Question 1

Cases Mobile Ltd produces and sells mobile phone cases and other mobile phone
accessories. For the current year, the company has budgeted to produce 16,000 mobile
phone cases. Budgeted costs of manufacturing the cases are as follows:

Cost per Case Total Costs

Direct Materials $2.50 $40,000

Direct Labour 1.50 24,000

Variable Manufacturing Overhead 4.00 64,000

Setup Costs 1,600

Machine Costs 1,500

Allocated Fixed Costs 26,900

Total Costs $158,000

In addition to the above information the company’s senior accountant discloses that the
setup costs vary with the number of batches in which the cases are produced. Currently
the company produces cases in batch sizes of 1,000 units. Also, the machine costs relate
to the rental costs of the machine used to produce the cases. An external supplier has
approached the Cases Mobile Ltd and has offered to supply the cases at $8.50 per case.

Required:

1) Assume that if Cases Mobile Ltd buys the cases from the external supplier, the
factory in which the cases are produced will remain idle. However the rental
costs associated with the machine can be avoided if Cases Mobile Ltd accepts the
offer from the outside supplier. Should the company accept the external
supplier’s offer? Show all calculations to support your answer.

2) Assume now that Cases Mobile Ltd has budgeted to produce 18,000 cases instead
of 16,000 cases. By choosing to buy the cases from the external supplier the
company can use the factory to produce other mobile phone accessories. These
could be sold for $50,000. The estimated additional costs of producing these
accessories are $25,000. Also, the rental costs associated with the machine can

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 be avoided if Cases Mobile Ltd accepts the offer from the outside supplier.
Should the company accept the external supplier’s offer? Show all calculations to
support your answer.

3) Briefly outline three other considerations that Cases Mobile Ltd may make in
deciding whether to purchase the cases from the external supplier.

Question 2

Buzz Ltd manufactures a single product called the Thingummy. Buzz Ltd uses a standard
costing system. Buzz Ltd plan to use 100,000 direct labour hours during 20XY.
Additionally, Buzz Ltd has budgeted for variable overhead of $500,000 and fixed overhead
of $1,500,000 for the 20XY year.
The standard cost per unit of Thingummy is shown below:
Direct material (5 kg at $6.20 per kg) $31.00
Direct labour (2 hrs at $20 per DLH) $40.00
Variable manufacturing overhead (2 hrs at $5 per DLH) $10.00
Fixed manufacturing overhead (2 hrs at $15 per DLH) $30.00
Standard cost per unit $111.00
The actual results for May 20XY were:
Actual production 4500 units
Actual activity level 10,000 DLH
Actual labour cost $190,000
Actual material cost $162,500 (25,000 kg purchased and used)
Variable overhead $55,000
Fixed overhead $115,000
Required:
a) Calculate the following variances for May 20XY:
i. Direct materials price and usage variances
ii. Direct labour rate and efficiency variances
b) Describe possible events that may have caused each of the direct material and
direct labour variances. Consider each variance separately, but also explain how
an impact in one area may influence variances in another area.
c) Explain the difference between ideal standards and currently attainable standards
and describe the effects on behaviour of these two types of standards.

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Question 3

Vroom makes toy cars. It manufactures two products – Basic and Deluxe. The Christmas
season is approaching and the accountant is busy preparing a budget for the month of
December. He has enlisted the help of line managers and staff in making projections.
Collectively they have gathered the following estimates for December:

Input costs

Direct materials:
Plastic $0.50 per kg
Wheels (1 set) $0.30 per toy car
Direct manufacturing labour $8 per hour

Input quantities per unit

Basic Deluxe
Direct materials:
Plastic 0.25kg 0.5kg
Wheels 1 1
Direct manufacturing labour 0.2 0.25 hours
hours

Inventory information, direct materials

Plastic Sets of
Wheels
Beginning inventory 125kg 350
Target ending inventory 240kg 480
Cost of beginning inventory $62.5 $105

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Sales and inventory information, finished goods
Basic Deluxe
Expected sales (in units) 3000 1800
Selling price $3 $4
Target ending inventory (in units) 300 180
Beginning inventory (in units) 200 150
Beginning inventory (in dollars) $500 $474

Required:
1. Prepare each of the following for December:
a. Production budget in units
b. Direct material purchases budget, in dollars.
c. Direct labour budget
2. Describe the style of budgeting employed by Vroom and its accountant, and outline
briefly the disadvantages of this approach.

