INSTRUCTIONS: TIME: 3 HOURS Answer ALL Questions in the Answer Booklet. (100 MARKS) QUESTION 1 (25 marks) Truffle Company (TC) makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labor for each batch is RM6.00 and the standard labor time is half an hour. In November, TC had budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers were paid for their actual hours worked. The actual total labor cost for November was RM136,800. The production manager at TC has input into the budgeting process. At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting at 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept the 5% pay cut with immediate effect. At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented immediately and made the chocolates more difficult to shape. When recipe changes such as these are made, it takes time before the workers become used to working with the new ingredient mix, making the process 20% slower for at least the first month of the new operation. The standard costing system is only updated once in June and no changes ever made to the system outside of this. Required: a) Calculate the total labor rate and total labor efficiency variances for November, based on the standard cost provided above. (7 marks) b) Analyse the total labour rate and total labour efliciency variances into component parts for planning and operational variances in as much detail as the information allows. (15 marks) c) Access the performance of the production manager for the month of November. (3 marks) ACC72210/June 2018 Page 2 of 6 3/6 QUESTION 2 (25 marks) Some commentators argue that: 'With continuing pressure to control costs and maintain efficiency, the time has come for all public sector organizations to embrace zero-based budget. There is no longer a place for incremental budgeting in any organization, particularly public sector ones, where zero-based budgeting is far more suitable anyway Required: a) Discuss the particular difficulties encountered when budgeting in public sector organizations compared with budgeting in private sector organizations. Drawing comparisons between the two types of organizations. (4 marks) b) Explain the terms 'incremental budgeting' and 'zero-based budgeting' (4 marks) c) State the main stages involved in preparing zero-based budgets. (6 marks) d) Discuss the view that there is no longer a place for incremental budgeting in any organizations, particularly public sector ones,' highlighting any drawbacks of zero-based budgeting that need to be considered. (11 marks) QUESTION 3 (25 marks) Harum Sdn Bhd (HSB) manufactures and sells its standard perfume by blending a secret formula of aromatic oils with diluted alcohol. The oils are produced by another company following a lengthy process and are very expensive. The standard perfume is highly branded and successfully sold at a price of RM39.98 per milliliters (ml). HBB is considering processing some of the perfume further by adding a hormone to appeal to members of the opposite sex. The hormone to be added will be different for the male and female perfumes. Adding hormones to perfume is not universally accepted as a good idea as some people have health concerns. On the other hand, market research carried out suggests that a premium could be charged for perfume that can 'promise the attraction of a suitor. The market research has cost RM3,000. Data has been prepared for the costs and revenue expected for the following month (a test month) assuming that a part of the company's output will be further processed by adding the hormones. The output selected for further processing is 1,000 litres, about a tenth of a company's normal monthly output of this, 99% is made up of diluted alcohol which cost RM20 per litre. The rest is a blend of aromatic oils costing RM18,000 per litre. The labour required to ACCT2210 June 2018 Page 3 of 6 QUESTION 4 (25 marks) The Ruby Company has been offered a seven-year contract to haul munitions to the government. Since the contract would represent new business, the company would have to purchase several new heavy-duty trucks at a cost of RM350,000 if the contract were accepted. Other data relating to the contract follow: Annual net cash receipts (before tax) from the contract Cost of replacing the motors in the trucks in four years Salvage value of the trucks at termination of the contract RM105,000 RM45,000 RM18,000 With the motors being replaced after four years, the trucks will have a useful life of seven years. The company will sell several old and fully depreciated trucks for a total selling price of RM16,000 in order to raise money to purchase the new truck. The company requires a 16% after-tax return on all equipment purchases. The tax rate is 30%. For tax purposes, the company computes depreciation deduction assuming zero salvage value and using straight- line depreciation. The new trucks would be depreciated over five years. Required: Compute the net present value of this investment opportunity. Would you recommend that the contract be accepted? Explain your answer. (25 marks) *** END OF QUESTIONS *** ACCT2210 June 2018 Page 5 of 6 produce 1,000 litres of the basic perfume before any further processing is 2,000 hours at a cost of RM15 per hour. of the output selected for further processing, 200 liters (20%) will be for male customers and 2 litres of hormones costing RM7,750 per litre will then be added. The remaining 800 litres (80%) will be for female customers and 8 litres of hormones will be added, costing RM12,000 per litre. In both cases the adding of the hormones adds to add to the overall volume of the products as there is no resulting processing loss. HBB has sufficient existing machinery to carry out the test processing, The new processes will be supervised by one of the most experienced supervisors currently employed by HBB. His current annual salary is RM35,000 and it is expected and expected that he will spend 10% of his time working on the hormone adding process during the test month. This will be split evenly between the male and female version of the product Extra labour will be required to further process the perfume, with an extra 500 hours for the male version and 700 extra hours for the female version of the hormone-added product. Labour is currently fully employed, making the standard product. New labour with the required skills will not be available at short notice. HBB allocates fixed overhead at the rate of RM25 per labour hour to all products for the purposes of reporting profits. The sales prices that could be achieved as one-off monthly promotion are RM75.00 per 100 ml for male version and RM59.50 per 100 ml for female version. Required: a) Outline the financial and other factors that HBB should considered when making a further processing decision. Note: Calculation is not required. (8 marks) b) Evaluate whether HBB should experiment with the hormone adding process using the data provided. Provide a separate assessment and conclusion for the male and the female versions of the product. (14 marks) c) HBB is considering outsourcing the production of the standard perfume. Outline the main factors it should consider before making such a decision. (3 marks) ACCT2210/June 2018 Page 4 of 6 