BAC 302/05

Advanced Cost and Management

Accounting 2016
"Students are highly encouraged to passage their TMAs to the Turnitin system before

submission, to encourage honest academic writing and it is not mandatory except for Project
courses".

Tutor-marked Assignment 1
Answer ALL questions below.
For questions 1 to 5, you may need to find the answers on the internet. Please
cite your references as per the WOU citation requirements.
Question 1
A restaurant is deciding whether it wants to update its image or not. It currently has a
cosy appeal with an outdated dcor that is still in good condition, menus and carpet that
need to be replaced anyway, and loyal customers.
Identify for the restaurant management
(a) those costs that are relevant to this decision,
(3 marks)
(b) those costs that are not differential,
(3 marks)
(c) and qualitative considerations.
(2 marks)
Question 2
A manufacturing firm sell a product for less than its long-term price
Describe how this scenario can come about.
(8 marks)
Question 3
Your best friend is a manager at Julies Bread.
Describe the process a manager must go about when choosing which of three kinds of
breads to produce and sell when bread uses a single oven with a limited capacity.
(8 marks)
1

Question 4
Differentiate among target price, target operating income and target cost.
(8 marks)
Question 5
A decision-makers risk attitude is how he or she values the loss and gain of a given
amount of money.
Explain the known three risk attitudes a decision maker takes.
[8 marks]
Question 6
Hammer Stores is a large garden equipment supplier with retail stores throughout
Malaysia. Many of the products it sells are bought in from outside suppliers but some
are currently manufactured by Hammers own manufacturing division Nail.
The transfer price that Nail charges to the retail stores are set by head office in Kuala
Lumpur and have been the subject of some discussion. The current policy is for Nail to
calculate the total variable cost of production and delivery and add 30% for profit. Nail
argues that all costs should be taken into consideration, offering to reduce the mark-up
on costs to 10% in this case. The retail stores are unhappy with the current pricing
policy arguing that it results in prices that are often higher than comparable products
available on the market.
Nail has provided the following information to enable a price comparison to be made of
the two possible pricing policies for one of its products.
Garden shears
1. Steel: the shears have 04kg of high quality steel in the final product. The
manufacturing process loses 5% of all steel put in. Steel costs RM4,000 per
tonne (1 tonne = 1,000kg)
2. Other materials: Other materials are bought in and have a list price of RM3 per
kg although Hammer secures a 10% volume discount on all purchases. Each
shear require 01kg of these materials.
3. The labour time to produce shears is 025 hours per unit and labour costs RM10
per hour.
4. Variable overheads are absorbed at the rate of 150% of labour rates and fixed
overheads are 80% of the variable overheads.
5. Delivery is made by an outsourced distributor that charges Nail RM050 per
garden shear for delivery.

Required
(a) Calculate the price that Nail would charge for the garden shears under the existing
policy of variable cost plus 30%.
(10 marks)
(b) Calculate the increase or decrease in price if the pricing policy switched to total cost
plus 10%.
(6 marks)
(c) Discuss whether not including fixed costs in a transfer price is a sensible policy.
(6 marks)
(d) Discuss whether the retail stores should be allowed to buy in from outside suppliers
if the prices are cheaper than those charged by Nail.
(8 marks)

Question 7
(a)
Nordin manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:
Model X Model Y Model Z
Selling price
RM80
RM90
RM100
Direct materials
30
30 30
Direct labor (RM10 per hour)
15
15 20
Variable support costs
(RM5 per machine-hour)
5
10 10
Fixed support costs
20
20 20
(i)

For each model, compute the contribution margin per unit.

(6 marks)

(ii)
(iii)

(iv)

For each model, compute the contribution margin per machine-hour.

(6 marks)
If there is excess capacity, identify and justify the model which is the most
profitable to produce.
(4 marks)
If there is a machine breakdown, identify and justify the model which is the
most profitable to produce.
(4 marks)

(b)
Kamera Kanon is considering eliminating Model AE1 from its camera line because of
losses over the past quarter. The past three months of information for model AE1 is
summarized below:

Sales (1,000 units)

Manufacturing costs:
Direct materials
Direct labor (RM15 per hour)
Support
Operating loss

RM
250,000
(140,000)
(30,000)
(100,000)
(20,000)

Support costs are 70% variable and the remaining 30% is depreciation of special
equipment for model AE1 that has no resale value.
Advice the management of Kamera Kanon whether they should eliminate Model AE1
from its product line or not.
(10 marks)