PM PT SEPT 2021 EXAM

SECTION A

Q1

The following statements have been made about activity based costing.

Unlike traditional absorption costing, ABC identifies variable overhead costs for allocation
to product costs.

ABC can be used as an information source for budget planning based on activity rather
than incremental budgeting.

Which of the above statements is/are true?

Q2

The following statements have been made about life cycle costing.

1. Life cycle costing can be applied to products with a short life cycle.
2. Product life cycle costing is well-suited for use within budgetary control systems.

Which of the above statements is/are true?

Q3

The following statements have been made about target costing.

1. Target costing makes the business look at what competitors are offering at an early
stage in the new product development process.
2. Cost control is emphasised at the new product design stage so any engineering
changes must happen before production starts.

Which of the above statements is/are true?

Q4

Given the following information, what is the target cost gap for product X?

Product X target selling price per unit $10

Target profit 25% on cost

Current cost $8.40 per unit

Q5

Which one of the following environmental management accounting techniques would include
an assessment of clean-up costs and costs of decontamination when a project comes to an
end?

Environmental activity based costing

Flow cost accounting

Input-output analysis

Life cycle costing

Q6

Which one of the following environmental costs should not be included in an environmental
cost budget?

Cost of cleaning up contaminated sites

Costs of using pollution-prevention methods and technology

Cost of fines for environmental contamination

Cost of recycling waste

Q7

According to the United Nations Division for Sustainable Development (UNDSD),

environmental costs may be described as comprising costs incurred to protect the
environment (such as pollution reduction measures), and also:

Energy costs

Costs of wasted materials, capital and labour

Costs of detecting damage to the environment

Costs to the general public of environmental damage

Q8

A manufacturing company uses throughput accounting. It has identified Labour Grade A as its
bottleneck resource. Which one of the following measures might enable the company to
improve its total throughput?

1. Reduce the selling prices of some products in order to increase sales demand.
2. Improve the efficiency of machine usage by cutting down wastage.
3. Pay Grade A labour overtime at a premium of $4 per hour in order to work additional
hours.
Q9

In which of the following ways might financial returns be improved over the life cycle of a
product?

1. Maximising the breakeven time.

2. Minimising the time to market.
3. Minimising the length of the life cycle.

Q10

The following statements have been made about material flow cost accounting.

1. In material flow cost accounting, waste is treated as a negative product and given a
cost.
2. Material flow cost accounting should encourage management to focus on ways of
achieving the same amount of finished output with less material input.

Which of the above statements is/are true?

Q11

The following estimates have been produced for a new product with an expected life of four
years

Year 1 Year 2 Year 3 Year 4

Units made and sold 5,000 10,000 25,000 10,000

$ $ $ $

R&D costs 0.8m 0.3m

Marketing costs 0.3m 0.3m 0.1m 0.1m

Production cost per unit 80 40 30 30

Customer service cost per unit 20 15 10 5

Disposal costs 0.2m

There was market research conducted and paid last month amounting to $0.1m

What is the expected life cycle cost per unit?

Q12

Value engineering is applied in target costing to identify those aspects of a product that do
not add value.

‘Value’ is said to consist of both the use value of a product (its function) and its:

Complexity value

Cost value

Esteem value

Quality value

Q13

The budgeted overheads of Nambro for the next year have been analysed as follows:

$000

Purchase order processing costs 450

Production run set up costs 180

Machine running costs 640

In the next year, it is anticipated that machines will run for 32,000 hours, 6,000 purchase
orders will be processed and there will be 450 production runs.

One of the company’s products is produced in batches of 500. Each batch requires a separate
production run, 30 purchase orders and 750 machine hours.

Using Activity Based Costing, what is the overhead cost per unit of the product?

Q14

Under costing of a product is most likely to result from:

misallocating direct labour costs

under-pricing the product

over costing another product

overstating total product costs

Q15

The common problem with using target costing for service industry is that:

The cost gaps cannot be easily closed.

It is difficult to set target cost for something so subjective as service provision.

Service company owners are not familiar with target costing, and as such, find it difficult to
apply.

