accounting, improving efficiency and creating more inventory will increase
profits. Higher inventories reduce the cost of sales and increase reported profits.
(b) In the theory of constraints, using non-bottleneck resources above the amount required for
maximum throughput is wasteful. It does not increase throughput; it only increases unused inventory
levels.
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To avoid the build-up of work in progress, production must be limited to the capacity of the
bottleneck resource but this capacity must be fully utilised.
There will be idle resources in non-bottleneck areas, but this does not matter. The focus should be on
maximising throughput, given the limitation of the bottleneck.
Output through the binding constraint should never be delayed or held up otherwise sales will be lost.
To avoid this happening a small buffer inventory should be built up immediately prior to the
bottleneck constraint. This is the only inventory that the business should hold, with the exception of
possibly a very small amount of finished goods inventory and raw materials, which is consistent with
a just in time (JIT) approach.
Operations in the production line prior to the binding constraint should operate at the same speed as
the binding constraint, otherwise excess and unwanted work in progress (other than the buffer
inventory) will be built up. According to TOC, inventory costs money in terms of storage space and
interest costs, and so inventory is not desirable.
4 INCREASING THROUGHPUT: ELEVATING THE BOTTLENECK
The theory of constraints states that the aim should be to maximise total throughput. The only way to
increase throughput is to increase the capacity of the bottleneck constraint. All the focus of
management attention should be on increasing the capacity of the bottleneck resource, or 'elevating
the bottleneck'.
3 THROUGHPUT ACCOUNTING
Throughput accounting (TA) is an approach to production management which aims to maximise

sales revenue less materials cost, while also reducing inventory and operational expenses.
5.1 Concept of throughput accounting
Throughput accounting is based on the following concepts, all derived from the TOC.
Concept 1: In the short run, all costs in the factory (with the exception of materials costs) are
fixed costs.
These fixed costs include direct labour costs. It is useful to group all these costs
and call them Total Factory Costs (TFC).
Concept 2 In a JIT environment, all inventory is a 'bad thing' and the ideal inventory level is
zero. Products should not be made unless a customer has ordered them. When
goods are made, the factory effectively operates at the rate of the slowest process,
and there will be unavoidable idle capacity in other operations.
Work in progress should be valued at material cost only until the output is
eventually sold, so that no value will be added and no profit earned until the sale
takes place. Working on output just to add to work in progress or finished goods
inventory creates no profit, and so should not be encouraged.
Concept 3 Profitability is determined by the rate at which 'money comes in at the door' (that
is, sales are made) and, in a JIT environment, this depends on how quickly goods
can be produced to satisfy customer orders. Since the goal of a profit-orientated
organisation is to make money, inventory must be sold for that goal to be
achieved. The bottleneck resource slows the process of making money. Making
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money means maximising throughput.
5.2 Objectives of throughput accounting
In throughput accounting, the aim is to maximise throughput. Many organisations make more than
one product, and each product uses a different amount of the bottleneck resource and earns a different
amount of throughput per unit.
Throughput is maximised by ranking products in order for production and sales according to
the throughput that they earn per unit of bottleneck resource they consume.
The top-ranking product should be manufactured up to the limit of maximum sales demand. The
second-ranking product should be made next up to the limit of maximum sales demand, then the third,
and so on.
The ratio for ranking products is therefore as follows.
Throughput return per Sales - direct material cost

factory hour = Usage of bottleneck resource in hours (factory hours)
Throughput accounting Throughput per unit of bottleneck resource

ratio = Factory cost per unit of bottleneck resource
Factory cost per unit of Total factory costs

bottleneck resource = Total units of bottleneck resource
5.3 Interpreting the TA ratio
Total throughput should exceed total factory costs otherwise the organisation will make a loss. This
means that the TA ratio should exceed 1.0.
A TA ratio that is not much higher than 1.0 is barely profitable. The aim should be to achieve as high
a TA ratio as possible.
TA ratios can also be used to assess the relative earning capabilities of different products. Products
can be ranked in order of priority for manufacture and sale in order of their TA ratios. (Higher TA
ratios should be given priority over lower TA ratios).
However, ranking products in order of priority according to their TA ratio will always give the same
ranking as putting them in order of throughput per unit of bottleneck resource.
5.4 How can a business improve a throughput accounting ratio?
The ratio is increased by either:
(a) Increasing the throughput per bottleneck hour, or
(b) Reducing the operating cost per bottleneck hour.
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The TA ratio could be increased in any of the following ways.
(a) Increase the selling price for the product. This will increase the throughput per unit, and so will
increase the throughput per unit of bottleneck resource.
(b) Reducing the material cost per unit. This will increase the throughput per unit, and so will
increase the throughput per unit of bottleneck resource.
(c) Reduce expenditure on operating costs/factory costs. This will reduce the operating cost per unit
of bottleneck resource.
(d) Improve efficiency, and increase the number of units or product that are made in each bottleneck
hour. This would increase total throughput per hour. The operating costs per hour would be
unaffected, therefore the TA ratio would increase.
(e) Elevate the bottleneck, so that there are more hours available of the bottleneck resource.
Throughput per unit of bottleneck resource would be unaffected but, since operating costs are all fixed
costs and there are more bottleneck hours available, the operating cost per bottleneck hour would fall,
and the TA ratio would increase.
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PRACTISE QUESTION
1, TARGET COSTING
QUESTION 1 (12/2007 – Q1)
Edward Co assembles and sells many types of radio. It is considering extending its product range to
include digital radios. These radios produce a better sound quality than traditional radios and have a
large number of potential additional features not possible with the previous technologies (station
scanning, more choice, one touch tuning, station identification text and song identification text etc).
Edward Co is considering a target costing approach for its new digital radio product.
A selling price of $44 has been set in order to compete with a similar radio on the market that has
comparable features to Edward Co’s intended product. The board have agreed that the acceptable
margin (after allowing for all production costs) should be 20%.
Cost information for the new radio is as follows:
Component 1 (Circuit board) – these are bought in and cost $4·10 each. They are bought in batches
of 4,000 and additional delivery costs are $2,400 per batch.
Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio.
However, there is some waste involved in the process as wire is occasionally cut to the wrong length
or is damaged in the assembly process. Edward Co estimates that 2% of the purchased wire is lost in
the assembly process. Wire costs $0·50 per metre to buy.
Other material – other materials cost $8·10 per radio.
Assembly labour – these are skilled people who are difficult to recruit and retain. Edward Co has
more staff of this type than needed but is prepared to carry this extra cost in return for the security it
gives the business. It takes 30 minutes to assemble a radio and the assembly workers are paid $12·60
per hour. It is estimated that 10% of hours paid to the assembly workers is for idle time.
Production Overheads – recent historic cost analysis has revealed the following production overhead
data:
Total production overhead Total assembly labour hours

$
Month 1 620,000 19,000
Month 2 700,000 23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal annual activity
levels. In a typical year 240,000 assembly hours will be worked by Edward Co.
Required: Calculate the expected cost per unit for the radio and identify any cost gap that
might exist.
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QUESTION 2 (12/2009)
Big Cheese Chairs (BCC) manufactures and sells executive leather chairs. They are
considering a new design of massaging chair to launch into the competitive market in which they
operate.
They have carried out an investigation in the market and using a target costing system have targeted a
competitive selling price of $120 for the chair. BCC wants a margin on selling price of 20% (ignoring
any overheads).
The frame and massage mechanism will be bought in for $51 per chair and BCC will upholster it in
leather and assemble it ready for despatch.
Leather costs $10 per metre and two metres are needed for a complete chair although 20% of all
leather is wasted in the upholstery process.
BCC estimates that the chair will take two hours to prepare. The cost of labour is $15 per hour.
Required:
(a) Calculate the average cost and identify any cost gap that may be present at that stage.
(b) Assuming that a cost gap for the chair exists suggest four ways in which it could be closed.
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QUESTION 3 (WITH ANSWER)
The board decided to commission some market research to determine the price customers would be
willing to pay for the D-Paad. Sales volumes and sales prices were estimated for the various stages of
the D-Paad’s product life cycle as follows:
Sales volume (millions) Sales price ($/unit)

