1
Costing – Performance Management
Target costing
Section - A
Question -1 (December 2014)
The following are all steps in the implementation of the target costing process for a product:
(1) Calculate the target cost
(2) Calculate the estimated current cost based on the existing product specification
(3) Set the required profit
(4) Set the selling price
(5) Calculate the target cost gap
Which of the following represents the correct sequence if target costing were to be used?
A. (1), (2), (3), (4), (5)
B. (2), (3), (4), (1), (5)
C. (4), (3), (1), (2), (5)
D. (4), (5), (3), (1), (2)
Question – 2 (specimen 2016)
The selling price of Product X is set at $550 for each unit and sales for the coming year are expected to be 800
units.
A return of 30% on the investment of $500,000 in Product X will be required in the coming year.
What is the target cost for each unit of Product X?
A.
B.
C.
D.
$385·00
$165·00
$187·50
$362·50
Question -3 (June 2015)
Which of the following statements describes target costing?
A. It calculates the expected cost of a product and then adds a margin to it to arrive the target selling price
B. It allocates overhead costs to products by collecting the costs into pools and sharing them out according to
each product’s usage of the cost driving activity
C. It identifies the market price of a product and then subtracts a desired profit margin to arrive at the target cost
D. It identifies different markets for a product and then sells that same product at different prices in each market
Question -4 (September 2016)
Which of the following techniques is not relevant to target costing?
A.
B.
C.
D.
Value analysis
Variance analysis
Functional analysis
Activity analysis
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Costing – Performance Management
Question -5 (March / June 2022)
Match the stages required to the correct step number to describe the sequence used when operating target costing.
Stages required
Cost the product
Determine the profit margin
Set the selling price
Use functional and value analysis
Identify the cost gap
Develop the product concept
Order of steps
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Question -6
VC Co is a firm of opticians. It provides a range of services to the public, such as eye tests and contact lens
consultations, and has a separate dispensary selling glasses and contact lenses. Patients book appointments with
an optician in advance.
A standard appointment is 30 minutes long, during which an optician will assess the patient's specific requirements
and provide them with the eye care services they need.
After the appointment, patients are offered the chance to buy contact lenses or glasses from the dispensary.
Which of the following describes a characteristic of the services provided by an optician at VC Co during
a standard appointment?
A. Non- perishable
B. Simultaneous
C. Tangible
D. Homogenous
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Costing – Performance Management
Section -B
Question -1 (September 2016)
Helot Co develops and sells computer games. It is well known for launching innovative and interactive role-playing
games and its new releases are always eagerly anticipated by the gaming community. Customers value the
technical excellence of the games and the durability of the product and packaging.
Helot Co has previously used a traditional absorption costing system and full cost- plus pricing to cost and price
its products. It has recently recruited a new finance director who believes the company would benefit from using
target costing. He is keen to try this method on a new game concept called Spartan, which has been recently
approved.
After discussion with the board, the finance director undertook some market research to find out customers’
opinions on the new game concept and to assess potential new games offered by competitors. The results were
used to establish a target selling price of $45 for Spartan and an estimated total sales volume of 350,000 units.
Helot Co wants to achieve a target profit margin of 35%
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit
$
Direct material
3.00
Direct laobur
2.50
Direct machining
5.05
Set – up
0.45
Inspection and testing
4.30
Total non- production costs
Design (salaries and technology)
Marketing consultants
Distribution
$000
2,500
1,700
1,400
Question -1
Which of the following statements would the finance director have used to explain to Helot Co’s board what the
benefits were of adopting a target costing approach so early in the game’s life-cycle?
1. Costs will be split into material, system, and delivery and disposal categories for improved cost reduction
analysis
2. Customer requirements for quality, cost and timescales are more likely to be included in decisions on product
development
3. Its key concept is based on how to turn material into sales as quickly as possible in order to maximise net
cash
4. The company will focus on designing out costs prior to production, rather than cost control during live
production
A.
B.
C.
D.
1, 2 and 4
2, 3 and 4
1 and 3
2 and 4 only
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Costing – Performance Management
Question -2
What is the forecast cost gap for the new game?
A. $2·05
B. $0·00
C. $13·70
D. $29·25
Question -3
The board of Helot Co has asked the finance director to explain what activities can be undertaken to close a cost
gap on its computer games.
Which of the following would be appropriate ways for Helot Co to close a cost gap?
