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1 FEEDBACK TUTORIAL LETTER 1 st SEMESTER 2017 ASSIGNMENT 2 COST AND MANAGEMENT ACCOUNTING 3A CMA311S 1

2 ASSIGNMENT 02 SOLUTIONS QUESTION 1 a) Order Cost 56,250 = 50 orders 1,125 = 50 x $10 = $500 (25 Marks) Holding Cost 1, 125 = (Average Inventory) x $0.50 = $ Total holding and ordering costs = $500 + $ = $ ( = 1 mark each, total = max 4 marks) b) EOQ = Where d = annual demand o ordering cost per order cc carrying costs per unit per year EOQ = = 1,500 units This is the order quantity that minimizes ordering and holding costs. ( = 1 mark each, total = 6 marks)

3 c) Costs at EOQ Order Cost Holding Cost 56,250 = 37.5 orders 1500 = 37.5 x $10 = $ = 750 (Average Inventory) x $0.50 = $375 Comparison d) At EQQ At Current Difference Ordering Costs Holding costs (93.75) Total costs ( = 1 mark each, total = max 6 marks) Existing Cost without discount N$ Material 56,250 x $ , Ordering Holding , Revised Cost with dsicount Material $196,875 x 95% 187, Order (56, ) x $ Holding (5625 2) x $0.50 1, , Therefore availing of the discount is financially worthwhile. There is a saving of $9, (Alternatively the student could look at the impact on each cost). ( = 1 mark each, total = max 9 marks)

4 QUESTION 2 (30 Marks) a.) The financial consequences would be as follows; If the Oshakati depot is closed the sales revenue of N$1.5 million will be forgone. However, tyres cost of N$ , wages and salaries of N$ and 15% of overheads (15% X N$ = N$64 500) would no longer be incurred. (2 marks) That is, the business would forgo contribution of; N$ Sales Tyres cost ( ) Wages and Salaries ( ) Overheads ( ) Contribution foregone (2 marks) Marks should be awarded to alternative calculation that justify that the branch should not be closed. Eighty five percent of the overheads will still be incurred, that is N$ If the depot is kept open, the depot would contribute N$ towards these overheads. If the depot were to be closed the loss would be N$ rather than N$ if it is kept open. Therefore the depot should be kept open (3 marks) b) Windhoek Oshakati Tsumeb Sales N$ N$ N$ Selling price N$25 N$25 N$25 Sale of tyres units units units This is in the ratio of 8:6:10 Contribution per tyre sold will be N$ N$ N$ Selling price Tyres cost (N$ / units) (N$15 x 80%) Wages and Salaries (N$ x 80%)/ units 2.50 (N$ x 80%)/ units 2.93 (N$ x 80%)/ units 2.86 Variable overheads: (N$ x 25%)/ units 1.41 (N$ x 15%)/ units 1.07 (N$ x 20%)/ units 1.20

5 Contribution 6.09 (3marks) 6.00 (3 marks) 8.94 (3 marks) Weighted contribution; Windhoek (8/24) x 100 x 6.09 = N$2.01 Oshakati (6/24) x 100 x 6.00 = N$1.50 Tsumeb (10/24) x 100 x 8.94 = N$3.75 Weighted contribution = N$7.26 ( Any2 above max 2 marks) Budgeted fixed costs N$ Windhoek = 75% X = Oshakati = 85% X = Tsumeb = 80% X = Total Fixed costs (1 mark) Break-even point = N$ /$7.26 = tyres (1 mark) c) Three non-financial issues The possible redundancies this will affect the morale of the employees in other depots Possible impact on brand name the business may be viewed by customers, suppliers and general public as failing Possible erosion of market share closing the depot will increase the competitor s presence in the market Possible bad press publicity (Any three and 2 marks for each explained) d) Costs are assumed to behave in a linear fashion. Unit variable costs are assumed to be constant and fixed costs are assumed not to change. This is not true because in reality there are semi variable and semi fixed costs which do not behave that way. Sales revenue is assumed to be constant for each unit sold. This is unrealistic because of the necessity to reduce selling price to achieve higher volumes. It assumes there are no inventories which is not realistic. It assumes activity is the only factor affecting costs and factors such as inflation are ignored. The analysis only works in short term. It assumes that as long as an activity is above breakeven point then it s profitable. This is not realistic because changes in cost and revenue pattern may result in breakeven points after which losses are made

6 (Any 4 and I mark for each. Other assumption outside this should be merited) QUESTION 3 (25 MARKS) (a) Activity Based Costing (ABC) is a cost management approach that links resource consumption to activities that a company performs and the assigns those activities and their associated costs to customers or product lines. ABC recognises that it is activities which drive costs and aims to control cost drivers by charging overheads to cost units on the basis of benefits received from the particular indirect activity e.g. ordering, planning etc. ABC seeks to attribute overheads to product costs on a realistic basis than simply production volume and also tries to show the relationship between overhead costs and the activities that cause them Activity based budgeting (ABB) is a planning and control system which seeks to support the objective continuous improvement. It is a development of traditional budgeting systems based on activity analysis techniques. ABB reviews activities to ensure they are adding value and focuses on relevant performance measures, by linking strategic objectives of the organisation with the objectives of individual activities. ( = 1 mark each, total 6 marks) (b) (i) (ii) Cost Pool Cost Driver Act. Based O.A.R. Machining Machine hours N$1.95 per machine hour x 2 Stores No. of orders issued N$275 per order issued x 2 Quality Assurance Budgeted production units N$9 per unit x 2 Maintenance No. repair hours N$30 per repair hour x 2 (c) x 2 = 8 marks for OAR and 4 marks for four cost driver identified Total = 12 marks Dept. 1 Dept. 2 Dept. 3 Total N$ N$ N$ N$ Machining 780, , ,000 1,755,000 Stores 137, , , ,500

7 Quality Assurance 180,000 90, , ,000 Maintenance 180,000 42, , ,000 Total Overhead Cost 1,277, , ,000 3,170,500 Budgeted production units 20,000 10,000 15,000 45,000 Overhead Cost per unit N$63.88 N$99.20 N$60.06 ( = ½ mark each, max 7 marks) mark up to 14/2=7 END OF ASSIGNMENT TWO SOLUTION TOTAL= 80 MARKS

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