Introductio
8 425
n
Growth 14 300
Maturity 56 220
Decline 2 120
Based on the market analysis, the board has approved the development of the DPaad as long as the
total product cost, including manufacturing, investment and overheads, does not exceed $13,000m.
Required :
1, What was the initial selling price of the D-Paad from the feasibility study results (to the
nearest whole $)?
2, Based on the market research analysis, what is the total cost gap of the D-Paad, if Darask Co
wants to achieve a target profit margin of 45%?
3, Discuss how to to close the cost gap of the D-Paad ?
Answer :
1, What was the initial selling price of the D-Paad from the feasibility study results (to the
nearest whole $)?
2, Based on the market research analysis, what is the total cost gap of the D-Paad, if Darask Co
wants to achieve a target profit margin of 45%?
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3, Discuss how to to close the cost gap of the D-Paad ?
Incorporate quality assurance inspections into the manufacturing processes to reduce faulty units
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2, LIFE CYCLE COSTING
QUESTION 1
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 $1,200,000 $1,000,000 $1,750,000
Manufacturing costs:
Variable cost per unit $40 $42
Fixed production costs $650,000 $1,290,000
Distribution costs:
Variable cost per unit $4 $4·50
Fixed distribution costs $120,000 $120,000
Selling costs:
Variable cost per unit $3 $3·20
Fixed selling costs $180,000 $180,000
Administration costs $200,000 $900,000 $1,500,000
Required:
a. Calculate the life cycle cost per unit.

b. Discuss the benefits of life cycle costing.
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QUESTION 2
The following information relates to the expected cost of a new product over its expected three-year
life.
Year 0 Year 1 Year 2 Year 3

Units made and sold 25,000 100,000 75,000
$850,00
R&D costs $90,000
0
Production costs
Variable per unit $30 $25 $20
$500,00 $500,00 $500,00
Fixed costs
0 0 0
Selling and distribution costs
$700,00 $500,00 $300,00
Fixed costs
0 0 0
Customer service costs
Required: What is the expected average life cycle cost per unit?
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QUESTION 3
Volt Co generates and sells electricity. It operates two types of power station: nuclear and wind.
The costs and output of the two types of power station are detailed below:
Nuclear station
A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful life.
Operating costs are $486m per year. Operating costs include a provision for depreciation of $175m
per year to recover the $7,000m cost of building the power station.
Each nuclear station has an estimated decommissioning cost of $12,000m at the end of its life. The
decommissioning cost relates to the cost of safely disposing of spent nuclear fuel.
Wind station
A wind station can generate 1,750 gigawatts of electricity per year. It has a life-cycle cost of $55,000
per gigawatt and an average operating cost of $40,000 per gigawatt over its 20-year life.
Requirement:
a. What is the life-cycle cost per gigawatt of the nuclear station (to the nearest $’000)?
b. If Volt Co sets a price to earn an operating margin of 40% over the life of a wind station,
what will be the total lifetime profit per station (to the nearest $m)?
c. Explain benefits of life-cycle costing for Volt Co?
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3, THROUGHPUT ACCOUNTING
QUESTION 1 (6/2009 – Q1)
Yam Co is involved in the processing of sheet metal into products A, B and C using three
processes, pressing, stretching and rolling. Like many businesses Yam faces tough price competition
in what is a mature world market.
The factory has 50 production lines each of which contain the three processes: Raw material for the
sheet metal is first pressed then stretched and finally rolled. The processing capacity varies for each
process and the factory manager has provided the following data:
Processing time per metre in hours

Product A Product B Product C
Pressing 0·50 0·50 0·40
Stretching 0·25 0·40 0·25
Rolling 0·40 0·25 0·25
The factory operates for 18 hours each day for five days per week. It is closed for only two weeks of
the year for holidays when maintenance is carried out. On average one hour of labour is needed for
each of the 225,000 hours of factory time. Labour is paid $10 per hour.
The raw materials cost per metre is $3·00 for product A, $2·50 for product B and $1·80 for product C.
Other factory costs (excluding labour and raw materials) are $18,000,000 per year. Selling prices per
metre are $70 for product A, $60 for product B and $27 for product C.
Yam carries very little inventory.
Required:
(a) Identify the bottleneck process and briefly explain why this process is described as a
‘bottleneck’.
(b) Calculate the throughput accounting ratio (TPAR) for each product assuming that the
bottleneck process is fully utilised.
(c) Assuming that the TPAR of product C is less than 1:
(i) Explain how Yam could improve the TPAR of product C.
(ii) Briefly discuss whether this supports the suggestion to cease the production of product C
and briefly outline three other factors that Yam should consider before a cessation decision is
taken.
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QUESTION 2
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 utilised 85% of the time and
Machines M and A are utilised 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.
Required:
(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.
(b) Assume that your calculations in part (a) have shown that large panels have a higher
throughput accounting ratio than small panels.
Required:
Using throughput accounting, prepare calculations to determine the optimum production mix
and maximum profit of S Co for the next year.
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(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.
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APPENDIX 1: SAMPLE ESSAY (BRAND 80 – 85)
A critical analysis of the extent to which management accounting techniques are used by small
and medium sized enterprises (SMEs)
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Introduction
Management accounting tools are commonly used in small and medium enterprises. These businesses
that aim for sustainability should focus on being cost-effective (Afirah Azudin & Noorhayati, 2018).
Small and medium enterprises account for the majority of businesses in almost every country,
including Vietnam, so understanding and applying the MAT to businesses is very important.
Management accounting techniques are used such as costing systems, budgeting, responsibility center
reporting and analysis for decision making. In this report, two techniques are used: budgeting and
costing; These two techniques are commonly and frequently used in many different MA studies. From
this research, two influencing factors have been drawn and thereby helping SMEs in Vietnam to better
manage their businesses.
Analysis
Budgeting system
The first technique is the Budgeting system, the use of a budget seems to be important for
small and medium businesses (Dan Dacian Cuzdriorean, 2017). The budgeting system helps the
company control expenses and supports the company's planning process for the future. The
monitoring of cash flow and expenses for the company will be more closely, budgeting system as an
important tool to monitor cash flow. To clarify the importance of applying a budgeting system to
small and medium-sized businesses, rely on research (Howard M.Armitage., Alan Webb & John
Glynn, 2016),it can be seen that small and medium enterprises are very focused on using operating
budgets. The size of the business is closely related to the complexity of the preparation and use of
operating budgets. Operating budgets are used as both a planning tool and for control purposes:
operating budgets are central to managing revenue, costs and profits, and in evaluating operational
performance. of managers. Most businesses do budgeting, which focuses on future income through a
sales budget, or an operating budget, which also includes expenses and income. Sales budgets,
production budgets, cash flow budgets, and financial position budgets are budgets that are done
frequently and very often in small and medium-sized businesses. Budgeting system mainly
emphasizes on planning and creating revenue targets for businesses. Budget utilization rate in small
businesses is about 67%, medium enterprises is 81%, according to research (Mahdi Alkhajeh & Azam
Khailid, 2018)
Costing system
The second technique that is quite commonly used in management accounting in small and
medium enterprises is the cost system, but in the cost system there are many different types of pricing,
in this study we will focus on the cost system. activity-based costing (ABC). SMEs make extensive
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use of costing systems that include standard costing, variable costing, target costing, quality costing,
and "zero or low" activity-based costing (Howard M.Armitage., Alan Webb & John Glynn, 2016). In
Canada and Australia, the use of activity-based costs by SMEs is very low.
Using a costing system when there are too few products or services becomes more
complicated, most of the costs associated with products and services are direct costs. Compared with
large enterprises, small and medium enterprises often "never" or "rarely" use ABC. In research
(Tandung Huynh,2013), company "Van Chinh" is a small-scale enterprise in Vietnam that uses ABC
technology in management. The use of ABC helps businesses feel more confident when making
decisions because ABC provides managers with detailed and accurate information. However, at the
same enterprise, there is a lack of accountants who are skilled in using the ABC method, so it is
difficult to determine the factors affecting costs. Currently, almost only large enterprises are using the
ABC method (J.A.Brierley., C.Drury & Christopher J.Cowton, 2007). The percentage of small and
medium enterprises that intend to use ABC in their business is smaller than in large enterprises.
Moreover, the percentage of large enterprises that have never considered ABC is also smaller than
that of SMEs
Enterprise size affects the application of managemet accounting

