Question Two

Youmagudun, a manufacturing company in the construction industry, produces three

products (A, B and C). All direct fitters are the same grade and are paid at £11 per hour. It is
anticipated that there will be a shortage of direct fitters in the forthcoming period, which
will prevent the company from achieving the following sales targets:

 Product A: 3,600 units

 Product B: 8,000 units
 Product C : 5,700 units

The following information is available:

Product A Product B Product C

£ per unit £ per unit £ per unit
Selling Price 100 69 85
Variable Costs:
Production 51.60 35 42.40
Other 5 3.95 4.25
Fixed Costs:
Production 27.20 19.80 21
Other 7.10 5.90 6.20

Note: The Variable

Production costs
includes the cost of 24.20 16.50 17.60
direct fitters

Required:

(a) Determine the production plan that would maximise profit in the following period, if
the available direct fitters’ hours total 26,400.
(16 marks)
(b) Critically evaluate the limitations of short-term decision-making using variable
costing
(9 marks)

(Total 25 marks)
Question Three

Owamya, a manufacturing company in the aerospace industry has two divisions: Division A
and Division B. Both divisions make a single standardised product. Division A makes
component ‘Fittle’, which is supplied to both Division B and to external customers.

Division B makes product ‘Gambol’ using one unit of component Fittle and other materials.
It then sells the completed product Gambol to external customers. To date, Division B has
always bought component Fittle from Division A.

The following information is available:

Component Fittle Product Gambol

£ £

Selling Price 40 96

Direct Materials

Component Fittle (40)

Other materials (12) (17)

Direct Labour (6) (9)

Variable Overhead (2) (3)

Selling & Distribution Costs (4) (1)

Contribution per unit 16 26

Annual Fixed Costs 500000 200000

Annual External Demand (in 160000 120000

units)

Capacity of plant 300000 130000

Division A charges the same price for component Fittle to both Division B and external customers.
However, it does not incur the selling and distribution costs when transferring internally to
Division B.
Division B has just been approached by a new supplier who has offered to supply it with
component Fittle for £37 per unit. Prior to this offer, the cheapest price which Division B
could have bought component Fittle for from outside the group was £42 per unit. It is head
office policy to let the divisions operate autonomously.

(a) Calculate the incremental profit/(loss) per component for the group if Division B
accepts the new supplier’s offer and recommend how many components Division A
should sell to Division B if group profits are to be maximised.
( 7 marks)
(b) Using the quantities calculated in (a) and the current transfer price, calculate the
total annual profits of each division and the group as a whole
( 8 marks)
(c) Critically evaluate the various approaches to determining product transfer prices
between trading divisions within a group.
(10 marks)
(Total 25 marks)
Question Four
Cogwinder Ltd produces three products – A, B and C, all made from the same material.
Cogwinder is considering replacing its traditional absorption costing approach to allocating
overheads, to an Activity-Based Approach (ABC). Information for the three products for last
year is:

Products A B C
Production and 15000 12000 18000
Sales Volumes
Sales price per unit £7.50 £12 £13
Raw material usage 2 3 4
per unit (Kg)
Direct Labour Hours 0.1 0.15 0.2
per unit
Machine hours per 0.5 0.7 0.9
unit
Number of machine 16 12 8
runs per year
Number of purchase 24 28 42
orders per year
Number of 48 30 62
deliveries to
customers per year

The price for raw materials remained constant throughout the year at £1.20 per kg.
Similarly, the direct labour cost for the whole workforce was £14.80 per hour. The annual
overheads were:

£
Machine set up costs 26550
Machine running costs 66400
Procurement costs 48000
Delivery costs 54320

Required
(a) Calculate the full cost per unit for products A, B and C under traditional absorption
costing, using direct labour hours as the basis for apportionment.
(7 marks)
(b) Calculate the full cost per unit of each product using Activity-Based Costing (ABC)
(9 marks)
(c) Discuss how Activity-Based Costing (ABC) might help Cogwinder improve its
profitability of the three products
(9 marks)

(Total 25 marks)
Question Five
Itworme Ltd manufactures a manual, push-type lawnmower for more environmentally
friendly grass cutting. Trading information for the October period is as follows:

 Number of mowers manufactured: 5,000

 Number of mowers sold: 4,500
 Selling price per mower £110 per mower
 Direct materials £30 per mower
 Direct labour £40 per mower
 Fixed production overheads £100,000
Required
(a) Produce profit statements for the period using marginal costing and absorption
costing methods
(8 marks)
(b) Compare and comment on the figures produced in part (a)
(5 marks)
(c) Critically evaluate the usefulness and limitations of using either a marginal costing or
an absorption costing approach in a manufacturing company.
(12 marks)

(Total 25 marks)