(1) Buy cheaper, lower grade plastic for the game discs and cases
(2) Using standard components wherever possible in production
(3) Employ more trainee game designers on lower salaries
(4) Use the company’s own online gaming websites for marketing
A.
B.
C.
D.
1, 2 and 3
1, 3 and 4
2 and 4
2 and 3 only
Question -4
The direct labour cost per unit has been based on an expected learning rate of 90% but now the finance director
has realised that a 95% learning rate should be applied. Which of the following statements is true?
A. The target cost will decrease and the cost gap will increase
B. The target cost will increase and the cost gap will decrease
C. The target cost will remain the same and the cost gap will increase
D. The target cost will remain the same and the cost gap will decrease
Question -5
Helot Co is thinking about expanding its business and introducing a new computer repair service for
customers. The board has asked if target costing could be applied to this service. Which of the following
statements regarding services and the use of target costing within the service sector is true?
A. The purchase of a service transfers ownership to the customer
B. Labour resource usage is high in services relative to material requirements
C. A standard service cannot be produced and so target costing cannot be used
D. Service characteristics include uniformity, perishability and intangibility
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Costing – Performance Management
Question (September/ December)
Darask Co is a global consumer electronics manufacturer. It sells its own brand of smartphones, computers and
personal entertainment devices. It uses target costing.
D-Paad - Feasibility study results
The board of Darask Co has conducted a feasibility study in order to decide whether or not to launch a new device,
the D-Paad, in 20X9. The D-Paad will have a three-year life cycle, over which a total of 80 million units will be sold.
The variable manufacturing and selling cost of the D-Paad is currently estimated at $123 per unit. The total fixed
product cost, including investment and overheads, is budgeted to be $3,360m over the whole life cycle.
The initial estimate of the selling price included in the feasibility study for the D-Paad was calculated to ensure a
profit mark-up of 60%.
D-Paad - Market research analysis
The board decided to commission some market research to determine the price customers would be willing to pay
for the D-Paad. Sales volumes and sales prices were estimated for the various stages of the D-Paad’s product life
cycle as follows:
Introduction
Growth
Maturity
Decline
Sale volume (millions)
8
14
56
2
Sale price ($ / unit)
425
300
220
120
Based on the market analysis, the board has approved the development of the D-Paad as long as the total product
cost, including manufacturing, investment and overheads, does not exceed $13,000m.
Retail outlets
The board of Darask Co is also considering the opening of some retail outlets which will be located in major cities
around the world. The outlets, as well as selling Darask Co's products, will also hold free-of-charge surgeries where
the product users can seek help on how to use their devices and have their devices repaired.
The board has been discussing whether it is possible to use target costing in relation to the retail outlets. The
following statements have been made:
Director X
Target costing cannot be used because it is difficult to estimate target selling prices for
services
Director Y
Target costing is most useful when what is being developed has a high degree of variability
such as developing new services
Director Z
Target costing when developing new services is difficult because services are intangible and
measuring a unit of service is not always possible
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Costing – Performance Management
Question 1
Which of the following statements about the use of target costing at Darask Co is/are correct?
(1)
(2)
It relies on just-in-time processes in order to work
It can be used alongside life cycle costing and planning
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Question 2
What was the initial selling price of the D-Paad from the feasibility study results (to the nearest whole $)?
$___________
Question 3
Based on the market research analysis, what is the total cost gap of the D-Paad, if Darask Co wants to
achieve a target profit margin of 45%?
A.
B.
C.
D.
$3,928m
$1,912m
$9,072m
$11,088m
Question 4
The following proposals have been made in order to close the cost gap of the D-Paad:
(1) Introduce 24-hour working in the factories where the D-Paad is made in order to increase
production and build inventory
(2) Incorporate quality assurance inspections into the manufacturing processes to reduce faulty units
(3) Increase the sales and marketing spend in order to boost the sales volumes of the D-Paad
Which of these proposals is/are likely to reduce the cost gap?
A. 1 and 2
B. 2 and 3
C. 2 only
D. 1 and 3
Question 5
In relation to the use of target costing for the retail outlets, which of the directors' statements is/are
correct?