In this study, in addition to analyzing two common techniques in management accounting,
there are also two factors that affect the above techniques. The first influencing factor is the size of the
business. Size affects the structure and control of the enterprise, the larger the enterprise, the higher
the level of implementation of management accounting methods must be (Kamilah Ahmad & Shafie
Mohamed Zabri, 2015). The size of a company is a very important factor in determining which
methods of management accounting are applied. Potential factors such as company size, intensity of
market competition always significantly and positively affect the cost system (Sudhashini Nair & Yee
Soon Nian, 2017). In Vietnam, the larger the enterprise size, the higher the use of management
accounting due to the high complexity of the cost system and the budget system. Large enterprises
have large scale, strong finance, diversified products and complex management systems, so they
always require complex techniques of management accounting. However, it is still possible to apply
management accounting in small companies because it can help businesses reduce risks through
budgeting tools (Thi Tu Oanh Le., Ngoc Bui Thi., Thi Thu Phong Tran & Quoc Hung Nguyen, 2020)
Technology affects the application of managemet accounting

Another critical factor affecting to the use of management accounting techniques to improve
the performance of a company is technology, especially advanced production/manufacturing
technology (AMT). Based on the article written by Kamilah Ahmad & Shafie Mohamed Zabri (2015),
the author indicates that there is positive significant influence between advanced production
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technology and certain MAPs such as costing and performance evaluation in particular in the smaller
firm context. This is because firm’s business environment becomes increasingly dynamic when using
modern technology, firms have found it increasingly important to use management accounting to
develop coherent and logically consistent business strategies. Moreover, according to the reasearch
(Thi Tu Oanh Le., etc, 2020) the using AMT has influence to budgeting and costing system. To be
specific, when the production process operates highly advanced technology, the control system
becomes more standardized, the role of management control might reduce. With the using modern
technology, the inputs in order to production processes are established and fixed. Therefore,
budgeting system is simpler as there are fewer fluctuating factors which need to be forecasted. To
addition, new technology allows high-level automation in producing and manufacturing processes as
well as communication and cooperation between machines and humans in a real life. Particularly,
technology is represented by the degree of automation in the processes namely production, sales,
personnel, business or management process. It promotes rapid production and standardized quality.
Thus, thanks to advanced manufacturing technology, planning for bugeting as well as establishing for
costing system become easier.
Conclusion
In the above study, it can be seen that two management accounting techniques are used quite
commonly in small and medium-sized enterprises, from which the study also shows that there are two
important factors that will affect the use of management accounting methods. use those techniques.
The two techniques mentioned are budgeting system and costing system; Two influencing factors are
the size of the enterprise and the technology used in the enterprise. Operating budgets are used as a
tool to plan, control revenue and control cash flow, thereby helping businesses evaluate and plan
operations more effectively. As for the cost system, it is an important factor to help manage costs and
increase profits. When using MA techniques, there are still factors that will affect their adoption in
businesses. In the above study, two influential factors have been shown that are the size and
technology of the enterprise. The size of the business has a big influence on the use of accounting
techniques because the larger the business, the more techniques are required to be applied. In addition,
to make the use of management accounting techniques easier and more accurate, technology is always
at the forefront.
The above report mostly focuses on two main management accounting methods: budgeting
system and costing system; and two factors affecting management accounting in small and medium
enterprises. In addition, it is necessary to analyze and research many other systems of management
accounting so that businesses can choose appropriate techniques to help better corporate governance.
For future research, there should be survey data from enterprises and further specify how the above
factors are commonly used in corporate governance. As for the influencing factors, it is recommended
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to indicate the positive and negative influences on the techniques of management accounting.
Reference
1. Afirah Azudin & Noorhayati (2018), “Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology”, Asia Pacific Managemnet
Review, Vol.23, Issue 3, pp.222-226.
2. Dan Dacian Cuzdriorean (2017) “The Use of Management Accounting Practices by Romanian
Small and Medium-Sized Enterprises: A Field Study”, Journal of Accounting and Management
Information Systems 16(2), pp.291-312.
3. Howard M.Armitage., Alan Webb & John Glynn (2016) “The Use of Management Accounting
Techniques by Small and Medium-Sized Enterprises: A Field Study of Canadian and Australian
Practice”, Accounting Perspectives 15(1), pp.31-69.
4. Mahdi Alkhajeh & Azam Khailid (2018), “The Implementation of Management Accounting
Practices and its Relationship with Performance in Small and Medium Enterprises”, Journal of
Accounting and Auditing: Research & Practice, Vol.2018, Article ID 750324.
5. Tandung Huynh (2013), “Apply activity-based costing to calculate product cost in small and
medium enterprises”, International Journal of Business and Economics Research 2(3), pp.59.
6. J.A.Brierley., C.Drury & Christopher J.Cowton (2007) “A Comparison of the Product Costing
Practices of Large and Small- to Medium-Sized Enterprises: A Survey of British Manufacturing
Firms”, project: Management accounting.
7. Kamilah Ahmad & Shafie Mohamed Zabri (2015), “Factors explaining the use of management
accounting practices in Malaysian medium-sized firms”, Journal of Small Business and Enterprise
Development, 22(4), pp.762-781.
8. Sudhashini Nair & Yee Soon Nian (2017), “Factors Affecting the Use of Management
Accounting Practices in Small and Medium Enterprises: Evidence from Indonesia”, 12(10),
pp.177.
9. Thi Tu Oanh Le., Ngoc Bui Thi., Thi Thu Phong Tran & Quoc Hung Nguyen (2020), “Factors
affecting the application of management accounting in Vietnamese enterprises”, Uncertain Supply
Chain Management.
Appendix 1 – word count: 1,374
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APPENDIX 2: SAMPLE ESSAY (Brand 60 – 65)
Introduction
Accountancy is the fastest-growing area of business activity. The ability to measure financial
information and make projections affect economic and organizational decision-making at all levels.
Financial accountants report on the performance of an organization, and management accountants
provide financial information to help with planning, strategy, and making business decisions.
“The ABC system can be complicated to implement. Traditional costing is easy to implement and is
the most common costing method used” according to (lumenlearning.com, Traditional Costing vs.
ABC). While Noreen (1991) thinks that surveys report indicate that ABC adopters are very few firms,
and this shows the level of dissatisfaction among users, and in theory, ABC requires the absence of
common costs. Datar & Gupta (1994) determined that due to the increasing number of cost pools the
frequency of errors was increased in product cost measurement, so many users consider it is a barrier
to Activity-based costing. Turner (2005) reported that ABC lacked customer focus, did not enhance
organizational learning, was not process-oriented, and was top-down in approach.
In activity-based costing systems mistakes may occur in the process of cost identification in general
and finding appropriate cost pools in particular with negative implications on the level of accuracy of
results. The ABC method is provided in the paper; It consists of two main works: introduction; Why
ABC is less widely used than absorption costing. This method can be successfully applied in
companies in different industries.
Analysis
2.1. Introduction to ABC technique:
Management accounting has been beneficial in every firm for many years. Among the numerous
factors that businesses must consider, one of the most important things that must be properly
considered is cost calculation. Costing approaches assist in determining cost-for-cost control decision-
making. ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered the
modern alternative to absorption costing, allowing managers to better understand product and
customer net profitability. This provides the business with better information to make value-based and
therefore more effective decisions.
Activity-based costing (ABC) is a costing method that activities in an organization and assigns the
cost of each activity to all products and services according to the actual consumption by each.
Therefore, this model assigns more indirect costs (overhead) into direct costs compared to
conventional costing.
2.2. Why is ABC less widely used than Absorption costing?
2.2.1. It is extremely difficult to effectively and successfully apply the ABC method
The ABC method is used less widely than the ABS method for several reasons, one of which is that it
is extremely difficult to effectively and successfully apply the ABC method. In their research, Ness
and Cucuzza estimated that no more than 10% of them now use activity-based management in a
significant number of their operations and the other 90% have given up, or their programs are
stagnating or floundering.
ABC is difficult to apply successfully because activity-based costing uses multiple cost bases for cost
allocation while absorption costing uses a single base to allocate all the costs. That helps the cost
system to be calculated more efficiently and accurately, but it requires multiple cost drivers, overhead
rates are complicated and more expensive to use (Boris Popesko, 2010). With absorption costing, the
costs accumulated in the cost centers are allocated to cost objects using selected allocation bases/cost
drivers. Typically direct labor or machine hours are the only cost drivers in absorption costing
( Daniel Pieter Prinsloo, 2008). While ABC is a costing model that identifies the cost pools, or
activity centers, in an organization and assigns costs to products and services (cost drivers) based on
the number of events or transactions involved in process of providing a product or service (Letza &
Gadd, 1994:59).
According to Innes in 1999, with ABC overhead costs are firstly pooled on the basis of activities that
have consumed resources – such as purchasing and material handling. Secondly, products consume
activities and a link (known as a cost driver) is found between each activity cost pool and product line,
e.g. number of purchase orders and the number of material movements. The calculation of the cost
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driver (activity cost divided by the cost driver volume) then allows overhead costs for the attached
