Preparation paper 10

KAI electronics makes high quality stereo headphones. The market for this product growing rapidly due to the increased use of MP3 players and mobile devices.

The company uses standard costing system to assess the performance of its managers. At the start of the period under review, the following standard cost card was calculated for one product, the delta:

At the end of the period, the finance director noted that a mistake has been made in forecasting selling price inflation. Inflation was lower than expected and the finance director believes that a lower standard selling price per unit of TZS 12,180 should have been used.

REQUIRED

1. Using the marginal costing approach, calculate the selling price variance and the sales volume contribution variance and reconcile budged contribution to actual contribution basing on the original standard. (4 marks)
2. Using the marginal costing approach, analyse the selling price variance into planning and operational variances. (4 marks)
3. Comment of the meaning of each of the variance calculated in part (a) and (b) and the overall performance of the sales department. (4 mars)

4. The managing director of KAI Electronics Co has expressed some surprise about the proposal of the finance director that the standard cost should be revised. “What’s the point of having a standard cost if we actually change it at the end of the year before doing variance analysis?” he asked. “Doesn’t this just mean that we move the goal posts to ensure we meet the target?”

   REQUIRED:

   Describe the principles that should be applied in the deciding whether a standard should be revised at the end of the year, prior to variance. (4 marks)

5. The production manager has requested that the standard cost be revised to reflect a higher than expected wage increase. When the standard was set, the expected pay rise was 2% - in line with inflation. The production manager claimed that the extra pay rise was necessary as the workers were de motivated. “I gave them all 5% to keep them happy!” he said.

   REQUIRED:

   Discuss the request of the production manager to revise the standard cost putting what you see as both sides of the argument and reach a conclusion as to whether or not the standard should be revised. (4 marks)

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Next Day Delivery (NDD) is considering which type of delivery van to buy at its next fleet replacement point. The finance team has correctly prepared a decision table to assist in this decision, which considers two van sizes – small (S) and medium (M), and each of three different levels of activity expected in the market (the uncertainty). Level 1 is the lowest activity level, and level 3 the highest.

The “outcome” measured in the table is the contribution per van likely to be gained over each year of use. The same number of vans would be bought, regardless of type.

NDD’s board (and owners) consists of four people:

1. The Managing Director (MD), who has always been a very confident and optimistic individual.
2. The Financial Director (FD), who is often teased by the others as being a bit too cautious; he worries about the impact of getting a decision wrong, and insists on using the minimax regret technique to make decisions.
3. The Operations Director (OD) is of the view that delivering correctly first time with no mistakes is the only way to be successful in the delivery business. He defines himself as ‘risk neutral’ and bases his decisions on expected values of returns.
4. The fourth owner (a silent investor) is on the board but doesn’t really understand the details of the business, preferring to focus on long average returns to fund a looming retirement.

REQUIRED:

1. Assuming the MD has the final say, which type of van is likely to be chosen?
2. Assuming the FD prevails, which type of van is likely to be chosen?
3. Assuming the OD’s preferences are met, what will be the average return gained per van?
4. What is the minimum return needed from the medium van at the activity level 1, to make the silent partner indifferent between the types of van, assuming that the average return for the small van is $11,930?

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KAI Limited manufactures two different styles of inner clothes: a Vest (V) and a Boxer (B) version. The finance department has correctly produced some costing information about the products and the overheads of the business.

• The Vest weighs 50g, with the Boxer version 60% heavier.
• Each cloth suffers waste in the manufacturing process with 10% of the input wasted for a Vest and 20% wasted for a Boxer.
• Both styles of cloth are made from the same material, at a cost of TZS 20,000 per kg.
• Labour time to make the clothes varies dependent on type of cloth. A batch of 100 of the Vest cloth takes two hours to make and a batch of 100 of the Boxer cloth takes three hours to make. Labour costs TZS 80,000 per hour.
• Production levels expected next period are 1,000 batches of the Vest cloth and 2,000 batches of the Boxer version.
• Overheads total TZS 400,000,000 per period, which are made up of TZS 100,000,000 for deliveries and TZS 300,000,000 for set up costs. 25 deliveries in total are expected, 80% of which are for the Boxer cloth. The machines will be set up 150 times, including 100 times for the Boxer cloth.

Required:

Compute the cost per unit of Vest and Boxer clothes under:

1. Activity Based Costing (ABC)
2. Traditional costing method if overheads are absorbed on a labour hours basis.

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Tarangire Limited makes three main products, using broadly the same production methods and equipment for each. A conventional product costing system is used at present, although an activity-based costing (ABC) system is being considered. Details of the three products for a typical period are:

Product details:

Direct labour costs TZS 6,000 per hour and production overheads are absorbed on a machine hour basis. The rate for the period is TZS 28,000 per machine hour.

1. You are required to calculate the cost per unit for each product using conventional methods. (4 marks)

2. Further analysis shows that the total of production overheads can be divided as follows:

   Production Overhead Breakdown

   Cost Category	Percentage (%)
   Costs relating to set-ups	35%
   Costs relating to machinery	20%
   Costs relating to materials handling	15%
   Costs relating to inspection	30%
   Total production overhead	100%

   The following activity volumes are associated with the product line for the period as a whole.

   Activity Volumes

   	Product X	Product Y	Product Z	Total
   Number of set-ups	75	115	480	670
   Movements of materials	120	210	870	1,200
   Number of inspections	150	180	670	1,000

   REQUIRED:

   Calculate the cost per unit for each product using ABC principles. (15 marks)



3. You are required to comment on the reasons for any differences in the costs in your answers to (a) and (b).

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Goshen Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts and treatments at the salon are carried out by one of the salon’s three senior stylists. The salon also has two salon assistants and two junior stylists.

Every client attending the salon is first seen by a salon assistant, who washes their hair; next, by a senior stylist, who cuts or treats their hair depending on which service the client wants; then finally, a junior stylist who dries their hair. The average length of time spent with each member of staff is as follows:

The salon is open for eight hours each day for six days per week. It is only closed for two weeks each year. Staff salaries are TZS 40,000,000 each year for each senior stylist, TZS 28,000,000 each year for each junior stylist and TZS 12,000,000 each year for each of the assistants. The cost of cleaning products applied when washing clients’ hair is TZS 1,500 per client. The cost of all additional products applied during a ‘treatment’ is TZS 7,400 per client. Other salon costs (excluding labour and raw materials) amount to TZS 106,400,000 each year.

Goshen Co charges TZS 60,000 for each cut and TZS 110,000 for each treatment.

The senior stylists’ time has been correctly identified as the bottleneck activity.

Required:

1. What is the annual capacity of the bottleneck activity?
2. The salon has calculated the cost per hour to be TZS 42,560. What is the throughput accounting ratio (TPAR) for both services?

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