OFFICE USE ONLY

Monash University
Semester One Examination 2011
Faculty of Business and Economics
Department of Accounting and Finance

EXAM CODE: AFW2020/AFG2020

TITLE OF PAPER: COST INFORMATION FOR DECISION MAKING

EXAM DURATION: 3 hours

READING TIME: 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)

Berwick Clayton Peninsula Distance Education Other (specify)

Caulfield Gippsland Sunway South Africa

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case,
mobile phone or any other material/item which has not been authorised for the exam or specifically
permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in
your possession. You are reminded that possession of unauthorised materials in an exam is a
disciplinable offence under Monash Statute 4.1.

AUTHORISED MATERIALS

CALCULATORS YES NO
(If YES, only calculators with an 'approved for use' Faculty label are permitted)

OPEN BOOK YES NO

SPECIFICALLY PERMITTED ITEMS YES NO

if yes, items permitted are:

This paper consists of six (6) questions printed on a total of eight (8) pages.
Students must attempt to answer ALL questions.

STUDENT ID: ... DESK NUMBER: .

PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER. THIS EXAMINATION
PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER.
NO EXAMINATION PAPERS SHOULD BE REMOVED FROM THE EXAMINATION ROOM

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Question One (Answer all the parts)

(a) Explain why overtime premium and idle time are treated as manufacturing overhead.

(b) Explain why in allocating indirect costs to responsibility centres, budgeted costs and
drivers are preferred to actual costs and drivers.

(c) Discuss the need to recognise different cost behaviour patterns in an organisation.

(d) What are behavioural issues in management accounting? Why are they considered
important in decision making?
(5 + 5 + 5 + 5 = 20 marks)

Question Two

Komal Kid Plastics manufactures plastic chairs in two departments, Moulding and
Finishing. The July 2010 physical and cost data for the Finishing Department are contained
in the table below:

Transferred- Direct Conversion

Units in costs materials costs
Work in process
1 July 2010 15,000 $50,000 0 $25,000
Units transferred
from Moulding 9,000
Work in process
31 July 2010 5,000
Costs added during
July 2010 $46,000 $38,000 $38,000
Completed chairs
sold in July 2010 12,000

The beginning work in process is 60% complete and the ending work in process is 40%
complete. Direct materials in the Finishing Department are added when the chairs reach
70% completion stage. The conversion costs are uniformly incurred throughout the
Department. There is no spoilage. Komal Kid Plastics uses the weighted average costing
method in the calculation of manufacturing costs.

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Question Two (contd)

Required:

(a) Complete the four steps of a cost of production report for the Finishing Department
for the month of July 2010

(b) Show the T account for Finishing Department Work in Process as it would appear on
31 July 2010

(c) Prepare a journal entry to record the cost of chairs sold in July

(d) What is normal spoilage and how is it dealt with in process costing?

(10 + 4 + 1 + 3 = 18 marks)

Question Three

You have recently completed your degree at Monash University, and joined your fathers
firm, which specialises in the preparation of tax returns. The firm offers two basic
products: the preparation of income tax returns for wage and salary earners and for small
businesses. You are only responsible for tax returns for wage and salary earners.

The firm is using a software package to process data. You are concerned about the pricing
policy, which sets a flat fee of $70 per return. With your fathers permission, you have
decided to use activity-based costing to estimate the cost of preparing the tax returns.

You have compiled the following information regarding the firms total costs and activities
for the completion of wage and salary earners tax returns.
Quantity of
Activity activity
Activity cost $ Activity driver driver
Interview client 20 000 No. of clients 5 000
Obtain missing data 250 000 No. of follow-up calls 10 000
Input data 40 000 No. of data entries 200 000
Print return 30 000 No. of returns 5 000
Submit return 10 000 No. of returns 5 000
Verify assessment 50 000 No. of hours 2 500
Discuss assessment with client 5 000 No. of hours 2 500
Total cost 405 000

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Question Three (contd)

ADDITIONAL INFORMATION:

Clients are interviewed only once per return.

Each return requires 2 follow-up calls to obtain missing data.
Each return requires 40 data entries.
It takes approximately 30 minutes to verify an assessment.
It takes approximately 30 minutes to discuss an assessment with the client.

Required:

(a) Use activity-based costing to estimate the cost of preparing a tax return.

(b) Use your answer in (a) above to evaluate the firms pricing policy.

(c) Discuss the problems that are likely to arise in using activity-based costing in service
organisations.
(7 + 3 + 6 = 16 marks)

Question Four

Aishah Ltd produces AIS Spelling Corrector X-1, a helpful gadget for those who need help
with spelling, crossword puzzles and writing term papers. In addition, AIS Spelling
Corrector X-1 can be connected to the computer via USB cable. This gadget comes with
databank, calculator and ten word games, which can display up to twenty characters. The
Company produces 24,000 units of AIS Spelling Corrector X-1 per annum.

