Preparation paper 4

A firm produces five (5) different products from a single raw material. Raw material is avaiable in abundance at TZS 6 per kg. The labour rate is TZS 8 per hour for all products. The plant capacity is 21,000 labour hours for the budget period. Production facilities can produce the products. Factory overhead is TZS 8 per hour, comprising TZS 5.60 per hour fixed overhead and TZS 2.40 per hour as variable overhead. The selling commission is 10% of the product price.

Below is the given information of the company about their activities:

REQUIRED:

1. Suggest a suitable sales mix which will maximize the company’s profit and determine profit that will be earned at selected sales mix. (10 marks)
2. Assume in above situation that 3,500 hours of overtime working is possible. This will result in additional fixed overhead of TZS 20,000, a doubling of labour rates and a 50% increase in variable overhead. Evaluate the impact of overtime working on profitability of a company. (5 marks)
3. In different investments, investors are needed to make analysis among different alternatives available to them to select the best option. During this process, a number of models and tools are used to reach a conclusion.

          REQUIRED:

          In view of the assertion above, with examples, explain the following costs as used in decision-making process:

          (i) Sunk cost (2 marks)

          (ii) Differential (incremental) cost (2 marks)

          (iii) Committed costs (1 mark)

          Total: 20 marks

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Mambosasa Ltd. makes special-purpose equipment according to customer specifications. During the past year, one of its loyal customers, Monga Ltd., ordered specialized equipment to be fabricated for it. Mambosasa Ltd. finished the fabric of the equipment only to be notified that Monga Ltd, had recently gone into liquidation and will not therefore take the equipment.

The original price to Monga Ltd. had been agreed at TZS.182,160,000 which included an estimated normal profit mark up of 10% on total costs. The costs incurred to manufacture the equipment were:

TABLE

After a sustained search, the sales manager of Mambosasa Ltd has managed to locate one potential buyer, Zedwi Systems Ltd, which has indicated that it could buy the equipment if certain conversion work could be carried out.

Mambosasa Ltd's production department has made a preliminary assessment which reveals that conversion would entail extra work cost as follows:

Direct materials TZS.11,520,000.

Direct wages:

Department X: 3 men for 4 weeks at TZS.540,000 per man/week.

Department Y: 1 man for 4 weeks at TZS.432,000 per man/week.

Variable overhead: 20% of direct wages.

Fixed production overhead:

Department X: 75% of direct wages.

Department Y: 25% of direct wages.

The following additional information is provided:

1. In the original equipment, there were three types of basic materials; type P, Q and R.
• Type P could now be sold to a scrap merchant for TZS.10,800,000.
• Type Q could be sold to a scrap merchant for TZS.7,200,000 but it would take 120 hours of labour paid at TZS.5,400 per hour to put it into a suitable condition for sale.
• Type R would need to be scrapped to Mambosasa Ltd. at a cost of TZS.2,160,000.
2. The materials for the conversion are at present in stock. If not needed for the conversion they could be used in the production of another equipment in place of materials that would currently cost TZS.13,680,000.
3. The conversion would be carried out in two departments
   Department X is currently extremely busy and it is estimated that its contribution overheads and profits is TZS.50 for every TZS.1 of labour.
   Department Y has idle staff, for organizational reasons its labour force cannot be reduced below its present level of four employees, all of whom are paid at the standard rate of TZS.432,000 per week.
4. The designs and specification of the original equipment could be sold in a neighboring country for a sum of TZS.5,400,000 if the machine is scrapped.
5. An additional temporary supervisor would have to be engaged for the conversion work at a cost of TZS.3,240,000. It is the company's normal practice to charge supervision as fixed overhead.
6. Monga Ltd. had paid Mambosasa Ltd. a non-returnable deposit of 12% of the selling price.

