Question 2 Answer:
Maximum
marks
a. The expected total direct labour hours during the period are computed as follows:
Product Caramel: 400 units × 0.7 hours per unit
280 hours
Product Delight: 1,200 units × 1.2 hours per unit
1,440 hours
Total direct labour hours
1,720 hours
2
Using these hours as a base, the predetermined overhead using direct labor hours would be:
Estimated overhead cost, £130,890 ÷ Estimated direct labour hours, 1,720
= £76.10/DLH
2
Using this overhead rate, the unit product costs are:
Product
Caramel
Product Delight
£ 10.70
£ 16.70
Direct labour
11.20
19.20
Manufacturing overhead
53.27
91.32
Direct materials
Total unit product cost
£ 75.17
£127.22
3 marks
b. The overhead rates for each activity cost pool are as follows:
Machine setups ............
Purchase orders ...........
General factory ............
Estimated
Overhead Expected Overhead
Costs
Activity
Rate
£13,570
230
£59.00
£91,520
2,080
£44.00
£25,800
1,720
£15.00
The overhead cost charged to each product is:
3 marks
Machine setups ............
Purchase orders ...........
General factory ............
Total overhead cost .....
Product Caramel
Product Delight
Activity Amount Activity Amount
100 £ 5,900
130 £ 7,670
810
35,640
1,270
55,880
280
4,200
1,440
21,600
£45,740
£85,150
4 marks
Overhead cost per unit:
Product C: £45,740 ÷ 400 units = £114.35 per unit
Product D: £85,150 ÷ 1,200 units = £70.96 per unit
2 marks
Using activity based costing, the unit product cost of each product would be:
Direct materials
Direct labor
Product
Caramel
Product Delight
£10.70
£ 16.70
11.20
19.20
114.35
70.96
£136.25
£106.86
Manufacturing overhead
Total unit product cost
4 marks
Total
20 marks
Question 3 Answer:
a.
Maximum
marks
1. Capital-intensive:
Break-even in units = Fixed expenses ÷ Unit contribution margin
= (£2,440,000 + £500,000) ÷ (£30 - £14 – £2)
= £2,940,000 ÷ £14 per unit
= 210,000 units
2
2. Labour-intensive:
Break-even in units = Fixed expenses ÷ Unit contribution margin
= (£1,320,000 + £500,000) ÷ (£30 – £17.60 – £2)
= £1,820,000 ÷ £10.40 per unit
= 175,000 units
2
Profit = Sales - Variable expenses - Fixed expenses
Capital-intensive:
Profit = £30Q – £16Q – £2,940,000
= £14Q – £2,940,000
2
Labour-intensive:
Profit = £30Q – £19.60Q – £1,820,000
= £10.40Q – £1,820,000
2
The profits are equal when:
£14Q – £2,940,000 = £10.40Q – £1,820,000
c
£3.60Q
= £1,120,000
Q
= £1,120,000 ÷ £3.60
Q
= 311,111
3
Maximum
marks
.
1. Capital-intensive:
Sales (250,000 × £30)
£7,500,000
Variable expenses (250,000 × £16)
4,000,000
Contribution margin
3,500,000
Fixed expenses
2,940,000
Net operating income
£ 560,
Degree of operating leverage = Contribution margin ÷ Net operating income
= £3,500,000 ÷ £560,000 = 6.25
3
2. Labor-intensive:
Sales (250,000 × £30)
£7,500,000
Variable expenses (250,000 × £19.60)
4,900,000
Contribution margin
2,600,000
Fixed expenses
1,820,000
Net operating income
£ 780,000
Degree of operating leverage = Contribution margin ÷ Net operating income
= £2,600,000 ÷ £780,000 = 3.33
3
The decision hinges upon the expected sales of the new product. If management is confident that
sales will be in excess of 311,111 units, then the capital-intensive method should be used. If sales are
likely to fall below this number, then the labor-intensive method should be used. Management
should also be aware that net operating income will be more volatile with the capital-intensive
method since it has higher operating leverage.
