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CA3 (MAC61US-MA260US) DUE 25 SEPTEMBER

Questions 1

Access Ltd manufactures and sells a single product X, the standard unit cost details

of which are as follows:

N$

Direct Materials 65

Direct Wages 45

Variable Overhead 30

The Budgeted monthly fixed production overheads are $45,000. The budgeted

output per month is 3,000 units.

The product has a standard selling price of $200 per unit.

The actual production and sales for the two months were:

April May

Units Units

Sales 3,200 3,300

Production 3,000 3,100

There was an opening stock of 500 units on 1st April.

Required:

(a) Calculate the standard cost and profit for one unit of X. (5 marks)

(b) Prepare the income statements for each April and May, using:

(i) Marginal costing

(ii) Absorption costing (16 marks)

(c) Advise the management team of Access Ltd on the best costing method.

(4 marks)

(Total 25 marks)

Question 2

Omake Ltd. is considering purchasing or investing in a new machine, either machine

X or machine Y. However, a condition of capital rationing exits in the company

(meaning due to availability of funds they can either invest in machine X or machine

Y and not both), and hence the need for capital budgeting appraisal.

Both machines would have an expected life of five years and would be depreciated

on a straight line basis. The following information is available:

Machine X Machine Y

Initial cost ($) 45 000 56 000

Residual value 5 000 6 000

Machine X Machine Y

Accounting profits ($) ($)

Year 1 6 000 5 000

Year 2 7 000 6 000

Year 3 7 000 8 000

Year 4 4 000 7 000

Year 5 3 000 4 000

Better Limited cost of capital is 10% per annum for which the discount factors are:

Year 1 0.909

Year 2 0.826

Year 3 0.751

Year 4 0.683

Year 5 0.621

Required:

(a) For both machines X and Y calculate:

(i) The accounting rate of return (based on average capital employed). (4 marks)

(ii) Payback period (4 marks)

(iii)Net present value (NPV) (10 marks)

(b) Recommend with reasons which machine should be purchased. (3 marks)

(c) State the disadvantages of both the accounting rate of return and the payback

period as