products. In addition, ABC requires more cost drivers than Absorption costing, costing drivers link
the performance of activities to demands made by individual products. To allocate a cost center to
products, simple drivers such as labor hours, machine hours, material processed, or units produced are
used. Even though there are only a few types of cost drivers, they can produce a large variety of
information (Daniel Pieter Prinsloo, 2008). Therefore, it can be seen that the application of ABC
requires a much more complex and detailed system than Absorption, so it can almost only be applied
to really large companies. This makes ABC not widely used.
In addition to the complexity of the ABC cost calculation, the difficulty related to employees is also a
reason that ABC is difficult to be used successfully. When applying a new method such as ABC, it
may not receive full support from a part of employees because a new management method may
require new knowledge or new employees will be more suitable. Educating employees at all levels
about the principles and the mechanics of ABC may be the most difficult task of all. Employees must
understand thoroughly what the company is trying to achieve through ABC as well as how to use it in
their jobs (Ness and Cucuzza, 1995).
2.2.2. Applying ABC is suitable for large companies
Using ABC costs causes many difficulties for small companies and corporations. Most companies
understand how big a job gathering the information needed to set up an ABC system is after
implementing it (Ness and Cucuzza 1995: 135). One reason is that ABC is much more detailed and
complex than standard cost accounting. Traditional systems come together with many costs into a few
heterogeneous overhead pools. Under ABC, each of those pools is often broken into activities, and it
may take hundreds of inquiries to identify and gather the information on them. similarly, an ABC
system uses many more statistical measures than a traditional system. Also, an activity-based costing
system using multiple cost drivers and overhead rates is more complicated and more expensive to use
(Hilton 1994: 99). That makes the firms must prepare a more amount of expense on measuring cost
driver and overhead.
Using traditional costing, only manufacturing costs can be assigned to products. Under ABC, both
manufacturing and non-manufacturing costs may be assigned. As Kaplan (1989: 1-3 quoted by
Polimeni et al 1991: 1116) indicated that all cost accounting systems are the problem of timeliness of
the information. Activity-based costing could not have solved this problem. A manager might need it
on a daily or hourly basis. However, many systems provide information, monthly. Indeed, there is
often a gap between the time information is reported and the period that is shown in a report. Also
questionable is the importance of the quality of the information. Another problem is collecting data
that is so time-consuming, especially in the beginning, what kind of information is that required to set
up an ABC system and where to find it takes a while. This makes the company have to spend a lot of
extra costs involved as well as time-consuming. Small firms are usually companies that sell products
at market prices because these companies do not have significant pricing power. Therefore, small
companies that use ABC costing will not be able to take advantage of its advantages such as accurate
product pricing to offer a competitive price in the market. Therefore, the application of ABC costing
for small and medium-sized companies not only shows no effect but can also cause losses in operating
costs as well as many other related costs. ABC can be more complex to explain to the stakeholders of
the costing exercise.
Furthermore, scholars warn that “activity-based costing data can easily be misinterpreted and must be
used with care when used in making decisions” (Garrison, 2009, p.338). The presenter of ABC
costing will have to perform much more carefully and meticulously than traditional costing otherwise
the person who has access to the report will easily misinterpret it, leading to bad consequences for
future activities. The reader of the ABC report must also be a good professional. In case the business
partner's expertise is not enough to understand the ABC costing report, the contracts will easily come
to a dead end because the two parties find a joint voice.
Conclusion
Understanding the differences and benefits of various management accounting approaches has a
significant influence on an organization's activities, and so helps in fundamental business decision-
making. As a result, it's critical to understand and choose the best approach for a company based on
its human resources, financial condition, technological skills, and other aspects that influence its
capacity to implement that method.
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This essay begins by introducing the ABC technique to completely comprehend it. We investigate
why the ABC technique is less often employed by examining its advantages and disadvantages.
combine with past research on this strategy to provide a detailed examination of how and why the
ABC method is less often employed in the business than the absorption costing method.
In conclusion, ABC has advantages but also disadvantages, so it depends on whether the company is
small or large, the business model or industry of the company to apply the method. some disadvantage
has been mentioned as more time-consuming leading to requiring more resources. ABC requires a
bigger amount of information than Absorption costs because needs more time-consuming to gather
information so admin costs and audit costs will increase, it takes much time to check the accuracy of
information. Moreover, small and normal companies account for a major amount of all the companies
around the world, and the ability of the workforce in these companies is restricted also ABC requires
a high-quality workforce. Small companies that know these disadvantages will usually not choose the
ABC method.
Reference:
Samuel Jebaraj Benjamin, Saravanan Muthaiyah, M. Srikamaladevi Marathamuthu, 2009, “An
Improved Methodology for Absorption Costing: Efficiency Based Absorption Costing (EBAC)”
Patricia Quesada and Rui Silva, 2021, “Activity-Based Costing (ABC) and Its Implication for Open
Innovation”
HOWARD COHEN, 2004, “IMPLEMENTING AN ACTIVITY-BASED COSTING MODEL-
HOWARD COHEN”
Daniël Pieter Prinsloo, 2008, “Advancing from Absorption Costing to Activity-Based Costing: An
Exploratory Study”
Fraser Sherman, 2019, “Absorption Costing vs. Activity-Based Costing for Decision Making - Fraser
Sherman”
Maha Faisal Alsayegh – 2020 “Activity Based Costing around the World: Adoption, Implementation,
Outcomes and Criticism”
Joseph A. Ness and Thomas G. Cucuzza, 1995 “Tapping the Full Potential of ABC”
Drury C - 2007 “Management and Cost Accounting. Sixth Edition. Thomson Learning”
Letza SR and Gadd K – 1994 “Should Activity-based Costing Be Considered as the Costing Method
of Choice for Total Quality Organization”
Innes J – 1999 “The use of activity-based information: a managerial perspective”
Reyhanoglu – 2004 “Activity-based Costing System: Advantages and disadvantages”
Traditional Costing vs ABC – lumen learning.com
Activity-based costing vs absorption costing: What are the differences in approach? – fool.com
Difference Between Absorption Costing and Activity Based Costing - differencebetween.com
Activity-Based Costing System vs Absorption Costing System - research-methodology.net
Noreen, E - 1991 “Conditions under Which Activity-Based Cost Systems Provide Relevant Costs.
Journal of Management Accounting Research”
Datar & Gupta -1994 “Aggregation, Specification and Measurement Errors in Product Costing”.
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APPENDIX 3: SAMPLE ESSAY (Brand 70 – 75)
Introduction
Management accounting is a type of accounting related to providing financial and other information
for various management purposes in an organization to help managers in preparing and
implementing planning, control, and related decision making. The main role of management
accounting is to support the achievement of goals. The Chartered Institute of Management
Accountants (CIMA) – the largest association of management accounting in the UK –considers
management accounting an integral part of management. The necessity of managerial accounting is
increased dramatically due to many variables like globalization, increased technology, quality, and
customer-oriented attitudes. Management accounting techniques can help managers make
decisions. The purpose of this research explains why Activity-Based Costing is used widely in the
world. The assignment gives some outline about management accounting techniques as well as
Activity-based costing, the explains why diverse products companies are likely to use the ABC
method, ABC is used widely in industries where overall production cost is very much higher as
compared to labor and material costs, why ABC method usually is used in the large corporations
more than in small companies and other features.
Analysis
The advanced management accounting techniques were improved to provide information
appropriate for decision-making in changing internal and external situations. In addition, advanced
management accounting techniques such as activity-based costing, cost of quality reporting, and
strategic management accounting have a wide range of uses. According to Horngren et al., (2002, p.
6), management accounting has the following functions: formulating business strategy, planning and
controlling activities, decision making, efficient resource usage, Performance improvement, and
value enhancement, safeguarding tangible and intangible assets, and corporate governance and
internal control. Like the traditional management accounting techniques, the advanced accounting
techniques are used lesser degree, for cost control, product pricing, management performance, and
investment justification. By contrast, it is also applied for sourcing materials, new product
introduction, engineering process changes, developing market strategy, exercising quality control,
and enhancing employee motivation. The costing system is one of the management accounting
practices which is chosen the most by companies.
The Activity-Based Costing (ABC) method is easily the most popular managing accounting originality
of the previous 20 years. ABC emerged at the end of the 1980s in the United States (Jones &
Dugdale, 2002) as well as spread quickly to Europe and Canada. It is a two-stage cost accounting
method for adding costs to products, services, or any other cost object. At an early stage, the
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organization should determine the organization’s activities and collect indirect costs of each activity
into what is called a cost pool or cost center. Within the next stage, indirect costs are allocated from
activities to each product based on the usage of activities for that product. Thus, costs will likely be
apportioned to products, services, or any other cost objects within proportion to the usage of this
activity. ABC was created as well as has long been advocated as a way of conquering the systematic
distortions of regular cost accounting as well as for getting relevance back again to managerial
accounting.
Firstly, it is to prevent product cost deviation. Cost distortion occurs because the costing system
uses only a single modifier for the entire cost. Cost distortion is prevented in ABC by applying
multiple cost pools (operations) and cost drivers. Additionally, while typically managing accountants
