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QUESTION 1

Triple Products Ltd manufactures three products Alpha, Beta and Gamma. At present the company uses a traditional absorption costing system to establish the costs of production. Budgeted production data for the next period is as follows: Alpha Beta Gamma Production output (units) 500 400 200 Material per unit @ 5.00 per kg 10kg 20kg 16kg Labour per unit @ 9.00 per hour 2hrs 2hrs 3hrs Machine time per unit 2hrs 1.5hrs 2hrs Budgeted production overheads for the period are 76,300 absorbed on a machine hour basis. Further investigation of this production overhead figure, has revealed the following activities and related overhead costs: Activities Costs () Product inspection 32,000 Machine set-up 16,000 Machine maintenance 12,000 Product despatch 8,200 Material handling 8,100 76,300 Other information (1) Orders budgeted: Alpha 10 orders; Beta and Gamma 5 orders each. Each order is expected to require one machine set up and two inspections. (2) Machine maintenance is carried out regularly based on a predetermined number of machine running hours. (3) Each product is packed and despatched in crates containing the following number of products per crate: Alpha 20 units, Beta 50 units and Gamma 25 units. The number of crates used influences product despatch costs. (4) Material handling costs are influenced by the quantity of material used. REQUIRED

(a) Calculate the production cost of one unit of each product using:

(i) Traditional absorption costing (6 marks)

(ii) Activity based costing. (10 marks)

(b) Explain the meaning of the term cost driver. Your explanation should include 2 examples to illustrate your answer. (4 marks)

QUESTION

2 Easy Travel is a transport business operating six passenger vehicles. The business, owned solely by T Hope and located in rented premises, employs one full time administration officer. T Hope acts as Transport Manager and drivers are contracted from an agency on the basis of individual jobs. The business operates A vehicles and Type B vehicles. It is budgeted that each vehicle will complete 48,000 km per year. The following additional information is provided regarding the business: Vehicle data A Type B Number of vehicles 2 4 Number of seats per vehicle 48 15 Number of tyres per vehicle 6 4 Vehicle costs Purchase price per vehicle 60,000 23,000 Trade-in value per vehicle (after 5years) 2,800 1,000 Road fund licence (per vehicle per year) 800 400 Insurance (per vehicle per year) 1,600 800 Servicing (every 12,000 km per vehicle) 300 per service 200 per service Tyres (renewed per 48,000 km) 200 per tyre 100 per tyre Fuel consumption (at 0.80 per litre) 1 litre per 3 km 1 litre per 5 km Depreciation is charged at 20% annually, in equal instalments, on the purchase price of each vehicle less the cost of the tyres and less its trade-in value after 5 years. Office costs Rent 12,000 per year Insurance 7,400 per year Administration 18,000 per year T Hope (Transport Manager) 25,000 per year Office costs are apportioned to vehicle types on the total number of passenger seats. Agency driver costs Cost per day A = 80 Type B = 60 Jobs are charged with agency driver costs directly according to time taken. Both vehicle costs and office costs are absorbed into the cost of jobs at a predetermined rate per kilometre for each type of vehicle REQUIRED (a) For each vehicle type calculate the: (i) vehicle cost absorption rate per kilometre (8 marks) (ii) office cost absorption rate per kilometre. (6 marks)

The following information relates to a job enquiry: (1) A local club requires transport for 28 passengers to and from a sporting venue. (2) The distance from the local club to the sporting venue is 200 km. (3) both types of vehicle are available for the job. (4)

The job can be completed in one day.

REQUIRED

(b) Calculate the cost to transport the 28 passengers to and from the sporting venue assuming:

(i) A vehicle is used (ii) Type B vehicles are used. (6 marks)

QUESTION 3

A company plans to sell 120,000 units of its single product, in a period at a selling price of 15 per unit. Fixed overheads and net profit for the period are expected to be 440,000 and 520,000 respectively using the existing production process. The company is considering a change to its production process. The change would increase the fixed overheads to 700,000 in the period and reduce the variable costs to 5 per unit. The selling price will remain constant regardless of production process. Production capacity in both the existing and changed processes would be 150,000 units in the period.

REQUIRED

(a) For the existing production process, calculate for the period the expected:

(i) Breakeven point in units (4 marks) (ii) margin of safety as a % of sales (1 mark) (iii) contribution sales ratio. (1 mark)

(b) Advise management, using supporting calculations, whether to change the production process if sales are 120,000 units in the period. (5 marks)

(c) Advise management, using supporting calculations, of the sales level (units) at which the changed process would become more profitable than the existing process. (5 marks) (d) Identify and explain 2 limitations of break-even analysis. (4 marks)

(d) Limitations of break-even analysis (i) It assumes selling price remains constant regardless of how many products are sold. (ii) It assumes variable costs increase in a linear fashion. In practice, economies of scale, may mean variable costs do not rise as fast as output. An additional acceptable answer could be: (iii) It assumes fixed costs remain constant. However, to achieve higher outputs, additional costs may be necessary thus producing stepped fixed costs.