ACC 211: COST AND MANAGEMENT ACCOUNTING

TUTORIAL QUESTIONS
PART 1: THROUGHPUT ACCOUNTING
Question 1
Sweet Treats Bakery makes three types of cake: brownies, muffins and cupcakes. The costs,
revenues and demand for each of the three cakes are as follows:
DETIALS Brownies Muffins Cupcakes
Batch size (units) 40 30 20
Selling price (Tsh per unit) 3,810 3,556 5,080
Material cost (Tsh per unit) 635 381 635
Labour cost (Tsh per unit) 1,016 1,143 1,270
Overhead (Tsh per unit) 381 508 762
Maximum daily demand (units) 160 90 100

The minimum daily demand is required for a long-term contract with a local cafe and must
be met. The cakes are made in batches using three sequential processes; weighing, mixing
and baking. The products must be produced in their batch sizes but are sold as individual
units. Each batch of cakes requires the following amount of time for each process:

Details Brownies Muffins Cupcakes

Weighing (minutes) 15 15 20
Mixing (minutes) 20 16 12
Baking (minutes) 120 110 120

The baking stage of the process is done in three ovens which can each be used for eight
hours a day, a total of 1,440 available minutes. Ovens have a capacity of one batch per
bake, regardless of product type. Sweet Treats Bakery uses throughput accounting and
considers all costs, other than material, to be 'factory costs' which do not vary with
production. On Monday, in addition to the baking ovens, Sweet Treats Bakery has the
following process resources available: Weighing Process Minutes available 240; Mixing
Process Minutes available 180.

Required:
a) Which of the three processes, if any, is a bottleneck activity?
b) What product mix would yield the maximum profit?
Question 2
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All
cuts and treatments at the salon are carried out by one of the salon’s three senior stylists.
The salon also has two salon assistants and two junior stylists.

Every client attending the salon is first seen by a salon assistant, who washes their hair;
next, by a senior stylist, who cuts or treats their hair depending on which service the client
wants; then finally, a junior stylist who dries their hair. The average length of time spent
with each member of staff is as follows:

Details Cut (Hrs) Treatment (Hrs)

Assistant 0·1 0·3
Senior stylist 1·0 1·5
Junior stylist 0·6 0·5

The salon is open for eight hours each day for six days per week. It is only closed for two
weeks each year. Staff salaries are Tsh 40,000 each year for each senior stylist, Tsh 28,000
each year for each junior stylist and Tsh 12,000 each year for each of the assistants. The
cost of cleaning products applied when washing clients’ hair is Tsh 1·50 per client. The
cost of all additional products applied during a ‘treatment’ is Tsh 7·40 per client. Other
salon costs (excluding labor and raw materials) amount to Tsh 106,400 each year. Glam Co
charges Tsh 60 for each cut and Tsh 110 for each treatment. The senior stylists’ time has
been correctly identified as the bottleneck activity.

Required:
a. What is the capacity of the bottleneck activity?
b. What is the throughput accounting ratio (TPAR) for both services?
 PART 2: TARGET COSTING
Question 1
a) Edward Co assembles and sells many types of radio. It is considering extending its product
range to include digital radios. These radios produce a better sound quality than traditional
radios and have a large number of potential additional features not possible with the
previous technologies (station scanning, more choice, one touch tuning, station
identification text and song identification text etc).
A radio is produced by assembly workers assembling a variety of components. Production
overheads are currently absorbed into product costs on an assembly labor hour basis.
Edward Co is considering a target costing approach for its new digital radio product.

Required:
a) Briefly describe the target costing process that Edward Co should undertake.
b) Explain the benefits to Edward Co of adopting a target costing approach at such an
early stage in the product development process.
c) Assuming a cost gap was identified in the process, outline possible steps Edward Co
could take to reduce this gap.
b) A selling price of Tsh 44 has been set in order to compete with a similar radio on the market
that has comparable features to Edward Co’s intended product. The board have agreed that
the acceptable margin (after allowing for all production costs) should be 20%.

Cost information for the new radio is as follows:

Component 1 (Circuit board) – these are bought in and cost Tsh 4·10 each. They are bought
in batches of 4,000 and additional delivery costs are Tsh 2,400 per batch.
Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed
radio. However, there is some waste involved in the process as wire is occasionally cut to
the wrong length or is damaged in the assembly process. Edward Co estimates that 2% of
the purchased wire is lost in the assembly process. Wire costs Tsh 0·50 per meter to buy.