have been perceived to become concentrate just on accounting strategies and procedures, the ABC
method has found that managing accountants will need also to be concerned with procedures,
activities, along with cost drivers to finish the application of ABC. It is to reduce squander or maybe
non-value-adding activities by offering a procedure perspective.
There are many reasons why ABC is used widely in the world. To be specific, firstly, because of the
rapid advancement of science and technology, automatic production lines have become increasingly
popular, and a wide range of items is mass-produced using a variety of models, techniques, and
complex manufacturing procedures. Labor and direct material costs make up a small proportion of
overall production costs, while the general production costs account for an increasingly larger
proportion and since then the allocation of indirect costs based on the criteria simple formula has
become inappropriate. According to “The relationship between product diversity, usage of advanced
manufacturing technologies and activity-based costing adoption” written by Martijn Schoute,
continues further research about product diversity with the usage of advanced manufacturing
technologies (AMT) and activity-based costing adoption. The article uses a dataset of survey
responses from 191 Dutch, medium-sized manufacturing firms to re-examine the relationship
between product diversity and ABC adoption. Improving upon the measurement of product diversity
and the difference between ABC adoption and use, it explains whether the relationship is curvilinear
(inverted U-shaped) and/or moderated by the usage of AMT. The findings show that product
diversity, on average, is also a positive effect related to both ABC adoption and ABC use, but also
that these relationships are indeed inverted U-shaped; i.e., starting with positive up to a point and
then begin to decline. From a practical perspective, the latter outcome means that firms are more
tend to adopt and use ABC at moderate levels of product diversity than at high levels of product
diversity. The results also indicate that the relationship with ABC use (but not with ABC adoption) is
negatively moderated by the usage of AMT, which from a practical perspective means that the
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impact of product diversity on firms’ likelihood of using ABC is stronger when the level of usage of
AMT is relatively low than when this level is relatively high. Overall, these results of Martijn Schoute
demonstrate that the inconclusive results of previous survey research on the relationship between
product diversity and ABC adoption at least partially seem to have been caused by methodological
issues.
Secondly, this part will focus on demonstrating how activity-based costing is applied successfully
in many different industry fields, in particular the hospitality industry and manufacturing industry,
but it is not successful in some departments such as banks or not diversity products. The
production factor- one of the most popular sectors of human life also faces challenges in allocating
costs. Therefore, ABC is adopted largely in the production industry because this method can solve
the limitations of the traditional costing system. In this industry, the research focus on the case of
Bicycle Part Company which was done by Tsung-Yueh Lu, Shu-Li Wang, Mei-Fang and Wu, Feng-
Tsung Cheng (2017). According to the research paper, the company has been very successful in using
the Activity-based costing method in their production activities. Especially, the company focuses on
an n pricing strategy- the cost-plus method. The ABC method provided thwithith them with accurate
costs which are important to keep competitive power in the market. Therefore, companies may re-
examine manufacturing processes with ABC cost information to identify the presence of non-value-
added activities to delete, combine, rearrange and simplify activities, such as inspecting, moving, and
wait, ng, and so on to increase performance and profitability. This leads to the success of the
company in pricing policy as well as manager overhead costs.
In terms of the hotel sector, there are cases of companies that included the leading Greek hotel
enterprises. This sector is facing a challenge, that is difficult to allocate cost information, due to the
hotel's revenue coming from many sources, not just room rentals. Difficulty in allocating costs leads
to affect managers to decide and evaluate hotel service. Therefore, the company adopts ABC to
solve this problem. To be more specific, ABC systems use a simple two-stage approach that is similar
to the structure of traditional cost systems, such as job-order costing and process costing, but more
general. The analysis of the survey data from 85 leading Greek hotel enterprises indicates that ABC
diffusion in the hospitality industry in Greece can be considered very satisfactory. From the point of
view of the article, the perceptions of the overall success of Activity-based costing are closely related
to the success of specific applications, such as service pricing, customer profitability analysis, and
service mix decisions. Hotels in Greece find it easier to allocate costs. As a result, the study
concluded that the ABC system provided accurate information cost with many others activity cost
drivers as well as management accounting practices in the hospitality industry in Greece.
However, the Bank of China is not adopting successfully ABC method. To be specific, in 2005, the
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Bank of China's senior management decided to implement an activity-based costing system to save
expenses. The ABC system was implemented as a result of several factors. First of all, since the mid-
1990s, when the Chinese economy began to expand and became an attractive market for
international banks, another well-known bank has come to China to do business, the Bank of China
has faced competition from those international banks. Second, it aspires to provide equity to capital
markets. Third, the growth of foreign banks in China compels the Bank of China to better manage its
resources.
After a period of implementing ABC, the Bank of China did not achieve the expected results. The
failure of ABC implementation at the Bank of China can be explained as follows: The business
purpose is unclear: ABC was introduced by the accounting department, but due to a lack of interest
in ABC, there were no representatives from other departments who were users of the system. This
leads to a loss of motivation and frustration in the accounting department. On the contrary, the
majority of Bank of China staff from various divisions are perplexed by ABC. Because the purpose of
ABC is unclear among the employees, the majority of them believe it will just serve to curb
expenditures. Some workers believe it will assist the company in modifying the work process; on the
other hand, some employees believe the company's structure will be reorganized. As a result, the
Bank of China's ABC implementation goal is unclear.
Thirdly, the ABC method usually is used in large-scale enterprises more than in small-scale
companies. As evidenced by the characteristics of a small company in Vietnam, it is called Van Chinh
company. This company uses the TDC method with one cost driver (labor hour) to assign overhead
costs in comparison with the ABC method. The results show ABC is more accurate, the information
provided is more detailed, and more confident for managers to make decisions. However, the
company is facing problems such as a lack of human resources, high costs, identification of cost
drivers, and especially a lack of accountants who can understand and have skills in the ABC method.
Therefore, this company does not enough resources to develop and use the ABC method. By
contrast, following the survey of the UK’s largest 1000 companies. They achieve success in using ABC
because of resources and enough cost to apply.
Fourthly, because of cultural factors, ABC can meet difficulties in adoption. Based on “The
development of the Activity-Based Costing method: A comparison between France and China”. The
situation is different in countries like France, Germany, or Northern countries of Europe where the
cultural features are different. For instance, French and German managers see the checking behind
control, while the Anglo-Saxons see steering there. In the French tradition, management accounting
is mainly used to identify the cost of a product, an activity, or a process whereas, in the North
American approach, Management accounting is used in a cybernetic process, by which the standards
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are compared with the real data and the deviations are identified and decomposed. Firms from
Northern countries of Europe (Sweden, Denmark …) are more sensitive to the knowledge-based
approach to management (cf. Argyris and Schön (1978) with the Organizational Learning Theory)
where the participative approaches are favored. How to allocate the indirect costs was the major
problem for French and German management accounting pioneers. This problem led them to build
an accounting technique very similar to Activity Based Costing (method of the homogeneous
sections). By contrast, the ABC rate of adoption is very low in China. Main factors affecting the
application of ABC Zhu and Chen (2000) discover that the most significant motivation was to acquire
more precise cost information and data, that the biggest difficulty of ABC design and implementation
lies in ABC information collection, and that the main reasons of not applying ABC were a lack of
training staff and satisfactory with current systems. Even if some internal and external factors can
explain for a part a low level of adoption in China, the “cultural” dimension could be a major
determinant.
Conclusion
The assignment focus on why some management accounting techniques are used widely. The main
findings are the development of technologies, mass production as well as diverse products, and the
characteristic of firms such as size, features, or industry fields to make the ABC method making it
more popular. For example, with the development of technologies and diverse products, those make
direct material and direct labor costs make up a small proportion of overall production costs and
create a wrong ca calculate the relationship between costs and activities without the ABC method.
Additionally, the ABC method usually is used in large-scale enterprises more than in small-scale
companies and the effect on culture led to the difference in using the ABC method. The assignment
has limitations such as only concentrating on the ABC method, in other contexts, for instance,
uniform products or fewer diverse products, whether using ABC is still correct. Further research
would need to continue to apply ABC to differences variances in other models and departments.
Based on the limitation of the data, this study would be one possible direction for further research
and help managers in this situation in this assignment can give more right decisions.
References
1, John Innes, Falconer Mitchell (1995), “A survey of activity-based costing in the U.K.’s largest
companies”, Management Accounting Research, 1995, 6, pp.137-153.
2, Wegmann, Grégory (2011), “The Development of the Activity-Based Costing Method: A
Comparison Between France and China”, 2011 International Symposium on Applied Economics,
Business and Development (ISAEBD 2011).
3, Odysseas Pavlatos and Ioannis Paggios, “Activity-Based Costing in the Hospitality Industry:
Page 118 of 130