A. X, Y and Z
B. Y and Z only
C. X and Y only
D. Z only
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Costing – Performance Management
Life cycle costing
Section -A
Question -1
A company has produced the following information for a product it is about to launch:
20X4
20X5
20X6
Units
2,000
5,000
7,000
Variable production cost per unit
$2.30
$1.80
$1.20
Fixed production costs
$3,000
$3,500
$4,000
Variable selling cost per unit
$0.50
$0.40
$0.40
Fixed selling costs
$1,500
$1,600
$1,600
Administrative costs
$700
$700
$700
What is the life-cycle cost per unit (to two decimal places)?
Question -2 (December 2014)
The following costs have arisen in relation to the production of a product:
(i)
(ii)
(iii)
(iv)
Planning and concept design costs
Testing costs
Production costs
Distribution and customer service costs
In calculating the life cycle costs of a product, which of the above items would be included?
A.
B.
C.
D.
(iii) only
(i), (ii) and (iii) only
(i), (ii) and (iv) only
All of the above
Question -3 (June 2015)
The following statements have been made about life cycle costing;
(i) It focuses on the short- term by identifying costs at the beginning of a product ‘s life cycle
(ii) It identifies all costs which arise in relation to the product each year and then calculates the product’s
profitability
(iii) It accumulates a product’s costs over its whole life time and works out the overall profitability of a product
(iv) It allocates costs to each stage of a product’s life cycle and writes them off at the end of each stage
Which of the above statements is / are correct?
A.
B.
C.
D.
(i) and (iii)
(iii) only
(i) and (iv)
(ii) only
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Costing – Performance Management
Question -4 (Specimen 2016)
Which of the following statements regarding life-cycle costing are correct?
(1) It can be applied not only to products but also to an organisation’s customers
(2) It includes any opportunity costs associated with production
(3) The maturity phase is characterised by a rapid build-up in demand
(4) Often between 70% to 90% of costs are determined early in the product life cycle
A (1), (2) and (4)
B (3) and (4)
C (1) and (4) only
D (2) and (3)
Question – 5 (September 2016)
A manufacturing company which produces a range of products has developed a budget for the life – cycle of a
new product P. The information in the following table relates exclusively to product P.
Design costs
Direct manufacturing costs
Depreciation costs
Decommissioning costs
Machine hours
Production and sales units
Lifetime total
$800,000
Per unit
$20
$500,000
$20,000
4
300,000
The company’s total fixed production overheads are budgeted to be $72 million each year and total machine hours
are budgeted to be 96 million hours. The company absorbs overhead on a machine hour basis.
What is the budgeted life – cycle cost per unit per product P?
A.
B.
C.
D.
$24.40
$25.73
$27.40
$22.73
Question -6 (March -2018)
A bank has developed a new type of account called the Gold Account. Development and advertising costs were
$50,000. At the start of each of the next four years, 1000 customers are expected to open a Gold Account and to
pay the bank $300 each year that they use it. Of the 1,000 customers who open a Gold Account, 500 are expected
to close the account after one year and 500 after two years. The bank estimates it will cost $400 per customer to
administer the Gold Account in the customer’s first year reducing to $50 per customer in the second year. Ignoring
the time value of money,
What is the lifecycle profit per customer of Gold Account?
A.
B.
C.
D.
$8.33
$25.00
$12.50
$16.67
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Costing – Performance Management
Section -B
Midhurst Co ((September/ December 2020)
Midhurst Co manufactures air conditioning units and is considering an investment in a new unit that will be used in
modern office buildings. Advances in technology mean that this unit is more sensitive to changes and variations in
temperature and therefore it can regulate airflow and heating more efficiently. Midhurst Co's competitors currently
do not have an equivalent product that can offer these features.
Midhurst Co expects to sell 10,000 units over the predicted five-year life cycle of the unit. The finance director has
just prepared the initial costings for the unit as follows:
Research and development costs
Design costs
Marketing costs
Variable production cost per unit
Fixed production cost
Variable distribution cost per unit
Fixed distribution cost
Variable selling cost per unit
Fixed selling cost
Administration cost
$'000
6,200
33,450
177,685
42
98,470
9
10,300
4
7,790
23,450
The finance director plans to use life-cycle costing to measure the profitability of the new product. The chief
executive has asked for more information about life-cycle costing, as she is not sure whether it is the right method
to use.
The production director has reviewed the costings in detail and suggested a couple of changes. He is enthusiastic
about the product and believes that modifications could be made to prolong the product's life but wonders when
the best time would be to make changes to the product.
Question 1
According to the life-cycle costing method, which TWO of the following statements regarding the stages of the lifecycle are true?
