TOPIC => Practice Questions

Question: Project X
The production manager of your organisation has approached you for some costing advice on
project X, a one-off order from overseas that he intends to tender for. The costs associated with the
project are as follows.

Material A
4,000
Material B
8,000
Direct labour
6,000
Supervision
2,000
Overheads
12,000
32,000
You ascertain the following.
(a) Material A is in stock and the above was the cost. There is now no other use for Material A,
other than the above project, within the factory and it would cost 1,750 to dispose of. Material
B would have to be ordered at the cost shown above.
(b) Direct labour costs of 6,000 relate to workers that will be transferred to this project from
another project. Extra labour will need to be recruited to the other project at a cost of 7,000.
(c) Supervision costs have been charged to the project on the basis of 33 1/3% of labour costs and
will be carried out by existing staff within their normal duties.
(d) Overheads have been charged to the project at the rate of 200% on direct labour.
(e) The company is currently operating at a point above breakeven.
(f) The project will need the utilisation of machinery that will have no other use to the company
after the project has finished. The machinery will have to be purchased at a cost of 10,000 and
then disposed of for 5,250 at the end of the project.
The production manager tells you that the overseas customer is prepared to pay up to a maximum of
30,000 for the project and a competitor is prepared to accept the order at that price. He also
informs you the minimum that he can charge is 40,000 as the above costs show 32,000 and this
does not take into consideration the cost of the machine and profit to be taken on the project.
Required:
(a) Cost the project for the production manager clearly stating how you have arrived at your figures
and giving reasons for the exclusion of other figures.
(b) Write a report to the production manager stating whether the organisation should go ahead with
the tender for the project, the reasons why and the price, bearing in mind that the competitor is
prepared to undertake the project for 30,000.
Note. The project should only be undertaken if it shows a profit.
(c) State four non-monetary factors that should be taken into account before tendering for this
project.

(d) Describe the advice you would give if you were told that the organisation was operating below
breakeven point? Give reasons for your advice.

Question: Coach Company

You are presented with the following information for the coming year about a coach company that
operates in your area.
30-seat
50-seat
coaches
coaches
Number of coaches
5
10
Number of drivers
5
10
Weekly wage costs per driver
220
250
Cost of each coach
20,000
32,000
Fuel consumption -miles per gallon
12.5
8.0
Licence fee per coach
350
500
Insurance per coach
340
400
Repairs and maintenance for the year are budgeted at 65,000 and are to be apportioned between the
coaches in the ratio of their total mileage. Administration expenses are budgeted at 93,600 and are
to be apportioned to each coach in the ratio of drivers wage costs.
You are told that each 30-seat coach is kept for six years, at which time it will have a resale value of
2,000 and that every 50-seat coach will be replaced after seven years and have a resale value of
4,000. It is the policy of the company to depreciate the coaches on a straight line basis.
It is envisaged that each 30-seat coach will travel 500 miles per week and each 50-seat coach will
travel 400 miles per week. The cost of fuel is budgeted at 2.20 per gallon. It is budgeted that each
coach will be in operation 50 weeks per year and the drivers will be paid for 52 weeks.
Required:
(a) Prepare costings to determine the operating cost per passenger mile on an absorption basis for
the following.
(i)
Each 30-seat coach
(ii)
Each 50-seat coach
(b) The company has been asked to tender for a contract to provide transport for an education
authority for 40 weeks in the coming year. The contract would involve three of the coaches
carrying 25 students 10 miles a day, 5 days a week and two coaches carrying 40 students 15
miles a day, 5 days a week.
Provide a total tender price on the basis of the costings you have prepared in (a) above, given
that the company requires a profit of 40% on contract price.
(c) The company is worried that over the last year more coach drivers have left the company than in
previous years.
Explain the possible reasons for the high rate of labour turnover and illustrate the costs involved
as opposed to the benefits of a stable workforce.

Question: Conversion Work

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A company has completed an order for a customer, who has gone into liquidation before taking
delivery. The sales manager has finally found a potential customer who will buy the product if certain
conversion work is undertaken.
The company has already spent 20,000 on manufacturing the product, and the following
information relating to the proposed conversion work is collected.
Materials required at cost
Direct wages: four workers
Variable overhead
Depreciation
Foreman
Fixed production overhead

