QA1.
Briefly explain what is meant by relevant cost. (30 words)
QA2.
What type of cost is considered to be hypothetical, ie no actual expense is incurred?
QA3.
Determination of cost and cost control are the primary roles of Financial Accounting or Cost Accounting?
QA4.
The value of “r” in a regression analysis is found to be zero. Does this indicate a perfectly positive or perfectly negative correlation?
QA5.
In response to a fall in demand for a product, should the manufacturer of that product consider an increase or a decrease in the mark-up amount?
QA6.
Identify two of the techniques that are used in a Total Productive Maintenance approach.
QA7.
Distinguish penetration pricing from price-skimming. (50 words)
QA8.
Briefly explain the term “internal rate of return”. (30 words)
QA9.
Identify any two external factors in an organisation’s pricing system.
QA10.
To price a non-customised product that is widely available in the market, the manufacturer should start from the cost to manufacture the produce or the current price of the product in the market?
QA11.
The management is considering a make-or-buy decision. Do they need to take into consideration the variable costs of production alone, or should they also consider the fixed costs that will no longer be incurred?
QA12.
When deciding on finding the most optimised mix of products, the company must recognise that to maximise production and profit, one of the factors of production will always run out.
Is it therefore true to suggest that “it is not possible to maximise profit if the products in the mix have low profit margins”?
QA13.
Green Ltd has low overheads. Would you advise them to implement Activity Based Management? Justify your answer. (30 words)
QA14.
Is it true that in a make-or-buy decision, the qualitative factors must always the most important considerations?
QA15.
Resource utilisation is commonly used in service and manufacturing environments. List three possible non-financial performance measures when measuring resource utilisation.
Section B – Answer all the questions in this section – Total 70 marks
Question B1
The management of Williams Ltd intends to open a new sales showroom and is considering two possible locations, London or Manchester. The company has allocated a budget of £160,000 for either of the two options. Based on the current forecast, the expected returns over the next five years are provided as below:
Cash inflow (£)
Year London Manchester
Year 1 40,000 60,000
Year 2 30,000 20,000
Year 3 60,000 40,000
Year 4 45,000 50,000
Year 5 80,000 75,000
The cost of capital is 9%.
Required:
Answer the following questions, showing your workings.
i) Using payback method, the management should choose
a) London
b) Manchester
c) neither of the two locations
d) either of the two locations as they have the same payback period
(6 marks)
ii) Using discounted method (NPV) the management should accept
a) London
b) Manchester
c) neither of the two locations
(8 marks)
iii. Discuss the advantages and limitations of the discounted method. (60 words)
(6 marks)
(Total 20 marks)
Question B2
Anderson Ltd is an established toy manufacturing company, operating for almost 10 years in the UK. The company has recently recruited a new managing director who intends to modernise the traditional costing approach in the company.
The new director wishes to adopt the more modern target costing approach, and has asked to provide the following information for the next management meeting:
Required:
a) Discuss the main benefits that are associated with target costing. (100 words)
(9 marks)
The management is currently considering the production of a new toy, which would cost £25 per unit. The company expects to have 30% profits on the cost of all its products.
Based on the current forecast, it is estimated that 8,000 units of the new toy could be sold in next year.
Required:
b) Use the above information to calculate the total revenue that could be
generated from the sale of the new toy. (6 marks)
(Total 15 marks)
Question B3
Cotton Ltd has recently revised its standard costs and has provided the following information for one of their products.
Standard costs
Material 700 metres at £5,600
Labour 300 hours at £3,000
At the end of the month of March, the actual costs were as below:
Material £5,500 for 620 metres
Labour £2,750 for 260 hours
The management had budgeted for the sale of 90 units of this product at £100 per unit during the month of March. The actual sales at the end of March were £6,850 for
80 units.
Required
a) Produce a variance statement of the following variances, clearly indicating whether they are adverse or favourable.
i) Material usage variance; (2 marks) ii) Material price variance; (2 marks) iii) Labour efficiency variance; (2 marks) iv) Labour rate variance; (2 marks) v) Total sales variance; (2 marks) vi) Total variance. (1 marks)
b) Discuss your findings from the above variances, commenting on the labour,
material and sales variances. (80 words) (9 marks)
(Total 20 marks)
Question B4
Jackson Ltd is a manufacturer of sports footwear. The company is now considering the launch of two main walking boots, Sleek and Trendy. A recent market research report has estimated a market demand of 1,000 pairs of Sleek and 600 pairs of Trendy per month for the following 12 months.
The production manager has provided the following information:
Sleek Trendy
Sale price per boot £120 £90
Variable cost per boot £20 £30
Labour hours to produce each boot 2 3
Required
a) Calculate the contribution margin per labour hour for each product. (4 marks)
The company intends to achieve the maximum profit from the production. You have, however, been informed by the production manager that the total possible number of labour hours available is 2,600 hours per month.
Required
b) Assuming that the company sells all the boots that are manufactured, compute:
I. the number of labour hours that should be allocated to produce a pair of
Sleek, and a pair of Trendy boots;
(2 marks)
II. the number of Sleek and Trendy boots that could be produced per month.
(2 marks)
The board has suggested a change in the existing shift work in the production department. This change increases the costs by £5,000 per month, but allows the production manager to allocate more hours to the production of the boots, as below:
Boots Hours allocated
Sleek 1,200
Trendy 3,800
Required
c) Calculate the number of Sleek and Trendy boots that could be produced if the change in the shift work is implemented. (5 marks)
d) Suggest if this is viable with regard to the profit maximisation objective of the
company. State any assumption that you have made. (2 marks)
(Total 15 marks)
END OF EXAM PAPER
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