ACCT2160 COST ANALYSIS & APPLICATIONS

PRACTICE QUESTIONS
(Questions 1-9)
Question 1
Nuts and Bolts Ltd is a manufacturer of specialty nuts and bolts required
for the building, automotive and specialty engineering industries. Some
of their valued customers require micro precision in the manufacturing
process as specialty Nuts and Bolts Ltd products are used in complex
mining and bridge designs.
The company is deciding the purchase order quantity for its standard line
of 2.5 cm brass nut and bolt fittings.

Annual demand is 18,000 units. ( D )

Ordering costs per purchase order are $16. ( P )
Carrying costs per units are $1.50 per year. ( C )
Nuts and Bolts Ltd uses an EOQ model for its purchasing decisions.
The store is open 360 days per year.

REQUIRED:
a) Calculate the economic order quantity
b) Assume that demand is known with certainty and the purchasing lead
time is 5 days. Calculate Nuts and Bolts reorder point for their 2.5 cm
brass nut and bolt fittings.
c) The materials manager at Nuts and Bolts Ltd has recently heard of
just-in-time (JIT) purchasing, and wonders if he should use it in his
business. He is very concerned that the cost of placing many frequent
orders will be too high. Explain the advantages of JIT purchasing and
address specifically his concerns about cost.
d) You were debating with a friend who now works as an accountant in
the hotel service sector. Your friend pointed out that EOQ and JIT
concepts are not really useful in a service industry like his. Whereas
EOQ and JIT are totally justifiable concepts for manufacturers, like
Nuts and Bolts Ltd, with limited variations in their product range. Do
you agree? Explain.

QUESTION 2
Antonio Bay Ltd manufactures a range of glass products. The company
has just introduced a glass display case to its existing product range. The
company expects to produce and sell 20,000 display cases per annum.
The estimated costs for one display case are as follows.

$
Direct materials (1 kg glass)

10

Other direct material

Direct labour

Variable
overhead

manufacturing

Fixed manufacturing overhead

Variable non-manufacturing

Fixed non-manufacturing

Investment in this product amounts to $500,000. The company requires a

40% return on investment.
REQUIRED: (all parts are independent)
(a) Determine the following;
i. Mark-up on full manufacturing cost;
ii. Selling price per display case.
(b)Antonio Bay believes that if it spends an additional $10,000 on advertising
the display cases it may be able to produce and sell 22,500 cases per
annum. Determine the return on investment (in percentage terms) if
22,500 cases are sold at the selling price determined in part (a).
(c) Outline the circumstances where Antonio Bay would be able to use costplus pricing, rather than market-based pricing to price the display cases.

(d)Assume Antonio Bay has decided to sell its display cases for $45. Antonio
Bay has just received a request from a valued customer to manufacture
200 display cases that are slightly smaller than the regular display case.
The new case has the following costs:
Direct materials (0.8 kgs glass)

$8

Other direct material

Direct labour

Variable overhead

Fixed overhead

Antonio Bay has no spare glass to fulfil this special order, so will have
to give up production of regular display cases if this order is filled.
What is the minimum price Antonio Bay should charge for each new
case?

QUESTION 3
SaPa Winery produces traditional rice wine and sells to retail shops, restaurants
and supermarkets. Sales representatives of the company are authorized to give
price discounts to key customers. SaPa Winery does not sell to end consumers.
SaPa Winery is considering the implementation of Customer Profitability Analysis
(CPA) for each category of customers. The following information about various
costs and activities is available:

REQUIRED:

a) Using the ABC information provided, calculate the customer level operating profit and
return on sales for each category of customers.
b)

Using the results obtained in part (a):

i.
Comment of the profitability of the three customers (Which one is the
most/least profitable and why?); and
ii.
Recommend two ways in which SaPa Winery can improve its
profitability. (Refer to a specific customer category in formulating your
recommendation.)

QUESTION 4
The Rally Company operates under a process cost system using the
weighted average method. All direct materials are added at the beginning
of production in the department, and conversion costs are incurred evenly
throughout production. Inspection occurs when production is 100 per cent
completed.
Following are data for July. All unfinished work at the end of July is 25 per
cent completed. The beginning inventory is 80 per cent completed.

Required
(a) Rallys accountant is considering the use of FIFO method instead of the
weighted average method that they are currently using. Prepare a
process cost report for Rally following the FIFO method for the month
of July.
(b) With reference to your calculation in part a, discuss the treatment of
the costs of normal and abnormal spoilage.

QUESTION 5
Thomas Company produces a standard-sized bookshelf. Standards and
budgets relating to this product are contained in the following table.