Evidence From Greece”, Journal of Hospitality & Tourism Research 2009.
4, Tsung-Yueh Lua, Shu-Li Wangb, Mei-Fang Wuc*, Feng-Tsung Chengdu,” Competitive Price Strategy
with Activity-Based Costing ̝ Case Study of Bicycle Part Company”, Procedia CIRP 63 ( 2017 ) 14 – 20.
5, Abdallah and Wei “Why did ABC fail at the bank of China?”, Management Accounting Quarterly 7
spring 2008, vol. 9, no.3.
6, Tanjung Huynh1, 2, Guangming Gong2, Ngocminh Ngo3, “Apply activity-based costing to calculate
product cost in small and medium enterprises”, International Journal of Business and Economics
Research 2013; 2(3): 59-68.
Page 119 of 130

APPENDIX 4: SAMPLE MIDDLE TERM TEST
Page 120 of 130

Question 1 (25 marks)
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 margin 25%. Overheads are currently absorbed on a machine
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:
Overhead category Annual overheads Total number of
Activity driver
($) activities per year
Supervisors 100,000 Site visits 500
Planners 120,000 Planning documents 250
Property related 240,000 Machine hours 920
A typical GC costs $4,500 in materials and takes 100 labor hours and 25 machine hours to complete.
A GC requires only one site visit by two supervisors and needs three planning documents to be raised.
The typical EX costs $8,500 in materials and takes 450 labor hours and 30 machine hour to complete.
An EX requires six site visits and 10 planning documents. In all cases labor is paid $25 per hour.
Required:
a, Calculate the cost and quoted price of a GC and of an EX using labor hours to (MHs) absorb
the overheads. (6 marks)
b, Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the
overheads. (14 marks)
c, Explain 2 advantages of applying activity based costing in BBB? (5 marks)
Lucky manufactures and sells three products, X, Y and Z, for which budgeted next month sales
demand, unit selling prices and unit variable costs are as follows.
Product X Y Z
650 400 450
Budgeted sale demand units units units
$ $ $
Unit sale price 20 18 14
Variable cost
- Material ($2 per kg) 8 6 2
- Labor ($10 per hour) 6 4 8
The organization has inventory of 50 units of X, 60 units Y and 100 units of Z, , which it is quite
willing to use up to meet sales demand.
All three products use the same direct materials and the same type of direct labor.
In the next year, the available supply of materials will be restricted to 4,000 kg and the available
supply of labor to 700 hours.
Fixed cost per month: $600
Required:
a, Determine limiting factor of following month (8 marks)
b, Determine optional production plan for next month (10 marks)
c, Determine maximum contribution and maximum profit of following month (5 marks)
d, List 2 methods that the entity could meet shortage production for next year (4 marks)
e, Discuss each methods and give your suggestion which method the entity should choose (8
marks) (4 marks for each method discussion)

