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ACCT90009 Strategic Cost Management

Department of Accounting

Practice Exam Questions

 These practice questions are provided for exam revision purposes.

 The questions are presented in the ‘booklet’ format that will be used in the final
exam (where writing space is provided under each of the questions for your
response).

 Please note, the questions do not cover all topics that are examinable on the final
exam in Semester 2, 2018.

 You should be able to complete these practice questions in two hours under exam
conditions (please be reminded that the final exam in this subject is three hours
long).

 As these are sample questions only, marks do not add to 100

 Guide solutions only are provided.


Question One: [4 + 4 + 4 = 12 Marks]
Using an old family recipe, Alison Parkes started a company that produces non-
alcoholic fruit punch. The fruit punch is sold in 375ml, 500ml and 600ml bottles to
supermarkets and cafés. The company has expanded rapidly, and Alison is currently
seeking a bank loan to borrow the money necessary to invest in additional equipment.
The bank has informed Alison that they will not consider her loan application until she
supplies them with up-to-date financial statements for the business.

Alison has never bothered with financial statements before and she is puzzled as to how
to determine the value of her fruit punch for the purposes of these financial statements.
Alison thought of perhaps using job-order costing, which had been used at her previous
employer. However, raw ingredients are continually being mixed to make more fruit
punch, and more bottled fruit punch is always coming off the end of the bottling line.
Alison didn’t see how she could use a job-order costing system since the job never
really ended. A friend has suggested that Alison investigate the feasibility of using a
process costing system given the production environment of her company.

a. To help Alison understand process costing systems explain their similarities to


the job-order costing system she is familiar with. [4 Marks]

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b. Do you think a job-order or process costing system would be more applicable
for Alison’s company? Explain. [4 Marks]

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c. Should Alison consider implementing an activity-based costing system for
product costing purposes? Why or why not? [4 Marks]

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Question Two: [6 + 3 + 5 + 6 = 20 Marks]
North Melbourne Building Supplies (NMBS) manufacture industrial size concrete
blocks. When William Ng, the company’s new accountant, started work last month, he
learnt that the company had never used standard costs. He decided to implement a
standard cost system to help the managers monitor operating performance. William was
unfamiliar with the production process for concrete blocks. After studying the
accounting and production records for NMBS for the previous year, however, he came
up with the following summary of direct and overhead cost standards for a cement
block. These standards reflect costs that should be incurred under ideal operating
conditions:

Direct Materials
Cost of Cement Mix $5 per kg
Quantity of Cement Mix 1 kg per block
Direct Labour
Labour Rate $10.00 per hour
Quantity of Direct Labour 0.1 hours per block
Fixed Overhead
Planned Expenditure $180,000
Variable Overhead
Spending per Labour Hour $2.00

The production scheduler had estimated that 90,000 concrete blocks would be sold in
the month of May. However, production for May was actually 95,000 blocks.

a. Evaluate the approach William has taken in setting standards for concrete
block production at North Melbourne Building Supplies. What are the
advantages and disadvantages of his approach? What improvements to the
method of setting standards may be warranted? [6 Marks]

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b. What effect will the slightly higher than anticipated production level for May
have on the direct materials, direct labour and variable overhead flexible
budget variances? Explain. [3 Marks]

c. In the month of May the actual labour rate was $12 per hour and actual direct
labour hours worked were 8,800. Calculate and interpret meaningful flexible-
budget variances for direct labour. [5 Marks]

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d. Actual fixed overheads for the production of 95,000 cement blocks in May
were $197,500. Fixed overheads are allocated to blocks on the basis of direct
labour hours. 8,800 actual direct labour hours were worked during May.
Calculate and interpret meaningful variances with respect to fixed overheads
for North Melbourne Building Supplies. [6 Marks]

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Question Three: [15 Marks]
Anne Lillis owns and manages AML Real Estate Ltd. The company generates revenues
through three departments: commercial sales, residential sales and property
management. Anne wants to determine the total costs (including support department
costs) of each revenue generating department. Each of the company’s department costs
and several associated allocation bases are presented below.