A. At the introduction stage, further capital expenditure will be needed as production capacity will need to increase
to meet demand
B. The maturity stage occurs when the market has reached 'saturation point' and bought enough of the product
C. The majority of a product's life-cycle costs are determined by decisions which are made at the design and
development stage
D. The growth stage, when sales will have reached their peak and become stable, will be the most profitable
stage
Question 2
What is the cost per unit for the new air conditioning unit using life-cycle costing (to the nearest $)?
A. $35,740
B. $51,847
C. $88,390
D. $90,735
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Costing – Performance Management
Question 3
The production director has suggested the following change for the costing of the new unit: Currently material costs
are 20% of the variable production costs per unit. One of the materials used is stainless steel which is budgeted
at $2,000 per unit but an alternative corrosion-resistant metal costing 25% less can be used. The production
director believes a 15% discount can be negotiated for the remainder of the materials.
What would be the revised material cost per unit (to the nearest whole $)? $ ____________
Question -4
The production director has also asked about the implications for production planning if the company wishes to
extend the product's life-cycle. At what stage of the life-cycle is the new unit most likely to undergo product
development?
A. Introduction
B. Growth
C. Maturity
D. Decline
Question -5
Question 5 The chief executive wants to be briefed on the advantages of using life-cycle costing. Which of the
following statements relating to the advantages of life-cycle costing are correct?
1. It draws management's attention to all costs related to a product which other costing methods usually treat as
period costs
2. It focuses on measuring a product's costs from concept to withdrawal rather than reviewing costs on a period
by period basis
3. It focuses on what consumers are prepared to pay for a product and establishes cost budgets based on an
expected selling price
4. It aids understanding of the relationship between decisions at the design stage and the cost of other functions,
such as marketing
A. 2, 3 and 4 only
B. 1, 2 and 4 only
C. 1 and 3 only
D. 1, 2, 3 and 4
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Costing – Performance Management
Environmental Accounting
Question – 1
Which of the following statements regarding environmental cost accounting are true?
1. The majority of environmental costs are already captured within a typical organisation’s accounting system.
The difficulty lies in identifying them
2. Input/output analysis divides material flows within an organisation into three categories: material flows; system
flows; and delivery and disposal flows
3. One of the cost categories used in environmental activity-based costing is environment-driven costs which is
used for costs which can be directly traced to a cost centre
4. Environmental life-cycle costing enables environmental costs from the design stage of the product right through
to decommissioning at the end of its life to be considered
A. (1), (2) and (4)
B. (1) and (4) only
C. (1), (3) and (4)
D. (2) and (3) only
Question -2 (September 2016)
Different management accounting techniques can be used to account for environmental costs.
One of these techniques involves analysing costs under three distinct categories: material, system, and delivery
and disposal.
What is this technique known as?
A. Activity-based costing
B. Life-cycle costing
C. Input-output analysis
D. Flow cost accounting
Question-3 (December -2014)
The following statements have been made about environmental cost accounting:
(i) The majority of environmental costs are already captured within a typical organisation’s accounting system.
The difficulty lies in identifying them
(ii) Input/output analysis divides material flows within an organisation into three categories: material flows; system
flows; and delivery and disposal flows
Which of the above statements is/ are above?
A.
B.
C.
D.
1 only
2 only
Neither 1 nor 2
Both 1 and 2
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Costing – Performance Management
Question -4 (June -2015)
When activity-based costing is used for environmental accounting, which statement is correct for
environment-related costs and environment-driven costs?
A. Environment-related costs can be attributed to joint cost centres and environment-driven costs cannot be
B. Environment-driven costs can be attributed to joint cost centres and environment-related costs cannot be
C. Both environment-related costs and environment-driven costs can be attributed to joint cost centres
D. Neither environment-related costs nor environment-driven costs can be attributed to joint cost centres
Question -5
Which TWO of the following statements about flow cost accounting (MFCA) are correct?
A. Manufacturing costs are categorized into material costs, system costs and delivery and disposal costs
B. MFCA records material inflows and balances this with outflows both in terms of physical quantities and at the
end of the process, in monetary terms too, so that businesses are forced to focus on environmental costs.
C. In MFCA, output costs are allocated between positive and negative product costs
D. The aim of flow cost accounting is to increase the quantity of materials which, as well as having a positive
effect on the environment, should have a positive effect on a company’s total costs in the long run
Question -6
The following are types of management accounting techniques.