Part A: 20 marks
The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a
one-off order of sofas, in excess of normal budgeted production. The following information has
already been prepared:
Page 121 of 130

Cost statement Note
Direct materials:
Fabric 250 m2 at $17 per m2 1
Wood 50 m at $8·20 per m2 2
Direct labour:
Skilled 200 hours at $16 per hour 3
Semi-skilled 300 hours at $12 per hour 4
Notes
1) The fabric is regularly used by HL Co. There are currently 150 m2 in inventory, which cost $17 per
m2. The current purchase price of the fabric is $16 per m2.
2) This type of wood is regularly used by HL Co and usually costs $10·20 per m. HL Co already has
600 m in inventory (which has cost of purchase $8·20 per m2) but 480 m of this is needed to complete
other existing orders.
3) The skilled labour force is employed under permanent contracts of employment under which they
must be paid for 40 hours’ per week’s labour, even if their time is idle due to absence of orders. Their
rate of pay is $16 per hour, although any overtime is paid at time and a half. There is spare
capacity of 50 labour hours for skilled labor.
4) There is no spare capacity for semi-skilled workers. They are currently paid $12 per hour or time
and a half for overtime. Semi-skill workers currently produce product A (which has contribution per
unit $18 and need 3 hours of semi-skill worker to complete).
Required:
1, Prepare, on a relevant cost basis, the lowest cost estimate which could be used as the basis for
the quotation. (Explain briefly your reasons for including or excluding each of the costs in your
estimate) (16 marks)
2, List and explain 2 factors the entity should consider before accept the contract (4 marks)
Part B: 20 marks
The Denim World sells fabrics to a wide range of industrial and consumer users.
One of the products it carries is denim cloth, used in the manufacture of jeans and carrying bags. The
supplier for the denim cloth pays all incoming freight. No incoming inspection of the denim
is necessary because the supplier has a track record of delivering high-quality merchandise. The
purchasing officer of the Denim World has collected the following information:
Annual demand for denim cloth 30,000 yards
Ordering cost per purchase order $200
Carrying cost per year
30% of purchase costs

Cost of denim cloth $10 per yard
The purchasing lead time is 2 weeks. The Denim World is open 250 days a year (50 weeks for 5 days
a week).
Required
1, Calculate the EOQ for denim cloth. (6 marks)
2, Calculate total holding cost for the year if the entity order at EOQ level (4 marks)
3, Calculate total ordering cost for the year if the entity order at EOQ level (4 marks)
4, If the supplier offer discount 10% of the entity purchase more than 10,000 yards per order.
Advise the management reorder quantity that the entity should choose? (6 marks)
Page 122 of 130

APPENDIX 5: SAMPLE FINAL EXAM
Page 123 of 130

Stay Clean manufactures and sells a small range of kitchen equipment. Specifically the product range
contains a dishwasher (DW), a washing machine (WM) and a tumble dryer (TD). The TD is of a
rather old design and has for some time generated negative contribution. It is widely expected that in
one year’s time the market for this design of TD will cease, as people switch to a washing machine
that can also dry clothes after the washing cycle has completed.
Stay Clean is trying to decide whether or not to cease the production of TD now or in 12 months’ time
when the new combined washing machine/drier will be ready. To help with this decision the
following information has been provided:
1. The normal selling prices, annual sales volumes and total variable costs for the three products are as
follows:
Product DW WM TD
Selling price per unit $130 $250 $30
Labour cost per unit $50 $80 $40
Contribution per unit $80 $170 –$10
Annual sales 5,000 units 6,000 units 1,200 units
2. It is thought that some of the customers that buy a TD also buy a DW and a WM. It is estimated
that 10% of the sales of WM and DW will be lost if the TD ceases to be produced.
3. All the direct labour force currently working on the TD will be made redundant immediately if TD
is ceased now. This would cost $8,000 in redundancy payments.
4. If Stay Clean waited for 12 months the existing labour force would be retained and retrained at a
cost of $500 per month to enable them to produce the new washing/drying product.
5. Recruitment and training costs of labour in 12 months’ time would be $200 per month in the event
that redundancy takes place now.
6. The space in the factory currently used for the TD will be sublet for 12 months on a short-term
lease contract if production of TD stops now. The income from that contract will be $1,000 per
month.
7. The supervisor (currently classed as an overhead) supervises the production of all three
products spending approximately 20% of his time on the TD production. He would continue to be
fully employed if the TD ceases to be produced now.
Required:
(a) Explain characteristics of relevant cost and its application? (10 marks)
(a) Calculate whether or not it is worthwhile ceasing to produce the TD now rather than waiting
12 months (15 marks)
(b) Briefly describe three issues that Stay Clean should consider if it decides to outsource the
manufacture of one of its future products. (5 marks)

Block Co operates an marginal costing system and sells three types of product – Commodity 1,
Commodity 2 and Commodity 3.
The following budgeted figures are available for the quarter ended 31 May 2013.
Standard
Budgeted Standard selling variable
Product and sales units
production price per unit production costs
per unit
Commodity 1 30,000 $35 $20
Commodity 2 30,000 $32 $28
Commodity 3 25,000 $45 $26
The following data shows the actual sales prices and volumes achieved for each product by Block Co
for the quarter ended 31 May 2013 and the average market prices per unit.
Page 124 of 130

Actual
Actual selling Average market
Product and sales units production and
price price per unit
per unit
Commodity 1 25,800 $31 $32
Commodity 2 31,400 $34 $34
Commodity 3 35,600 $42 $39
Required:
(a) Calculate, the sales price planning variance, sales price operating variance for each product
1, product 2, product 3. (8 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance
and the total sales quantity variance. (12 marks)
(c) Explain 3 reasons for sale price planning variance in part (a) above (6 marks)
(d) Explain 2 reasons for sale mix variance in part (b) above (4 marks)
ALG Co is launching a new, innovative product onto the market and is trying to decide on the right
launch price for the product. The product’s expected life is three years. Given the high level of costs
which have been incurred in developing the product, ALG Co wants to ensure that it sets its price at
the right level and has therefore consulted a market research company to help it do this. The research,
which relates to similar but not identical products launched by other companies, has revealed that at a
price of $70, annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 1,500 units and
for every $2 decrease in selling price, demand would be expected to increase by 1,500 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new
product are as follows:
Annual production (units) 200,000 250,000 300,000 320,000
$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,320,000 1,550,000 1,700,000 1,680,000
The entity budget production of 222,000 units for next period.
Required:
(a) Calculate the total variable cost per unit and total fixed overheads. (5 marks)
(b) If the entity applies marginal cost plus with mark up 30%. Determine selling price per unit
(2 marks)
(c) If the entity applies full cost plus with margin 20%. Determine selling price per unit (5
marks)
The entity use absorption costing to allocate overhead and determine OAR based on number of
products produced.
(d) Calculate the optimum (profit maximizing) selling price for the new product AND calculate
the resulting profit for the period. (10 marks)
Note: If P = a – bx then MR = a – 2bx.
(e) The sales director believes that a high price should be charged at launch.
Required:
 Discuss 2 conditions which would make market skimming a more suitable pricing strategy for
ALG (4 marks),
 Recommend whether ALG should adopt this approach and explain your recommendation. (4
marks)
Yam Co is involved in the processing of sheet metal into products A, B and C using three
processes, pressing, stretching and rolling. Like many businesses Yam faces tough price competition
in what is a mature world market.
The factory has 50 production lines each of which contain the three processes: Raw material for the
Page 125 of 130

sheet metal is first pressed then stretched and finally rolled. The processing capacity varies for each
process and the factory manager has provided the following data:
Processing time per metre in hours
Product A Product B Product C
Pressing 0·50 0·50 0·40
Stretching 0·25 0·40 0·25
Rolling 0·40 0·25 0·25
The factory operates for 18 hours each day for 6 days per week. It is closed for only two weeks of the
year for holidays when maintenance is carried out. On average one hour of labour is needed for each
of the 225,000 hours of factory time. Labour is paid $10 per hour.
The raw materials cost per metre is $3·00 for product A, $2·50 for product B and $1·80 for product C.
Other factory costs (excluding labour and raw materials) are $18,000,000 per year. Selling prices per
metre are $70 for product A, $60 for product B and $27 for product C.
Yam carries very little inventory.
Required:
(a) Identify the bottleneck process and briefly explain why this process is described as a
‘bottleneck’.
(b) Calculate the throughput accounting ratio (TPAR) for each product assuming that the
bottleneck process is fully utilised.
Page 126 of 130