Direct Materials (timber)

8 metres @ $6.00 metre

Direct Labour budget (@$20 per DLH)

Budgeted volume of output
Budgeted machine hours

$160,000
20,000 bookshelves
10,000 machine hours

Budgeted variable overhead

$30,000

Thomas Company uses machine hours to allocate variable overhead to

products. The actual data for the period just ended were as follows:
Number of units produced

22,000 units

Actual direct materials purchases

165,000 metres

Cost of actual direct materials used

$1,029,600
Actual direct material usage per bookshelf10% lower than standard
Actual direct labour usage per bookshelf
Actual total direct labour cost
Actual variable overhead costs
Actual machine hours

0.3 DLH
$145,200
$22,000

8,800 machine hours

REQUIRED:
a)

Calculate the direct materials price variance (based on purchases)

and the direct materials quantity variance. Show all workings.

b)

Calculate the direct labour rate and efficiency variances. Show all
workings.

c)

Calculate the variable overhead spending and efficiency variances.

Show all workings.

Continued at the back.

ADDITIONAL INFORMATION
Thomas Companys management accountant has collected the following
information relating to production of the window frame.

d)

The companys materials purchasing manager decided to purchase a

higher quality of timber. This increased the price of the timber,
compared to standard.

The higher quality timber resulted in a reduction in reworks and

scrap.

Thomas Company employees had to work overtime during the period,

due to higher demand than expected.

Thomas Companys purchasing manager was able to get a very good

price on the indirect materials used in the manufacture of the window
frames (i.e. glue, nails etc.). Although she paid less for these
materials, quality was not affected.
Write a brief report which explains the likely causes of the variances
you calculated in parts a) and b)

QUESTION 6
Red Dogs Inc. operates under a process cost system using the weighted
average method. All direct materials are added at the beginning of
production in the department, and conversion costs are incurred evenly
throughout production. Inspection occurs when production is 100 per cent
completed.
Following are data for April. All unfinished work at the end of April 75% is
per cent completed. The beginning inventory is 20% per cent completed.

Required
(c) Prepare a process cost report for Red Dog for the month of April.
(d) Describe factors that would affect an accountants choice of process
costing method(FIFO or weighted average), and make a
recommendation for a process costing method for Red Dog. Explain
your choice.

QUESTION 7
Buffalo Falls Ltd manufactures among other things, glass table tops. It
uses a just-in-time system of production for its table tops. However it
orders the glass used in production in bulk. The glass takes up a lot of
space in the companys warehouse, and often is damaged during storage.
Consequently Buffalo Falls has decided to trial a Just-in-Time (JIT)
purchasing system. The following data relate to this system.

Demand for table tops is estimated to be 9,000 units for the

coming year.
Currently, each table top requires on average a sheet of glass.
This includes an amount for scrap and reworks. Under the JIT
system, scrap and reworks are expected to be minimal; therefore
only 1/3 a sheet of glass is expected to be used per table top.
Each sheet of glass currently costs $60.
This will not change
under JIT.
Currently Buffalo Falls orders glass in lots of 1,000 sheets. With
the introduction of JIT this will fall to 50 sheets.
Each order costs $100, but will fall by 50% under JIT.
Damaged inventory is estimated to be on average $5 per
average unit held. This will not be incurred under JIT.
Other carrying costs amount to $60 per unit. This will not change
if JIT is introduced.
Buffalo Falls will not need as much warehouse space, therefore
will lease 75% of an existing warehouse to another firm for $2
per square metre. The warehouse has 30,000 square metres.
Three employees who currently earn $30,000 each will be
directly affected by the just-in-time adoption decision. Two will
be transferred to other positions within Buffalo Falls; one will be
fired.
Buffalo Falls expects that it will lose sales amounting to 250 table
tops with the introduction of JIT. Selling price of these items will
be $200 per item, and variable costs per item will be $60 and
fixed costs will be $20 per item.
Assume Buffalo Falls has a required rate of return of 30% per
annum.
Required:
a) Calculate the Economic Order Quantity for glass.
b) Calculate total annual cost of ordering and carrying the glass.
c)
Should Buffalo Falls implement its just-in-time inventory
policy? Show all calculations.

QUESTION 8
Vina Electrics manufactures two types of washing machines: a top loader
and a front loader. The following monthly information has been collected
about each machine.

Top
Loader
Number of washing machines produced

Front
Loader

340

200

180

320

hours

hours

$ 12,000

and sold
Inspection of materials received at $40
per hour
Visits to customer sites to fix problems

34,000
Manufacturing inspection at $50 per hour

250

500

hours

hours

$ 400

$ 100

Percentage of units needing rework

50%

20%

Testing reliability of machines at $100 per

1,200

1,800

hour

hours

hours

$ 200

350

80%

10%

$ 15,000

Reworks

in

the

manufacturing

department
Average rework cost per
unit

Warranty repair costs

Average repair cost per unit
Percentage of units needing repair
Machinery repairs

25,000

Design engineering to ensure product

quality

$ 85,000

40,000

Quality training for employees

$ 50,000

35,000
Number of employees working on each

10

20

machine

Vina Electrics is currently assessing the quality of each of its washing

machines.

REQUIRED:

(a) Prepare a detailed Cost of Quality Report for each product.

(b)Given the information contained in your Cost of Quality Report, which
products quality is being managed most efficiently and effectively?
Fully explain your answer.

END OF THE PAPER