The perception of management accountants that service industry performances cannot be

measured.

SECTION B

FOLLOWING SCENARIO RELATES TO Q16 TO Q20

Alpinestar make two types of suits using skilled tailors (labour) and a delicate and unique
fabric (material).

Both the tailors and the fabric are in short supply and so the accountant at Alpinestar has
correctly produced a linear programming model to help decide the optimal production mix.

The model is as follows:

Variables:

Let W = the number of work suits produced

Let L = the number of lounge suits produced

Constraints

Tailors’ time: 7W + 5L ≤ 3,500 (hours) – this is line T on the diagram

Fabric: 2W + 2L ≤ 1,200 (metres) – this is line F on the diagram

Production of work suits: W ≤ 400 – this is line P on the diagram

Objective is to maximise contribution subject to:

C = 48W + 40L

The following diagram were produced based on linear programming

Q16

Which are is considered as feasible region?

a) Below OABED
b) Between BCE
c) Above ABE
d) Between OABCD

Q17. Based on the diagram, determine the optimal solution point?

Q18. Based on the optimal solution, what is the maximum contribution?

Q19. What would be the shadow price for tailor’s time (per hour)?

Q20

Which of the following statements are true?

Shadow prices are only calculated for non-binding constraints

Slack represents unused resources of the binding constraints

Shadow price presents the maximum premium can be paid above the normal rate or price

At optimal solution, binding constraint resources will fully utilised

FOLLOWING SCENARIO RELATES TO Q21 TO Q25

A company produces 3 products AA, BB and CC.

The following information relates to the three products

Total fixed cost $640,000 p.a.

AA BB CC
Annual Demand 26,000 22,000 20,000
Selling Price per unit 120 160 110
Variable cost per unit 92 104 50

The following P/V chart was prepared by an assistant for the three products.

Q21

Calculate the weighted average contribution sales ratio.

Q22

Value at Point 1 would be?

Q23

Which product represent box 1, 2 and 3?

Q24

Which of the following statement relates to point 2?

It represents the minimum sales to achieve required profit

It represents the break even point if sales are at constant mix

The break even point achieved by selling only one product based

It represents break-even point if products are sold based on most profitable

Q25

The following statements have been made about multi-product profit-volume charts.

1. A multi-product profit-volume chart can be drawn only if a constant sales mix is

assumed.
2. A multi-product profit-volume chart can be drawn that shows the contribution of each
product to the breakeven sales volume.

Which of the above statements is/are true?

FOLLOWING SCENARIO RELATES TO Q26 TO Q30

Tesla Co is a private car manufacturer offering three types of electrical known as TA, TB and
TC. Tesla Co currently rent an manufacturing plant from a neighbouring government. The
Managing Director of Tesla Co is keen to maximise profits and has heard of something called
‘throughput accounting’, which may help him to do this. The following information is
available:

All cars go through a five different individual (process), irrespective of which car they are
producing. This process involves a designer, a technician, a safety officer, a mechanic and a
production specialist.

The price of each of model of TA, TB and TC is $2,700, $3,500 and $4,250 respectively.

The only materials’ costs relating to the production are for the battery, the cables and the
components. These are as follows:

TA TB TC
$/u $/u $/u
Battery 700 800 1,000
Cables 35 40 45
Components 5.60 5.60 5.60
There are five members of staff employed by Tesla Co. Each works a standard 40-hour week
for 47 weeks of the year, a total of 1,880 hours each per annum. Their salaries are as
follows:

Designer: $38,000 per annum;

Technician: $45,000 per annum;

Safety Officer: $75,000 per annum;

Mechanic: $90,000 per annum;

Production specialist: $50,000 per annum.

The only other production costs are general overheads, which include the rental costs, and
amount to $250,000 per annum.

Maximum annual demand for TA, TB and TC is 600, 800 and 1,200 units respectively.

Time spent by each staff on the models: Hours per unit

TA TB TC
Designer 0.6 0.5 0.8
Technician 1.4 0.3 0.5
Safety Officer 0.2 0.2 0.2
Mechanic 0.75 1.00 1.25

Q26

Which of the following is/are the bottleneck process?