(i)
(ii)
(iii)
(iv)
Flow cost accounting
Input/ out put analysis
Life cycle costing
Activity based costing
Which of the above techniques could be used by a company to account for its environmental costs?
A.
B.
C.
D.
(i) only
(i) and (ii) only
(i),(ii) and (iii) only
All of the above
Question -7
Flow cost accounting is a technique which can be used to account for environmental costs. Inputs and outputs
are measured through each individual process of production.
Which of the following is NOT a category used within flow cost accounting?
A.
Material flows
B.
System flows
C. Delivery and disposal flows
D. Waste flows
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Costing – Performance Management
Question -8
Which one of the following environmental management accounting techniques would include an assessment of
clean – up cost and costs of decontamination when a project comes to an end?
A.
B.
C.
D.
Environmental activity- based costing
Flow cost accounting
Input- output analysis
Life -cycle costing
Question -9 (September / December 2022)
Zul Co manufactures a single product, the Zoot, which is made from a mix of two chemicals: A and B. The company
accounts for environmental costs using input/output analysis. Chemical A costs $1,000 per tonne and chemical B
costs $1,500 per tonne. Any chemicals which are wasted in the production process must be disposed of at a cost
of $250 per tonne. June's production run used 10 tonnes of chemical A and 50 tonnes of chemical B. Total output
of Zoot was 54 tonnes.
What is the environmental cost of June's production run?
A. $7,000
B. $1,500
C. $8,500
D. $10,000
Question -10 (September/ December 2020)
Which TWO of the following activities are environmental INTERNAL failure costs?
Options:
A. Quality control inspections to monitor pollution levels in water leaving a production process
B. Water purification treatment to clean waste water before it leaves the factory
C. Fitting of carbon filters to machine processes to reduce carbon emissions
D. Power usage measuring system to monitor energy consumption within the factory
E. Payment of fines for breaching environmental regulations in the industry
F. Insulation of heating pipes in the factory to reduce heat loss
G. Public relations costs to remedy reputational damage caused by accidental river pollution
H. Capturing and recycling of waste exhaust gases to generate energy
Costing – Performance Management
14
Question -11 (September 2019)
A company grows different types of tea leaves and blends them together. The tea leaves are picked by hand
because too many leaves were damaged and wasted when picking machines were used. The tea leaves are then
dried and processed and any waste produced is recycled. The company regularly tests its tea for contaminants, in
line with food safety legislation. It recently identified that one tea plantation contained high levels of contaminated
soil after the use of a new pesticide. Identify, by selecting the relevant box in the table below, the environmental
cost classification of each of the following costs.
Cost incurred to clean PREVENTION
contaminated soil
Staff cost for picking leaves by PREVENTION
hand
Recycling waste cost
PREVENTION
DETECTION
Cost incurred for testing tea PREVENTION
for contaminants
DETECTION
DETECTION
DETECTION
INTERNAL
FAILURE
INTERNAL
FAILURE
INTERNAL
FAILURE
INTERNAL
FAILURE
EXTERNAL
FAILURE
EXTERNAL
FAILURE
EXTERNAL
FAILURE
EXTERNAL
FAILURE
Question -12 (September / December 2021)
A company's actual production figures for a batch of products are as follows:
Material
Laobur and overhead
Normal loss 10%
Abnormal loss
Good output
Kg
2,000
2,000
(200)
1,800
(100)
1,700
$
10,000
26,000
36,000
36,000
(2,000)
34,000
In terms of environmental cost categorisations, how would the normal and abnormal losses be described?
A.
B.
C.
D.
Normal loss = Potentially hidden costs
Normal loss = Potentially hidden costs
Normal loss = Conventional costs
Normal loss = Conventional costs
Abnormal loss = Conventional costs
Abnormal loss = Contingent costs
Abnormal loss = Contingent costs
Abnormal loss = Contingent costs
Question -13
In environmental costing, the future cost of cleaning up operations for a product or activity may be classified as a
A.
B.
C.
D.
Carbon footprint
Contingent cost
Hidden cost
Relationship cost
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Costing – Performance Management
Note:1
Environmental costs can be categorised as prevention costs, detection cost, internal failure costs and external
failure costs.
1. Environmental internal failure costs relating to an environmental failure, for example pollution or wastage
but where the failure has been identified and dealt with within the organisation before it manages to affect the
external environment.