Contents
1, INTRODUCTION TO THE COURSE..............................................................................................1
2, ASSESSMENT DETAILS................................................................................................................2
3, LIST OF TOPICS..............................................................................................................................8
4, LECTURER INFORMATION........................................................................................................11
5, SESSION PLAN.............................................................................................................................12
6, SESSION REQUIRED READING.................................................................................................14
7, OTHER INFORMATION...............................................................................................................14
CHAPTER 1 ACTIVITY BASED COSTING....................................................................................15
LEARNING OBJECTIVES............................................................................................................15
PRACTISE QUESTION.................................................................................................................24
QUESTION 1..............................................................................................................................24
QUESTION 2..............................................................................................................................25
QUESTION 3..............................................................................................................................26
QUESTION 4..............................................................................................................................27
CHAPTER 2 INVENTORY MANAGEMENT..................................................................................28
QUESTION 1..............................................................................................................................35
QUESTION 2..............................................................................................................................36
QUESTION 3..............................................................................................................................37
CHAPTER 3 DECISION MAKING WITH LIMITING FACTOR.....................................................38
QUESTION 1:.............................................................................................................................41
QUESTION 2:.............................................................................................................................42
QUESTION 3..............................................................................................................................43
QUESTION 4..............................................................................................................................44
QUESTION 5..............................................................................................................................46
QUESTION 6..............................................................................................................................48
QUESTION 7..............................................................................................................................50
QUESTION 8 (ACCA F5 – Dec 2021).......................................................................................52
Page 127 of 130

CHAPTER 4 RELEVANT COSTS.....................................................................................................55
QUESTION 1..............................................................................................................................57
QUESTION 3..............................................................................................................................59
QUESTION 4..............................................................................................................................60
QUESTION 6..............................................................................................................................61
QUESTION 7..............................................................................................................................62
QUESTION 8 (with answer).......................................................................................................63
CHAPTE 5 PRICING DECISION......................................................................................................68
QUESTION 1..............................................................................................................................70
QUESTION 2:.............................................................................................................................71
QUESTION 3:.............................................................................................................................72
CHAPTER 6 VARIANCE ANALYSIS..............................................................................................73
QUESTION 1 BASIC VARIANCE............................................................................................76
QUESTION 2.1 PLANNING AND OPERATING VAIRANCE................................................77
QUESTION 2.2 PLANNING AND OPERATING VARIANCE................................................78
QUESTION 3 PLANNING AND OPERATING VARIANCE...................................................79
QUESTION 7.1 MARKET SIZE AND MARKET SHARE.......................................................83
QUESTION 7.2 MARKET SIZE AND MARKET SHARE.......................................................84
QUESTION 9 MATERIAL MIX AND YIELD..........................................................................85
QUESTION 10 MATERIAL MIX AND YIELD........................................................................86
QUESTION 13 SALE MIX AND QUANTITY..........................................................................89
CHAPTER 7 SPECIAL COSTING TECHNIQUES...........................................................................91
Page 128 of 130

PRACTISE QUESTION...............................................................................................................104
1, TARGET COSTING.................................................................................................................104
QUESTION 1 (12/2007 – Q1)...................................................................................................104
QUESTION 2 (12/2009)............................................................................................................105
2, LIFE CYCLE COSTING...........................................................................................................108
QUESTION 1............................................................................................................................108
QUESTION 2............................................................................................................................109
QUESTION 3............................................................................................................................110
3, THROUGHPUT ACCOUNTING.............................................................................................111
QUESTION 1 (6/2009 – Q1).....................................................................................................111
QUESTION 2............................................................................................................................112
APPENDIX 1: SAMPLE ESSAY (Brand 80 – 85)...........................................................................114
APPENDIX 4: SAMPLE MIDDLE TERM TEST............................................................................129
Question 1 (25 marks)...................................................................................................................129
Question 2 (35 marks)...................................................................................................................129
Question 3 (40 marks)...................................................................................................................129
APPENDIX 5: SAMPLE FINAL EXAM..........................................................................................131
Question 1 (30 marks)...................................................................................................................131
Question 2 (30 marks)...................................................................................................................131
Question 3 (30 marks)...................................................................................................................132
Question 4 (10 marks)...................................................................................................................132
Page 129 of 130

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1.1, LEARNING OUTCOMES

DETAILED IN LIST DETALIED IN

Word length Title of essay

Research essay 1,500 (+/- 10%) words Organizations need to understand

Requirements for Essay

o Put it in italics and in speech marks to show it is a “direct quote”

Word count Indicative

Spelling, grammar and punctuation 5%

90 - Excellent work - As below plus - contains accurate, relevant material;

0 - 30 No serious attempt to address the question or problem; the work manifests a

1 Activity based costing and absorption costing

3 Decision making with limiting factors

7 Specialist cost and management accounting techniques

Topic Detailed learning objective

3 Decision making with limiting factors

2. Formulate and solve a multiple scarce resource problem both graphically

3. Explain and apply the concept of opportunity costs.

4. Explain the issues surrounding make vs buy and outsourcing decisions.

5. Calculate and compare 'make' costs with 'buy-in' costs.

7. Apply relevant costing principles in situations involving shutdown, one-off

2. Derive and manipulate a straight-line demand equation. Derive an equation

3. Calculate the optimum selling price and quantity for an organisation,

4. Calculate a price from a given strategy using cost-plus

5. Explain different price strategies, including: Cost-plus, Skimming,

4. Suggest and justify alternative methods of controlling production processes

7. Calculate, identify the cause of and explain planning and operational

Specialist cost and management accounting techniques

5.1, Session plan (5 hours per week)

Author Title Publisher

2, Identify appropriate cost drivers under ABC.

3, Calculate costs per driver and per unit using ABC.

4, Discuss advantages and disadvantages of ABC

ABSORPTION COSTING ACTIVITY BASED COSTING

ABC ADVANTAGES ABC DISADVANTAGES

(a) ABC recognises this complexity 

1.1 Definition of ABC

Overhead Annual cost for the coming year

You are provided with the following data:

Overhead category Annual overheads Total number of

Cost Cost driver $

2, Calculate and interpret optimal reorder quantities.

3, Calculate and interpret optimal reorder quantities when discounts apply.

WHAT IS EOQ KEY FORMULATION

To decide mathematically whether it would be

LIMITING FACTOR LINEAR PROGRAMMING

Step 1: Determine contribution per limiting factor

WHAT: Amount of change in the value of the

Mash 3,000 units

Sauce 5,000 units

Cakes Cookies Shakes

Note: No further calculations are required.

Manufacturing details for the two products are as follows:

Product Pool cues Snooker cues

(a) Calculate the contribution earned from each cue. (2 marks)

Stage Xeno (X) Yong (Y)

To make a unit of each product the following resources are required:

The contribution per unit made on each product is as follows:

A, Determine the limiting factor(s) in month 1?

Determine the production volume for Herdorf for month 2?

Road Spikes Trail

Demand and resource availability for March

Road 2,300 pairs