CUAC203 TUTORIAL QUESTIONS
Question 1
Dzomba limited manufactures a range of picture frames which it supplies to retailers throughout
Zimbabwe. The company uses a standard variable (marginal) costing system and this allows Dzomba
limited to monitor costs effectively and also to simplify its pricing policy. The company’s most popular
picture frame is the ‘Golden’ which features gold geometric designs. Dzomba Limited purchases the preformed frame (which incorporates the front decorative part and a wood laminate back) from South Africa
and, using clear glass and brass plated hooks, assembles the complete frame. The following are the
budgeted figures, relating to the ‘Golden’ frame for the month of March:
Per unit
Total
14.50
72,500
Pre-formed frame
3.55
(17,750)
glass (0.25 square metres per frame @ €3.40 per square metre)
0.85
(4,250)
Brass plated hooks (2 hooks per frame @ €0.65 each)
1.30
(6,500)
Assembly labour (0.25 hr per frame @ €11 per hour)
2.75
(13,750)
Variable overhead (0.25 hr per frame @ €1.30 per assembly labour hour)
0.325
(1,625)
Sales
less costs:
fixed production overhead
(8,725)
Profit
19,900
For the month of March 2015, the company produced and sold 4,960 ‘Golden’ frames and recorded the
following actual results:
Sales
less costs:
Pre-formed frame (@ €3.50 each)
glass (based on 1,250 square metres)
Brass plated hooks (@ €0.625 each)
Assembly labour (based on 1,220 hours)
Variable overhead (based on assembly labour hours)
fixed production overhead
Profit
72,912
(17,360)
(4,275)
(6,200)
(13,481)
(1,647)
(8,215)
21,734
The managing director of Dzomba limited was pleased to note that actual profit achieved exceeded
budgeted profit and has asked for your assistance in explaining the factors that were responsible for this
positive result.
REQUIREMENT:
Using the information provided for the month of March 2015:
(a) Prepare a profit statement, based on variable (marginal) costing principles, showing the original
budget, flexed budget and actual results.(18 marks)
QUESTION 2
Asani Ltd has created a new division with 4 investment opportunities. The firm’s cost of capital is
20%. The following additional information is available;
Opportunity
Income ($)
Investment ($)
A
131 000
750 000
B
162 000
600 000
C
151 000
500 000
D
148 000
700 000
Required
(i)Calculate the Return on Investment (ROI) for each project.
(6 marks)
(ii)Assume you are the Division Manager and you are being evaluated based on ROI; select the
investment opportunities you would accept where the projects are mutually exclusive. Calculate
the associated ROI for the division.
(2 marks)
(iii) If on the other hand, you were evaluated on Residual Income (RI) basis, identify the
investment you would accept. Calculate the associated RI for the division.
(5 marks)
QUESTION 3
J Ltd drew up budgets at two levels of activity for the year to 31 March 2013.Extracts from the
budgets and management accounts of the company are asfollows:
Budget
Budget
Actual
Units sold
15,000
18,000
17,500
$
$
$
Sales price per unit
80
80
80
Purchases
630,000
756,000
752,500
Direct labour
150,000
180,000
172,500
Production overheads
105,000
120,000
121,000
Depreciation
14,000
14,000
13,600
Rent
41,000
41,000
39,000
Direct expenses
90,000
108,000
104,000
Required:
a) Explain the purpose of flexing a budget.
(3 marks)
b) Prepare a flexed budget including variances and a comparison of the flexed budgeted to actual
profit.
(9 marks)
QUESTION 4
(a)ToiToi Ltd. manufactures and sells a special table for secondary schools. The following
information hasbeen projected for the first six months of 2016.
SalesVolume (Units) Administration expenses ($) Other Costs ($)
January
February
March
April
May
June
July
10,000
12,000
15,000
8,000
7,500
6,000
7,500
12,500
12,500
12,500
10,000
10,000
10,000
25,000
25,000
25,000
22,000
22,000
22,000
1. Direct labour cost per unit is $2.
2. The selling price is projected to be $15 per unit in January, February and March, rising by10%
on 1 April, and remaining at that level for May & June.