Water purification treatment to clean waste water before it leaves the factory and capturing and recycling of
waste exhaust gases to generate energy would be examples of environmental internal failure costs.
2. Environmental prevention costs relate to activities or measure which aim to avoid the pollution or wastage
occurring. Insulation of heating pipes in the factory to reduce heat loss and fitting of carbon filters to machine
processes to reduce carbon emissions would come under this heading.
3. Environmental detection costs relate to the costs incurred to test the levels of emissions and wastage to
ensure that the organisation is being compliant with internal standards and external regulations. Quality control
inspections to monitor pollution levels in water leaving a production process and power usage measuring
system to monitor energy consumption within the factory would come under this heading.
4. External failure costs relate to pollution which has affected the outside environment. Payment of fines for
breaching environmental regulations in the industry and public relations costs to remedy reputational damage
caused by accidental river pollution would be examples of environmental external failure costs.
Note -2
They identified four types of costs:
1. conventional costs: raw material and energy costs having environmental relevance
2. potentially hidden costs: costs captured by accounting systems but then losing their identity in ‘general
overheads’
3. contingent costs: costs to be incurred at a future date – for example, clean-up costs
4. image and relationship costs: costs that, by their nature, are intangible, for example, the costs of preparing
environmental reports.
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Costing – Performance Management
Activity Based Costing
Question – 1(December -2014)
A company manufactures two products, C and D, for which the following information is available:
Budgeted production (units)
Labour hours per unit / in total
Number of production runs required
Number of inspections during production
Product C
1,000
8
13
5
Total production set up costs
Total inspection costs
$140,000
$80,000
Product D
4,000
10
15
3
Total
5,000
48,000
28
8
Other overhead costs are absorbed on a labour hour basis.
Using activity – based costing, what is the budgeted overhead cost per units of product D?
A.
B.
C.
D.
$43.84
$46.25
$131.00
$140.64
Question -2 (June 2015)
A company makes two products using the same types of materials and skilled workers. The following information
is available
Product A
Product B
Budgeted volume (units)
1,000
2,000
Material per unit ($)
10
20
Labour per units ($)
5
20
Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is the volume of
material purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
Using the activity -based costing, what is the total fixed overhead amount to be absorbed into each unit of product
B (to the nearest whole $)?
A.
B.
C.
D.
$113
$120
$40
$105
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Costing – Performance Management
Question -3 (June 2019)
Maribela Co makes a range of products and sells them online. It uses activity-based costing to allocate costs to its
products. Its two most successful products are ABC1 and ABC2 but it makes approximately 20 other products in
its factory. The company processes and despatches 12 million orders each year over its entire product range.
Information relating to ABC1 and ABC2 is as follows:
Sales volume (units)
Average order size (units)
ABC 1
10 million
8
ABC 2
2.4 million
1.2
The total packing and despatching cost pool for Maribela Co is $18 million each year. What is the packing and
despatching cost per unit of ABC1 (to two decimal places)?
A.
B.
C.
D.
$5.54
$0.69
$1.50
$0.19
Question -4 (September/ December 2020)
Which THREE of the following statements about activity-based costing (ABC) and traditional costing systems
(absorption costing and marginal costing) are correct?
Options:
A. No over-absorption or under-absorption of overheads can occur under ABC
B. ABC is useful for businesses which have high overheads in their cost structure
C. ABC is not suitable for use in businesses that provide services
D. Marginal costing understates the true cost of a product when compared to ABC
E. ABC is better than absorption costing in understanding what causes costs to be incurred
F. Both ABC and marginal costing treat all fixed costs as product costs
Question -5 (December 2014)
The following statements have been made in relation to activity – based costing:
(1) A cost driver is a factor which causes a change in the cost of an activity
(2) Traditional absorption costing tends to under – estimate overhead costs for high volume products
Which of the above statement is/ are ture?
A.
B.
C.
D.
1 only
2 only
Neither 1 nor 2
Both 1 and 2
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Costing – Performance Management
Throughput accounting
Section -A
Question -1 (Specimen 2016)
A company manufactures a product which requires four hours per unit of machine time. Machine time is a
bottleneck resource as there are only ten machines which are available for 12 hours per day, five days per week.
The product has a selling price of $130 per unit, direct material costs of $50 per unit, labour costs of $40 per unit
and factory overhead costs of $20 per unit. These costs are based on weekly production and sales of 150 units.
