As a cost and management accountant you always advocate about the use of cost volume profit (CVP) analysis and activity based costing in different cost management scenario. Thats why management of the PQR Limited wants you to explain the following issues for their next cost management move for the organisation.

Required:

1. What is a cost driver? What is the cost driver in conventional cost volume profit (CVP) analysis? How is the cost driver measured in conventional CVP analysis? (7 marks)

2. In activitybased costing, costs are classified into unit level, batch level, product level and facility level. How these categories are typically handled in CVP analysis, where there are only two categories available: fixed or variable? (7 marks)

3. In an environment where activitybased costing is necessary and appropriate, is the relevance of conventional CVP analysis enhanced or diminished? Explain. (7 marks)

4. Explain the additional limiting assumption of using CVP analysis under activitybased costing.

(7 marks)

5. PQR Limited makes major household appliances such as refrigerators, stoves and dishwashers. Sales are heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes and up market units. PQR generally makes two levels of each product: the economy model (fully functional, but with few special features) and the prestige model (with the most popular special features). PQR Limited assumes a product mix of 40 per cent economy and 60 per cent prestige. Describe how the change in the percentage of rental units in housing starts could create a problem with the stable product mix assumption. (7 marks)