Question 1

Gash Ltd. manufactures three different products and the following information is available concerning these products together with other operating statistics and information. The company calculates selling price as a mark up on cost of 10%. The company has total overheads of Ksh. 748,800, which are currently allocated on a plant-wide basis using direct labour hours as the absorption base.

Gash Ltd. is considering implementing an Activity Based Costing (ABC) system and has recently identified various cost drivers and assigned costs to related activity cost pools as follows:

Activity: Cost Driver: Cost Pool:

(Material Inspections) (Material Quantity) (320,000)

(Machine Maintenance) (Machine Hours) (316,800)

(Production Scheduling) (Production Set Ups) (112,000)

Additional information is as follows:

Products: Alp Bep Cip

Production (Units): 5,000 8,000 7,500

Prime Cost: Ksh.64,000 Ksh. 64,000 Ksh. 72,000

Machine Hours: 24,000 8,000 16,000

Production Set Ups: 105 305 215

Raw Material (kg): 400,000 240,000 640,000

Labour Hours: 32,000 16,000 48,000

Required:

(a) Using the traditional approach to accounting for overheads, calculate the product cost per unit for each of the three products.

(b) Using the principles of Activity Based Costing, calculate the product cost per unit for each of the three products.

(c) Explain the difference in your answers to (a) and (b) and the potential implications for decision making in Kala Ltd.

Question 2

XYZ Ltd manufactures a range of fast moving consumer goods. One of their most popular products is a luxury toaster which is produced using a mixture of automated and manual production activities. The directors are concerned that although the product appears to be popular, they do not have any detailed information on how profitable it actually is and if there is any risk of the toasters actually creating losses.

Your firm has been engaged to provide some consultancy services on Breakeven Analysis (Cost-Volume-Profit Analysis) and make recommendations to help XYZ Ltd meet its target profits. Having analysed the companys records for the past year and in light of known current market trends, the following estimates and projections have been established:

The unit cost card for a toaster is as follows:

Ksh. Materials 10

Labour 10

Variable overheads 4

Fixed overheads 2246

Fixed costs relating to this product are expected to be Ksh 330,000 per period, and will be absorbed on the budgeted level of production and sales of 15,000 units per period. Opening and closing stocks may be ignored. A selling price of Ksh.57 per toaster has been recommended by the Marketing Director to ensure customer demand can be met.

REQUIRED:

(a) Prepare a break-even chart for toaster production clearly showing the following:

_ Fixed costs

_ Total variable costs

_ Total revenue

_ Total costs

_ Break-even point

(b) Calculate the contribution to sales ratio (to one decimal place) and verify the break-even point (in both revenue and units) already identified in the chart for part (a).

(c) Calculate the budgeted profit for the period.

(d) Calculate the margin of safety for the period, both in units and as a percentage.

(e) Estimate the sales levels (in both revenue and units) required to generate a target profit of 20%.

Kindly help, you're assistance will be highly appreciated. Thank you in advance.