What is the throughput accounting ratio?
A.
B.
C.
D.
1·33
2·00
0·75
0·31
Question -2 (June 2015)
X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price
Material costs
Conversion cost
Time on bottleneck resource
$320
$80
$60
6 minutes
What is the return per hour for product A.
A.
B.
C.
D.
$40
$2400
$30
$1800
Question -3 (June 2015)
The following statements have been made in relation to the concepts outlined in the throughput accounting.
(i) Inventory levels should be kept to a minimum
(ii) All machine within a factory should be 100% efficient, with no idle time.
Which of the above statements is / are correct?
A.
B.
C.
D.
(i) only
(ii) only
Both (i) and (ii)
Neither (i) nor (ii)
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Costing – Performance Management
Question -4 (September 2016)
A manufacturing company uses three processes to make its two products, X and Y. The time available on the
three processes is reduced because of the need for preventative maintenance and rest breaks.
The table below details the process times pe product and daily time available:
Process
Hours available per day
1
2
3
22
22
18
Hour required to make
one unit of product X
1.00
0.75
1.00
Which of the following will improve throughput?
A. Increasing the efficiency of the machine routine for process 2
B. Increasing the demand for both products
C. Reducing the time taken for rest breaks on process 3
D. Reducing the time taken X requires for process 1
Hour required to make
one unit of product Y
0.75
1.00
0.50
20
Costing – Performance Management
Section - B
Question (Specimen paper)
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts and treatments at
the salon are carried out by one of the salon’s three senior stylists. The salon also has two salon assistants and
two junior stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair; next, by a senior
stylist, who cuts or treats the hair depending on which service the customer wants; then finally, a junior stylist
who dries their hair.
The average length of time spent with each member of staff is as follows:
Cut
Hour
0·1
1·0
0·6
Assistant
Senior stylist
Junior stylist
Treatment
Hour
0·3
1·5
0·5
The salon is open for eight hours each day for six days per week. It is only closed for two weeks each year. Staff
salaries are $40,000 each year for each senior stylist, $28,000 each year for each junior stylist and $12,000 each
year for each of the assistants. The cost of cleaning products applied when washing the hair is $1·50 per client.
The cost of all additional products applied during a ‘treatment’ is $7·40 per client. Other salon costs (excluding
labour and raw materials) amount to $106,400 each year.
Glam Co charges $60 for each cut and $110 for each treatment.
The senior stylists’ time has been correctly identified as the bottleneck activity.
Question -1
What is the annual capacity of the bottleneck activity?
A
B
C
D
Cuts
2,400
4,800
7,200
9,600
Treatments
1,600
4,800
4,800
9,600
Question -2
The salon has calculated the cost per hour to be $42·56.
What is the throughput accounting ratio (TPAR) for both services?
Cuts
Treatments
A 1·37
1·58
B 1·41
2·38
C 1·37
1·41
D 1·41
2·41
21
Costing – Performance Management
Question -3
Which of the following activities could the salon use to improve the TPAR?
(1) Apply an increase to the selling price of the services
(2) Identify ways to reduce the material costs for the services
(3) Increase the level of inventory to prevent stock-outs
(4) Increase the productivity of the stage prior to the bottleneck
(5) Improve the control of the salon’s total operating expenses
(6) Increase the time spent by the bottleneck activity on each service
A. (1), (2), (5) and (6)
B. (1), (2) and (5) only
C. (3) and (4)
D. (1), (2), (4) and (6)
Question -4
What would be the effect on the bottleneck if the salon employed another senior stylist?
A.
B.
C.
D.
The senior stylists’ time will be a bottleneck for cuts only
The senior stylists’ time will be a bottleneck for treatments only
The senior stylists’ time will remain the bottleneck for both cuts and treatments
There will no longer be a bottleneck
Question -5
Which of the following statements regarding the theory of constraints are correct?
1. It focuses on identifying stages of congestion in a process when production arrives more quickly than the
next
stage can handle
2. It is based on the concept that organisations manage three key factors – throughput, operating expenses
and
inventory
3. It uses a sequence of focusing steps to overcome a single bottleneck, at which point the improvement
process is complete
4. It can be applied to the management of all limiting factors, both internal and external, which can affect an
organisation
A. (1) and (2) only
B. (1), (2) and (3)
C. (2), (3) and (4)
D. (1), (3) and (4)