3. The cost of direct materials is estimated to be $3 per unit.
4. Variable production overhead is 50% of the direct labour cost per unit.
5. Sales and marketing expenditure is projected at $3 per unit sold.
6. Depreciation is calculated at the rate of 20% per year, using the straight-line method.
7. Inventory of one-third of the following month’s projected sales volume is to be held at the
endof each month.
8. Receivables at 30 June are estimated to be 10% of June sales revenue.
9. Payables at 30 June are projected to total $12,000.
Statement of Financial Position at 1 January 2016
ASSETS
$
Non-current assets
Equipment
Current Assets
Inventory
19,998
Receivables
12,000
Bank
16,750
Total assets
EQUITY AND LIABILITIES
Equity
Payables
Total Equity and Liabilities
$
165,000
48,748
213,748
204,148
9,600
213,748
Required:
(i) Prepare a Budgeted monthly Income Statement for the period 1 January 2016 to 30 June
2016.
(12 marks)
(ii) Prepare a budgeted Statement of Financial Position as at 30 June 2016. (5 marks
Question 5
A machine shop makes boxes (B) and tins (T). Contribution per box is $5 and per tin is $7. A box
requires 3 hours of machine processing time, 16kg of raw materials and 6 labour hours. A tin
requires 10 hours of machine processing time, 4kg of raw materials and 6 labour hours.
In a given month, 330 hours of machine processing time are available, 400kg of raw material and
240 labour hours. The manufacturing technology used means that at least 12 tins must be made
every month.
Required
Determine the optimal production plan if the firm is seeking to maximize contribution.
Question 6
Gwati Ltd manufactures a range of high quality office chairs. The company produces three types
of luxury chairs: The Rocking, Comfort and Ordinary. The company has two main production
departments, the forming department, which is highly mechanised and the finishingdepartment,
which is labour intensive.
The company has been in operation for ten years and every year sales have increased. The
current selling price of the chairs was established two years ago based on a markup of
approximately30% on product cost.
For the first time since it commenced trading, profits for last year were lower than expected and
management wereconcerned that this may be a continuing trend. An initial investigation raised
questions regarding the overheadcosting system used by the company. Currently, the company
uses a traditional overhead costing approach,absorbing overheads based on either machine hours
or labour hours as appropriate. Details relating to the currentyear are provided below:
Rocking
comfort
ordinary
Selling price per chair
$875
$1,050
$1,200
Direct materials per chair
$225
$270
$315
Direct labour per chair
$115
$138
$161
Direct labour hours per chair
5
6
7
Machine hours per chair
10
11
13
Total chairs produced
1,750
1,000
600
Forming
Finishing
Total
$
$
$
828,729
400,982
1,229,711
Production overhead costs
In an attempt to curb the reduction in profits, the company is considering changing to an activity
based costingapproach for absorbing overheads and has compiled the following information:
Activity
Cost Driver
Cost $
Purchasing
No. of requisitions
125,175
240
225
285
750
Set up costs
No. of set ups
512,120
150
300
350
800
Machining
No. of machine hours 205,095
17,500
11,000
7,800 36,300
3,000
2,450
2,800 8,250
Quality control No. of inspections
387,321
Total
1,229,711
Rocking
Comfort
ordinary Total
Required:
(a) Calculate the total product cost for each of the three types of office chair using:
(i) The costing approach currently used by GwatiLtd;
(ii) Activity based costing.
(8 marks)
(10 marks)
(b) Compare and comment on your answers in (i) and (ii) above, providing recommendations to
improve the profitability of Gwati Ltd
(7 marks)
Question 7
HumbaLtd is evaluating an investment proposal to manufacture it new product called Zenox,
which has performed well in test marketing trials conducted recently by the company’s research
and development division. The following information relating to this investment proposal has
now been prepared.
