QUESTION ONE

  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)


  • Updated: 18 Jul 20
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  • Attempts: 3425
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  • Correct: 919

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(b) Enter the cost of 'Part A1' per unit of Ny78:
QUESTION TWO

Edukinara Tanzania Limited produces two products – “Newthings” and “Oldthing”. Each product uses similar processes and equipment, but “Newthings” are produced in large volumes whereas “Oldthings” are produced in a smaller volume. At present, overheads are apportioned to products using a traditional absorption costing basis.

You are the cost accountant at Edukinara Limited and, as a result of the large amount of discussion in the management literature of Activity Based Costing; you are considering changing from absorption costing to Activity Based Costing for the purpose of charging overheads to production.

You have decided to prepare a comparison of the product costs using both the current method and an Activity Based Costing method prior to making a final decision and have accumulated the following summarized data from the next year’s budget:

Cost category TZS Current basis of apportionment
Volume related costs 320,000 Machine hours
Purchasing related costs 156,000 Labour hours
Set-up costs 44,000 Labour hours
520,000

Extract from the standard cost cards for “Newthings” and “Oldthings” show the following:

NewThings OldThings
Labour hours per unit 3 2
Machine hours per unit 1 1
Budgeted production next year 30,000 units 10,000 units
Number of purchases orders per annum 170 90
Number of machine set-up per year 76 56

Requirement:

  1. prepare calculations showing the overheads charged to each product using: -
    1. the proposed Activity Based Costing system
    2. the current (traditional) costing system
  2. “The ABC system recognizes that some activities are unrelated to volume by using allocation bases that are independent of production volume.”
    Briefly explain how traditional costing systems can result in distorted product costs using the Edukinara Limited to illustrate your point.     (8 marks)

  • Updated: 18 Jul 20
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  • Attempts: 1134
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  • Correct: 460

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Overhead Absorption Rate of Volume related [ABC]:
QUESTION THREE

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:

30 pieces Jigsaw 250 piece jigsaw 1,000 piece jigsaw
Direct materials:
Paperboard @ $1.60 per metre 0.25 metres 0.5 metres 0.75 metres
Direct labour: @ $14.40 per hour 6 mins 8 mins 10 mins
Variable overhead: 75% Direct labour cost
Machine hours required 0.2 hour 0.25 hour 0.5 hour
Sales demand for the year (units) 50,000 27,000 36,600
Selling price per unit $3.6 $5.45 $7.85

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)


  • Updated: 18 Jul 20
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  • Attempts: 858
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  • Correct: 285

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Total Labour Hours:
QUESTION FOUR

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:

Actual data
Actual production 21,600 rucksacks
Direct materials costs: 16,200 square metres €81,000
Direct labour costs: 8,640 hours €108,864
Variable production overhead costs €54,000
Fixed production overhead costs €85,200
Variances
Direct material price variance €4,050 F
Direct material usage variance €5,670 F
Direct labour rate variance €864 F
Direct labour efficiency variance €27,432 F
Variable production overhead expenditure variance €432 A
Variable production overhead efficiency variance €13,392 F
Fixed production overhead variance €3,775 A

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)

  • Updated: 18 Jul 20
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  • Attempts: 0
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  • Correct: 0

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Direct Material cost per unit:
QUESTION FIVE

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)


  • Updated: 18 Jul 20
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  • Attempts: 1
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  • Correct: 0

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(i) Transfer Price:
(a) Total overhead of cost centre A:
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