INSTRUCTIONS: TIME: 3 HOURS Answer ALL Questions in the Answer Booklet. (100 MARKS) QUESTION 1 (25 marks) Truffle Company (TC) makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labor for each batch is RM6.00 and the standard labor time is half an hour. In November, TC had budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers were paid for their actual hours worked. The actual total labor cost for November was RM136,800. The production manager at TC has input into the budgeting process. At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting at 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept the 5% pay cut with immediate effect. At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented immediately and made the chocolates more difficult to shape. When recipe changes such as these are made, it takes time before the workers become used to working with the new ingredient mix, making the process 20% slower for at least the first month of the new operation. The standard costing system is only updated once in June and no changes ever made to the system outside of this. Required: a) Calculate the total labor rate and total labor efficiency variances for November, based on the standard cost provided above. (7 marks) b) Analyse the total labour rate and total labour efliciency variances into component parts for planning and operational variances in as much detail as the information allows. (15 marks) c) Access the performance of the production manager for the month of November. (3 marks) ACC72210/June 2018 Page 2 of 6 3/6 QUESTION 2 (25 marks) Some commentators argue that: 'With continuing pressure to control costs and maintain efficiency, the time has come for all public sector organizations to embrace zero-based budget. There is no longer a place for incremental budgeting in any organization, particularly public sector ones, where zero-based budgeting is far more suitable anyway Required: a) Discuss the particular difficulties encountered when budgeting in public sector organizations compared with budgeting in private sector organizations. Drawing comparisons between the two types of organizations. (4 marks) b) Explain the terms 'incremental budgeting' and 'zero-based budgeting' (4 marks) c) State the main stages involved in preparing zero-based budgets. (6 marks) d) Discuss the view that there is no longer a place for incremental budgeting in any organizations, particularly public sector ones,' highlighting any drawbacks of zero-based budgeting that need to be considered. (11 marks) QUESTION 3 (25 marks) Harum Sdn Bhd (HSB) manufactures and sells its standard perfume by blending a secret formula of aromatic oils with diluted alcohol. The oils are produced by another company following a lengthy process and are very expensive. The standard perfume is highly branded and successfully sold at a price of RM39.98 per milliliters (ml). HBB is considering processing some of the perfume further by adding a hormone to appeal to members of the opposite sex. The hormone to be added will be different for the male and female perfumes. Adding hormones to perfume is not universally accepted as a good idea as some people have health concerns. On the other hand, market research carried out suggests that a premium could be charged for perfume that can 'promise the attraction of a suitor. The market research has cost RM3,000. Data has been prepared for the costs and revenue expected for the following month (a test month) assuming that a part of the company's output will be further processed by adding the hormones. The output selected for further processing is 1,000 litres, about a tenth of a company's normal monthly output of this, 99% is made up of diluted alcohol which cost RM20 per litre. The rest is a blend of aromatic oils costing RM18,000 per litre. The labour required to ACCT2210 June 2018 Page 3 of 6 QUESTION 4 (25 marks) The Ruby Company has been offered a seven-year contract to haul munitions to the government. Since the contract would represent new business, the company would have to purchase several new heavy-duty trucks at a cost of RM350,000 if the contract were accepted. Other data relating to the contract follow: Annual net cash receipts (before tax) from the contract Cost of replacing the motors in the trucks in four years Salvage value of the trucks at termination of the contract RM105,000 RM45,000 RM18,000 With the motors being replaced after four years, the trucks will have a useful life of seven years. The company will sell several old and fully depreciated trucks for a total selling price of RM16,000 in order to raise money to purchase the new truck. The company requires a 16% after-tax return on all equipment purchases. The tax rate is 30%. For tax purposes, the company computes depreciation deduction assuming zero salvage value and using straight- line depreciation. The new trucks would be depreciated over five years. Required: Compute the net present value of this investment opportunity. Would you recommend that the contract be accepted? Explain your answer. (25 marks) *** END OF QUESTIONS *** ACCT2210 June 2018 Page 5 of 6 produce 1,000 litres of the basic perfume before any further processing is 2,000 hours at a cost of RM15 per hour. of the output selected for further processing, 200 liters (20%) will be for male customers and 2 litres of hormones costing RM7,750 per litre will then be added. The remaining 800 litres (80%) will be for female customers and 8 litres of hormones will be added, costing RM12,000 per litre. In both cases the adding of the hormones adds to add to the overall volume of the products as there is no resulting processing loss. HBB has sufficient existing machinery to carry out the test processing, The new processes will be supervised by one of the most experienced supervisors currently employed by HBB. His current annual salary is RM35,000 and it is expected and expected that he will spend 10% of his time working on the hormone adding process during the test month. This will be split evenly between the male and female version of the product Extra labour will be required to further process the perfume, with an extra 500 hours for the male version and 700 extra hours for the female version of the hormone-added product. Labour is currently fully employed, making the standard product. New labour with the required skills will not be available at short notice. HBB allocates fixed overhead at the rate of RM25 per labour hour to all products for the purposes of reporting profits. The sales prices that could be achieved as one-off monthly promotion are RM75.00 per 100 ml for male version and RM59.50 per 100 ml for female version. Required: a) Outline the financial and other factors that HBB should considered when making a further processing decision. Note: Calculation is not required. (8 marks) b) Evaluate whether HBB should experiment with the hormone adding process using the data provided. Provide a separate assessment and conclusion for the male and the female versions of the product. (14 marks) c) HBB is considering outsourcing the production of the standard perfume. Outline the main factors it should consider before making such a decision. (3 marks) ACCT2210/June 2018 Page 4 of 6