Question 4

Benson Ltd manufactures a single product. An extract from their budgeted income
statement for the 20XY financial year appears below:

Sales (100,000 units) 4,000,000

Less Variable Costs 2,800,000
Contribution margin 1,200,000
Less Fixed Costs 900,000
Operating Profit before tax $300,000

Required:

i) Calculate Benson’s break-even point in units and in sales dollars for 20XY.
Calculate the contribution margin ratio.
ii) Calculate the margin of safety in units and sales dollars. Explain how this
information could be useful to managers.

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 iii) Calculate the number of units that Benson would need to sell in order to earn a
target profit of $350,000 after tax, assuming a tax rate of 30%.

Question 5

Millennium Ltd has two production departments (Machining and Assembly) and two
support departments - Information Systems (IS) and Human Resources (HR).
Budgeted manufacturing overhead for the four departments for 20XY is as follows:
$
IS 320 000
HR 280 000
Machining 400 000
Assembly 420 000

The machining department allocates overhead on the basis of machine hours (100 000
machine hours are expected to be used in 20XY in the machining department), while the
assembly department allocates overhead on the basis of direct labour hours (120 000
direct labour hours are expected to be worked in the assembly department in 20XY).

Cost drivers for the two support departments and budgeted consumption of the two
support departments’ services for 20XY are shown in the following table:

IS HR Machining Assembly
IS (Cost - 20% 50% 30%
driver:
Kilowatt
Hours)
HR (Cost 10% - 45% 45%
driver: direct
labour hours)
Required:
a) Using the information given above, allocate the budgeted costs of the support
departments to the production departments using the direct method
b) Using the information given above, allocate the budgeted costs of the support
departments to the production departments using the sequential (step-down) method.
Allocate the IS department’s costs first.
c) Calculate the pre-determined overhead rates for both the machining and assembly
departments using the overhead costs derived from the sequential (step-down) method.
d) Explain the differences between the direct, the sequential (step-down) and reciprocal
methods of support department cost allocation.

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Question 6

Casper Industries manufactures and sell DVD players. At the beginning of the year there
were no beginning inventories and at the end of the year the following information was
recorded with respect to the balance in the inventory accounts:
Raw materials $30,000
Work in progress $45,000
Finished goods $73,400
During the year, purchases of raw materials totalled $255,000 and the company
incurred $405,000 in direct labour costs. Casper Industries also incurred other costs,
which are detailed below:
Indirect materials $30,000
General administration $55,000
Indirect manufacturing labour $21,000
Factory electricity $10,000
Factory rates $25,000
Depreciation – plant & equipment $55,000
Distribution $35,000
Marketing $85,000
Total revenue for the year was $930,000. The company’s ending inventory of finished
goods is carried at the average unit manufacturing costs for the year. In addition, there
was no over or under applied overhead for the year.

Required:
a) Calculate the cost of goods manufactured for the year. Show all calculations.

b) Prepare an income statement for the year. Provide all supporting

calculations.

Question 7

Zoot Limited’s Machining Department had 10 000 units in work-in-process (WIP) on 1st
May. These units were 25% complete with respect to conversion. Direct materials are
added at the beginning of the production process. An additional 60 000 units were
started during May, and 20 000 units were in WIP on 31 May. The units in WIP on 31
May were 20% complete with respect to conversion.

