UNIVERSITY OF TECHNOLOGY,JAMAICA

ADVANCED COST AND MANAGEMENT

TUTORIAL QUESTIONS Unit 2

1. Risky Business Limited manufactures and sells a fruit cake. The company Target
utilises the traditional costing system. System uses a single OAR to absorb costing
all overheads within each department. Currently the entity has two
departments: Bakery and packaging. Below are the budgeted overheads and
the budgeted activity levels in both departments:

Bakery Packaging
Set-up costs $1,400,000 $1,600,000
Inspection $2,200,000 $1,300,000
Machining costs $1,400,000 $1,100,000
Machine hours 100,000 400,000
Labour hours 500,000 20,000

During the period ended June 30, 2014, the company incurred the following
per unit costs below. Additionally, it was ascertained that direct material cost
on average $100 per kilogram while, direct labour is $40 per hour.

Direct material per unit in kilograms 3

Direct labour per unit: Bakery 6
Direct labour per unit: Packaging 2
Machine hours per unit: Bakery 1
Machine hours per unit: Packaging 4

Management’s policy to adopt a target costing to estimate the targeting cost

of its products. For this reason, a market research was conducted which yield
a target selling price of $800. Management also has a targeted profit margin
of 25%.

Required:
a. Calculate the projected total cost of the fruit cake
b. Calculate the targeted cost
c. Determine the target gap
d. Highlight some possible techniques that management could use to
reduce the target gap identified above

2. Domicem SA currently manufactures and sells cements locally. The entity Target
now adopts a target costing system in which it is the company’s policy to costing
each a 20% targeted profit margin on its cements. Meanwhile, research
conducted revealed customers are willing to pay on average $1,200 per bag.

The total cost of Domicem’s cement is derived using an activity based

costing (ABC) system. From this system overheads are categorised as
follows:

Set-up costs $10,000,000

Inspection $4,000,000
Material handling $5,000,000
Machining costs $11,000,000

The following are the budgeted activity levels for the overheads identified
above:

Number of set--ups 2,500,000

Number of inspections 200,000
Material moves 100,000
Machine hours 1,000,000
 Below are the actual data for May 2014 provided by the production
manager:
Number of set--ups 100
Number of inspections 5
Material moves 6
Machine hours 10
Direct material per unit (kilogram) 35
Direct labour hours per unit 20

Direct material cost per kilogram for the month of May 2014 was $20, while
direct labour cost per hour for the same period was $10.
Required:
a. Briefly outline the steps in the target costing process
b. Calculate the targeted cost
c. Calculate the target gap

3. A Jamaican company has developed new electronic book to compete with Life-cycle
Sangters Book Stores. The product is estimated to have a life-cycle of four costing
years and the following costs relate to the product over its entire life cycle:

Costs in millions Year 1 Year 2 Year 3 Year 4

R & D costs 350
Design costs 150
Production costs 200 100
Production in units 70 30

The production volumes above were noted in thousands and management

expects to sell each book for $10,000.

Required:
a. Calculate the unit cost for each book using life-cycle costing
b. Calculate the profit for each book and in total using life-cycle
costing
c. Why is life-cycle costing considered more appropriate than
traditional costing methods?

4. A Jamaican company has developed a watch (Carter 2016). The product is Life-cycle
estimated to have a life-cycle of five years and the following costs relate to costing
the product over its entire life cycle:

Costs in millions Year 1 Year Year Year 4 Year 5

2 3
R & D costs 500
Design costs 300
Marketing costs 25 45 20 10
Distribution costs 30 50 20
Production costs per 1,000 1,500 1,250
unit$
Production in 500 800 700
units(‘000)

The production volumes above were noted in thousands and management

expects to sell watch for $5,000.

Note: production costs per unit are not expressed in millions

Required:
a. Calculate the unit cost for each Carter using life-cycle costing
b. Calculate the profit for each Carter and in total using life-cycle
costing
c. Briefly explain the stages of the product life cycle
5. Beetle Juice Limited manufactures product XYZ345 that requires 3 hours of Throughput
Labour time. Labour hours are a scarce resource. The company has 100 costing
machines. Each employee works 8 hours per day.

The factory operates five days per week and 50 weeks annually. The
company sells each unit of this product for $280 and the product uses direct
material costing $40 per unit. The total factory operating costs includes
direct labour costs and production overheads. The average labour hour rate is
$15 per hour and employees work 8 hours per day.

The company employs and activity based costing system in its production
process. The budgeted overheads are as follow:

Inspection costs $5,000,000

Material handling $3,000,000
Machining costs $2,000,000

The budgeted activity levels and the drivers were also analysed below:

Number of inspections 200,000

Material moves 300,000
Machining Hours 1,000,000

The actual activities for the same period are noted below based on data
provided by the production department:
Number of inspections 260,000
Material moves 150,000
Machining Hours 750,000

Required:
a. Calculate the return per factory hour
b. Calculate the cost per factory hour
c. Calculate the TPAR
d. What decision should be made by management?

6. Jockey Factory Limited manufactures underwear that requires 2 hours of Throughput

machine time. Machine hours are a scarce resource, due to the productive costing
capacity of the machines. The company has 50 machines. Each machine
works 8 hours per day.

The factory operates five days per week and 50 weeks annually. The
company sells each unit of this product for $120 and the product uses direct
material costing $20 per unit. The total factory operating cost includes direct
labour and production overheads. The average direct labour hour rate is $25
per hour. The company has 100 employees during the period who actual
worked 8 hours per day. Overheads are absorbed using direct labour hours.
The budgeted overheads for the period are $5,000,000. While the budgeted
direct labour hours were 200,000 hours.

Required:
a. Calculate the return per factory hour
b. Calculate the cost per factory hour
c. Calculate the TPAR
d. What decision should be made by management?
7. Jamaica Producers Enterprise Limited manufactures three products: X,Yand Throughput
Z. Details for the products and resource requirements are as follow: costing
X Y Z
Sales price 3.20 2.50 3.60
Material costs 1.80 1.50 1.80
Direct labour cost 0.60 0.40 0.30
Machine time 4 2 3
Weekly demand 4,000 1,500 2,500

Note: machine times above are stated in minutes

Machine time is a bottleneck resource and maximum capacity is 200

machine hours. Operating cost which includes direct labour costs are $ 6,000
per week. The direct labour costs are $10 per hour.

Required:
a. Determine the profit maximizing outputs and the maximum profit
b. Calculate the TPAR at this profit maximizing output.

8. Pebbles Limited manufactures three beers: Light, Medium and Hard. Limiting
factor
Light Medium Hard analysis
Selling price 120 180 200
Variable costs 60 60 100
Direct labour hour rate per unit $10 $6 $5
Machine hours per unit 6 10 12

Demand for the products are as follows, while machine hours are limited to
300,000 and labour hours to 100,000 hours:

Product Demand
Light 10,000
Medium 12,000
Hard 8,000

Direct labour costs per unit are 50% of variable costs per unit. Variable costs
include direct material and direct labour. Fixed costs for the period
amounted to $1,750,000.
Required:
a. Determine the optimal product mix
b. Determine the optimal profit
c. What might cause an entity not to produce all products demanded?