Initial investment
$2.5 million
Selling price (current price terms)
$20 per unit
Expected selling price inflation
3% per year
Variable operating costs (current price terms)
$8 per unit
Fixed operating costs (current price terms)
$170,000 per year
Expected operating cost inflation
4% per year
The research and development division has prepared the following demand forecast as a result of
its test marketing trials. The forecast reflects expected technological change and its effect on the
anticipated life-cycle of Product Zenox.
Year
1
2
3
4
Demand (units)
60,000
70,000
120,000
45,000
It is expected that all units of Product Zenox produced will be sold, in line with the company’s
policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is
expected at the end of four years, when production of Production of Zenox is planned to end.
For investment appraisal purposes, Humba Ltd uses a nominal (money) discount rate of 10% per
year and a target return on capital employed of 30% per year. Ignore taxation.
Required:
(a) Identify and explain the key stages in the capital investment decision-making process, and the
role of investment appraisal in this process.
(6 marks)
(b) Calculate the following values for the investment proposal:
(i) net present value;
(ii) Internal rate of return;
(15 marks)
(c) Discuss your findings in each section of (b) above and advise whether the investment
proposal is financially acceptable.
(4 marks)
Question 8
Squash Ltd manufactures 2 products: Product S and Product T and sells these products at a price
which provides a 20% mark-up on absorption cost. Although Squash operates in a highly
competitive environment with intense price competition, sales of Product S regularly surpass
budget expectations. The sales volumes achieved for Product T are less satisfactory and in recent
years the actual sales volume achieved for this product has consistently been below the budgeted
level. The company currently calculates absorption costs using a traditional volume based
approach in which overheads are absorbed on the basis of direct labour hours. Squash Ltd
produces 6,000 units of Product S and 4,000 units of Product T every year. The following cost
information is currently available in respect of the most recent reporting period:
Product S
Product T
Direct material cost per unit
$68
$72
Direct labour cost per unit (@ $10 per hour)
$30
$40
Budgeted fixed production overheads amount to $680,000 for the year
A recent examination of production overheads led to the identification of the following activities,
activity costs and cost drivers.
Activity
Cost Driver
Cost
Cost Driver Volumes Per Annum
Product S Product T Total
Purchasing
No. of requisitions
$120,000
600
200
800
Setting-up
No. of set-ups
$180,000
310
140
450
Machining No. of machine hrs
$240,000
4,200
3,800
8,000
Quality control No. of inspections
$140,000
200
150
350
REQUIRED:
(a) Calculate the absorption cost per unit for Product S and for Product T using the overhead
absorption approach currently employed within Squash Ltd.
(6 marks)
(b) Calculate the absorption cost per unit for Product S and for Product T if, on the basis of the
information provided above, an Activity Based Costing (ABC) approach was adopted.
(12 marks)
(c) Discuss the appropriateness of introducing ABC to Squash Ltd given the company’s
particular circumstances.
(7 marks)
Question 9
Magaka Ltd is an electronics store that has a number of stores across Zimbabwe. The manager of
the company is an ambitious person, and is looking to expand his activities, by continuously
adding the number of stores.
Magaka Ltd assesses the performance of each of their stores individually. The expected return on
investment(ROI) of Magaka Ltd is 10%. Some of the stores have been able to achieve an ROI
above this target. The market for Magaka Ltd is rapidly increasing. The the company, expects an
average gross profit ratio of around 40%.
Below is financial data given for two of MagakaLtd’s stores for the last year:
Store A
Store B
($'000)
($'000)
Sales
860
675
Gross profit
362
285
Net profit
75
50
Assets employed (investment
585
360
Required:
(a) Discuss the past financial performance of store A and B using ROI and any other measure
you feel appropriate from the given data.
(8 marks)
(b) Using your findings discuss whether each of the measures you used correctly reflects the
stores’ actual performance.
(7 marks)
(c) Discuss the any five disadvantages of comparing divisional performance.