3
Total 20 marks
Question 4 Answer
Maximum
marks
Answer:
a
Variable cost per unit on normal sales:
Direct materials
£38.80
Direct labor
9.70
Variable manufacturing overhead
2.30
Variable selling & administrative expense
1.70
Variable cost per unit on normal sales
£52.50
4
Variable cost per unit on special order:
Normal variable cost per unit
£52.50
Reduction in variable selling & admin.
0.20
Variable cost per unit on special order
£52.30
Selling price for special order
£ 75.30
Variable cost per unit on special order
52.30
Unit contribution margin on special order
23.00
Number of units in special order
3,000
Increase (decrease) in net operating income
£69,000
2
4
b. The opportunity cost is just the contribution margin on normal sales:
Normal selling price per unit
Variable cost per unit on normal sales
Unit contribution margin on normal sales
£81.10
52.50
£28.60
2
Maximum
marks
c. Minimum acceptable price:
Unit contribution margin on normal sales
£28.60
1
1,000
1
Lost contribution margin displaced sales
£28,600
2
Total variable cost on special order
156,900
1
£185,500
1
3,000
1
£61.83
1
Displaced normal sales
Number of units in special order
Minimum acceptable price on special order
Total
20 marks
Question 5 Answer
Maximum
Marks
a.
i.
Total material variance = £140 U
2
ii.
=
Materials price variance = AQ(AP - SP)
(2.1 x 400) x (£1.60 - £1.50) = £84 U
2
iii
Materials quantity variance = SP(AQ - SQ)
=
£1.50(2.1 x 400 - 2.0 x 400) = £60 U
2
iv.
Direct labor rate variance = AH(AR - SR)
= (1.4 x 400) x (£6.50 - £6.00) = £280 U
2
v.
Direct labor efficiency variance = SR(AH - SH)
= £6.00(1.4 x 400 - 1.5 x 400) = £240 F
2
vi
. Variable overhead rate variance = AH(AR - SR)
= (1.4 x 400) x (£3.10 - £3.40) = £168 F
2
vii
Variable overhead efficiency variance = SR(AH - SH)
= £3.40(1.4 x 400 - 1.5 x 400) = £136 F
2
b.
The total materials variance is divided into a price variance and a
quantity variance for two basic reasons. First, the difference between
the standard materials cost for the actual output and the actual
materials cost is due to two different factors. One factor is the price
that was paid for the materials.
3
The second factor is the efficiency with which the materials were used.
Breaking down the total variance allows managers to isolate these two
factors. Second, different people are usually responsible for purchasing
and for using materials in production. The price variance is generally
the responsibility of the individual in charge of purchasing. The quantity
variance is generally the responsibility of the individual in charge of production.
3
Total 20 marks
Question 6
Maximum
marks
Question 6 Answer:
a.
Sales, April: £300,000 × 0.26
£ 78,000
Sales, May: £500,000 × 0.70
350,000
Total Collections
b.
£428,000
3
Budgeted cost of goods sold for May:
£500,000 × 60% = £300,000
Required inventory level at the end of April:
£300,000 × 25% = £75,000
c.
2
May
June
July
Budgeted sales
£500,000
£700,000
£400,000
Budgeted cost of goods sold (60%)
300,000
420,000
240,000
Desired ending inventory, at cost*
Total needs
105,000
405,000
Less beginning inventory, at cost**
Required purchases, at cost
60,000
480,000
75,000
105,000
£330,000
£375,000
6
*Following month’s cost of goods sold × 25%
**Current month’s cost of goods sold × 25%
d.
Payments for May purchases: £330,000 × 0.50
£165,000
Payments for June purchases: £375,000 × 0.50
187,500
£352,500
2
e..
October production = 8,000 + (7,000 × 10%) - (8,000 × 10%) = 7,900;
November production = 7,000 + (11,000 × 10%) - (7,000 × 10%) = 7,400;
October production resin needs = 7,900 × 7 = 55,300 ounces
November production resin needs = 7,400 × 7 = 51,800 ounces
October resin purchases = 55,300 + (51,800 × 25%) - (55,300 × 25%) =
54,425 ounces
7
Total
20 marks