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Chartered University College F5 (Performance Management) EXAMINER: EPD (Class Assesment-1) (PART-A) T M! A""#$!

%& '5 mins


P"!A)! A,)$!R A,- . /U!)T #,)0

T#TA" MAR()& *+

1.Abkaber assembles three types of motorcycle at the same factory: the 50cc Sunshine;
the 250cc Roadster and the 1000cc Fireball. t sells the motorcycles throu!hout the "orld. n response to market pressures Abkaber has in#ested hea#ily in ne" manufacturin! technolo!y in recent years and$ as a result$ has si!nificantly reduced the si%e of its "orkforce. &istorically$ the company has allocated all o#erhead costs usin! total direct labour hours$ but is no" considerin! introducin! Acti#ity 'ased (ostin! )A'(*. Abkaber+s accountant has produced the follo"in! analysis. Annual Output Annual direct labour hours Selling price Ra !aterials cost )units* ), per unit* ), per unit* Sunshine -00 Roadster .00 Fireball 000 1he three cost dri#ers that !enerate o#erheads are: Deli"eries to retailers 2 the number of deli#eries of motorcycles to retail sho"rooms Set#ups 2 the number of times the assembly line process is re3set to accommodate a production run of a different type of motorcycle Purchase orders 2 the number of purchase orders. 1he annual cost dri#er #olumes relatin! to each acti#ity and for each type of motorcycle are as follo"s: Nu!ber o$ deli"eries to retailers Nu!ber o$ set ups Nu!ber o$ Purchase orders -00 /0$000 /$000 1$.00 220$000 .$000 2$000 200$000 -$000

Sunshine -00 Roadster 400 Fireball 100

100 /0 50

45 -0 25

1he annual o#erhead costs relatin! to these acti#ities are as follo"s: Deli"eries to retailers Set#up costs Purchase orders , %&'((&((( )&(((&((( *&)((&(((

All direct labour is paid at ,5 per hour. 1he company holds no in#entories. At a board meetin! there "as some concern o#er the introduction of acti#ity based costin!.1he finance director ar!ued: 6 #ery much doubt "hether sellin! the Fireball is #iable but am not con#inced that acti#ity based costin! "ould tell us any more than the use of labour hours in assessin! the #iability of each product.+ 1he marketin! director ar!ued: 6 am in the process of ne!otiatin! a ma7or ne" contract "ith a motorcycle rental company for the Sunshine model. For such a bi! order they "ill not pay our normal prices but "e need to at least co#er our incremental costs. am not con#inced that acti#ity based costin! "ould achie#e this as it merely a#era!es costs for our entire production+. 1he mana!in! director ar!ued: 6 belie#e that acti#ity based costin! "ould be an impro#ement but it still has its problems. For instance if "e carry out an acti#ity many times surely "e !et better at it and costs fall rather than remain constant. Similarly$ some costs are fi8ed and do not #ary either "ith labour hours or any other cost dri#er.+ 1he chairman ar!ued: 6 cannot see the problem. 1he o#erall profit for the company is the same no matter "hich method of allocatin! o#erheads "e use. t seems to make no difference to me.+ Re+uired: ,a- .alculate the total pro$it on each o$ Ab/aber0s three t1pes o$ product using each o$ the $ollo ing !ethods to attribute o"erheads: ,i- the e2isting !ethod based upon labour hours ,ii- acti"it1 based costing. (15 marks) ,b- state * ad"antages 3 % disad"antages o$ using abc costing. ,4 !ar/s-

%. 9isc Sounds :td specialises in the manufacture of (9 players.


a

t is plannin! to introduce

ne" (9 player specially desi!ned for youn! children. 9e#elopment of the ne" (9 player is to be!in shortly$ and 9isc Sounds :td is in the process of preparin! a product life cycle bud!et. t e8pects the ne" product to ha#e a life cycle of 4 years and estimates the follo"in! costs: Year 1 Year 3 Units manufactured and sold 150$000 (9 players per batch ;rice per (9 player R = 9 and desi!n costs ;roduction costs >ariable cost per (9 player 15 >ariable cost per batch Fi8ed costs Marketing costs >ariable cost per (9 player 2./0 Fi8ed costs 400$000 Distribution costs (9 players per batch 120 >ariable cost per (9 player >ariable cost per batch 100 Fi8ed costs 2-0$000 Customer service costs per CD player < 1.50 Re+uire!ents 50$000 -00 < -5 < 000$000 < 1. < 500 < .00$000 < 4..0 < -00$000 200$000 500 < -0 < 100$000 < 15 < .00 < .00$000 < 4.20 < 400$000 < 500 < 45 2 < < .00 < .00$000 < Year 2

200 <1 < 120 < 2-0$000

1.0 <1 < 120 < 2-0$000 < <1 <

<2

< 1.50

,a- .alculate the budgeted li$e c1cle operating pro$it $or the ne !ar/s,b- E2plain ho an organisation e2ercise. ,5 !ar/s-

.D pla1er. ,1%

ould bene$i t $ro! a product li$e c1cle costing

*.?@@A& BB$ a manufacturer of computer !ames$ has de#eloped a ne" !ame called the
Action Accountant )AA*. 1his is an interacti#e 49 !ame and is the first of its kind to be introduced to the market. ?@@A& BB is due to launch the AA in time for the peak sellin! season. ?@@A BB has been usin! a traditional absorption costin! system to calculate costs and price its products. 1he ne" mana!ement accountant belie#es that this is inappropriate for this company and is ar!uin! for a ne" approach to be adopted. Re+uired: As !anage!ent accountant o$ 6EE78I99& do the $ollo ing. ,a- Discuss the principles o$ the $ollo ing techni+ues and e2plain ho ha"e been applied to the AA. : ;i$e c1cle costing : <arget costing ,1( !ar/s-

each could

A fe" months later$ ?@@A& BB is in the process of introducin! another ne" !ame$ the :au!hin! :a"yer )::* and has undertaken market research to find out about customersC #ie"s on the #alue of the product and also to obtain a comparison "ith competitorsC products. 1he results of this research ha#e been used to establish a tar!et sellin! price of ,55 and a pro7ected lifetime #olume of 200$000 !ames. (ost estimates ha#e also been prepared based on the proposed product specification. Manufacturing cost , 9irect material 4.21 9irect labour -.24 9irect machinery costs 1.12 Drderin! and recei#in! 0.24 Euality assurance -..0 9esi!n 10./0 Non-manufacturing costs Farketin! /.15 9istribution 4.25 After3sales ser#ice and

"arranty costs

1.40

1he tar!et profit mar!in for the :: is 40G of the proposed sellin! price. Required ,b- .alculate the target cost o$ the ;; and discuss the i!plications o$ the result. E2plain the li!itations o$ target costing $or 6EE7I99. ,1( !ar/s) (Total = 20 marks)

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