Q27

Calculate the total factory cost per bottleneck hour.

Q28

Calculate the throughput accounting ratio for product TC.

Q29

Based on throughput accounting, what should be the order of ranking to manufacture

Q30

The following statements have been made about throughput accounting.

1. Non bottleneck process production level should be based on bottleneck process

capacity
2. If machine time is the bottleneck resource, there is no value in taking measures to
improve direct labour efficiency.

Which of the above statements is/are true?

SECTION C

Q31

Daikin Co specialises in the production of a range of air conditioning appliances for industrial
premises. It is about to launch a new product, the ‘Ice chill’, a unique air conditioning unit
which is capable of providing unprecedented levels of air conditioning using a minimal amount
of electricity. The technology used in the Ice Chill is unique so Daikin Co has patented it so
that no competitors can enter the market for two years. The company’s development costs
have been high and it is expected that the product will only have a five-year life cycle.

Daikin Co is now trying to ascertain the best pricing policy that they should adopt for the Ice
Chill’s launch onto the market. Demand is very responsive to price changes and research has
established that, for every $15 increase in price, demand would be expected to fall by 1,000
units. If the company set the price at $735, only 1,000 units would be demanded.

The costs of producing each air conditioning unit are as follows:

Direct material 42

Direct labour (@$6/hr) 9

Note.

The company absorbs variable overhead at rate of $2 per labour.

Total fixed cost amounts to $300,000 and will be absorbed based on 60,000 units

Required

a) Establish the demand function (equation) for air conditioning units. (2 marks)
b) Calculate the optimum price and quantity and its maximum profit (8 marks)
c) Explain the penetration pricing and price skimming strategy and recommend which
would be appropriate for Daikin to introduce the Ice Chill. (10 marks)
Q32

Cam Co manufactures webcams, devices which can provide live video and audio streams via
personal computers. It has recently been suffering from liquidity problems and hopes that
these will be eased by the launch of its new webcam, which has revolutionary audio sound
and visual quality.

The webcam is expected to have a product life cycle of two years. Market research has
already been carried out to establish a target selling price and projected lifetime sales
volumes for the product. Cost estimates have also been prepared, based on the current
proposed product specification. Cam Co uses life cycle costing to work out the target costs for
its products. You are provided with the following relevant information for the webcam:

Projected lifetime sales volume 50,000 units

Target selling price per unit $200

Target profit margin (35% selling price) $70

Estimated lifetime cost per unit $160

(see note below for detailed breakdown)

Note. Estimated lifetime cost per unit:

$ $
Manufacturing costs

Direct material (bought in parts) 40

Direct labour 26

Machine costs 24

Quality control costs 10

100

Non-manufacturing costs 60

Estimated lifetime cost per unit 160

The company needs to close the cost gap of $30 between the target cost and the estimated
lifetime cost. The following information has been identified as relevant:

1. Direct material cost: all of the parts currently proposed for the webcam are bespoke
parts. However, most of these can actually be replaced with standard parts costing
55% less. However, three of the bespoke parts, which currently account for 20% of the
estimated direct material cost, cannot be replaced, although an alternative supplier
charging 10% less has been sourced for these parts.

2. Direct labour cost: the webcam uses 45 minutes of direct labour, which costs $34.67
per hour. The use of more standard parts, however, will mean that whilst the first unit
would still be expected to take 45 minutes, there will now be an expected rate of
learning of 90%. This will end after the first 100 units have been completed. Time
taken for subsequent units (after 100th unit), will be based on time taken to complete
unit no. 100. The total time taken for first 99 units are 2215.70 minutes and total time
for first 100 units are 2234.69 minutes

Required

a) Recalculate the estimated lifetime cost per unit for the webcam after taking
into account points 1 and 2 above. (10 marks)
b) Identify the cost gap and suggest how this can be eliminated. (2m)
c) Briefly discuss the benefits of life cycle costing for pricing, performance
management and decision-making. (4 marks)
d) Briefly explain how an organisation can maximise return over the product life
cycle. (4 marks)