(10 marks)
Question 10
Ngwenya Ltd. is a small company and plans to start trading on 1st October 2017. The company’s
business will involve importing computer storage devices and retailing them to the general
public and computer repair centres. The Directors will fund the business by providing $100,000
in share capital and will lodge this cash to the company’s bank account on the first day of
trading. The Directors recognise the importance of ensuring proper management of cash flow
and have provided the following estimated information relating to the first four months trading
activities.
Oct 17
Purchases (units)
Sales (units)
1,000
690
Nov 17
Dec 17
Jan 18
1,080
930
1,320
1,170
1,600
1,410
Purchases will cost $20 per unit for the first two months but the cost is expected to increase by
10% thereafter and remain at this price for the rest of the budget period. As this is a new
company, payment must be cash on delivery for the first two months. However, to compensate
for the expected price increase, a one month credit period will be allowed from the time of the
increase.
Sales will be at a uniform price of $35 per unit with 20% expected to be for cash. The balance
will be on credit with 50% of credit customers taking one month’s credit and the remaining 50%
paying two months after the original sale. No bad debts are expected.
Starting from October 2017, Ngwenya Ltd. will employ two casual staff at a cost of $1,000 each
per month and Directors’ salary of $1,400 per month will also be paid. Other trading expenses
are estimated to be $800 per month (excluding depreciation) and are payable in the following
month.
Non-current (fixed) assets will be purchased on 1st October as follows:
$
Depreciation Method
Premises
75,000
No depreciation required.
Fixtures and Fittings
10,500
10% per annum straight line.
Motor Vehicle
6,000
25% per annum straight line.
Annual subscription to the local Chamber of Commerce of Zimbabwe will be paid in January
2010. This will cost $600 but covers membership for the twelve calendar months of 2010.
REQUIRED:
(a) Prepare a schedule of projected monthly cash receipts for the four month budget period ended
31st January 2018.
(10 marks)
(b) Prepare a schedule of projected monthly payments to inventory suppliers for the four month
budget period ended 31st January 2018.
(3 marks)
(c) Prepare a monthly cash budget for the four month period ended 31st January 2018.(12marks)
A company manufactures and sells a wide range of products. The products are manufactured in
various locations and sold in a number of quite separate markets. The company’s operations are
organised into five divisions which may supply each other as well as selling on the open market.
The following financial information is available concerning the company for the year just ended:
($000)
Sales
8600
Production cost of sales
5332
Gross profit
3268
Other expenses
2532
Net profit
736
Additional Information
1. An offer to purchase Division 5, which has been performing poorly, has been received by
the company.
2. The gross profit percentage of sales, earned by Division 5 in the year, was half that
earned by the company as whole. Division 5 sales were 10% of total company sales.
3. Of the production expenses incurred by Division 5, fixed costs were £316 000.
4. Other expenses (i.e. other than production expenses) incurred by the division totalled
$156 000, all of which can be regarded as fixed. These include £38 000 apportionment of
general company expenses which would not be affected by the decision concerning the
possible sale of Division 5.
5. In the year ahead, if Division 5 is not sold, fixed costs of the division would be expected
to increase by 5% and variable costs to remain at the same percentage of sales. Sales
would be expected to increase by 10%.
6. If the division is sold, it is expected that some sales of other divisions would be lost.
These would provide a contribution to profits of £20 000 in the year ahead.
Required:
(a) Calculate whether it would be in the best interests of the company, based upon the expected
situation in the year ahead, to sell Division 5.
(15 marks)
(b) Discuss other factors that you feel should influence the decision.
(10 marks)
QUESTION 11
Asani Ltd has created a new division with 4 investment opportunities. The firm’s cost of capital is
20%. The following additional information is available;
Opportunity
Income ($)
Investment ($)
A
131 000
750 000
B
162 000
600 000
C
D
151 000
148 000
500 000
700 000
Required
(i)Calculate the Return on Investment (ROI) for each project.
(6 marks)
(ii)Assume you are the Division Manager and you are being evaluated based on ROI; select the
investment opportunities you would accept where the projects are mutually exclusive. Calculate
the associated ROI for the division.
