Assignment - 1. F5 - Performance Management

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1 Assignment - 1 F5 - Performance Management Mr. Ghan Name - Student ID - ID - Date Submitted - Date Returned - MARK - % MARKER COMMENTS (including areas for improvement)

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3 1. The following statements have been made about activity based costing. (1) Unlike traditional absorption costing, ABC identifies variable overhead costs for allocation to product costs. (2) ABC can be used as an information source for budget planning based on activity rather than incremental budgeting. 2. The following statements have been made about activity based costing. (1) Implementation of ABC is unlikely to be cost-effective when variable production costs are a low proportion of total production costs. (2) In a system of ABC, for costs that vary with production levels, the most suitable cost driver is likely to be direct labour hours or machine hours. 3. The following statements have been made about activity based costing. (1) Activity based costs are not the same as relevant costs for the purpose of short-run decision-making. (2) Activity based costing is a form of absorption costing. Page 3

4 4. Product X is made in a production process where machine time is a bottleneck resource. One unit of Product X requires 0.1 machine hours. The costs and selling price of Product X are as follows: $ Materials 6 Labour (0.25 hours) 3 Other factory costs Sales price Profit In a system of throughput accounting, what is the return per factory hour? a) $90 b) $60 c) $10 d) $4 5. The following statements have been made about throughput accounting. (1) When throughput accounting (TA) is used, the aim should be to have sufficient inventories to overcome bottlenecks in production. (2) Throughput accounting is based on the assumption that in the short run, most factory costs, other than materials, are fixed. 6. The following statements have been made about life cycle costing. (1) Life cycle costing can be applied to products with a short life cycle. (2) Product life cycle costing is not well-suited for use within budgetary control systems. Page 4

5 7. The following information relates to the expected cost of a new product over its expected three-year life. Year 0 Year 1 Year 2 Year 3 Units made and sold R&D costs $ $90000 Production costs Variable per unit $30 $25 $20 Fixed costs $ $ $ Selling and distribution costs Variable per unit $6 $5 $4 Fixed costs $ $ $ Customer service costs Variable per unit $4 $3 $2 What is the expected average life cycle cost per unit? a) $35.95 b) $46.25 c) $48.00 d) $ The following statements have been made about target costing. (1) Target costing makes the business look at what competitors are offering at an early stage in the new product development process. (2) Cost control is emphasized at the new product design stage so any engineering changes must happen before production starts. 9. The following statements have been made about target costing. (1) Target costing is inappropriate for a new product that has no existing market. (2) It may be acceptable for a target cost for a new product to be exceeded during the growth stage of its life cycle. Page 5

6 10. Which one of the following environmental management accounting techniques would include an assessment of clean-up costs and costs of decontamination when a project comes to an end? a) Environmental activity based costing b) Flow cost accounting c) Input-output analysis d) Life cycle costing 11. Which of the following statements about relevant costing is/are correct? (1) An opportunity cost is defined as the relevant cost of taking a business opportunity. (2) Business decisions should be taken on the basis of whether they improve profit or reduce costs. is correct is correct is correct are correct 12. A company produces three components on the same machine. The components are used in the manufacture of a finished product. The budget for next year indicates a requirement for 3000 units of each component, but only of machine time will be available. Additional components and be purchased from an external supplier to meet any production shortfall. Component Machine hours per unit Variable production cost per unit Purchase price from external supplier $ per unit $ per unit A B C What is the minimum total variable cost at which the 3000 units of all three components can be obtained? a) $ b) $ c) $ d) $ Page 6

7 13. The following budgeted data has been prepared for a company that manufacturers four products. Product W X Y Z $ per unit $ per unit $ per unit $ per unit Sales price Variable cost Budgeted sales units Direct labour hours per unit If the total available direct labour hours in the period is hours and the company plans to maximise profit, which products should it make and sell in the period? a) W, X and Y b) W, X and Z c) W, Y and Z d) Y and Z only 14. A company is budgeting to sell units of its product next year at a price of $15 per unit. Fixed costs will be $ and the variable cost/sales ratio is 44%. What is the breakeven sales revenue figure and what is the margin of safety in the budget? a) Breakeven $ , margin of safety 26.7% b) Breakeven $ , margin of safety 36.4% c) Breakeven $ , margin of safety 6.7% d) Breakeven $ , margin of safety 7.1% 15. The following statements have been made about multi-product profit-volume charts. (1) A multi-product profit-volume chart can be drawn only if a constant sales mix is assumed. (2) A multi-product profit-volume chart can be drawn that shows the contribution of each product to the breakeven sales volume. Page 7

8 16. Linacre Co Linacre Co operates an activity based costing system and has forecast the following information for next year. Cost pool Cost Cost driver Number of drivers Production set-ups $ Set-ups 300 Product testing $ Tests 1500 Component supply and storage $25000 Component orders 500 Customer orders and delivery $ Customer orders 1000 General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be $ and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be hours. Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders of 50 units per order. The company holds no inventories of Product ZT3 and will need to produce the order requirement in production runs of 900 units. One order for components is placed prior to each production run. Four tests are made during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product ZT3: Component cost: Direct labour: Profit mark up: $1.00 per unit 10 minutes per unit at $7.80 per hour 40% of total unit cost Required: (a) Calculate the activity based recovery rates for each cost pool. (b) Calculate the total unit cost and selling price of Product ZT3. (2 marks) (8 marks) (10 marks) Page 8

9 17. Fit Co Fit Co specialises in the manufacture of a small range of hi-tech products for the fitness market. They are currently considering the development of a new type of fitness monitor, which would be the first of its kind in the market. It would take one year to develop, with sales then commencing at the beginning of the second year. The product is expected to have a life cycle of two years, before it is replaced with a technologically superior product. The following cost estimates have been made. Year 1 Year 2 Year 3 Units manufactured and sold Research and development costs $ Product design costs $ Marketing costs $ $ $ Manufacturing costs: Variable cost per unit $40 $42 Fixed production costs $ $ Distribution costs: Variable cost per unit $4 $4.50 Fixed distribution costs $ $ Selling costs: Variable cost per unit $3 $3.20 Fixed selling costs $ $ Administration costs $ $ $ Note: you should ignore the time value of money. Required: (a) Calculate the life cycle cost per unit. (6 marks) (b) Briefly discuss the benefits of life cycle costing for pricing, performance management and decision-making. (4 marks) (10 marks) Page 9

10 18. Yam Co Yam Co is involved in the processing of sheet metal into products A, B and C using three processes, pressing, stretching and rolling. Like many businesses Yam tough price competition in what is a mature world market. The factory has 50 production lines each of which contain the three processes: Raw material for the sheet metal is first pressed then stretched and finally rolled. The processing capacity varies for each process and the factory manager has provided the following data: Processing time per metre in hours Product A Product B Product C Pressing Stretching Rolling The factory operates for 18 hours each day for five days per week. It is closed for only two weeks of the year for holidays when maintenance is carried out. On average one hour of labour is needed for each of the hours of factory time. Labour is paid $10 per hour. The raw materials cost per metre is $3.00 for product A, $2.50 for product B and $1.80 for product C. Other factory costs (excluding labour and raw materials) are $ per year. Selling prices per metre are $70 for product A, $60 for product B and $27 for product C. Yam carries very little inventory. Required: (a) Calculate the throughput accounting ratio (TPAR) for each product assuming that the bottleneck process is fully utilised. (7 marks) (b) Assuming that the TPAR of product C is less than 1, suggest how Yam could improve the TPAR of product C. (3 marks) (10 marks) Page 10