Question 1 (35 marks). Good News Ltd manufactures a single product. Its fiscal year ends on 31 December. There was no opening inventory in 2019. The following information was extracted from its books: Units produced Units sold 2019 32,000 25,000 Cost and price data for 2019: Selling price per unit Direct materials cost per unit produced Direct labour cost per unit produced Variable manufacturing overheads per unit sold $110 $9 $8 $13 The company also incurred fixed manufacturing overheads of $96,000 per annum in 2019. Non-manufacturing overheads are as follows: Variable non-manufacturing overheads Fixed non-manufacturing overheads $12 per unit sold $70,000 per annum Required: (a) Prepare an operating statement for the year ended 31 December 2019 using: (i) Absorption costing (ii) Marginal costing (16 marks) (15 marks) (b) Why marginal costing is normally be used for making business decision? Explain. (4 marks) Question 2 (34 marks) Universal Toys Company is planning to launch a new toy to the market. Below is the expected production and operating costs on the new toy: Selling Price $350 per unit Direct materials $120 per unit Direct labor $180 per unit Electric power $3.20 per unit Supervisor salaries $25,000 per year Advertising and Selling Expenses $120,000 per year Salesperson salaries (5 persons) $360,000 per year The annual expected sales of the new toy is 10,000 units. The management of the company is deciding whether Static or Flexible budget should be used for evaluating the operating performance of this new toy. If flexible budget to be adopted, the following expenses will be calculated based on the expected annual sales volume: Advertising and Selling Expenses $10 per unit Salesperson salaries (5 persons): - Basic Salary per person $15,000 per year - Total Commission $20 per unit Required: (a) Prepare a Static and Flexible budget of Statement of Operation for Universal Toys (24 marks) Company. (b) Which type of budgeting method should be adopted for evaluating the operating (10 marks) performance of the new toy? Explain. Question 3 (17 marks) A company could buy a component for $5 per unit from an outside supplier that costs the company $6 per unit to produce. The $6 unit cost of producing a normal required volume of 10,000 units per month was determined as follows: $ Direct materials 8,000 Direct labour 12,500 Variable overhead 10,000 Fixed overhead per month 29,500 Total cost of manufacturing 10,000 units per month 60,000 Average manufacturing cost per unit 6.0 A review of operations indicated that if the production of this component was discontinued, all the cost of direct materials and direct labour plus $9,000 of variable overhead would be eliminated. In addition, $2,500 of the fixed overhead would be eliminated. Required: Prepare a Differential Cost Statement to determine whether the component should be manufactured by the company or bought from outside suppliers. (17 marks) Question 4 (14 marks) Robin Company purchased and used 700 pounds of direct materials to produce a product with a 500 pound standard direct materials requirement. The standard materials price is $3.00 per pound. The actual materials price was $2.00 per pound. Required: (a) Determine the following: (i) direct material price variance (ii) direct material quantity variance (iii) total direct material variance (2 marks) (2 marks) (2 marks) (b) Is the company facing any problem? Explain and suggest suitable action to be taken (8 marks) by the company