2,000
2,000
400
1,000
150
800
6,350

It is company policy to price its products at 25% mark up on cost, and accordingly a price of
32,937.50 (20,000 + 6,350 + 6,587.50) would be quoted.
Notes
(a) The materials which are to be used on the conversion are in stock. The material could be used in
the production of another good in place of material that the company would otherwise have to buy at
a cost of 4,000.
(b) Four workers would be required to complete the conversion. They would be taken from a
department which is currently working well below full capacity.
(c) The conversion work will require the use of machinery which cost 120,000 eight years ago. It
has an estimated life of ten years. Depreciation is charged on a straight line basis.
(d) The conversion work will be supervised by a foreman who is currently employed by the company.
The foreman receives a salary which is equivalent to 1,500 per month. It is estimated that the
conversion will occupy 10% of the foremans time.
(e) The conversion will take one month.
(f) The original customer had paid a non-returnable deposit of 3,000.
(g) It is company policy to charge production with a proportion of general fixed overheads at an
absorption rate of 40% of material costs.
(h) In its existing condition the product could be sold for scrap, earning a revenue of 1,000.
Required:
Prepare calculations to show the minimum price which you would recommend the company to quote
to the new customer. Assume that no other customer will be found. Give reasons for the inclusion or
exclusion of items in your computations.
Question: Trainee
You work as a trainee for a small management consultancy which has been asked to advise a
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company, Rane Limited, which manufactures and sells a single product. Rane is currently operating
at full capacity, producing and selling 25,000 units of their product each year. The cost and selling
price structure for this level of activity is as follows.
At 25,000 units output
per unit
per unit
Production costs
Direct material
14
Direct labour
13
Variable production overhead
4
Fixed production overhead
8
Total production cost
39
Selling and distribution overhead
Sales commission -10% of sales value
Fixed

6
3
9

Administration overhead
Fixed
Total cost
Mark-up (20%)
Selling price

2
50
10
60

A new managing director has recently joined the company and he has engaged your organisation to
advise on his companys selling price policy. The sales price of 60 has been derived as above from a
cost plus pricing policy. The price was viewed as satisfactory because the resulting demand enabled
full capacity operation.
You have been asked to investigate the effect on costs and profit of an increase in the selling price.
The marketing department has provided you with the following estimates of sales volumes which
could be achieved at the three alternative sales prices under consideration.
Selling price per unit
Annual sales volume (units)

70
20,000

80
16,000

90
11,000

You have spent some time estimating the effect that changes in output volume will have on cost
behaviour patterns and you have now collected the following information.
Direct material
The loss of bulk discounts means that the direct material cost per unit will increase by 15% for 11
units produced in the year if activity reduces below 15,000 units per annum.
Direct labour
Savings in bonus payments will reduce labour costs by 10% for all units produced in the year if
activity reduces below 20,000 units per annum.
Sales commission
This would continue to be paid at the rate of 10% of sales price.
Fixed production overhead
If annual output volume was below 20,000 units then a machine rental cost of 10,000 per annum
could be saved. This will be the only change in the total expenditure on fixed production overhead.
Fixed selling overhead
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A reduction in the part-time sales force would result in a 5,000 per annum saving if annual sales
volume falls below 24,000 units. This will be the only change in the total expenditure on fixed selling
and distribution overhead.
Variable production overhead
There would be no change in the unit cost for variable production overhead.
Administration overhead
The total expenditure on administration overhead would remain unaltered with this range of activity.
Stocks
Ranes product is highly perishable; therefore no stocks are held.
Required:
(a) Calculate the annual profit which is earned with the current selling price of 60 per unit.
(b) Prepare a schedule to show the annual profit which would be earned with each of the three
alternative selling prices.
Question: Trainee (revisited)
Prepare a brief memorandum to your boss, Chris Jones. The memorandum should cover the
following points.
(a) Your recommendation as to the selling price which should be charged to maximise Rane
Limiteds annual profits.
(b) Two non-financial factors which the management of Rane Limited should consider before
planning to operate below full capacity.

Question: North and South

You are an assistant management accountant with North and South. The company makes several
products, two of which are the Handy and the Super. The unit selling price and costs for both are
reproduced below. All are current costs.
Handy
Selling price
Material X - 2 litres
Labour - grade 1
Overheads based on labour hours
Unit profit

Super

100
32
24
24
20

Selling price
Material Y - 3 kilograms
Labour - grade 2
Overheads based on labour hours
Unit profit

102
30
32
32
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The contracts director of North and South, Elizabeth Brookes, is considering whether to bid for a
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contract. Already the development department has spent 150 person-hours on preliminary work and
this amount will double if a full bid is made. The charge-out rate for the development department is
250 per hour of which 50 relates to general overheads. However, the overhead component will
double in the immediate future to allow for the department only working at 50 per cent capacity. In
addition to these costs, the contract will require three types of material.
The contract calls for 1,000 kilograms of material A. North and South currently have 1,500
kilograms in stock although the company has no further use for it. It originally cost 10 per kilogram
but was subsequently written down to 8 per kilogram. The current purchase price is 9 while any
surplus stock can be sold for 7 per kilogram.
Material B is also no longer used in the company. The contract requires 1,500 litres of which 600
litres is in stock. Originally this cost 20 per litre although the current purchase price is 24. If not
used in the contract, Material B could either be sold to a competitor for 14 per litre or used as a
replacement for material X in the making of the Handy. For each litre of Material B used, North and
South could save purchasing one litre of material X.
Material C is used regularly by North and South and 2,000 kilograms will be required by the
contract. North and South operates a first-in-first-out stock valuation system and the current stocks
are 500 units at a unit cost of 7 purchased on 20 October 1?XS and 700 units costing 7.50 per
unit purchased on 8 November 19X5. Additional supplies are available at a unit price of 8 and any
surplus stocks can be sold for 7.50 each.
The contract calls for 2,000 hours of labour grade 2, the rate for which is 16 per hour. This includes
a 100 per cent overhead recovery rate. Currently there is a severe shortage of this quality of labour.
If the contract is won, North and South will have to take employees away from producing the Super.
The contract will also require the use of two machines for six months. These are special, heavy-duty
machines although they will only be required for light work on the contract. The depreciation charge
per annum using the straight-line method is 20,000 per machine. For the first three months of the
contract, they would have no further use but for the second three months, North and South has
entered into an arrangement to rent them to another company for a total of 18,000. Less
sophisticated machines suitable for use on the contract are available for hire at 2,000 per machine
per month.
North and South have a company-wide policy to add 100 per cent to all contract costs to cover
general overheads.
Required:
Elizabeth Brookes has asked for your advice about the contract. She is particularly concerned to
estimate the minimum bid price which would not involve a loss for North and South. Prepare a
statement recommending the minimum price at which it would be viable for North and South to
undertake the contract.