MX-222 is one of the integrated chips in AIS Spelling Corrector X-1. One unit of AIS Spelling
Corrector X-1 requires one unit of MX-222. Currently, the Company manufactures MX-222 to
meet the annual production of AIS Spelling Corrector X-1. The annual manufacturing costs of
MX-222 are as follows:

Direct materials $84,000

Direct labour $53,000
Indirect labour $32,000
Inspection and testing $48,000
Power and utilities $85,000
Insurance $30,000
Depreciation (fixed) $36,000
Miscellaneous fixed expenses $24,000

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Question Four (contd)

If the Company discontinues manufacturing MX-222 and buys from an external supplier,
management expects that several annual manufacturing costs could be reduced as follows:
Power and utilities costs reduced by 20%.
Inspection and testing costs reduced by 30%.
Insurance costs reduced by 30% .

Zira Ltd, a reputable electronic component supplier is willing to supply identical chips
required by Aishah Ltd at $6.00 each. In addition, the Company will have to pay
transportation costs of $26,000 per delivery, assuming that only one delivery is required.

Required:

(a) List the important quantitative and qualitative considerations that Aishah Ltd should
take into account when making a make or buy decision.

(b) Recommend whether the Company should manufacture MX-222 or buy the equivalent
chips from Zira Ltd. Show all supporting calculations.

(c) Two weeks ago, the Company received an order from Hadiff Ikh Ltd, an international
company from Turkey, for 12,000 units of AIS Spelling Corrector X-1 at a price of $245
each. If the company manufactures the component MX-222 to meet this order, the
annual manufacturing costs (excluding depreciation and miscellaneous fixed
expenses) will increase by 10%. Should the company make or buy the component of
MX-222?
(4 + 8 + 7 = 19 marks)

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Question Five

PART A

Sunny Telco is a mobile telecommunications company that has the widest and most
extensive coverage nationwide. Its vision is to become No.1 Mobile Operator in Postpaid
plans. The existing Normal Postpaid plan requires customers to register and pay a one-time
deposit of $300. This plans emphasis is on pay as you use with a flat nationwide call rate
of $0.30 per minute and $0.15 per SMS.

Late last month Sunny Telco introduced two new Sunny Exec Postpaid plans. With any
Sunny Exec postpaid plan, customers are guaranteed low rates and greater benefits. These
are:
New Sunny EXE 40 Postpaid Plan where customers have to pay $40 monthly access fee,
a $0.20 per minute flat rate on calls, and $0.10 flat rate per SMS.
New Sunny EXE 250 Postpaid Plan with a monthly commitment of $250, with 700
bundled minutes and 50 free SMS. No extra talk time or SMSs can be purchased under
this plan.

Required:

(a) State the cost behaviour pattern (variable, fixed or semi-variable) for the costs
associated with each of the three plans.

(b) Which plan is the best for somebody who normally uses 10 hours of voice call and 40
SMSs every month?
(3 + 4 = 7 marks)

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Question Five (contd)

PART B
H & I specialises in homemade ice cream - classic, seasonal and locally-inspired ice cream
flavors. Their ice cream is super-premium and uses only top-quality ingredients. Currently,
the management is in the process of determining if there is a relationship between machine
hours and the maintenance costs. The management obtains the following monthly
information for the past 6 months:
Machine Maintenance
Hours Costs
August 8,000 $62,000
September 6,000 $59,000
October 8,500 $60,000
November 5,000 $40,000
December 4,000 $54,000
January 6,500 $62,000

In addition, a regression analysis was performed to estimate the cost function and the
following results were generated:

Regression Statistics
R Square = 0.922654
Adjusted R Square = 0.912981
Standard Error = 897.368741
Observations = 6

Coefficients
Intercept = 45638.621897
Slope = 1.876324

Required:

(a) State the cost function using the high low method.

(b) State the cost function using the regression statistics.

(c) Which method should be used by the management to predict the maintenance cost.
Why?
(3 + 1 + 2 = 6 marks)

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Question Six

Super 15 Ltd is a manufacturer of sports equipment. The company uses a standard costing
system and applies overhead on the basis of machine hours. The company has recently
received a request from the rugby union to bid on the manufacture of 500 rugby balls. The
bid must be stated at total cost per unit plus a mark-up of no more than 30% of bid price.
Total cost includes all manufacturing cost and direct administrative cost associated with
the manufacture and sale of the rugby balls. The rugby union indicated that bids in excess
of $65 per rugby ball are not likely to be considered.

You have gathered the following information about the production of rugby balls in order
to prepare a bid for the 500 rugby balls:

Raw material (0.75m of leather per rugby ball) $40 per meter
Direct labour (15 minutes per rugby ball) $20 per hour
Direct machine cost $10 per rugby ball
Variable overhead $15 per machine hour
Fixed overhead $50 per machine hour
Direct administrative cost $2.50 per rugby ball

The company produces 25 balls per machine hour.

Required:

(a) Calculate the minimum price per rugby ball that Super 15 Ltd could bid without
reducing the companys profit.

(b) Using the total cost criteria and the maximum mark-up specified, calculate Super 15
Ltd bid price per rugby ball.

(c) Assume that the price per rugby ball the company has calculated using the cost-plus
criteria is greater than the maximum bid of $65 per ball allowed. List five factors that
they should consider before deciding whether to submit a bid at the maximum
acceptable price of $65 per rugby ball.
(6 + 4 + 4 = 14 marks)

END OF EXAMINATION

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