REQUIRED:

1. Determine the minimum price that Mambosasa Ltd. should accept from Zedwi System Ltd, for the converted equipment and explain clearly how will you arrive at your figure by justifying the relevance of each item. (15 marks)
2. Explain clearly any assumptions that you have made in arriving at your conclusions in (1) above. (5 marks)

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Mazabe Limited manufactures and sell consumer product Zebo. Relevant information relating to the year ended 31st October, 2021 is as hereunder:

Salient features of the business plan for the year ended 31st October 2022 are as hereunder:

1. Sale is budgeted at 21,000 units at the rate of TZS. 11,000 per unit.
2. Cost of raw material is budgeted to increase by 4%
3. A quality control consultant will be hired to check the quality of raw materials. It will help improve the quality of material produced and reduce raw material usage by 5%. Payment will be made to consultant at TZS.20 per kg.
4. The management has negotiated a new agreement with labour union whereby wages would be increased by 10%. The following measures have been planned to improve efficiency:
   • 30% of the savings in labour cost would be paid as bonus.
   • A training consultant will be hired at a cost of TZS.3,000,000 per annum to improve the working capabilities of the workers.
   • On account of the above measure, it is estimated that labour time will be reduced by 15%.
5. Variable production overhead will increase by 5%
6. Fixed production overheads are expected to increase at the rate of 8% on account of inflation. Fixed overheads are allocated on the basis of machine hours
7. The company has a policy of maintaining closing stock at 5% of sales. In order to ovoid stock-outs, closing stock would now be maintained at 10% of sales. The closing stock are valued on FIFO basis.

REQUIRED:

1. Prepare a budgeted profit or loss statement for the year ended 31st October 2022 under variable and absorption costing methods. (14 marks)
2. Reconcile the profit worked out under the two methods. (3 marks)
3. Explain briefly the relative strength of variable costing as compared to absorption costing approaches. (3 marks)

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1. Melendez Transport (MT) is a transport company that has recently won a five-year government contract to provide rail transport services. The company appointed a new Director to take responsibility for the government contract. She has worked in various position in other rail transport companies for a number of years. She has put together a team of managers by recruiting some of her former colleagues and some of MT’s current managers.

   The contract stipulated that the company should prepare detailed budgets for its first year of operations to show how it intends to meet the various operating targets that are stated in the contract. The new director is undecided about whether she should prepare the budget herself or whether she should involve her management team, including the newly recruited managers, in the process.

   REQUIRED:
   Prepare a report, addressed to the new Director that discussed advantages and disadvantages of participative budgeting and make appropriate recommendation. (6 marks)

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2. You have been given following data from the production and sales and billing department of Hashim Manufacturing Company for yearly period:

   Fixed Cost
   Wages and salaries	TZS 950,000,000
   Rent, rates and taxes	TZS 600,000,000
   Depreciation	TZS 740,000,000
   Sundry administration cost	TZS 650,000,000

   Semi-variable Cost (at 50% of capacity)
   Maintenance and repairs	TZS 350,000,000
   Indirect labour	TZS 790,000,000
   Sales department salaries	TZS 380,000,000
   Sundry administration cost	TZS 280,000,000

   Variable Cost (at 50% of capacity)
   Materials	TZS 2,170,000,000
   Labour	TZS 2,040,000,000
   Other variable costs	TZS 790,000,000

   Your analysis of costs from data for several years reveals that the fixed cost remains constant at all levels of production; semi-variable cost remains constant between 45% and 65% of capacity, increasing by 10% between 65% and 80% capacity and 20% between 80% and 100% capacity.

   Sales at various levels are:

   Level	TZS
   50% capacity	10,000,000,000
   60% capacity	12,000,000,000
   75% capacity	15,000,000,000
   90% capacity	18,000,000,000
   100% capacity	20,000,000,000

   REQUIRED:

   1. Prepare a flexible budget for the year and forecast the profit at 60%, 75%, 90% and 100% capacity. (11 marks)
   2. Comment on the usefulness of flexible budget to the management Hashimu Manufacturing Company. (3 marks)

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Tukio Ltd manufactures a single product and has provide you with the following information:

Budget data:

No operating or closing stock

Variances resulting from operations during the period are provided in the table below:

REQUIRED:

1. Prepare the standard cost sheet for the product (4 marks)
2. Prepare a statement showing total standard cost for actual output (4 marks)
3. Prepare actual cost sheet for the period (4 marks)
4. Prepare a statement reconciling budgeted profit with actual profit for the period (8 marks)

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