Question: North and South (revisited)

Write a short memo to Elizabeth Brookes:
(a) explaining and justifying by way of example the accounting technique or techniques you have
used in deriving the minimum bid price;
(b) justifying why you believe the individual costs of each resource associated with the contract
should be included in your statement in answer to the North and South question.
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Question: Quality Data Products Ltd.

You have recently been appointed as the Management Accountant to Quality Data Products Ltd.
QDP was started almost five years ago by Peter Dixon to manufacture an improved television aerial.
For the first four years, the company could sell as many units as it could make. Because of this, it
was agreed to charge overheads to production based on the companys maximum manufacturing
capacity.
However, Hilary Farmer, the companys Finance Director, believes that the likely level of sales and
production for the full twelve months of the current year will fall to 2.4 million units. On this
assumption, she has prepared a forecast statement of profitability for year five.
Forecast income statement 12 months ended 30 June 19X6

Turnover
120,000,000
Variable material
Variable labour
Variable production overhead
Fixed production overhead absorbed*

26,160,000
34,080,000
10,560,000
19,200,000
90,000,000
30,000,000

Gross profit
Sales commission**
Fixed selling expenses
Fixed administration expenses
Unabsorbed fixed production overhead*

6,000,000
11,500,000
5,000,000
4,800,000
27,300,000
2,700,000

Operating profit

* Total fixed production overhead comprises fixed overhead absorbed and charged to production
plus fixed overhead unabsorbed and charged as an expense of the year
** Based on sales turnover
Hilary explained that the reason for the reduced profit was partly due to reduced sales volume arising
from a competitor entering the market and partly due to QDP no longer being able to claim a 20%
discount on material costs because production had fallen below 2.5 million aerials.
Peter Dixon put forward three proposals to improve profitability next year. The first was to reduce
prices by 8%, the second to reduce prices by 12%. If prices were reduced by 8%, he felt demand
would increase to 2.8 million aerials per year but if prices fell by 12% the demand was likely to be
3.5 million aerials. The third proposal was to manufacture an improved product.
This third proposal would involve a 12 million marketing campaign to launch the revised aerial. In
addition, a new material would have to be used. This would cost 10% more than the current material
and the supplier would not offer any quantity discounts. However, because of the improved quality
of the material, the variable labour cost per aerial would fall by 2.00 and there would be no other
changes. If the new product was launched, Peter believes volume would return to the level of the
previous four years.
Required:
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On the assumption that sales and production volumes equal one another, you are asked to prepare a
statement identifying the likely profitability of Quality Data Products next year for each of the three
proposals.
Question: Quality Data Products Ltd. (revisited)
On receiving your statement, Hilary Farmer informs you that Peter Dixon was not absolutely certain,
that the volumes suggested for the three proposals would be achieved. She also mentioned that he
had not considered any of the wider, non-financial implications of the proposals.
Required:
Hilary Farmer asks you to prepare a memorandum. The memorandum should:
(a) estimate the volume of sales necessary for each of the three proposals where profitability would
be the same as in the current year;
(b) identify two non-financial matters which should be considered before making a final decision.
Question: Mark-Up Ltd.
Mark-up Ltd has begun to produce a new product, Product X, for which the following cost
estimates
have been made.

Direct materials
27
Direct labour: 4 hrs at 5 per hour
20
Variable production overheads: machining, 1/2 hr at 6 per hour
3
50
Production fixed overheads are budgeted at 300,000 per month and because of the shortage of
available machining capacity, the company will be restricted to 10,000 hours of machine time per
month. The absorption rate will be a direct labour rate, however, and budgeted direct labour hours
are 25,000 per month. It is estimated that the company could obtain a minimum contribution of 10
per machine hour on producing items other than product X.
The direct cost estimates are not certain as to material usage rates and direct labour productivity, and
it is recognised that the estimates of direct materials and direct labour costs may be subject to an
error of 15% (plus or minus 15 per cent). Machine time estimates are similarly subject to an error
of 10%.
Required:
The company wishes to make a profit of 20% on full production cost from product X. What should
the full cost-plus based price be?