  Available Allocation Bases


Total No. of Office Space Computer Sales
Department
Costs Employees (sq. feet) Processing Hrs Dollars
Personnel $980,000 12 30 1,760,000 N/A

Information Technology 477,000 7 95 682,000 N/A

Advertising 381,000 4 20 470,000 N/A

Commercial Sales 5,245,000 26 221 620,000 $6,760,000

Residential Sales 4,589,510 105 600 910,000 8,230,000

Property Management 199,200 6 60 420,000 498,000

Using the step down method, allocate the service department costs to the revenue
generating departments. Justify the sequence in which you allocate service
department costs and the allocation base you choose for each service department.
[15 Marks]

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Question Four: [12 + 6 = 18 Marks]
Yatoya Pty Ltd. is a major motor vehicle producer, located in Victoria. The company
has experienced declining sales and increasing costs over the last few years. At the
beginning of this year, Yatoya was taken over by a Japanese multi-national company
that has car manufacturing interests in most Western economies. An audit team from
the Japanese parent company has just completed its evaluation of Yatoya and
recommended sweeping changes to the company’s inventory, production and quality
management. The major recommendations include the following:
 Inventories of raw materials, work-in-progress and finished goods are to be halved
during the next year and then reduced by a further 10 percent per year over the
following three years;
 The number of raw material suppliers is to be reduced to just one or two suppliers
for each major raw material;
 Shopfloor employees are to be trained to stop the production line the moment they
identify a quality problem and to start it again once they have corrected the problem;

Gary Pan has been the managing director of Yatoya for the past 20 years. He is stunned
by the report from Japan and firmly believes that the implementation of these
recommendations will cause the company’s costs to increase even further.

a. Explain how each of the recommendations made by the Japanese audit team
may lead to better resource management at Yatoya. [12 Marks]

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b. What limitations are associated with the implementation of the audit team’s
recommendations? [6 Marks]

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Question Five: [6 + 6= 12 Marks]
The following summary cost of quality reports were prepared for Coffee Bean Inc., pre
and one year post implementation of a total quality initiative. Coffee Bean Inc. import
green coffee beans from Brazil and manufacture a range of instant coffee products that
are sold in major supermarket chains throughout Australia.

Quality Spending Pre-Implementation Quality Spending Post-Implementation


  $’s (‘000) %   $’s (‘000) %
Prevention 130 10.74 Prevention 140 13.15
Appraisal 200 16.53 Appraisal 340 31.92
Internal Failure 240 19.84 Internal Failure 390 36.62
External Failure 640 52.89 External Failure 195 18.31
Total $1,210 100.00 Total $1,065 100.00

a. Define each of the four quality categories included in the report. Provide an
example of a cost that is likely to be incurred by Coffee Bean Inc. in each of
the categories. [6 Marks]

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b. Evaluate fully the changes that have taken place in quality expenditure
patterns at Coffee Bean Inc. Is there any scope for improvement in this
expenditure pattern? [6 Marks]

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Question Six: [3 + 10 + 4 = 17 Marks]
Ferguson Dentistry Services operates in a large metropolitan area. Currently, Ferguson
has its own dental laboratory to produce porcelain and gold crowns. The unit costs to
produce the crowns are as follows:

  Porcelain Gold
Direct Materials $70 $130
Direct Labour 27 27
Variable Overhead 8 8
Fixed Overhead 22 22
Total $127 $187

Fixed overhead is comprised of the Lab Supervisor’s Salary ($26,000), Depreciation on


Equipment ($5,000) and Rent of the Lab Facility ($32,000).

A local dental laboratory has offered to supply Ferguson all the crowns it needs. Its
price is $125 for porcelain crowns and $150 for gold crowns, however, the offer is
conditional on supplying both types of crowns – it will not supply just one type for the
price indicated. If the offer is accepted, the equipment used by Ferguson’s laboratory
would be scrapped (it is old and has no market value), and the lab facility would be
closed. Ferguson uses 2,000 porcelain crowns and 600 gold crowns per year.

a. What are the attributes of relevant information for tactical decision making?
[3 Marks]

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b. On the basis of a relevant cost/benefit analysis should Ferguson continue to
make its own crowns, or should they be purchased from the external supplier?
What is the dollar benefit of the decision you suggest? [10 Marks]

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c. What qualitative factors should Ferguson consider in making this decision?
[4 Marks]

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Question Seven: [1 + 2 + 3 = 6 Marks]
The following cost function for Thomson Catering was estimated using least-squares
regression analysis:

Y = $2,169 + $2.77X

Where X is the number of meals sold.

a. What are the estimated costs for a typical month in which 1,800 meals will be
sold? [1 Marks]

b. What might be a problem with using the estimated cost function if Thomson
Catering plans to sell 7,000 meals in a month? [2 Marks]

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c. What are the advantages of using least-squares regression analysis to estimate
costs over the visual fit and high-low methods of estimation? [3 Marks]

- END OF EXAMINATION PAPER -

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