(2 marks)
(iii) If on the other hand, you were evaluated on Residual Income (RI) basis, identify the
investment you would accept. Calculate the associated RI for the division.
(5 marks)
QUESTION 12
Chan Ltd is a large integrated Chinese conglomerate with farming, metals and mining operations
throughout Zimbabwe. The General Manager of the farming division has been directed by
the Board to submit his proposed capital budget for 2016 for inclusion in the company wide
budget. The Divisional Manager is considering the following projects, all of which require an
outlay of capital and have equal risk.
Project
1
2
3
4
5
6
Investment required ($)
24,000
9,600
7,000
4,800
3,200
1,400
Return ($)
5,520
3,072
980
864
640
392
The Divisional Manager must decide which of the projects to accept. The company has a cost of
capital of 15%. An amount of $60 000 is available to the division for investment purposes.
Required:
(a) Compute the total investment, total return on capital invested and total residual income
on each of the following assumptions, indicating the preferred project:
(i)The company has a rule that all projects promising at least 20% or more returnshould be
accepted.
(5 marks)
(ii)The divisional manager is evaluated on his ability to maximise his return on capital invested.
(5 marks)
(iii) The divisional manager is expected to maximize residual income as computed by using the
15% cost of capital. (5 marks)
Question 13
Hototri Ltd manufactures and sells two products Nike and Puma. The products s both use the
same type of good quality wood (ash) which can be difficult to source in sufficient quantity. The
supply of ash is restricted to 5,400 kg per period. Ash costs $40 per kg.
The products are made by skilled craftsmen (highly skilled labour) who are well known for their
workmanship. The skilled craftsmen take years to train and are difficult to recruit. Hotori’s
craftsmen are generally only able to work for 12,000 hours in a period. The craftsmen are paid
$18 per hour.
Hotori sells the products to a large market. Demand for Nike and puma is strong, and in any
period, up to 15,000 Nike and 12,000 Puma could be sold. The selling price for one unit for Nike
is $41 and the selling price for one unit of Puma is $69. Fixed cost are expected to be incurred in
the manufacture of the two products are $24 000 per period. The fixed cost are expected to be
absorbed based on labour hours.
Manufacturing details for the two products are as follows:
Nike
Puma
Craftsmen time per unit
0.5 hours
0.75 hours
Ash per unit
270 g
270 g
Other variable cost per unit
$1.20
$4.70
Required:
(b) Using a graph paper, identify the feasible region and determine the optimal production
plan for a typical period assuming that Hotori is seeking to maximize the profit earned.
(20 marks)
Question 14
The Zama Division is manufacturer of glasses for patients who are visually impaired and its
products are sold all over pharmaceuticals retailers in Zimbabwe. Managers in the Group of
companies are rewarded annual bonuses using Return on Investments. ROI in the Group is
measured as accounting profits divided by the net book value of assets at the beginning of the
year. In recent years, Zama Divisional manager has managed to achieve a ROI of 12% per
annum, and the cost of capital is 5% per annum. Zama Division has developed a new range of
sun glasses and the products has performed well its recent marketing trials by the research and
development team of Zama division. Production of sun glasses require a new investment in
equipment which would cost $200,000 (payable immediately) and would have a 4-year useful
life with nil residual value at the end of that time. The net cash inflows to the division at the
end of each of the four years would be as follows:
Year 1
Year 2
Year 3
Year 4
$40,000
$60,000
$70,000
$76,000
REQUIRED:
(a) Evaluate whether the Division Manager of Zama is likely to accept the proposed investment
in new product and whether the decision will lead to the maximisation of shareholder wealth.
Justify of your reasoning supported by appropriate calculations. (16 marks).
(b) Mr Zimuto , CEO, is considering to use Residual Income as the performance measure as
an alternative system of performance evaluation in order to motivate goal congruent decisionmaking by the Zama divisional manager. Evaluate with appropriate supporting calculations
where appropriate the proposed option by CEO (9 marks)