QUESTION ONE - ANSWER ALL PARTS PART A Oven Pies Ltd plans to buy a delivery van to distribute pies from the bakery to various neighborhood shops. It will use the van for three years. The expected costs are as follows: 15,000 New Van Trade-in price after three years 600 Service costs, every 6 months 450 Spare parts, per 10,000 miles Four new tyres, every 15,000 miles Vehicle license and insurance, per year 360 1,200 800 Fuel, per litre* *Fuel consumption is 1 litre every five miles 0.70 REQUIRED: (a) Prepare a table of costs for mileages of 5,000, 10,000, 15,000, 20,000 and 30,000 miles per annum, distinguishing variable costs from fixed costs. (b) Calculate the average cost per mile at each of the mileages set out in (a). (c) Write a short commentary on the behaviours of costs as annual mileage increase. (20 Marks) PART B Mateo Company's average cost per unit is 1.425 per unit at the 16,000-unit level of activity and 1.38 at the 20,000 unit level of activity. Assume that all of the activity levels mentioned in this question are within the relevant range. REQUIRED: Predict the following items for Mateo Company Variable cost per unit. (a) Total fixed cost per period. (b) Total expected costs at the 18,000 unit level of activity (c) (20 Marks) PART C Provide three reasons why an organisation may require knowledge of how costs and revenues (10 Marks) vary with different levels of activity. (TOTAL:50 MARKS) Page 2 of 6 QUESTION TWO - ANSWER ALL PARTS PART A The following is Dairygold Corporation's contribution format income statement for last month: Sales 1,200,000 Less Variable Expenses C800,000 400,000 Contribution Margin Less Fixed Expenses 300,000 Net Income 100,000 The company has no beginning or ending inventories and produced and sold 20,000 units during the month. REQUIRED: (a) What is the company's contribution margin ratio? (b) What is the company's break-even in units? (c) If sales increase by 100 units, by how much should net income increase? (d) How many units would the company have to sell to attain target profits of 125,000? (e) What is the company's margin of safety in euros? (f) What is the company's degree of operating leverage? (g) List three assumptions utilised in your analysis in (a) to (f) above. (30 Marks) PART B Explain the contribution approach and discuss two reasons why a contribution approach to product costing is preferable to a full cost approach. (10 Marks) PART C The O'Neil company produces three products with the following costs and selling prices: B Selling price per unit 30 40 40 Variable cost per unit 12 20 10 Direct labour hours per unit 1.5 1. Machine hours per unit 1.5 REQUIRED: If machine hours are the company's production constraint, determine in which order the three products should be produced. (10 Marks) (TOTAL: 50 MARKS) Page 3 of 6 QUESTION THREE Knowing that you are studying management accounting, a friend who manages a small business has sought some costing advice about Project X -a one-off order that he intends to tender for. The costs associated with the Project X are as follows: 16,000 Material A 32,000 Material B 24,000 Direct labour 8,000 Supervision 48,000 Overheads 128,000 You ascertain the following information: Material A is in stock and the above was the cost. There is now no other use for Material A, other than Project X and it would cost 7,000 to dispose of. Material B would have to be ordered at the cost shown above. Direct labour costs of 24,000 relates to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at a i. ii. iii, cost of 28,000. iv. Supervision costs have been charged to the project on the basis of 33% of labour costs and will be carried out by existing staff within their normal duties. Overheads have been charged to the project at the rate of 200% on direct labour. The company is currently operating at a point above break-even. The project will need the utilisation of machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of 40,000 and then disposed of for 21,000 at the end V. vi. vii. the project. The friend tells you that the customer is prepared to pay up to a maximum of 90,000 for the project and a competitor is prepared to accept the order at that price. He also informs you the minimum that he can charge is 140,000 as the above costs show 128,000 and this does not take into consideration the cost of the machine and profit to be taken on the project. REQUIRED: (a) Based on the information provided, advice your friend as to whether or not he should tender for Project X. Explain your treatment of each item that comprises your financial analysis. State any assumptions that you made. (25 Marks) (b) Outline three non-financial factors that your friend should also consider before making their final decision as to whether or not tender for this project. (15 Marks) (c) Outline what is meant by a 'sunk cost' and explain why firms need to consider this type of cost when making decisions. Provide two examples of 'sunk costs' to supplement your answer, (10 Marks) (TOTAL: 50 MARKS) Page 4 of 6 QUESTION FOUR Pot Ltd produces a single product. The management currently uses an absorption costing approach but is considering using a variable costing approach in the future. The following data relates to the most recent month of operations. 125 Selling price per unit 250 Units in beginning inventory Units produced 7,400 Units sold 5,900 Direct material per unit 54 Direct labour per unit 35 Variable manufacturing overhead per unit 2 Variable selling and administrative cost per unit 4 Fixed manufacturing overhead cost 74,000 Fixed selling and administrative cost 35,400 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. REQUIRED: (a) Calculate the unit product cost for the month under variable costing and under absorption costing. (6 Marks) (b) Prepare an income statement for the month using variable costing principles. (15 Marks) (c) Prepare an income statement for the month using absorption costing principles. (15 Marks) (d) Contrast the general effect on profit of using absorption and marginal costing principles respectively. Use the figures in (b) and (c) above to illustrate your answer. (8 Marks) (e) Describe the circumstances when variable and absorption costing systems will report identical profits. (6 Marks) (TOTAL: 50 MARKS) Page 5 of 6 Trimake Ltd manufactures a range of electronic car components according to their customer's specifications. One division specialises in the production of air-conditioning units. The existing cost accounting system establishes a predetermined overhead absorption rate on the basis of total budgeted production overhead and direct labour hours. The total budgeted production overhead is estimated to be 95,400. Total budgeted direct labour hours are estimated to be 36,000. The division manager, Mr Barry has been on a course about activity- based costing and he is keen to apply his new knowledge to Trimake Ltd. Mr Barry has received a request to provide an estimate for 60 air-conditioning units. The estimated requirements of order R4565 are as follows: QUESTION FIVE 120 Direct labour hours Machine hours 30 Material purchase orders Shipments Direct labour is paid at a basic rate of 8 per hour. Each unit will require 2 kilos of aluminium which costs 12 per kilo. The activity-based costing system would use three activity cost pools - materials handling, machine related and shipping. Budgeted production overhead costs and expected activity as are follows: Activity Cost Pool Quantity of Cost Driver Material handling 36,000 1,000 orders Running machinery 27,200 1,200 machine hours Shipping 32,200 220 shipments REQUIRED: (a) Using the existing cost accounting system, calculate the R4565 order cost, the unit cost and the profitability per unit if the selling price is 100 per unit. (14 Marks) (b) Using the activity-based cost accounting system, calculate the R4565 order cost, the unit cost and the profitability per unit if the selling price is 100 per unit. (20 Marks) (c) Comment on your findings and discuss briefly whether Trimake Ltd should change its present policy on overhead absorption, stating reasons to support your conclusion. (8 Marks) (d) Outline two changes in the business environment that have led to activity-based costing becoming more prevalent. (8 Marks) (TOTAL: 50 MARKS) Page 6 of 6