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Costs incurred in the Machining Department for May were as follows:

WIP 1 May Costs incurred in May Total

Direct material $78 000 $252 000 $330 000

Conversion $35 800 $85 200 $121 000

$113 800 $327 200 $451 000

Required:

a) Distinguish between job and process costing. Describe the organisational

settings in which each of these would be appropriate.

b) Using the weighted average method of process costing, calculate the cost of
goods completed and transferred out during May and the cost of WIP at 31 May.
Show all workings.

Question 8

Dom Bagnio, the management accountant, at Eltsen Corporation is trying to estimate the
fixed and variable costs of producing Pluto Bar, their most popular chocolate bar. After
thoroughly analysing the company’s accounting information he has extracted the following
data:
Month No. of Pluto Bars Pluto Bar Production
produced Costs ($)

January 9,800 28,760

February 10,100 29,200
March 10,000 31,600
April 12,800 33,400
May 12,700 33,000
June 15,000 36,700
July 15,500 41,300
August 10,000 28,340
September 10,400 34,200

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 October 14,900 43,000
November 13,500 31,100
December 12,900 33,600

Required:
a) Use the High-Low method to estimate the cost function at Eltsen Corporation
based on the number of Pluto Bars produced. Show all calculations.

b) What are two disadvantages of using this method?

c) What two other methods can be used to estimate the cost function at Eltsen
Corporation? Briefly explain and evaluate these methods.

Question 9

PART A

Tables Ltd has been operating for fourteen years and currently employs 100 staff. The
company manufactures two types of tables: a Standard One (S1) and a Deluxe one (D1).
Each S1 sells for $550 and each D1 sells for $825. The company sells both types of
tables to large department stores and to furniture retailers. Even though the production
facility is located in Melbourne the company delivers its tables nationally. Tables Ltd
has recently become concerned about the decline in company profits and has decided to
focus on the costs of producing the tables. The management accountant, Tania Brown,
has decided to implement an Activity Based Costing System so she can get a better idea
of the product costs and determine the profitability of the tables. To produce each S1
table the company uses 3 meters of material and also uses 4.5 meters of material for
each D1 table. The cost per meter is $64.50. The average direct labour cost per hour is
$8.50 with each S1 table requiring 3 direct labour hours (DLH) and each D1 table
requiring 4.5 DLH. Producing S1 involves 1 production run with 1,800 tables produced.
Producing D1 involves 1 production run during which 800 tables are produced.
Following is additional data that Tania Brown has collected for the analysis:

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Manufacturing Overhead Costs

Activity Total ($)

Setup 10,000

Inspection 90,000

Material Storage 82,000

Purchasing 54,000

Delivery 45,000

TOTAL $281,000

Activity Information

Activity Driver S1 D1

Setup No of Setups 3 5

Inspection No of Inspections per run 4 8

Material Storage Average sq meters 450 350

Purchasing No of purchase orders 125 25

Delivery No of invoices 50 25

Required:

(a) Discuss the key features of the activity based costing system for Tables Ltd.

(b) Calculate the product costs for S1. Use this information to calculate the profitability
for S1. Show all workings.

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Question 10

Mon Pty Ltd has three divisions that operate autonomously. Their results for the
2016/17 financial year are as follows:
Ber Cau Cla
Operating income $1,500,000 $ 1,750,000 $11,000,000
Investment base 5,000,000 10,000,000 50,000,000
The expectation for the 2017/18 financial year is that each division will have the same
financial results as in 2016/17. However, Mon is considering investing in new capital
equipment for each of the three divisions. The cost of this new equipment would be
$1,000,000 per division and it would increase each division’s operating income by
$210,000. Monash’s expected rate of return for all investments is 20%.
Required:
a. Compute each division’s ROI for 2016/17.
b. Compute each division’s residual income for 2016/17.
c. If the divisions performance is assessed based on ROI would they go ahead with
the investment in the new capital for 2017/18? Comment on whether this would
be in the best interests of Mon.
d. If the divisions performance is assessed based on RI would they go ahead with
the investment in the new capital equipment for 2017/18? Comment on whether
this would be in the best interests of Mon.

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