1ST Mock Exam 2012-2013 (Cost accounting for decision-making)
5.Sue company manufactures product X. On 31 December 2010, Sue is not satisfied with its total sales volume of 55,000 units in 2010 and is considering the following two ways to improve its profitability:
Alternative 1
The marketing manager suggests launching a promotional campaign which would incur $3,500 per month. Besides, sales commission of $5 per unit would be paid to salespeople. It is expected that annual sales volume in 2011 would be 40% more than that in 2010. No additional production overheads would be incurred.
Alternative 2
The operations manager suggests reducing 10% of product X’s selling price. It is estimated that its annual sales volume will increase by 30,000 units. Moreover, the manager decides to purchase direct materials from one supplier only, which leads to a reduction of material cost of $4 per unit. A new machine costing $50,000 with an estimated useful life of 4 years and zero residual value would be purchased to improve the productivity and it will lower the labour cost of $2 per unit. The machine is depreciated on a straight line basis. No additional production overheads would be incurred.
It is given that the selling price of product X is $40 per unit and the total production costs of 55,000 units is $1,375,000. Fixed production overheads are $55,000.
REQUIRED:
(a)Prepare two separate statements showing the relevant costs and revenues for alternative 1 and 2. Advise which proposal Sue should adopt.
The management is also considering buying product X from a supplier at a price of $45 instead of producing it in 2011. Its budgeted annual production volume is 40,000 units. The historical cost and replacement cost of its direct materials is $3 per kg and $5 per kg respectively. The materials are in constant use and there is sufficient stock in hand. Due to a shortage of labour supply, the piece-rate wage will increase by $10. If the company chooses to buy product X, the factory used for its production will be let to Ozone Ltd for one year at an annual rental of $450,000. Besides, a custom-made machine will a net book value of $10,000 would have no use and be disposed at a value of $6,000.
Some of production costs of product X are as follows:
Direct materials: 5 kg per unit
Piece-rate wage: $5
REQUIRED:
(b)Based on the financial information above, advise whether the management should buy from the supplier.
(c)State one factor that the company has to consider in deciding whether product X should be purchased.
Pre-Mock Exam 2012-2013 (Cost accounting for decision-making)
7.KC Limited manufactures one single type of drink. The following are the monthly budget data for 2011:
$Direct labour cost / 268,450
Direct material cost:
Material X / 61,650
Material Y / 586,300
Variable production overheads / 47,200
Fixed production overheads / 712,800
Fixed selling expenses / 208,800
Selling price per litre / 700
Selling price per litre of scrap / 60
The budgeted monthly finished goods to be produced and sold are 3,080 litres. Scrap is 3 out of every 17 litres of pre-inspection drink. All scrap is expected to be sold in the month of occurrence.
REQUIRED:
(a)(i)Calculate the total monthly variable production costs
(ii)Calculate the monthly pre-inspection volume
(iii)Calculate the monthly selling amount of scrap
(iv)Calculate the monthly variable production costs per litre of finished goods
(v)Calculate the monthly break-even volume (in litres) of finished goods. (correct to 1 decimal place)
(5 marks)
However, the management of KC Limited is not satisfied with the monthly budgeted performance for 2011. The following are the two proposals that will improve the company’s performance:
Proposal 1:
Material Y will be replaced by higher quality Material Y* which costs 8% higher than Material Y. Compared with the original budgeted data for 2011, Proposal 1 will reduce the scrap to 1 out of every 34 litres and cost of Material X to $23,656. Moreover, the direct labour cost and variable production overheads will also decrease by 20% and 10% respectively.
Proposal 2:
A machine costing $4,000,000 with a scrap value of $86,080 and an estimated useful life of 3 years, which will enhance automation and lead to a reduction in usage of materials, will be bought. Compared with the original budgeted data for 2011, Proposal 2 will lead to a 18% reduction in the monthly usage of material Y, a 30% decrease in the monthly direct labour cost and a reduction of variable production overheads by $11,051. The scrap will also be reduced to 1 out of every 17 litres. The company provides full-year depreciation on a straight-line basis.
REQUIRED:
(b)Calculate the monthly break-even volume (in litres) of KC Limited for each of the proposal if the monthly pre-inspection volume is the same as in (a)(ii). (correct to 1 decimal place) (5 marks)
(c)If the monthly demand for the drink is 4,000 litres and the company is able to meet demand with existing production capacity, prepare a statement showing the budgeted monthly profit in (a) and the estimated monthly profits for Proposal 1 and 2. (correct to nearest dollar) (3 marks)
(d)Based on calculations in (b) and (c), explain which option you would recommend to the management of KC Limited. (1 marks)
KC Limited received a special order with a proposed selling price of $2,100,000. The order requires two types of material. Material C is in regular use by the company and the amount of stock originally costs $480,000 and the current market price of Material C to be used in the order is $500,000. Material D is no longer used by the company and cannot be used elsewhere if it is not used in the order. The total amount of Material D in the warehouse is $230,000 and its current purchase price is $350,000. The amount of Material D in stock is only one-third of the amount required for the order. If it is not used, Material D could be sold for $120,000. Total direct wages for the order is $385,000 and total production overheads are expected to be 120% of direct wages. Fixed production overheads are absorbed at 40% of direct wages.
REQUIRED:
(e)Prepare a statement showing all relevant costs and revenues to find the profit or loss on the order if it is accepted. (3 marks)
(Total:17 marks)
HKET 2011 (Paper 2A, 3) (Cost accounting for decision-making)
3.Delicious Restaurant is deciding whether to continue to have its home-made cakes as the free dessert or purchase cakes from the supplier. The number of cake needed is 2,500 pieces daily.
Here is the daily production cost for the home-made cakes:
$Direct material / 2,300
Direct labour / 500
Variable manufacturing cost / 400
Fixed manufacturing cost / 800
On the other hand, the supplier is willing to sell cake at $1.5 per piece to Delicious Restaurant.
REQUIRED:
(a)Delicious Restaurant should continue to produce home-made cakes or purchase from the supplier? Show your workings.
(b)Apart from the cost, what factors may involve when deciding whether to continue the production of home-made cakes or not? List two of them.
Assume Delicious Restaurant decided to continue to produce cakes by itself, now it needs to consider whether to continue using the old oven or not.
Here is the information related to the old oven and the new oven:
Old Oven / New OvenNet book value / $72,000 /
Purchase cost for new oven / / $180,000
Residual service years / 3 years / 3 years
Variable cost per year / $108,000 / $54,000
Fixed cost per year / $200,000 / $200,000
*The old oven can be sold for $12,000 at present.
REQUIRED:
(c)Should Delicious Restaurant have a new oven or not? Show your workings.
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