1. Vipuri Enterprises assembles and sells a range of components for motor vehicles. Vipuri is now considering a proposal to add a new component to its product range. This is a component for Nyumbu cars, which has been given an industrial code number Ny78. The company sees an opportunity to gain market share in Tanzania (the only market so far for Nyumbu cars) that is expected to grow considerably over time (when Nyumbu cars start to be exported), but already competition from rival producers is strong.

   Component Ny78 would be produced by assembling a number of parts bought in from external suppliers, and would then be sold to manufacturers of Nyumbu cars. Vipuri Enterprises would use its current workforce of assembly workers to make the component. Production overheads are currently absorbed into production costs on an assembly hours basis.

   Vipuri is considering the use of target costing for the new component.

   REQUIRED:
   

   1. Explain briefly how target costing might be used in the development and production of a new product.     (3 marks)
   2. Explain the benefits of adopting a target costing approach at an early stage in the development of a new product.     (3 marks)
   3. If a target costing approach is used and a cost gap is identified for component Ny78, suggest possible measures that Vipuri might take to reduce the gap.     (4 marks)

2. Suppose you have been given the following cost information for the new component Ny78.

   1. Part A1: Each unit of component Ny78 requires one unit of part A1. These bought-in parts are purchased in batches of 5,000 units, and the purchase cost is TZS. 5,300 each plus delivery costs of TZS. 2,750,000 per batch.
   2. Part A2: Each unit of components Ny78 requires 20 cm of part A2, which costs TZS.2,400 per meter to purchase. However, it is expected that there will be some waste due to cutting and that 5% of the purchased part will be lost in the assembly process
   3. Other parts for component Ny78 will also be bought in and will cost TZS.7,200 per unit of the component.
   4. Assembly labour: It is estimated that each unit of component Ny78 will take 25 minutes to assemble. Assembly labour, which is not in short supply, is paid TZS.24,000 per hour. It is also estimated that 10% of paid labour time will be idle time.
   5. Production overheads. Analysis of recent historical costs for production overheads shows the following costs:

      	Total production overhead (TZS)	Total assembly labour hours worked
      Month 1	912,000,000	18,000
      Month 2	948,000,000	22,000

   Fixed production overheads are absorbed at a rate per assembly hour based on normal activity levels. In a normal year, Vipuri works 250,000 assembly hours

   Vipuri estimates that it needs to sell component Ny78 at a price of not more than TZS. 56,000 per unit to be competitive, and it is considered that an acceptable gross profit margin on components sold by the company is 25%. Gross margin is defined as the sales price minus the full production cost of sales.

   REQUIRED

   Calculate the expected cost per unit of component Ny78 and calculate any cost gap that exists.     (10 marks)

Juma produces a range of high-quality jigsaw puzzles for adults and children. The company is based in Waterford and has been in operation for over twenty years. It produces three types of jigsaw, 30 piece and 250 piece for children and 1,000 piece for teenagers and adults.

In the past two years, the company has experienced increasing demand for its products and has expanded production to meet demand. However, sales forecasts for the current year suggest that demand for all types of jigsaw puzzles is much higher than in previous years.

The production manager has indicated that the company has a total of 32,000 machine hours and 18,000 direct labour hours available for the current year. Production and sales details relating to three types of jigsaw are shown below:

Budgeted fixed production overhead is estimated to be $5,700 per month and the company has also budgeted for selling and administration expenses of $26,500 for the year.

Required:

1. Based on the information provided above, state whether Juma has sufficient production capacity to satisfy sales demand for the coming year. You should provide calculations to support your answer.     (4 Marks)
2. Compute the optimal production plan for Juma for the current year, clearly showing total profit expected.     (13 Marks)
3. Explain the meaning of the following terms:
1. Relevant cost
2. Sunk cost     (3 marks)

Dearg DAC produces one type of strong and affordable rucksack for the Irish and European hiking market. The company has been operating for the past five years from its manufacturing base in Kerry.

During the year, to improve its management accounting information, the company invested in a new information technology system but unfortunately there have been problems with the software. The standard cost card, which provides details of the standard production cost to make one rucksack, has been lost and the company is unable to produce its budget for the year ahead.

The management accountant has retrieved some information relating to actual costs and variances for the year.

The budgeted production for the year was 21,000 rucksacks. Other relevant information is shown below:

Dearg DAC operates a standard variable costing system.

REQUIREMENT:

1. Using the information provided above, prepare:
1. The standard cost card for one rucksack.     (12 marks)
2. A cost statement showing original budget, flexed budget and actual results for the year.     (5 marks)
2. Describe TWO criticisms of standard costing.     (3 marks)

The Information Technology division (IT) of the JR Business Consulting Group provides consulting services to its clients as well as to other divisions within the group. Consultants always work in teams of two on every consulting day. Each consulting day is charged to external clients at Tshs.750,000 which represents cost plus 150% profit mark up. The total cost per consulting day has been estimated as being 80% variable and 20% fixed.

The Director of the Human Resources (HR) division of JR Business Consulting Group has requested the services of two teams of consultants from the IT division on five days per week for a period of 48 weeks, and has suggested that she meets with the Director of the IT division in order to negotiate a transfer price. The Director of the IT division has responded by stating that he is aware of the limitations of using negotiated transfer prices and intends to charge the HR division Tshs.750,000 per consulting day. The IT division always uses ‘state of the art’ video-conferencing equipment on all internal consultations which would reduce the variable costs by Tshs.50,000 per consulting day. This equipment can only be used when providing internal consultations.

Required:

1. Calculate and discuss the transfer prices per consulting day at which the IT division should provide consulting services to the HR division in order to ensure that the profit of the JR Business Consulting Group is maximized in each of the following situations:
1. Every pair of consultants in the IT division is 100% utilized during the required 48 week period in providing consulting services to external clients, i.e. there is no spare capacity.     (4 marks)
2. There is one team of consultants who, being free from other commitments, would be available to undertake the provision of services to the HR division during the required 48 week period. All other teams of consultants would be 100% utilized in providing consulting services to external clients. (4 marks)
3. A major client has offered to pay the IT division Tshs.264,000,000 for the services of two teams of consultants during the required 48 week period.(4 marks)
2. Briefly discuss FOUR limitations of negotiated transfer prices.     (8 marks)

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