Other material – other materials cost Tsh 8·10 per radio.

Assembly labour – these are skilled people who are difficult to recruit and retain. Edward
Co has more staff of this type than needed but is prepared to carry this extra cost in return
for the security it gives the business. It takes 30 minutes to assemble a radio and the
assembly workers are paid Tsh 12·60 per hour. It is estimated that 10% of hours paid to the
assembly workers are for idle time.
Production Overheads – recent historic cost analysis has revealed the following production
overhead data:
Total production overhead
Month 1 Tsh 620,000 Month 2 Tsh 700,000
Total assembly labor hours
Month 1 19,000 Month 2 23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal
annual activity levels. In a typical year 240,000 assembly hours will be worked by Edward
Co.
Required: Calculate the expected cost per unit for the radio and identify any cost gap
that might exist.

Question 2
Ronald Pneumatics Inc uses a manufacturing costing system with one direct cost category
(direct materials) and three indirect cost categories:

i) Setup, production order, and material-handling costs that vary with the number of
batches.
ii) Manufacturing operation costs that vary with machine-hours.
iii) Cost of engineering changes that vary with the number of engineering changes made.

In response to competitive pressures at the end of 20X8, Ronald Pneumatics Inc employed
value engineering techniques to reduce manufacturing costs.

Below is the actual information for 20X8 and 20X9:

DETAILS 20X8 (TZS 000) 20X9 (TZS 000)

Setup, production-order, and materials-handling cost per batch 4000 3,750
Total manufacturing operating cost per machine hour 27.5 25.00
Cost per engineering change 6000 5000

The management of Ronald Pneumatics Inc wants to evaluate whether value engineering
has succeeded in reducing the target manufacturing cost per unit of its product, RP4, by
11%. Actual results for 20X8 and 20X9 for RP4 are:
 Actual Results
DETAILS
for 20X8 for 20X9
Units of RP4 produced 1,750 2,000
Direct materials cost per unit of RP4 (TZS 000) 600 550
Total number of batches required to produce RP4 35 40
Total machine-hours required to produce RP4 10,500 11,000
Number of engineering changes made 7 5

Required:
1. Calculate the manufacturing cost per unit of RP4 in 20X8.
2. Calculate the manufacturing cost per unit of RP4 in 20X9.
3. Did the company achieve the target manufacturing cost per unit for RP4 in 20X9?
Explain.
4. Explain how the company reduced the manufacturing cost per unit of RP4 in
20X9.
 PART 3: LIFECYCLE AND TARGET COSTING

Question 1
ABC Co specializes in the manufacture of solar panels. It is planning to introduce a new
slimline solar panel specially designed for small houses. Development of the new panel is to
begin shortly and Solaris is in the process of determining the price of the panel. It expects the
new product to have the following costs.

Year 1 Year 2 Year 3 Year 4

Units manufactured and sold 2,000 15,000 20,000 5,000
Tsh Tsh Tsh Tsh
R&D costs 1,900,000 100,000
Marketing costs 100,000 75,000 50,000 10,000
Production cost per unit 500 450 400 450
Customer service costs per unit 50 40 40 40
Disposal of specialist equipment 300,000

The Marketing Director believes that customers will be prepared to pay Tsh 500 for a solar
panel but the Financial Director believes this will not cover all of the costs throughout the
lifecycle.
Required: Calculate the cost per unit looking at the whole life cycle and comment on the
suggested price.

Question 2
A company manufactures MP3 players. It is planning to introduce a new model and
development will begin very soon. It expects the new product to have a life cycle of 3 years
and the following costs have been estimated.

Year 0 Year 1 Year 2 Year3

Units manufactured and sold 25,000 100,000 75,000
Price per unit (Tsh) 90 80 70
R&D costs (Tsh) 850,000 90,000 - -
Production costs
Variable cost per unit (Tsh) 30 25 25
Fixed costs (Tsh) 500,000 500,000 500,000
Marketing costs
Variable cost per unit (Tsh) 5 4 3
Fixed costs (Tsh) 300,000 200,000 200,000
Distribution costs
Variable cost per unit (Tsh) 1 1 1
Fixed costs (Tsh) 190,000 190,000 190,000
Customer service costs per unit (Tsh) 3 2 2
Required:

i. Explain life cycle costing and state what distinguishes it from more traditional
management accounting techniques.
ii. Calculate the cost per unit looking at the whole lifecycle and comment on the price to be
charged.